Earnings Call Transcript - AMAL Q4 2022

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Amalgamated Financial Corporation Fourth Quarter 2022 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Jason Darby, Chief Financial Officer. Please go ahead, sir.

Jason Darby, Chief Financial Officer

Thank you, operator, and good morning, everyone. We appreciate your participation in our Fourth Quarter 2022 Earnings Call. With me today is Priscilla Sims Brown, President and Chief Executive Officer. As a reminder, a telephonic replay of this call will be available on the Investors section of our website for an extended period of time. Additionally, a slide deck to complement today's discussion is also available in the Investors section of our website. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We caution investors that actual results may differ from the expectations indicated or implied by any such forward-looking statements or information. Investors should refer to slide 2 of our earnings slide deck as well as our 2021 10-K filed on March 11, 2022, for a list of risk factors that could cause actual results to differ materially from those indicated or implied by such statements. Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release as well as on our website. Let me now turn the call over to Priscilla.

Priscilla Sims Brown, President and Chief Executive Officer

Thank you, Jason. Good morning, everyone. We appreciate your time and your interest today. This morning, I will provide an update on the progress we have made on our 'Growth For Good' strategic plan and my thoughts on the next leg of our strategic journey. Jason will then provide an in-depth review of our fourth quarter financial results. With 2022 concluded, culminating in our third consecutive quarter of record earnings, I feel good about what we've accomplished and confident that we can execute the next leg. Before discussing future plans, I'd like to spend some time on the quarterly and full-year results. Starting off, we reported another record quarter of earnings at $0.80 per share, while we reported core earnings of $0.83 per share. For the full year 2022, we grew earnings per share 56% to $2.61. Also, we delivered 6.1% loan growth as compared to the linked quarter, increasing nearly 24% or $785 million to $4.1 billion over the year. Our net interest income was $67 million for the quarter, an increase of $66 million or 37.6% to $240 million over the year. I have spoken often about our commitment to credit quality and the efforts we have undertaken beginning over 18 months ago to better condition our balance sheet against future credit risk. Over the course of the year, nonaccrual loans decreased to $22 million or 0.5% of total loans, and equally as important, credit quality greatly improved as classified or criticized assets declined by $125 million or 54.3% to $106 million. At the beginning of 2022, we set a macro target of a 1% return on average assets. While modest as an industry peer comparison, this target represented a 25% increase from our previous year performance. Given our improved profitability and earnings power, the return profile of the bank has markedly improved, and our return on average assets expanded 24 basis points to 1.05% by year-end 2022. Before leaving our results discussion, I'd like to take a moment now to discuss our fourth quarter deposit metrics. Average deposits decreased by $576 million to $6.7 billion, largely due to the $513 million expected runoff of our political deposits following the congressional elections. The drop during the quarter was at the high end of the estimate communicated during our third quarter call if a selection cycle was highly competitive, evidenced by the thin margin of both majorities in Congress. We were very pleased that our political deposits grew to approximately $1.3 billion during the year, and our political deposit trends are interesting as both our high and low balance points have grown over previous cycles. With another highly contested presidential election already in its early phase, political deposits have started to build already through January. We expect our political deposits to grow steadily throughout