Amalgamated Financial (AMAL) - 2023 Q2 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This section outlines the nature of forward-looking statements within the report, emphasizing that they are not guarantees of future performance and are subject to various risks, uncertainties, and assumptions Forward-Looking Statements and Risks This section outlines the nature of forward-looking statements within the report, emphasizing that they are not guarantees of future performance and are subject to various risks, uncertainties, and assumptions - Forward-looking statements are not historical facts or assurances of future performance and are identified by terms like 'may,' 'will,' 'anticipate,' 'expect,' and 'estimate'[6] - Key potential risks include uncertain conditions in the banking industry and economies, increased credit losses, deposit outflows, unfavorable capital markets, interest rate fluctuations, fiscal challenges facing the U.S. government, changes in real estate collateral values, regulatory changes, and operational/security breaches[7] - Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of their date, and the Company disclaims any obligation to update them, except as required by law[9] ITEM 1. Financial Statements (unaudited) This section presents the Company's unaudited consolidated financial statements, including statements of financial condition, income, comprehensive income, changes in stockholders' equity, and cash flows, along with detailed notes Consolidated Statements of Financial Condition The Consolidated Statements of Financial Condition provide a snapshot of the Company's assets, liabilities, and stockholders' equity as of June 30, 2023, compared to December 31, 2022, showing a slight decrease in total assets but an increase in total stockholders' equity Consolidated Statements of Financial Condition (Amounts in thousands) | Metric | June 30, 2023 | December 31, 2022 | |:---|:---|:---| | Total Assets | $7,792,812 | $7,843,124 | | Total Liabilities | $7,264,198 | $7,334,169 | | Total Stockholders' Equity | $528,614 | $508,955 | | Deposits | $6,894,651 | $6,595,037 | | Loans receivable, net | $4,184,307 | $4,060,971 | | Allowance for credit losses | $(67,431) | $(45,031) | | Securities Available for Sale | $1,580,248 | $1,812,476 | | Securities Held-to-Maturity | $1,654,531 | $1,541,301 | | FHLBNY advances | $— | $580,000 | | Other borrowings | $230,000 | $— | - Total assets decreased by $50.3 million from December 31, 2022, to June 30, 2023[11] - Total stockholders' equity increased by $19.6 million, primarily due to net income and an improvement in accumulated other comprehensive loss[11] Consolidated Statements of Income The Consolidated Statements of Income present the Company's financial performance for the three and six months ended June 30, 2023 and 2022, showing an increase in net income driven by higher interest income, partially offset by increased interest expense and provision for credit losses Consolidated Statements of Income (Amounts in thousands, except per share) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---|\ | Total interest and dividend income | $85,922 | $58,669 | $170,857 | $109,130 | | Total interest expense | $22,937 | $2,171 | $40,593 | $4,264 | | Net interest income | $62,985 | $56,498 | $130,264 | $104,866 | | Provision for credit losses | $3,940 | $2,912 | $8,899 | $5,205 | | Total non-interest income | $7,944 | $7,246 | $13,150 | $14,668 | | Total non-interest expense | $37,529 | $34,346 | $76,156 | $68,743 | | Income before income taxes | $29,460 | $26,486 | $58,359 | $45,586 | | Income tax expense | $7,818 | $6,873 | $15,383 | $11,808 | | Net income | $21,642 | $19,613 | $42,976 | $33,778 | | Earnings per common share - basic | $0.71 | $0.64 | $1.40 | $1.09 | | Earnings per common share - diluted | $0.70 | $0.63 | $1.39 | $1.08 | - Net income increased by $2.0 million (10.3%) for the three months ended June 30, 2023, compared to the same period in 2022[13] - Net interest income increased by $6.5 million (11.5%) for the three months ended June 30, 2023, primarily due to higher yields and average balances on interest-earning assets[13] Consolidated Statements of Comprehensive Income The Consolidated Statements of Comprehensive Income detail the net income adjusted for other comprehensive income (loss) items, primarily unrealized gains and losses on available-for-sale securities, showing a significant improvement in total comprehensive income