Good morning, ladies and gentlemen, and welcome to the Amalgamated Financial Corporation Third Quarter 2023 Earnings Conference Call. During today's presentation, all parties will be on a listen only mode. Following the presentation, the conference will be open for questions with instructions to follow at that time. 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.

Thank you, operator, and good morning, everyone. We appreciate your participation in our third quarter 2023 earnings call. With me today is Priscilla Sims Brown, our 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 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 9, 2023, 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 US 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.

Thank you, Jason, and good morning, everyone. I'm excited to be here today to discuss our third quarter results as they clearly demonstrate the business of social responsibility as a business that can do well financially, while also doing good in the world. While the banking events from earlier in the year are no longer dominating the news headlines, we are conscious of the economic environment we're operating in. With the Fed continuing to maintain a hawkish stance and the reality of this higher for longer interest rate position slowly settling into the bond market, we believe we have a solid strategy to prepare our balance sheet for growth optionality by the second half of next year. As a reminder in mid-March, we quickly pivoted to a modified growth strategy centered on a mutual balance sheet, building capital and increasing our tangible common equity ratio. Now to full quarter's end, our neutral balance sheet strategy is playing out well and perhaps even better than we expected. Since our March results, our leverage ratio has improved 39 basis points to 7.89% as we steadily march towards an 8.5% leverage target. And our tangible common equity ratio has increased modestly by 29 basis points to 6.72% as we target 7.5%. The TCE ratio is very important to us and we have been measuring ourselves against the minimum target of 6% since the second quarter of 2022. Looking more closely at our balance sheet, we continue to fund loan growth predominantly from runoff of our securities portfolio augmented by select security sales. As we change the mix of assets from securities to loans, the balance sheet health will benefit as the portfolio amortization will naturally reduce unrealized loss positions and replace those assets with loans at market rates. During the quarter, we reduced…

Thank you, Priscilla. Net income for the third quarter of 2023 was $22.3 million or $0.73 per diluted share compared to $21.6 million or $0.70 per diluted share for the second quarter of 2023. The $0.7 million increase for the third quarter of 2023 was primarily driven by a $1.9 million decrease in the provision for credit losses, a $0.7 million increase in net interest income and a $0.2 million decrease in noninterest expense, offset by an increase in net losses on sales of available-for-sale securities of $0.8 million and a $1 million increase in income tax expense. Beginning on slide five, there were no exclusions related to solar tax equity investments for the third quarter of 2023. 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 third quarter of 2023 was $23.3 million or $0.76 per diluted share compared to $22 million or $0.72 per diluted share for the second quarter of 2023. Turning to slide seven. Deposits at September 30, 2023 were $7 billion, an increase of $96.2 million in the second quarter of 2023. As Priscilla touched on, total deposits, excluding brokered CDs increased by $172.7 million to $6.6 billion. Excluding brokered CDs, noninterest-bearing deposits represent approximately 45% of average deposits and 43% of ending deposits for the quarter ended September 30, 2023, contributing to an average cost of deposits of 111 basis points, up 24 basis points from the previous quarter as we continue to competitively price our deposits to build and protect our customer base. Our total cost of deposits including…

Thank you. Before opening the line for questions Amalgamated CEO, Priscilla Sims Brown would like to make a few additional comments in light of last evening's events.

Thank you, Camilla. Like most of you I watch the news stories of the mass shootings in Maine last night. I would be remiss if I didn't acknowledge it. Like many of you I had a sleepless night thinking about the victims and their loved ones and what we should do to end the epidemic of gun violence in this country. I don't have all the answers but this much I do know. We cannot continue to leave the solution to those directly affected or to their children for whom this has become the number one cause of death in America. We can't point fingers at others without also looking at ourselves. Every single American has a role to play in ending this. Amalgamated Bank filed for a merchant code for gun retailers to support law enforcement efforts to detect illicit firearm purchases. This is not about attacking altering or diluting the Second Amendment. We now have a code and it should be implemented worldwide. This is just one small step of many, many steps society should take. Health care workers, teachers, legislators, parents, bystanders, public service, lawyers, advocates, organizers, ministers, employers and yes everyone in financial services we all have a role to play beyond offering our thoughts and even our prayers. This is a solvable American problem. I'll now turn it back to the operator and Jason and I are happy to take your questions.