the year by approximately $250 million. Also during the quarter, we had some nice non-political deposit wins, and I am encouraged by our deposit pipeline. Although we expect our deposit base, including political, to be more rate sensitive in 2023 based on a protracted higher rate environment, we believe our deposit gathering franchise and mission-aligned thesis will be a differentiated and competitive advantage. Over a year ago, we described the fundamentals of the first leg of our strategy as to accelerate loan growth and improve our profitability, managing our risk exposure prudently and growing our positive impact on society. Underlying these fundamentals were a set of financial targets that focus on us being the most improved bank in the country for financial performance. The combination of credit profile improvement, lending execution, deposit retention strategies, and our core earnings strength positions us well for a changing economic environment and success as we are on the precipice of our second century as a U.S. banking institution. As we celebrate our full first 100 years, I cannot be more inspired by the team we have in place to propel this great bank into its next centennial. The expansion of our lending platform has been a priority for our management team. The lending and credit risk management teams we have built over the last 6 quarters should continue to deliver results in the segments of the market where we see opportunity to grow, including real estate, sustainability, and not-for-profit. In particular, we believe sustainable lending holds significant opportunity where it is estimated that $3 trillion will need to be invested in the United States to achieve net zero emissions by 2050. This is a significant market opportunity, which we believe will be less impacted by economic or cyclical factors. Our bankers are experts in sustainability and underwriting commercial loans across the sector, such as storage for solar energy, geothermal projects, and biodiesel projects. We also anticipate that the fee increases that we negotiated with our customers last year in the trust business will take effect in 2023. I'm confident that the rolling of our trust business under our Chief Banking Officer will provide the unified customer focus needed to drive better results. Similar to our digital and customer strategy, we see substantial growth to cross-sell banking services to our trust customers, and trust and asset management services to our banking customers. As mentioned on previous calls, we will be focused this year on executing our digital transformation. We see a tremendous opportunity to tie our commercial business into a reimagined consumer business and reach through our commercial customers to their members. For instance, if we're doing business with a large non-profit, we want to attract their members and donors who are naturally aligned with Amalgamated. To be successful, we need to offer products and services that are competitive and meet their needs as well as enhance the customer experience for both our commercial and consumer customers. To date, we have conducted an RFP for our digital plan, and we expect to make a selection during the first quarter. The combination of our efforts in both marketing and digital were reflected in the fourth quarter expense rate, and we expect to remain constant on those expenses through 2023. We recognize these investments need to be made. As was the case with our lending strategy, we will make disciplined choices funded through profitability with a requirement for timely returns. I am excited to move Amalgamated into its next centennial and the next leg of our 'Growth For Good' strategy. Our support of issues that are consistent with the social responsibility of a bank and importance to our employees, our customers, and the majority of Americans will always be core to our mission. I expect continued discussion around positions we have taken, and I understand this and encourage a sensible dialogue to build a better understanding of views. Ultimately, I believe our mission paired with our financial performance this year shows the resilience of our strategy. Now, let me turn the call over to Jason.

