Q4 2022 Amalgamated Bank Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the amalgamated Financial Corporation fourth quarter 2022 earnings Conference call.
During todays presentation, all parties will be on a listen only mode.
Following the presentation. The conference will be opened for questions with instructions to follow at that time.
As a reminder, this conference call is being recorded.
I'd now like to turn the call over to Mr. Jason Darby Chief Financial Officer. Please go ahead Sir.
Thank you operator, and good morning, everyone. We appreciate your participation in our fourth quarter 2020 earnings call with me today is Persil assumes 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 on the <unk>.
Dressers 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.
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 two of our earnings slide deck as well as our 2021 10-K filed on March 11th 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.
It was on our website let.
Let me now turn the call over to Priscilla.
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 strategy journey.
<unk> 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 plan I'd like to spend some time on the quarterly and full year results.
Starting off we reported another record quarter of earnings at 80 cents per share. While we reported core earnings of 83 cents per share for the full year 2022, we grew earnings per share of 56% to $2 61.
Also we delivered six 1% loan growth as compared to the linked quarter, increasing nearly 24% or $785 million.
4.1 billion over the year.
And our net interest income was $67 million for the quarter.
Increased $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 of our balance sheet against future credit risk.
Over the course of the year nonaccrual loans decreased to $22 million.
0.5% of total loans and equally as important credit quality greatly improved as classified and criticized assets declined by $125 million or 54, 3%.
$106 million.
At the beginning of 2022 we set of macro target of a 1% return on average assets well.
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 asset expanded 24 basis points to 1.15% 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 run off of our political deposits following the congressional election.
During the quarter was at the high end of the estimate that we communicated during our third quarter call is this election cycle with 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 are high and our load balancer point have grown over previous cycles.
With another highly congested presidential election already in its early phase political deposits have started to build already through January we expect our political deposits grow steadily throughout the year by approximately $250 million.
Also during the quarter, we had some nice nonpolitical deposit win 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 differentiator and competitive advantage.
Over a year ago. We described the fundamentals of the first leg of our strategy were 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 focused on being the most improved bank in the country for financial performance.
Combination of credit profile improvement lending execution.
Positive retention strategy 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 first 100 years I could not 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.
Our lending and credit risk management teams, we have built over the last six quarters. She continued to deliver results and 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 three trillion dollars 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 with solar energy geothermal projects and biodiesel projects.
We also anticipate that the fee increases that we negotiated with our customers last year and the trust business will take effect in 2023.
Confident that the rolling of our trust business under our Chief Banking Officer will provide a unified customer.
Needed to drive better results.
Similar to our digital and customer strategy, we see substantial growth to cross sell banking services to our truck 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 re imagined the consumer business and reached through our commercial customers to their members.
Instance, if we're doing business with a large nonprofit 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 a digital player and we expect to make a selection during the first quarter.
The combination of our efforts in both marketing and digital well reflected in the fourth quarter expense rate, 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 moving amalgamated into its next centennial and the next leg of our growth for good strategy are supportive issues that are consistent with the social responsibility of the bank and importance to our employees our customers and the majority of Americans will always be core to our mission.
<unk> continued discussion around positions, we've taken and I understand this and encourage a sensible dialogue to build a better understanding of abuse. Ultimately I believe our mission paired with our financial performance. This year shows the resilience of our strategy now.
Now, let me turn the call over to Jason.
Thank you Priscilla.
Net income for the fourth quarter of 2022 was a record $24 $8 million.
Or 80 cents per diluted share compared to $22 $9 million or <unk> 74 cents 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 $7 million decrease in noninterest expense.
<unk> $9 million decrease in provision for loan losses.
$1.3 million decrease in income tax expense related to an elective change in taxable income recognition.
Offset by a zero point $3 million decrease in net interest income and as your appoint $8 million decrease in noninterest income.
Beginning on slide five exclusions related to solar tax equity investments were $1 $7 million and 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 and excluding the impact of solar tax equity investments, our non-GAAP measure for the fourth quarter of 2022 was $27 $2 million or <unk> 87 per diluted share compared to $24 $8 million or <unk> 80 per diluted share for the third quarter of 2022.
Yeah.
Turning to slide seven 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 20th 2023 deposits have increased by approximately $225 million to $6 8 billion, including approximately $135 million of broker time deposits strategically issue to reduce funding costs.
Noninterest bearing deposits represent 53% of average deposits and 51% of ending deposits for the quarter ended December 31, 2022 contributing to.
For an average cost of deposits is 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 a more competitive environment for deposits in our markets.