for the six months ended June 30, 2023, compared to the prior year Consolidated Statements of Comprehensive Income (Amounts in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---|\ | Net income | $21,642 | $19,613 | $42,976 | $33,778 | | Net unrealized gains (losses) on securities | $(10,948) | $(51,543) | $4,725 | $(115,412) | | Total other comprehensive income (loss), net of taxes | $(7,897) | $(37,322) | $3,493 | $(83,577) | | Total comprehensive income (loss), net of taxes | $13,745 | $(17,709) | $46,469 | $(49,799) | - Total comprehensive income significantly improved from a loss of $49.8 million in the six months ended June 30, 2022, to a gain of $46.5 million in the same period of 2023, largely due to a positive change in net unrealized gains on securities[15] Consolidated Statements of Changes in Stockholders' Equity This statement details the changes in each component of stockholders' equity for the three and six months ended June 30, 2023 and 2022, reflecting the impact of net income, stock repurchases, dividends, and the adoption of new accounting standards Key Changes in Stockholders' Equity (Amounts in thousands) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|\ | Balance at January 1 | $508,955 | $563,875 | | Cumulative effect of adoption of ASU No. 2016-13 | $(17,825) | — | | Net income | $42,976 | $33,778 | | Repurchase of common stock | $(4,582) | $(11,733) | | Dividends declared on common stock | $(6,222) | $(4,957) | | Other comprehensive income (loss), net of taxes | $3,493 | $(83,577) | | Balance at June 30 | $528,614 | $498,041 | - The adoption of ASU No. 2016-13 resulted in a $17.8 million decrease in retained earnings as of January 1, 2023[19] - Total stockholders' equity increased by $19.7 million from December 31, 2022, to June 30, 2023, primarily due to net income and other comprehensive income, partially offset by dividends and stock repurchases[19][300] Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows present the cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2023 and 2022, highlighting significant shifts in investment and financing strategies Consolidated Statements of Cash Flows (Amounts in thousands) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|\ | Net cash provided by operating activities | $62,113 | $68,093 | | Net cash provided by (used in) investing activities | $4,893 | $(983,571) | | Net cash provided by (used in) financing activities | $(64,831) | $917,531 | | Increase in cash, cash equivalents, and restricted cash | $2,175 | $2,053 | | Cash, cash equivalents, and restricted cash at end period | $65,715 | $332,538 | - Net cash provided by investing activities significantly improved from a net outflow of $983.6 million in 2022 to a net inflow of $4.9 million in 2023, driven by changes in securities purchases/sales and loan activities[26] - Net cash used in financing activities in 2023 ($64.8 million outflow) contrasts sharply with a net inflow in 2022 ($917.5 million), primarily due to a $580.0 million decrease in FHLBNY advances and subordinated debt repurchases[26][28] Notes to Consolidated Financial Statements This section provides detailed disclosures and explanations for the amounts presented in the consolidated financial statements, covering significant accounting policies, financial instrument details, and other commitments 1. BASIS OF PRESENTATION AND CONSOLIDATION This note details the basis of accounting, significant accounting policies, and recent accounting standard adoptions, particularly focusing on ASU No. 2016-13 (CECL) and ASU 2022-02, and their impact on the Company's financial statements - The Company adopted ASU No. 2016-13 (CECL) on January 1, 2023, replacing the incurred loss methodology with an expected credit loss model[31] Impact of ASU 2016-13 Adoption (Day 1 Adjustment, in thousands) | Asset/Liability | Gross Adjustment | Tax Impact | Net Adjustment to Retained Earnings | |:---|:---|:---|:---|\ | Allowance for credit losses on held-to-maturity securities | $668 | $(184) | $484 | | Allowance for credit losses on loans | $21,229 | $(5,849) | $15,380 | | Allowance for credit losses on off-balance sheet credit exposures | $2,705 | $(744) | $1,961 | | Total Day 1 Adjustment | $24,602 | $(6,777) | $17,825 | - ASU 2022-02, eliminating the troubled debt restructuring (TDR) model, was adopted on January 1, 2023, on a prospective basis with no material impact on financial statements[50] 2. ACCUMULATED OTHER COMPREHENSIVE