Jason Darby, Chief Financial Officer

Thank you, Priscilla. Net income for the fourth quarter of 2022 was a record $24.8 million or $0.80 per diluted share compared to $22.9 million or $0.74 per diluted share for the third quarter of 2022. The $1.9 million increase for the fourth quarter of 2022 was primarily a result of a $0.7 million decrease in noninterest expense, a $0.9 million decrease in provision for loan losses, and a $1.3 million decrease in income tax expense related to an elected change in taxable income recognition, offset by a $0.3 million decrease in net interest income and a $0.8 million decrease in noninterest income. Beginning on Slide 5. Exclusions related to solar tax equity investments were $1.7 million in accelerated depreciation for the fourth quarter of 2022. Because of the income statement volatility associated with the accounting for these investments, we believe metrics excluding the timing impact of tax credits or accelerated depreciation is a helpful way to evaluate our current and historical performance. Core net income excluding the impact of solar tax equity investments, a non-GAAP measure, for the fourth quarter of 2022 was $27.2 million or $0.87 per diluted share, compared to $24.8 million or $0.80 per diluted share for the third quarter of 2022. Turning to Slide 7. Deposits at December 31, 2022 were $6.6 billion, a decrease of $565.3 million from the third quarter of 2022. The decline in spot balances was primarily due to the expected decline in political deposits given the conclusion of the congressional elections in the fourth quarter of 2022. Through January 20, 2023, deposits have increased by approximately $225 million to $6.8 billion, including approximately $135 million of broker time deposits strategically issued to reduce funding costs. Non-interest bearing deposits represent 53% of average deposits and 51% of ending deposits for the quarter ended December 31, 2022, contributing to an average cost of deposits of 34 basis points in the fourth quarter of 2022, a 20 basis point increase from the previous quarter due to our repricing actions in response to the more competitive environment for deposits in our markets. Deposits held by politically active customers were $643.6 million as of December 31, 2022, a decrease of $513.7 million on a linked quarter basis. As noted on our previous call, political deposit trends are difficult to predict, but we are at the natural low point of our balances as the election cycle concluded in November. We expect political deposits to begin rebuilding in the first quarter of 2023, and we have experienced $5.2 million of political deposit inflows through January 2023. Turning to Slide 12. Total loans receivable net of allowance and deferred fees and costs at December 31, 2022, were $4.1 billion, an increase of $231.8 million or 6.1% compared to September 30, 2022. The increase in loans was primarily driven by a $120.6 million increase in commercial and industrial loans, an $82.7 million increase in multifamily loans, and a $39.8 million increase in residential loans, offset by a $3.8 million decrease in consumer and other loans, a $1.3 million decrease in construction and land development loans, and a $2.9 million decrease in commercial real estate loans as we continue to reduce that asset class exposure. During the quarter, we had $12.7 million of payoffs of criticized or classified loans as the bank's credit quality continued to improve. The yield on our total loans was 4.24% compared to 4.11% in the third quarter of 2022. On Slide 13, our net interest margin was 3.56% for the fourth quarter of 2022, an increase of 6 basis points from 3.5% in the third quarter of 2022. The margin increase was driven by continued loan growth, which substantially improved our asset yield mix, offset by increased rates and average balances of interest-bearing liabilities, particularly in short-term borrowings. This increase in funding cost was expected as we communicated during our third-quarter call that borrowings would elevate in the fourth quarter in relation to the decline in political deposits. Prepayment penalties earned in loan income contributed 1 basis point to our net interest margin in the fourth quarter of 2022 compared to 4 basis points in the third quarter of 2022. Core non-interest income, excluding the impact of solar tax-equity investments, a non-GAAP measure, was $7.3 million for the fourth quarter of 2022 compared to $7.5 million for the third quarter of 2022. The decrease of $0.2 million was primarily related to slightly lower trust department fees, a $0.2 million loss on the disposition of an Other Real Estate Owned property, and a $0.6 million loss on the sale of non-performing held-for-sale loans, mostly offset by increased business banking fees and a one-time beneficiary income on bank-owned life insurance. Core non-interest expense, a non-GAAP measure for the fourth quarter of 2022 was $35.6 million, a decrease of $0.7 million from the third quarter of 2022. This is primarily driven by a $1.5 million decrease in professional fees, offset by a $0.5 million increase in advertising and promotion expense and increased other expenses related to recruiting services. Looking forward, we expect our non-interest expense to modestly rise as we embark on the next leg of our 'Growth For Good' strategy, as Priscilla discussed earlier in the call. Moving to Slide 17, non-performing assets totaled $34.8 million or 0.44% of period-end total assets at December 31, 2022, a decrease of $19.5 million compared with $54.3 million or 0.7% on a linked quarter basis. The decrease in non-performing assets was primarily driven by the sale of $9.6 million of restructured residential loans held for sale and $12.7 million of payoffs related to criticized and classified loans. Our criticized assets declined $7.4 million or 7% to $105.6 million on a linked quarter basis. The allowance for loan losses