Thank you. [Operator Instructions] Our first question comes from the line of Peter Hale [ph] with Piper Sandler. Please proceed with your question.

Hey, good morning, guys. Just filling in for Alex Twerdahl today. Could you give us some color on what new loan yields are coming on the books at? I know you mentioned some lower-yielding loans are rolling off the loan book and you're adding higher-yielding loans. So any color on new loan yields and maybe the yields on specific segments that would be helpful?

Sure. Happy to take that question. Yields -- bring on yields have been strong. For the quarter, I would say, on the commercial portfolio blended the bring on rates were around 7.25%. Obviously that has a little bit of movement across the segments. We saw about 6.5% sort of on average between the multifamily and our regular real estate. And then the C&I business was quite a bit higher probably more closer to the 8% to 9% range in certain cases. So pretty strong yields there. The PACE assets were in the mid-7%s during the quarter. And we're even seeing as you probably noticed with the rates pushing up subsequent to the close of the quarter we're seeing increased rates again. We're seeing our PACE assets now being originated in the low 8% range. Our multifamilies are probably right around 7%. So we're really seeing a fairly decent lift and we're not really having any issues at the moment finding lendable opportunities that are also strong on credit metrics that are meeting market rates. So we think it ties really well into the point you raised about our lower-yielding assets turning over and that's been something that we've been pointing to for a little while and the rate opportunities for the credit segments we operate in are fairly substantial at this point.

Got it. Thanks. I just want to switch to expenses. I know it seems like you guys found some stability in this quarter and last quarter in core expenses around the $37 million range. Is there any reason to believe that that won't be repeatable? Or like how should we think about expenses maybe going into 4Q and entering 2024?

Yeah. So 4Q I think can look very similar to 3Q. We've been fairly disciplined in our approach for the entire year. As you know, we moved into a kind of capital-constraining mode after the events of mid-March and really focusing on building capital and being as prudent as possible with expense management. So the $37 million, $37.5 million kind of baseline that we've said over the past couple of quarters I think is reasonable to assume for Q4. Now, I'll caveat that by saying quarter four is usually the quarter where if there is going to be a surprise that's when it comes up. So we're cautiously optimistic and I think I'm not really aware of anything major or material. Otherwise, I'd be letting you know today but just kind of bear that in mind. When we think about 2024, I don't really have a number for you. Ordinarily, we will forecast that and a guidance perspective when we do our Q4 earnings and we kind of roll forward our entire model for the upcoming plan year. But I do think that, we're going to be making investments in our business. I do think there'll be opportunities for us to make various improvements. And so I would not think that a $37 million or $37.5 million quarterly run rate would be what we go for in the 2024 year. That said, we'll always kind of keep ourselves banded to a core efficiency ratio. And even in this year we said 52% was really going to be our outer band and we were really going to try to stay within that and not go past that. We would be disciplined similarly in the 2024 plan year and we'll have more share about that at the next quarter.

Got it. Thanks. That's all for now. I'll get back in the queue. Thanks for answering my questions.

Thank you.

Thank you. Our next question comes from the line of Chris O'Connell with KBW. Please proceed with your question.

Hey. Good morning. Nice quarter.

Good morning, Chris. How are you?

Good. Hi Jason. So I was hoping to get some color obviously political deposits the growth was great this quarter and it seems to be chugging along in early Q4. I was wondering if you could provide any color as to where you think they could top out at the top of the election cycle next year. And then also, if you'd be willing to provide roughly where a blended range of the cost of new political deposits coming on the balance sheet are?