Deposits held by politically active customers with $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've experienced $5 $2 million of political deposit inflows through January 20th 2023.
Turning to slide 12, total loans receivable net of allowance of deferred fees and costs at December 31, 2022 for $4 $1 billion, an increase of $231.8 million or six 1% compared to September 32020 to the.
The increase in loans was primarily driven by $126 million increase in commercial and industrial loans.
$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.
$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 two 4% compared to four 1% in the third quarter of 2022.
On slide 13, our net interest margin was 356% for the fourth quarter of 2022, an increase of six basis points from three 5% in the third quarter of 2022.
The margin increase was driven by continued loan growth with 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 one basis points of our net interest margin in the fourth quarter of 2022 compared to four basis points in the third quarter of 2022.
Core noninterest income excluding the impact of solar tax equity investments and 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 zero point $2 million is primarily related to slightly lower Trust department fees, a zero point $2 million loss on the disposition of an Oreo property and a zero point $6 million loss on the sale of nonperforming held for sale loans.
Mostly offset by increased business banking fees and a onetime beneficiary income on bank owned life insurance.
Core noninterest expense and non-GAAP measure for the fourth quarter of 2022 was $35 $6 million a decrease of zero point $7 million from the third quarter of 2022.
This was primarily driven by a $1.5 million decrease in professional fees offset by a zero point $5 million increase in advertising and promotion expense and increased other expenses related to recruiting services.
Looking forward, we expect our noninterest expense to modestly rise as we embark on the next leg of our growth through good strategy is first of all I discussed earlier in the call.
Moving to slide 17, nonperforming assets totaled $34 $8 million or four 4% of period end total assets at December 31, 2022, a decrease of $19 $5 million.
Paired with $54 $3 million or 0.7% on a linked quarter basis.
The decrease in nonperforming 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 of 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 of 2022, the ratio of allowance to nonaccrual 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 2022 was primarily related to $1.6 million in charge offs related to nonperforming 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 zero point $6 million related to higher loan balances and 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 more 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 a $28 million of a rig.
Mining capacity under our $40 million share repurchase program.
Additionally, we have declared a quarterly dividend of <unk> 10 per share our capital position remains solid to support our ongoing growth initiatives and improved to 752% during the quarter.
Slide 20 shows the 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 points and 50 basis point increase at each of them in November and December meetings, respectively.
The fed is also a message 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 the 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, 2020 to tangible book value per share.
Our non-GAAP measure was $16.05.
Compared to $15 37 as of September 30 of 2022, increasing almost entirely related to quarterly earnings.
We're also pleased with our tangible common equity to tangible assets of $6 three zero percent 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.
Actuation is from Mark to market changes have no impact on our tier one 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 physical spending projects and increased funding in our focus segments paired with the investments we've made in 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 pivot to an overall conservative outlook relative to the uncertainty that exists for 2023, we've implemented actions relative to the expense and balance sheet management, which correlates 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 pretax pre provision earnings ex 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 zero point $5 million increase in annual net interest income from a parallel 25 basis point increase in short term rates and a decline of approximately zero point $7 million, if only short term rates increase by 25 basis points.
We were 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're focused on optimizing our loan portfolio by continuing to replace older lower yielding loans with higher yielding loans and expect modest margin expansion in net interest income growth as we improve our loan yield while also reducing high cost borrowings over the course of the year.
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 with lower cost deposits throughout the year and we believe this is a significant opportunity to drive earnings.
As pursuing 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.
And with that I'd like to ask the operator to open up the line for any questions operator.
Thank you we will now be conducting a question and answer session. If you'd like to ask you. A question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of Janet Lee with Jpmorgan. Please proceed with your question.
Hi, good morning.
I wanted to start off with you are NII guidance.
As to 50 62, 63 are you guys still assuming that 33% interest bearing deposit beta that you guys gave in the third quarter.
Hello.
It'd be 40% beta on any incremental rate rises so when we think about how we're modeling it out.
You know, it's it's really based on any any forward, Florida increases to the fed rate.
But we're not taking it as as 40% kind of across the entire portfolio on a blended basis, if that makes sense.
As you've probably seen in the first 300 basis points of rate rises are our deposit beta was very very low.
And only more recently in the last hikes that happened in November and December and as we are projecting into a into January I'm, sorry at the February meeting and beyond.
40% on those numbers, but we think that.
We think that overall you know our cost of funds should remain relatively stable when.
When factoring in kind of the the previous performance out of the deposit base over the first 300 basis points of rate rise.
Okay, just to make sure I understand this correctly so.