increased $2.9 million to $45 million at December 31, 2022, from $42.1 million at September 30, 2022, primarily due to higher loan balances. At December 31, 2022, we had $27.8 million of impaired loans for which there was a specific allowance of $5.7 million compared to $38.2 million of impaired loans for which a specific allowance of $5.2 million was made. The ratio of allowance to total loans was 1.10% at December 31, 2022, and 1.09% at September 30, 2022. The ratio of allowance to non-accrual loans was 207% at December 31, 2022. Provision for loan losses totaled $4.4 million for the fourth quarter of 2022 compared to $5.4 million for the third quarter of 2022. The decrease in provision expense in the fourth quarter of 2022 was primarily related to $1.6 million in charge-offs related to non-performing loans that were transferred to held for sale in the previous quarter and subsequently sold in the current quarter. Adjusted, our provision for loan losses in the current quarter increased by $0.6 million related to higher loan balances, increases in certain specific reserves, and elevated charge-offs in our consumer solar loans. Moving along to slide 18, our core return on average equity and core return on average tangible common equity, excluding the impact of solar tax equity, were 21.8% and 22.6%, respectively, for the fourth quarter of 2022. We did not repurchase shares of our common stock during the fourth quarter and have $28 million of remaining capacity under our $40 million share repurchase program. Additionally, we have declared a quarterly dividend of $0.10 per share. Our capital position remains solid to support our ongoing growth initiatives and improved to 7.52% during the quarter. Slide 20 shows a reconciliation of the change in tangible common equity and related tangible book value. As expected, during the fourth quarter, the Federal Reserve Board continued its cycle of interest rate increases with a 75 basis point and 50 basis point increase at each of the November and December meetings, respectively. The Fed has also messaged further rate increases to occur in the first half of 2023. Despite the consistent rising interest rate environment through the fourth quarter, the Fed stepped down the rate increase in December, which reduced market volatility in the fourth quarter and resulted in very little change to our tax affected mark-to-market adjustment to the fair value of our securities portfolio from the third quarter. As such, as of December 31, 2022, tangible book value per share, a non-GAAP measure, was $16.05 compared to $15.37 as of September 30, 2022, increasing almost entirely related to quarterly earnings. We are also pleased with our tangible common equity to tangible assets of 6.30% for the quarter in comparison to 6% from the previous quarter, reflecting our conservative balance sheet management and capital position against our general target of 6%. As a reminder, fluctuations from mark-to-market changes have no impact on our Tier 1 capital position. Following the trajectory of the third quarter, our loan growth exceeded our expectations in the fourth quarter as demand for our mission-aligned real estate lending and our sustainability lending continues to increase based on fiscal spending projects and increased funding in our focus segments, paired with the investments we made and talent where needed. That said, we anticipate net loan growth to moderate in 2023 to approximately 2% to 3% sequential growth, led mainly by our commercial portfolios. As the industry pivots to an overall conservative outlook relative to the uncertainty that exists for 2023, we have implemented actions related to expense and balance sheet management, which correlate to closely managing our solid current liquidity position, access to capital, and borrowing capacity to avoid realized losses. Turning to slide 21, considering the economic uncertainty and the forward curve suggesting further rate increases in the first half of 2023, we are initiating full year guidance for 2023, which includes core pre-tax, pre-provision earnings excluding solar of $142 million to $148 million, and net interest income of $256 million to $263 million. As the Fed continues to raise interest rates, generally speaking, the benefit to our net interest income from asset sensitivity reduces. Going forward, we estimate an approximate $0.5 million increase in annual net interest income from a parallel 25 basis point increase in short-term rates and a decline of approximately $0.7 million if only short-term rates increased by 25 basis points. We are taking a cautious view towards the economy, given the risk of recession as the Federal Reserve has aggressively raised rates over the last year. We are focused on optimizing our loan portfolio by continuing to replace older lower-yielding loans with higher-yielding loans and expect modest margin expansion and net interest income growth as we improve our loan yields while also reducing high-cost borrowings over the course of the year. With that said, we anticipate net interest income to decline to approximately $63 million to $65 million in the first quarter of 2023 as we recognize the impact of the borrowings used to offset our political deposit outflow. Looking forward, we know we will need to be more competitive to maintain and attract deposits, which will continue to drive upward pressure on our funding costs. That said, we will still be repaying high-cost borrowings at lower-cost deposits throughout the year, and we believe this is a significant opportunity to drive earnings. As Priscilla noted, we are pleased with the bank's third consecutive quarter of record results, which demonstrates the resilience of our sustainability-focused lending segments and strategic initiatives designed to grow the bank while improving our profitability and returns. With that, I'd like to ask the operator to open up the line for any questions.