LOSS This note provides a summary of the components of accumulated other comprehensive loss (AOCI), net of income taxes, highlighting changes related to benefit plans and unrealized gains/losses on available-for-sale securities Accumulated Other Comprehensive Loss (AOCI) Summary (Amounts in thousands) | Component | Balance as of Jan 1, 2023 | Current Period Change (Six Months) | Income Tax Effect (Six Months) | Balance as of June 30, 2023 | |:---|:---|:---|:---|:---|\ | Unrealized gains (losses) on benefits plans | $(1,652) | $97 | $(27) | $(1,582) | | Unrealized gains (losses) on available for sale securities | $(95,539) | $3,771 | $(1,039) | $(92,807) | | Unaccreted unrealized loss on securities transferred to held-to-maturity | $(11,516) | $954 | $(263) | $(10,825) | | Total | $(108,707) | $4,822 | $(1,329) | $(105,214) | - Net change in unrealized gains (losses) on available for sale securities for the six months ended June 30, 2023, was a gain of $4.7 million, a significant improvement from a loss of $115.4 million in the prior year[57] 3. INVESTMENT SECURITIES This note details the Company's investment securities portfolio, including available-for-sale (AFS) and held-to-maturity (HTM) categories, their amortized cost, fair value, and unrealized gains/losses Investment Securities Summary (June 30, 2023, in thousands) | Category | Amortized Cost | Fair Value | Gross Unrealized Gains | Gross Unrealized Losses | |:---|:---|:---|:---|:---|\ | Available for sale | $1,708,346 | $1,580,248 | $140 | $(128,238) | | Held-to-maturity | $1,654,531 | $1,476,941 | $— | $(178,297) | | Total | $3,362,877 | $3,057,189 | $140 | $(306,535) | - As of June 30, 2023, available for sale securities with a fair value of $937.0 million and held-to-maturity securities with a fair value of $425.4 million were pledged, primarily to FHLBNY[61] - The allowance for credit losses for held-to-maturity securities was $0.7 million at June 30, 2023, with a provision of $20 thousand for the three months ended June 30, 2023[79] - The temporary impairment of fixed income securities is primarily attributed to changes in overall market interest rates and/or changes in credit/liquidity spreads[73] 4. LOANS RECEIVABLE, NET This note provides a detailed breakdown of the loan portfolio, including commercial and retail segments, their credit quality indicators, past due status, and activity in the allowance for credit losses Loans Receivable Composition (Amounts in thousands) | Loan Type | June 30, 2023 | December 31, 2022 | |:---|:---|:---|\ | Commercial and industrial | $949,403 | $925,641 | | Multifamily | $1,095,752 | $967,521 | | Commercial real estate | $333,340 | $335,133 | | Construction and land development | $28,664 | $37,696 | | Residential real estate lending | $1,388,571 | $1,371,779 | | Consumer solar | $411,873 | $416,849 | | Consumer and other | $44,135 | $47,150 | | Total loans receivable | $4,251,738 | $4,101,769 | | Allowance for credit losses | $(67,431) | $(45,031) | | Total loans receivable, net | $4,184,307 | $4,060,971 | Allowance for Credit Losses (ACL) Activity (Six Months Ended June 30, 2023, in thousands) | Metric | Commercial and Industrial | Multifamily | Commercial Real Estate | Construction and Land Development | Residential Real Estate Lending | Consumer Solar | Consumer and Other | Total | |:---|:---|:---|:---|:---|:---|:---|:---|:---|\ | Beginning balance - ALLL (Jan 1, 2023) | $12,916 | $7,104 | $3,627 | $825 | $11,338 | $6,867 | $2,354 | $45,031 | | Adoption of ASU No. 2016-13 | $3,816 | $(1,183) | $(1,321) | $(466) | $3,068 | $16,166 | $1,149 | $21,229 | | Beginning balance - ACL (adjusted) | $16,732 | $5,921 | $2,306 | $359 | $14,406 | $23,033 | $3,503 | $66,260 | | Provision for (recovery of) credit losses | $1,745 | $1,603 | $(21) | $(35) | $600 | $2,974 | $(138) | $6,728 | | Charge-offs | $(1,726) | $(1,127) | $— | $— | $(59) | $(3,631) | $(239) | $(6,782) | | Recoveries | $42 | $— | $— | $— | $327 | $842 | $14 | $1,225 | | Ending Balance - ACL (June 30, 2023) | $16,793 | $6,397 | $2,285 | $324 | $15,274 | $23,218 | $3,140 | $67,431 | - Total loans receivable increased by $149.9 million (3.7%) from December 31, 2022, to June 30, 2023[84] - Nonaccrual loans increased to $33.7 million at June 30, 2023, from $21.7 million at December 31, 2022, primarily driven by construction and land development loans[87][281] 5. DEPOSITS This note summarizes the Company's deposit composition, including