Look at it.
In terms of the cycle to date.
Cycle interest bearing deposit beta is it going to be lower than 40% is that what you said.
I'm, just saying I think on the on the incremental increases that are coming from the fed and in the current year. We're gonna look at 40% on the interest bearing deposits that's kind of our model.
But I'm not taking that as a number across the entire portfolio as a as a 40 basis point I'm, sorry, it's a 40% beta.
What I'm trying to say is I think there is an implied benefit that we've received in the first 100 basis points of rate rise.
And I think you know our overall blended cost of funds should remain.
Stable from where we've been right now other than the the increases that we've seen and you.
You know in the November December fed hikes, and then what we're projecting going forward. So it's really kind of a prospective 40% beta on interest bearing and nothing on any retrospective rate hikes.
Okay Alright.
Got it.
And I think there's a lot of moving T cells.
Well, thank god, but debt pay down.
But in terms of the trajectory of NIM sort of actually through 2020 three.
Fair to assume a step down in margin from the FY <unk> 2022 level starting in the lung can't 'twenty three and then.
Are you assuming all.
Stabilized NIM after first quarter, how should we think about the trajectory.
I think thats exactly the way it and the way to think about it in the way. We're thinking about is there there should be a little bit of margin compression in Q1 as the full effect of the of the deposit repricing as we did at the end you know near the end of the fourth quarter and also the effect of the borrowings that we've had.
Take hold in our in our margin calculation in Q1, we do expect that to stabilize and then you know as we look out throughout the remainder of the year you know our ability to to really drive deposits you know through the AR to the deposit gathering franchise.
Could favorably impact the margin, if we're able to pay down more borrowings than we're modeling right now.
Okay. That's helpful and just wanted to deposit growth.
Expecting around 3% balance sheet growth for 2020. One can you just give us more.
All are around how youre seeing our deposit growth.
<unk> trends.
Being in finding 'twenty, three I know theres a lot of.
Seasonality T R. The positive trends on a period end basis, but if you look at it on an average deposit.
Like how should we think about that growth prospect in 2000, 2030 versus full year 'twenty or 'twenty two.
Yep.
I think I think we're trying to take a very conservative view on deposit growth throughout the year and be realistic relative to the to the deposit market and the competitive environment that we're in.
As the liquidity.
It has continued to tightening the fed you know, we're expecting a protracted higher rate environment. So you know a lot of what we're showing in our projections I was assuming a conservative approach. It's hard to think about it you know probably generally speaking, we see a 5% opportunity to grow deposits on an average basis you know throughout the year.
And you know I would look at that as sort of accelerating as we get into Q2, three and four you know, particularly as we would expect the you know the political deposits to start to build at a more rapid pace you know leading up to the 2024 elections.
That's generally how we're thinking about it right now again.
Okay, so 5% on a full year basis for average deposits deposits that that's our conservative model yes.
Okay.
I wanted to ask.
So it's too crowded.
Good to see.
It's going down.
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 1.5%.
Loss ratio on that consumers thought solar loan balance.
Well, but found that 75 to 100 basis point range, you mentioned in the previous call.
Comfortable are you with that credit risk on this portfolio I know you guys should have should be working on but people adoption started in January .
I assume you guys have done.
There is some expectation that you guys have a lot to play out and do you expect a continued sort of pick up in loss rates on that segment can you just help us think about that.
Yeah, absolutely so yeah, the the consumer solar charge offs has ticked up a bit.
From where we were originally thinking they were going to be I think.
As rates have accelerated.
And remain in a little higher place.
We've seen a little bit more stress and a little bit of a faster fashion in that portfolio than than we were originally anticipating that.
That said I think we're still just under some of the thresholds that we have with our with loss protections that we've got built into some of our arrangements right. Now so most of the charge offs that youre seeing or are coming in before some of those protections kick in so I feel like there's a little bit of a governor.
On that you know in that charge off ratio kind of moving forward, but it is something that we think is going to be a little bit higher than 1%.
You know whether it gets to a $1 50 on an annualized basis is a little tough for us to project.
But right.
Right now I think.
There's really two things in the solar and solar portfolio number one we're really not adding any more solar in the consumer space threat. The first at least the first half of this year, maybe some minor things, but more importantly, I think what we've seen now is.
An opportunity for us too.
To really tighten up on the on the credit box that we you know that we're offering I'm sorry that were requiring for additional purchases that were going to be doing.
With regard to things that are already on the books.
We're paying very very very close attention to the individual loans that are in fact going delinquent.