Operator, Operator

Our first question comes from the line of Janet Lee with JPMorgan.

Sun Lee, Analyst

I want to start off with your NII guidance of $256 million to $263 million. Are you guys still assuming that 33% interest-bearing deposit beta that you guys gave in the third quarter?

Jason Darby, Chief Financial Officer

We expect a 40% beta on any additional rate increases. Our modeling is based primarily on anticipated increases to the Fed rate, but we are not applying this 40% to the entire portfolio on a blended basis. As you've likely noticed, during the first 300 basis points of rate increases, our deposit beta was quite low, and it has only recently risen in the hikes that occurred in November and December. Looking ahead to the February meeting and beyond, we anticipate a 40% beta on those figures. However, we believe that our overall cost of funds should remain relatively stable, considering the previous performance of our deposit base during the initial 300 basis points of rate increase.

Sun Lee, Analyst

Okay, just to make sure I understand this correctly. So if we look at it in terms of the cycle to date, is the interest-bearing deposit beta going to be lower than 40%? Is that what you said?

Jason Darby, Chief Financial Officer

I believe that with the incremental increases from the Fed this year, we will see a 40% increase on the interest-bearing deposits. That’s our expectation. However, I’m not applying that figure across the entire portfolio as a 40% beta. What I mean is that I think we’ve seen an implied benefit from the first 300 basis points of rate hikes, and our overall blended cost of funds should remain stable from our current position, aside from the increases from the Fed hikes in November and December, along with our projections moving forward. Essentially, we expect a prospective 40% beta on interest-bearing deposits, without considering any past rate hikes.

Sun Lee, Analyst

All right. I understand that there are many factors involved with reducing debt. Regarding the direction of net interest margin throughout 2023, it seems reasonable to expect a decrease in margin from the fourth quarter of 2022 starting in the first quarter of 2023. Will you be assuming a stabilized net interest margin after the first quarter? How should we view the trajectory of net interest margin?

Jason Darby, Chief Financial Officer

I think that's exactly the way to think about it and the way we're thinking about it. There should be a little bit of margin compression in Q1 as the full effect of the deposit repricing we did near the end of the fourth quarter and also the effect of the borrowings that we've had take hold in our margin calculation in Q1, we do expect that to stabilize. Then, as we look out throughout the remainder of the year, our ability to really drive deposits through the deposit gathering franchise could favorably impact the margin if we're able to pay down more borrowings than we're modeling right now.

Sun Lee, Analyst

That's helpful. Regarding the deposit growth, you're anticipating about 3% growth in the balance sheet for 2023. Can you provide more insight into your expectations for deposit trends this year? I understand there is considerable seasonality in your deposit trends at each period's end, but when considering average deposit balances, how should we approach the growth potential for 2023 compared to the full year of 2022?

Jason Darby, Chief Financial Officer

I think we're trying to take a very conservative view on deposit growth throughout the year and be realistic relative to the deposit market and the competitive environment that we're in as the liquidity has continued to tighten in the Fed. We're expecting a protracted higher rate environment. So a lot of what we're showing in our projections is assuming a conservative approach. If I were to think about it, probably, generally speaking, we'd see a 5% opportunity to grow deposits on an average basis throughout the year, and I would look at that as sort of accelerating as we get into Q2, Q3, and Q4, particularly as we expect the political deposits to start to build at a more rapid pace, leading up to the 2024 elections. So that's generally how we're thinking about it right now, Janet.

Sun Lee, Analyst

So 5% on a full year basis for average deposits.

Jason Darby, Chief Financial Officer

That's our conservative model, yes.

Sun Lee, Analyst

Okay, I want to shift to credit. It's good to see your NPLs going down. Looking at your net charge-offs in the fourth quarter, it looks like all of your charge-offs were coming from solar loans, and if I'm doing some rough math here, I think I'm getting about a 1.5% loss ratio on that consumer solar loan balance, which is a little bit up from that 75 to 100 basis point range you mentioned in the previous call. How comfortable are you with that credit risk on this portfolio? I know you guys should be working on the CECL adoption started in January. So I assume there's some expectation that you have with that portfolio, and do you expect a continued pickup in loss rates on this segment? Can you just help us think about that?

Jason Darby, Chief Financial Officer

Sure. The consumer solar charge-offs have increased slightly from our initial expectations. Due to rising rates, we've observed more stress in that portfolio than we anticipated. However, we are still below our loss protection thresholds, and most charge-offs are occurring before these protections activate. I believe there is some limitation on the charge-off ratio moving forward, but we anticipate it will exceed 1%. It's challenging to predict if it will reach $150 million annually. Currently, we are not adding more solar loans in the consumer sector for at least the first half of this year, aside from minor additions. More importantly, we see an opportunity to tighten our credit requirements for future purchases. For the existing loans, we are closely monitoring those going delinquent and collaborating with providers to ensure we effectively utilize their collection services to manage charge-offs. Regarding CECL, it is a significant part of our modeling, but we are not ready to discuss the details since we are still reviewing our control structure with our audit team. We do expect that adopting CECL will not significantly impact our capital, but it may lead to an increase in our allowance for loan losses, particularly related to solar loans.