Sure Chris. Happy to take that, great to talk to you again, so the political deposits have trended nicely for us. I think we've been very, very pleased with the results so far. I think it's nice to see that the historical expertise that we built-up in being able to reasonably predict the nature of these deposits has been playing out. And if I look at my current quarter it looks a lot like what quarter three and 2021 looks like. So I think there's some repeatable trends that you could look to when you think about the forward quarters, as a good benchmark for where deposit balances will likely top out. It's difficult to nail it down and say, it's going to do one particular thing, because the cycles are always different. But we feel pretty good about, how those historical trends look. And I wouldn't expect us to be in excess of what those historical trends were at this time I think if we're neutral to that or even to that I think that would be a pretty good positive for us because the environment is certainly a lot different from a liquidity point of view than it was during the last cycle Chris. In terms of the rates we have seen a continuing trend towards interest-bearing. While these deposits are in accumulation phase we talked last quarter that two-thirds of those deposits were in DDA or noninterest-bearing. That trend has shifted to very close to 50-50 at this point. And we think that that ratio will probably hold if not even continue to migrate downward you could see a 40-60 ratio, on the political deposit balances as we kind of move towards the early part of next year. The later we go into the cycle probably the more transactional, it will become and a little bit less rate-dependent, because those deposits will be staged for usage, but that's generally how we're seeing the numbers right now and what I could reasonably project for you for the upcoming quarters.

Okay. Great. That's a super helpful. And then, just shifting to the fee side trust, were down a little bit. And I know that there's, market factors on the AUM and AUC side. But you guys noted I think in the deck that they were down and striving for net revenue quality. Just hoping you could kind of provide some color around what exactly that entails?

One way to think about that is similar to the way we looked at lending and what you've seen going on in the lending book, where we've traded out of customer activity that is less favorable to the bank in the long-term and into better quality relationships that are more favorable to the bank long-term. Certainly it's not a credit issue obviously on the trust side, but similar in the sense that we are looking for better quality long-term relationships. So as there's a natural attrition going on in the trust business, we are allowing that to happen. Now none of this is new or specific to the quarter. This is the follow-on to activity. We started earlier in the year where you'll recall we talked about rightsizing some of the fees passing on some of the costs that appropriately should be passed on to customers. And then where that results in having a relationship that is not good for the bank long-term or good overall then we've allowed the natural attrition to occur. You saw that reflected in the quarter.

Okay. Got it. And then, as far as the credit trends in the quarter ago just any detail you could provide? I mean, there is a number of large upgrades it seems like on criticized and classified loans that were fairly substantial and a couple of payoffs. And then in particular the multifamily $1.2 million net charge-off in 3Q was that getting sold at par should we expect a reversal of that in 4Q?

So I'll take the multifamily charge-off part of that first, Chris. I think that was one credit that we had kept our eye on for quite some time. And the resolution of that credit and not having it move into an REO position, all things equal, was a good outcome for the bank. Really at the end of the day that there was an improvement related to that $1.2 million in our non-accrual assets but that really just got traded out into a charge-off metric. So, I don't view that as an overall favorable improvement for our nonperforming assets. But to your question of could we see more of those types of things? There's probably one credit where we're keeping a very close eye on where you -- and that's already in our non-accrual numbers where we could see a similar instance. I don't think the numbers would be at the $1.2 million range. It's something less than that. But there is probably one more credit that we're just keeping our eye on right now that could follow a similar path albeit I don't have a good estimate as to when the timing will be on that. And so, aside from those two loans that we're speaking about on the credit quality side though, we've been able to see some substantial improvement that occurred during the quarter. I've talked a couple of times about substandard loans not substandard -- excuse me, special mention loans that we were waiting for some updated financial information and some other factors that would be triggers for improvement to the quality rating. I think we were very prudent in waiting for those. Perhaps some of those could have been upgraded sooner and you would have seen a smoother trail on that criticized asset trend line. But at the same time, we're not really the type of bank that's going to just upgrade something because we think it's going to be in a past great situation. So once we got empirical information on the metrics, we made the decision to do the upgrades. But these to us are not substantial surprises we felt for quite a while that these would be upgradable and hopefully we're able to reasonably communicate that in past quarters.

Yes, absolutely. And then I know you guys are moving towards on PACE for your capital targets and still was able to eke out some repurchases along the way this quarter. Do you think that is something that you can continue to do in Q4 while moving towards those targets?