We're working with our providers right now to make sure that you know that where we're getting all the benefit of a of.
What they offer in terms of collection services and other things that you know.
Would potentially put a governor on consumer so our charge offs.
To your point on on the on seasonal obviously, it's a it's a significant pull on in a seasonal yeah, we've factored that into what we've been doing to model right now.
In terms of how always lay out you know, we're not quite ready to talk about that since we haven't been as you know our entire control structure through.
Through our audit team yet, but you know what we do see is our is.
Yeah, you know not a not a significant impact on our on capital when we do the adoption and the bill through retained earnings, but probably we will have.
And overall increase in our coverage ratio a triple L.
That would that would obviously have a component of it related to solar.
Okay, great. Thanks for taking my questions.
Thank you Jim.
Our next question will come from the line of Alex toward all with Piper Sandler. Please proceed with your question.
Hey, good morning.
Hi, good morning.
Wanted to ask.
How about loan growth I know you guys did have a lot of hiring at the end of 'twenty. One early 2022 I'm. Just curious you know as as those teams are if those teams. They in people you've hired are now kind of fully up to speed.
Or if there is additional kind of low hanging fruit to expand the loan portfolio earlier early in the new year.
Yeah.
Yes, Alex you're right you know we've talked about this on prior earnings calls to which is that our we had a robust pipeline due to the banker growth and hiring initiatives that took place back in first and second quarter of <unk> 22, and that materialized through both the third and fourth quarter.
As those banker relationships developed into securing loan originations at a pace ahead of plan.
In the quarter the biggest drivers were our commercial portfolio.
With our C&I book.
At 126 million.
Primarily a function of our unique climate finance products and.
And we had an increase of 82 and a half million or so in multifamily.
And the retail resi book was also supportive at nearly 40 million. So that was that was the quarter.
We think that you will still continue to see.
Nice opportunities coming our way in a very nice pipeline on both the multifamily book and also in the areas of sustainability.
When you've got a net zero sector.
That's looking like it's valued at around three trillion dollars we've got.
Bankers now both both existing and some of those that we brought on with unique.
The skills and expertise in these areas and so we're really we're really seeing the opportunity to bring on additional loans, but also you know we have the opportunity to be quite choosy in this environment and bring on the kind of quality that we want to see in the book.
Great and then you know when you think about the sustainability loan C&I alone since I think a lot of it is probably aren't familiar exactly what that might look like what sort of spreads or pricing or indexes would those be repricing off of and kind of what are the new loan yields today.
That we could maybe helped.
Think about where the overall loan yields could be going over the next couple of quarters.
Yes.
So I think the well, let's maybe maybe focus a little bit more on the on the yields I think they are coming in.
Right now.
You know $5 75 to six they move around a little bit depends on sort of the you know the underwriting criteria.
But I think in general spreads are fairly well.
We're fairly wide for us in terms of.
Being able to have profitability and good return on those I'd have to get back to you on some specifics it might be easier.
Two because I need to break it down a little bit between the types of sustainability.
Deals that we that we get into it might be a little bit easier to share some detail that way, but right now I'd say generally speaking any other coming on in the upper fives to 6% range.
Okay.
And then.
Just kind of looking forward a little bit you know you guys are pretty asset sensitive you really enjoyed the lift up in rates.
And now <unk> and.
And now seeing 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 early next year.
Yeah. That's that's a great question I mean, I think we've been we've been kind of doing that throughout the year.
You know we've been we've been in certain cases, we've been taking a security sales losses and repositioning those those proceeds into fixed rates, so trying to blend down.
The overall portion of our portfolio, particularly in Securities for example.
To more of a of a 50 50 mix between fixed and floating if you recall we were much higher you know on the floating side you know as we can.
Entered the year, and then slowly, but when we've been mixing that down to.
To put in a built in hedges to interest rate declines, but I think the more important thing has been you know kind of the overall migration from the from the really from the securities portfolio from cash into the lending portfolio. So the the more we grow the lending book and were up almost $800 million this year.
And net loans you have the more we grow the lending book, you know roughly 75% to 80% of that book is fixed rate. So we're really doing a lot to sort of protect ourselves from that from that down down interest rate sensitivity.
I think if I would characterize yourselves right now, we're probably pretty close to neutral in terms of sensitivity to a to an interest rate drop at this point.
Yeah.
Great. Thank you for taking my questions.
Thanks.
As a reminder, it is star one to ask a question. Our next question comes from the line of Chris O'connell with VW. Please proceed with your question.
Good morning, Chris Hey, Chris.
Hey, good morning, good morning, Jason.