Operator, Operator

Our next question will come from the line of Alex Twerdahl with Piper Sandler.

Alexander Roberts Twerdahl, Analyst

I wanted to ask about loan growth. I know you did a lot of hiring at the end of 2021 and early 2022. I'm curious if those teams you hired are now fully up to speed or if there are still opportunities to expand the loan portfolio early in the new year.

Priscilla Sims Brown, President and Chief Executive Officer

Yes, Alex, you're correct. We've mentioned this in previous earnings calls as well; we experienced a strong pipeline due to the growth and hiring of bankers in the first and second quarters of 2022. This subsequently materialized in both the third and fourth quarters as those banker relationships led to loan originations exceeding our expectations. In this quarter, our commercial portfolio was the largest contributor, with our C&I book at $120.6 million, primarily driven by our unique climate finance products. We also saw an increase of about $82.5 million in multifamily lending. Additionally, the retail residential book contributed nearly $40 million. Moving forward, we anticipate continued opportunities and a solid pipeline in both the multifamily sector and sustainability initiatives. With a net zero sector valued at around $3 trillion, we now have bankers with unique skills and expertise in these areas. This positions us well to acquire more loans while also being selective about the quality we add to our portfolio.

Alexander Roberts Twerdahl, Analyst

Great, when considering the sustainability loan and commercial and industrial loan, since many of us might not be entirely clear on what that entails, what types of spreads, pricing, or indexes will they be repricing from, and what are the current loan yields that could help us understand where the overall loan yield might trend over the next few quarters?

Jason Darby, Chief Financial Officer

Let's focus on the yields. Currently, they are around 5.75% to 6%. They can fluctuate based on the underwriting criteria. Generally, the spreads are quite wide for us, allowing for profitability and good returns. I will need to get back to you with some specifics. It may be easier to break down the details by the types of sustainability deals we're involved in. But for now, I would say they are generally in the upper 5% to 6% range.

Alexander Roberts Twerdahl, Analyst

Okay, and then just kind of looking forward a little bit, you guys are pretty asset sensitive. You really enjoyed the lift up in rates and now seeing that the forward curve now has a number of rate cuts baked into... I'm just curious what kind of steps you're taking to try to shield net interest income for the possibility of rates going down at some point towards the end of this year or early next year.

Jason Darby, Chief Financial Officer

Yes, that's a great question. I think we've been managing that throughout the year. In some cases, we've taken losses from security sales and redirected those funds into fixed rates, aiming to adjust the overall balance of our portfolio, especially in securities, to a more even mix of 50-50 between fixed and floating rates. If you remember, we started the year with a much higher percentage of floating rates, and gradually, we've been transitioning to include built-in protections against interest rate drops. However, what's been even more significant is the shift from our security portfolio and cash into the lending portfolio. The more we expand our lending book — we've increased it by nearly $800 million this year in net loans — the more we see that approximately 75% to 80% of that book is in fixed rates. Therefore, we're taking substantial steps to safeguard against the impact of falling interest rates, and I would say that currently, we are likely close to neutral regarding our sensitivity to a potential interest rate decline.

Operator, Operator

Our next question comes from the line of Chris O'Connell with KBW.

Christopher O'Connell, Analyst

So I was hoping to dig a little bit into the commentary around deposit pricing and being a little bit more rate sensitive for next year. Could you give us a breakdown of how much of the political deposit business is non-interest bearing and what might be subject to some sort of rate sensitivity next year? And how much longer term you expect to remain in non-interest bearing?