non-interest-bearing, NOW, money market, savings, time deposits, and brokered CDs, along with their weighted average rates and maturity schedules Deposit Composition (Amounts in thousands) | Deposit Type | June 30, 2023 Amount | June 30, 2023 Weighted Average Rate | December 31, 2022 Amount | December 31, 2022 Weighted Average Rate | |:---|:---|:---|:---|:---|\ | Non-interest-bearing demand deposit accounts | $2,958,104 | 0.00% | $3,331,067 | 0.00% | | NOW accounts | $199,262 | 0.95% | $206,434 | 0.73% | | Money market deposit accounts | $2,744,411 | 2.02% | $2,445,396 | 0.94% | | Savings accounts | $363,058 | 1.04% | $386,190 | 0.75% | | Time deposits | $161,335 | 1.77% | $151,699 | 2.57% | | Brokered CDs | $468,481 | 5.02% | $74,251 | 3.84% | | Total Deposits | $6,894,651 | 1.27% | $6,595,037 | 0.52% | - Total deposits increased by $299.6 million (4.5%) from December 31, 2022, to June 30, 2023[118] - Total estimated uninsured deposits were $3.93 billion at June 30, 2023, down from $4.52 billion at December 31, 2022[288] 6. BORROWED FUNDS This note outlines the Company's borrowed funds, including FHLBNY advances and other borrowings, detailing their collateralization and outstanding balances - There were no outstanding FHLBNY advances as of June 30, 2023, a decrease from $580.0 million at December 31, 2022[122] - The Company had an outstanding balance of $230.0 million related to the Federal Reserve's Bank Term Funding Program (BTFP) at June 30, 2023, which was not present at December 31, 2022[123] - Interest expense on FHLBNY advances for the six months ended June 30, 2023, was $4.4 million, up from zero in the prior year[122] 7. SUBORDINATED DEBT This note describes the Company's 3.250% Fixed-to-Floating Rate subordinated notes due 2031, including their terms, redemption options, and recent repurchases - The Company has $85.0 million in 3.250% Fixed-to-Floating Rate subordinated notes due 2031[125] - The Company repurchased $4.0 million of subordinated notes on March 17, 2023, contributing to a $0.8 million gain on repurchases for the six months ended June 30, 2023[127] Subordinated Debt Interest Expense (Amounts in thousands) | Period | Interest Expense | |:---|:---|\ | Three Months Ended June 30, 2023 | $0.6 million | | Three Months Ended June 30, 2022 | $0.7 million | | Six Months Ended June 30, 2023 | $1.2 million | | Six Months Ended June 30, 2022 | $1.4 million | 8. EARNINGS PER SHARE This note provides the computation of basic and diluted earnings per common share (EPS) using the two-class method, detailing the factors used in the calculation for the three and six months ended June 30, 2023 and 2022 Earnings Per Share (EPS) Computation | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---|\ | Income attributable to common stock (thousands) | $21,642 | $19,613 | $42,976 | $33,778 | | Weighted average common shares outstanding, basic (thousands) | 30,619 | 30,818 | 30,662 | 30,962 | | Basic earnings per common share | $0.71 | $0.64 | $1.40 | $1.09 | | Diluted earnings per common share | $0.70 | $0.63 | $1.39 | $1.08 | - Diluted EPS increased by $0.07 (11.1%) for the three months ended June 30, 2023, and by $0.31 (28.7%) for the six months ended June 30, 2023, compared to the respective prior periods[130] 9. EMPLOYEE BENEFIT PLANS This note details the Company's long-term incentive plans, including stock options, restricted stock units (RSUs), and the Employee Stock Purchase Plan (ESPP, outlining their status, vesting conditions, and associated compensation expenses Restricted Stock Units (RSUs) Summary (Six Months Ended June 30, 2023) | Metric | Time-based RSUs Shares | Performance-based RSUs Shares | |:---|:---|:---|\ | Unvested, January 1, 2023 | 331,023 | 96,970 | | Awarded | 135,837 | 62,945 | | Forfeited/Expired | (8,294) | (6,013) | | Vested | (124,970) | (23,948) | | Unvested, June 30, 2023 | 333,596 | 129,954 | - Total unrecognized compensation cost related to non-vested RSUs and PSUs was $7.5 million as of June 30, 2023, expected to be recognized over 2.0 years[143] - Compensation expense for RSUs and PSUs increased to $2.0 million for the six months ended June 30, 2023, from $1.1 million in the prior year[143] 10. FAIR VALUE OF FINANCIAL INSTRUMENTS This note defines fair value and categorizes financial instruments into a three-level hierarchy based on observability of inputs, presenting assets measured at fair value on a recurring and non-recurring basis, as well as estimated fair values for