So I was hoping to.
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 as you know.
Noninterest bearing and what might be subject to some sort of rate sensitivity.
And next year, and how much kind of longer term.
Expect to kind of remain in noninterest bearing.
Yes, Thanks, Chris.
Normally we have been operating at about a two thirds DDA are noninterest bearing and one third.
Interest bearing and that number has been sort of moving over time are in the past year towards our towards almost the exact opposite direction right now I would say, we're probably at about 40% DDA and 60%.
Interest bearing at this point in time and the way, we sort of think about it as you know of the remaining $650 million that we have right. Now you know roughly $150 million is how we model out as being potentially subject to shifting.
Here from I'm, sorry from from interest bearing to sorry.
Sorry from a noninterest bearing and interest bearing position. So that's sort of the risk that we have baked into our DDA mix right now.
For for cost of funds adjustments, but.
In general what we think will happen this year as.
You know because it's sort of a building year for for political deposits. We think more of those will come in requiring some form of compensation. We don't think it's going to be.
Our top of the market in terms of pricing I think they are still very much a mission aligned value proposition that has.
That has benefited from the bank in terms of when these deposits come on even if they are interest bearing but over the course of this year, it's likely that there'll be some form of compensation that'll be.
Required for these deposits because it'll be in a building phase you know as we move into next year of 2024.
Much more of a transactional style year heading up to the election.
I think we would we would naturally expect there to be less requirement for pricing on those deposits and just more you know more ability for it to be placed and then executed in terms of the way campaigns typically want their accounts serviced by a bank.
Got it so it sounds like the modest near term pressure, but given the high velocity of those.
Deposits in general.
That there is still pretty insulated from from rates longer term.
I think that's a fair characterization.
And it's not totally insulated you would say partially insulated yeah, yeah, we'd be in a net.
The words, we think that this unusual rate environment is going to lead to.
A greater focus on on rates that we would have had you know in the first 300 basis points, but we but we don't expect to have to go to market.
Yeah.
And for the you mentioned some some success so recent.
Recently, and some pipeline success.
Actually.
You know some kind of the rest of the sustainability or sorry.
Broader court clients outside of political deposits.
Deposit gathering.
Maybe just.
Some of the categories or types of clients that you guys are having success there outside of our political deposits.
Yep.
So I think one of the interesting things.
We gave a little bit of an update on deposits through January 20th and you know we're up we're up $225 million or so no granted 135 is our issued broker Cds, but that leaves a $90 million Delta, which is all new customer attraction and its been a you know things that we're talking about towards that.
At the end of Q4 update where we thought or the pipeline looked good and we still think it does even after these wins.
They've been kind of spread across.
Some of our some of them are reunion based customers some of them were.
Really relationship driven accounts based on the on the real estate lending we have been doing prior.
And then there's been others that have been very mission aligned in the in the philanthropic space Yeah, Yeah, that's right that they've been not for profits.
That's where you're going to see that continue as we look at the pipeline today.
Great.
And on the on the trusts are segmented and those fees.
When do the 2023 kind of fee adjustments take hold and how material is that increase in those fees.
Yes.
And just any other kind of success or updates that you're having on that side of the business.
Why don't I start with just generally what's happening you might have the numbers.
So those those fee adjustments and also cost adjustments, meaning the pass through of some of our costs related to custody.
Those adjustments are you starting to see come through.
Beginning of 2023 and N on through and maybe you have the actual yeah.
It's it's going to be an evolutionary process and the trust business Theres a lot of opportunity for us to drive to drive results out of that business, but.
I think it's gonna be a staged approach I think in the you know in the current year.
We'll see some some.
Incremental benefit to the 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 finished the year at about $13 5 million as a sort of a baseline and that it should be improving from there. It's gonna be based on you know on the existing.
Thing.
Book, a pension based business, it's not really new products or anything that you know that we're kind of hoping it's really things that are already embedded in and just additional.
Hum.
Margin contribution that that we've been working with our partners to be able to to accommodate on and then I think over time, we will continue to focus on the trust business, but as it pertains to overall noninterest income you know I don't think it'll have a significant.
Impact relative to the to the ratio of our noninterest income to interest income over the course of 2023.
Understood.
I appreciate the color thanks for taking my question.
Welcome.
There are no further questions in the queue I'd like to hand, the call back to pursue mushrooms Brown for closing remarks.
Okay well. Thank you all thank you for your questions and thanks for your interest today and and thanks for listening to our optimism for the bank as we go forward this year in particular.
With great enthusiasm in 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.
Yeah.
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.