Jason Darby, Chief Financial Officer

Thanks, Chris. Typically, we have operated with about two-thirds of our deposits being non-interest bearing and one-third being interest bearing. However, over the past year, that ratio has shifted significantly. Currently, we're around 40% non-interest bearing and 60% interest bearing. We estimate that out of the remaining $650 million we have, approximately $150 million may transition from non-interest bearing to interest bearing. This represents the risk we've considered in our deposit mix regarding cost of funds adjustments. Generally, we anticipate that this year will be a growth period for political deposits, which will likely require some form of compensation. Although we don't expect pricing to be at the highest levels, we believe there is still a mission-driven value proposition that benefits the bank when these deposits come in, even if they are interest bearing. Throughout this year, it is probable that we will need to provide some compensation for these deposits due to their growth phase. Looking ahead to next year, 2024, as we enter a more transactional phase leading up to the election, we expect a reduced need for attractive pricing on these deposits and a greater capability to manage them as campaigns typically require services from a bank.

Christopher O'Connell, Analyst

Got it. So it sounds like some modest near-term pressure, but given the high velocity of those deposits in general that they're still pretty insulated from rates longer term?

Jason Darby, Chief Financial Officer

I think that's a fair characterization.

Priscilla Sims Brown, President and Chief Executive Officer

And it's not completely insulated; you could say it's partially insulated.

Jason Darby, Chief Financial Officer

Yes, yes.

Priscilla Sims Brown, President and Chief Executive Officer

We believe that this unusual rate environment will lead to more attention on rates than we would have seen with the first 300 basis points, but we do not anticipate needing to go to market.

Christopher O'Connell, Analyst

You mentioned some recent successes and potential opportunities in sustainability or SRO with clients beyond political deposits for gathering deposits. Can you share some of the types of clients where you've experienced success outside of political deposits?

Jason Darby, Chief Financial Officer

We provided an update on deposits through January 20, showing an increase of approximately $225 million. Of this, $135 million comes from our issued broker CDs, which leaves us with a $90 million difference attributable to new customer acquisition. This aligns with our previous discussions at the end of Q4, where we felt optimistic about our pipeline, and that sentiment remains even after these achievements. The new customers span a variety of segments, including union-based clients and relationship-driven accounts linked to the real estate lending we have been doing. Additionally, we have engaged with clients in the philanthropic sector who align with our mission.

Priscilla Sims Brown, President and Chief Executive Officer

Yes, that's right. It's been not-for-profits. That's where you're going to see that continue as we look at the pipeline today.

Christopher O'Connell, Analyst

Great, and on the Trust segment and those fees, when do the 2023 fee adjustments take hold, and how material is that increase on those fees? And just any other kind of success or updates that you're having on that side of the business?

Priscilla Sims Brown, President and Chief Executive Officer

I will begin by providing a general overview of the current situation; you may already have the numbers. The adjustments to fees and costs, including the pass-through of some of our custody-related expenses, are starting to be reflected in early 2023 and beyond, and you might have the specific data.

Jason Darby, Chief Financial Officer

Yes, it's going to be an evolutionary process in the trust business. There's a lot of opportunity for us to drive results out of that business. But I think it's going to be a staged approach. I think in the current year, we'll see some incremental benefit to the trust fee line as it runs through the income statement. I don't have an exact number to quote for you, Chris, but I do think you can think of where we are right now, or how we finish the year at about $13.5 million as sort of a baseline, and that it should be improving from there. It's going to be based on the existing book of pension-based business. It's not really new products or anything that we're hoping, it's really things that are already embedded and just additional margin contributions that we've been working with our partners to be able to accommodate on. Then, I think over time, we'll continue to focus on the trust business. But as it pertains to overall non-interest income, I don't think it will have a significant impact relative to the ratio of our non-interest income to interest income over the course of 2023.

Operator, Operator

There are no further questions in the queue. I'd like to hand the call back to Priscilla Sims Brown for closing remarks.

Priscilla Sims Brown, President and Chief Executive Officer

Well, thank you all. Thank you for your questions and thanks for your interest today, and thanks for listening to our optimism for the bank as we go forward this year, in particular with great enthusiasm on our 100th anniversary. We look forward to follow-up calls with most of you one-on-one as we go through the rest of the day and next week. But thank you for your participation.

Operator, Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.