instruments not recorded at fair value Assets Carried at Fair Value (June 30, 2023, in thousands) | Category | Level 1 | Level 2 | Level 3 | Total | |:---|:---|:---|:---|:---|\ | Available for sale securities | $194 | $1,557,598 | $22,456 | $1,580,248 | | Total assets carried at fair value | $194 | $1,557,598 | $22,456 | $1,580,248 | Estimated Fair Value of Financial Instruments Not Measured at Fair Value (June 30, 2023, in thousands) | Instrument | Carrying Value | Estimated Fair Value | |:---|:---|:---|\ | Held-to-maturity securities | $1,654,531 | $1,476,941 | | Loans receivable, net | $4,184,307 | $3,833,150 | | Deposits payable on demand | $6,264,835 | $6,264,835 | | Subordinated debt, net | $73,766 | $59,013 | - Individually analyzed loans measured at fair value on a non-recurring basis totaled $6.3 million at June 30, 2023, all categorized as Level 3[155] 11. COMMITMENTS, CONTINGENCIES AND OFF BALANCE SHEET RISK This note details the Company's off-balance sheet risks, including credit commitments (commitments to extend credit and standby letters of credit) and investment obligations, particularly related to PACE assessment securities Off-Balance Sheet Credit Risk (Amounts in thousands) | Instrument | June 30, 2023 | December 31, 2022 | |:---|:---|:---|\ | Commitments to extend credit | $641,697 | $723,902 | | Standby letters of credit | $23,095 | $29,568 | | Total | $664,792 | $753,470 | - The allowance for credit losses on off-balance sheet credit commitments increased to $5.1 million at June 30, 2023, from $1.6 million at December 31, 2022[166] - The Company has an estimated remaining commitment of $132.4 million for the purchase of PACE assessment securities until December 2023[167] 12. LEASES This note provides information on the Company's operating leases, primarily for real estate, detailing lease costs, cash paid, weighted average remaining lease term, and the operating lease liability Operating Lease Costs (Amounts in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---|\ | Operating lease cost | $1,795 | $2,257 | $3,572 | $4,508 | | Cash paid for operating leases liability | $2,816 | $2,632 | $5,629 | $5,262 | - The weighted average remaining lease term on operating leases was 3.3 years at June 30, 2023, with a weighted average discount rate of 3.23%[173][174] Operating Lease Commitments (June 30, 2023, in thousands) | Year | Undiscounted Operating Lease Payments | |:---|:---|\ | 2023 | $5,665 | | 2024 | $11,324 | | 2025 | $10,593 | | 2026 | $9,200 | | 2027 | $959 | | Thereafter | $— | | Total undiscounted payments | $37,741 | | Less: present value adjustment | $1,940 | | Total Operating leases liability | $35,801 | 13. GOODWILL AND INTANGIBLE ASSETS This note addresses the Company's goodwill and intangible assets, including the annual impairment test for goodwill and the estimated amortization expense for the core deposit intangible asset - The carrying amount of goodwill was $12.9 million at both June 30, 2023, and December 31, 2022, with no impairment identified[179] Estimated Amortization Expense for Core Deposit Intangible (Amounts in thousands) | Year | Total | |:---|:---|\ | 2023 | $444 | | 2024 | $730 | | 2025 | $574 | | 2026 | $419 | | 2027 | $265 | | Thereafter | $229 | | Total | $2,661 | - Amortization expense for the core deposit intangible was $0.4 million for the six months ended June 30, 2023[181] 14. VARIABLE INTEREST ENTITIES This note describes the Company's investments in unconsolidated variable interest entities (VIEs) related to solar generation facilities, detailing the maximum exposure to loss and tax benefits recognized - The Company's maximum exposure to loss from tax credit investments in unconsolidated VIEs was $66.9 million as of June 30, 2023[184] Tax Credit Investments and Commitments (Amounts in thousands) | Metric | June 30, 2023 | December 31, 2022 | |:---|:---|:---|\ | Tax credit investments included in equity investments | $6,651 | $3,299 | | Loans and letters of credit commitments | $60,276 | $60,857 | | Funded portion of loans and letters of credit commitments | $53,945 | $47,683 | - Tax credits and other tax benefits recognized from solar generation VIE investments totaled $1.6 million for the six months ended June 30, 2023[185] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a comprehensive analysis of the Company's financial performance and condition, discussing key trends, significant events, and the impact of accounting policies on its results