I reasonably do, yes. I think everything that we put into our capital projection targets assumes a constant dividend. It assumes a fair level of capital allocation for buyback. And it also assumes a reasonable loss on undervalued assets like securities. And I'm sure you saw we took another $1.8 or so million in securities losses this quarter. So the plan really kind of allows for some capital flexibility. We could probably accelerate the capital build if we pulled back on some of those other shareholder-related metrics. But I'm not sure that that's really something we want to do. It's always an arrow in the quiver, but we feel like the earnings stream that we've developed really gets us an ability to quickly accumulate capital. I think this quarter we slowed a little bit on the capital build because we carried a little bit of a larger balance sheet than we wanted, but I do expect that to return to the levels of previous quarters mainly because with the deposit gathering we had, we brought in a little bit of excess cash and our borrowings or CD -- broker CD maturities were really scheduled to start releasing this month and the next month. So, we'll be able to reduce that balance sheet size by about $150 million over the course of the quarter just because of the brokered CDs that are going to be maturing and hopefully that will continue on our continue aiding our capital building PACE.

Great. Sorry, did I hear you at $100 million for the full balance sheet next quarter down?

It will be $150 million for the brokered CD maturities for the full quarter and we have about $100 million that will be maturing before the end of this month October.

Got it. And then just thinking about like the balance sheet as we move beyond Q4 and into 2024, how are you thinking about the amount of PACE growth as we get beyond this quarter in loan growth and just the overall kind of net balance sheet growth as we get into next year, given there's still a fairly short duration securities portfolio? And obviously, you have some -- still some ability to bring down brokered CDs or borrowings?

Yes. So, not really prepared yet, Chris, to talk much beyond the second quarter of next year. We've targeted the second quarter as sort of the potential end to a flat balance sheet structure. Now within that, we will continue to add PACE assets. Do you think we were a little bit higher than we expected this quarter and that's fine because they were great volume opportunities for us? But I like the idea of somewhere between $35 million and $40 million a quarter in net PACE growth between now and the middle of the second quarter. We've got the capacity coming through from our provider and we think it makes a lot of sense for us to be able to add assets in that space. Between the securities portfolio runoff and cash flow from that, we think that the ability for us to generate loans that 2% to 3% sequential quarter loan growth is still very viable. I do think we're going to keep moving our loans to secure -- I'm sorry our securities to loans ratio in an inverse direction we're about 50-50 right now. And I would expect that to be somewhere around 40% security 60% loans by the time we get to the end of the second quarter next year. And then in terms of like absolute balance sheet growth and where we might go from there if you don't mind I'll reserve on that until we give you our full year projections when we do our Q4 earnings release. They do think will be if we do things the way we expect we'll be in a spot where we'll be able to grow the balance sheet by some amount.

Great. That’s helpful. And do you have how much of the loan portfolio is set to mature over like the next 12 months or so?

I do. And these are somewhat move around numbers just because of the prepayments and other types of events that might occur. But I would guess you're going to be somewhere in the range of over the next 12 months on the commercial portfolio $350 million to $370 million. And I think it's going to split somewhere around two-thirds for commercial real estate including multifamily and about a third of that in C&I. And maybe to answer a follow-on question I think the yield on that particular in the real estate portfolio is going to be a nice opportunity for us to replace a blended yield on the real estate portfolio loan is about just a little over 4%, maybe 4.5% somewhere in that range. So, you'll see quite a bit of the older assets set to mature and whether we reprice on those or we choose to allow those to refinance elsewhere. We think we have plenty of pipeline to be able to keep our repricing PACE going and not have any balance sheet erosion.

Great. And just last one for me. Can we get an early look at what the tax rate could be for next year?

Yes. Right now we think it's going to be somewhere around 27.5%. It can change Chris I just want to be cautious on that. But being at 27% and we're going to finish this year we're targeting 27.4%. We had to go back and do an update to our annual effective tax rate after we became clear that we were going to have higher pretax income. I think we had a little bit of a lower assumption on some of the original estimates when we were earlier in the year and some of the events were unfolding. But based on how we expect to end the year and based on what we think earnings might look like in the forward years I think 27.5% is probably a reasonable estimate at this point Chris and we'll tighten that up for you when we do our ATR calculation early next year.

Got it. Thanks Jason. Appreciate taking my questions.

Thanks Chris.

Good question. Thank you.

Thank you. There are no further questions at this time. And I would like to turn the floor back over to management for closing comments.

Thank you, Camilla and thank you for those very good questions. And of course as Jason mentioned we look forward to next quarter when we can provide a little bit more color as to how the next year looks. So, with that we'd like to as usual invite you to continue to ask your questions. We're available over the course of the next phase and we like to bid you a good day. Thank you.

Thank you. This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.