General This section provides an overview of Amalgamated Financial Corp. and Amalgamated Bank, detailing their history, current financial position, and the range of commercial and retail banking, investment management, and trust and custody services offered - As of June 30, 2023, total assets were $7.79 billion, total loans (net) were $4.18 billion, total deposits were $6.89 billion, and stockholders' equity was $528.6 million[191] - The Company's trust business held $40.31 billion in assets under custody and $14.52 billion in assets under management as of June 30, 2023[191] - The Company is B Corporation certified and a member of the Global Alliance for Banking on Values, committed to social and environmental performance[195] New Developments This section discusses the impact of recent bank failures (Silicon Valley Bank, Signature Bank, First Republic Bank) on the banking sector and the Company's proactive measures to monitor and mitigate liquidity risk - Recent bank failures in March and May 2023 generated concerns about the banking sector's health and liquidity[196] - The Federal Reserve introduced the Bank Term Funding Program (BTFP) to provide additional liquidity to eligible depository institutions[196] - The Company implemented precautionary actions including increased deposit monitoring, proactive customer outreach, increased pledging of assets to FHLBNY and Federal Reserve, utilization of BTFP, increased brokered CDs, and higher target cash balances[196] Critical and Significant Accounting Policies and Estimates This section highlights the critical accounting policy for the allowance for credit losses (ACL), which changed with the adoption of ASU 2016-13 (CECL), and discusses the inherent uncertainties in estimating future credit losses - The allowance for credit losses (ACL) is a critical accounting policy, with changes due to the adoption of ASU 2016-13 (CECL) effective January 1, 2023[197] - Estimating future credit losses under CECL involves significant management judgment, relying on past events, current conditions, and reasonable and supportable forecasts, which are subject to volatility[198] - Incorrect assumptions could lead to material changes in the ACL, impacting net income, and bank regulators may require adjustments to the allowance[199][201] Recent Accounting Pronouncements This section addresses the impact of recently issued accounting standards, specifically ASU 2021-01 (Reference Rate Reform), on the Company's financial reporting - The adoption of ASU 2021-01, related to Reference Rate Reform (LIBOR transition), is not expected to have a material impact on the Company's operating results or financial condition[203] Results of Operations This section analyzes the Company's financial performance, focusing on net income, net interest income, provision for credit losses, non-interest income, non-interest expense, and income taxes for the three and six months ended June 30, 2023, compared to the prior year General The Company's results of operations are primarily driven by net interest income, non-interest income, provision for credit losses, income taxes, and non-interest expenses Net Income and EPS (Amounts in millions, except per share) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---|\ | Net income | $21.6 | $19.6 | $43.0 | $33.8 | | Diluted EPS | $0.70 | $0.63 | $1.39 | $1.08 | - The $2.0 million increase in net income for Q2 2023 was primarily due to a $15.1 million increase in interest income on securities and an $11.6 million increase in interest income on loans, partially offset by a $20.7 million increase in interest expense[206] - The $9.2 million increase in net income for the six months ended June 30, 2023, was primarily due to a $61.8 million increase in interest income, offset by a $25.4 million increase in interest expense[207] Net Interest Income Net interest income, a key revenue driver, increased for both the three and six months ended June 30, 2023, primarily due to higher yields on interest-earning assets, despite increased costs of interest-bearing liabilities Net Interest Income and Margin (Amounts in thousands, except percentages) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---|\ | Net interest income | $62,985 | $56,498 | $130,264 | $104,866 | | Net interest spread | 2.33% | 2.88% | 2.52% | 2.74% | | Net interest margin | 3.33% | 3.03% | 3.46% | 2.90% | | Yield on average earning assets | 4.55% | 3.14% | 4.54% | 3.01% | | Average rate on interest-bearing liabilities | 2.22% | 0.26% | 2.02% | 0.27% | - Net interest income increased by $6.5 million (11.5%) for Q2 2023 and $25.4 million (24.2%) for the six months ended June 30, 2023, year-over-year[211][219] - The yield on average earning assets increased by 141 basis points for Q2 2023 and 153 basis points for the six months ended June 30, 2023, driven by the rising rate environment and increased loan/securities balances[214][220] - The average rate on interest-bearing liabilities increased by 196 basis points for Q2 2023 and 175 basis points for the six months ended June 30, 2023, due to higher borrowing costs and deposit rates[214][220] Provision for Credit Losses The provision for credit losses increased for both the three and six months ended June 30, 2023, reflecting consumer loan charge-offs, increased specific reserves for individually analyzed loans, and an impairment charge on a corporate bond Provision for Credit Losses (Amounts in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---|\ | Provision for credit losses | $3,940 | $2,912 | $8,899 | $5,205 | | Provision for credit losses on loans | $3,116 | $2,912 | $6,728 | $5,205 | | Provision for credit losses on securities | $20 | — | $1,200 | — | | Provision for credit losses on off-balance sheet credit exposures | $804 | — | $971 | — | - The Q2 2023 provision increase was driven by $1.4 million in consumer loan charge-offs and a $1 million increase in specific reserves for individually analyzed loans[226] - The six-month provision increase was primarily due to a $1.2 million impairment charge on a SIVB Corporate bond and an additional $1.1 million related to a multifamily loan charge-off[227] Non-Interest Income Non-interest income showed a mixed trend, increasing for the three months ended June 30, 2023, but decreasing for the six-month period, primarily due to increased losses on the sale of securities Non-Interest Income (Amounts in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---|\ | Trust Department fees | $4,006 | $3,479 | $7,935 | $6,970 | | Bank-owned life insurance income | $546 | $1,283 | $1,327 | $2,097 | | Losses on sale of securities | $(267) | $(582) | $(3,353) | $(420) | | Equity method investments income (loss) | $556 | $(638) | $711 | $(206) | | Other income | $389 | $386 | $1,360 | $619 | | Total non-interest income | $7,944 | $7,246 | $13,150 | $14,668 | - Non-interest income increased by $0.7 million for Q2 2023, driven by a $1.2 million increase in equity method investments income and a $0.5 million increase in Trust Department fees[231] - Non-interest income decreased by $1.5 million for the six months ended June 30, 2023, primarily due to $3.0 million in increased losses on the sale of securities, including a SIVB Corporate bond[233] Non-Interest Expense Non-interest expense increased for both the three and six months ended June 30, 2023, primarily due to higher compensation and employee benefits Non-Interest Expense (Amounts in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---|\ | Compensation and employee benefits, net | $21,165 | $18,046 | $43,180 | $35,715 | | Total non-interest expense | $37,529 | $34,346 | $76,156 | $68,743 | - Total non-interest expense increased by $3.2 million for Q2 2023 and $7.5 million for the six months ended June 30, 2023, primarily due to increased compensation and benefits related to headcount and corporate incentive payments[236][237] Income Taxes Income tax expense and the effective tax rate increased for both the three and six months ended June 30, 2023, compared to the prior year Income Tax Expense and Effective Tax Rate | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:---|:---|:---|:---|:---|\ | Income tax expense (thousands) | $7,818 | $6,873 | $15,383 | $11,808 | | Effective tax rate | 26.5% | 25.9% | 26.4% | 25.9% | - The effective tax rate for the six months ended June 30, 2023, was 26.4%, an increase from 25.9% in the same period of 2022[240] Financial Condition This section provides an in-depth analysis of the Company's financial position, including balance sheet changes, investment securities, loan portfolio, allowance for credit losses, nonperforming assets, deposits, interest rate risk, liquidity, and capital resources Balance Sheet The Company's total assets slightly decreased at June 30, 2023, compared to December 31, 2022, with notable shifts in loans, investment securities, and resell agreements - Total assets were $7.79 billion at June 30, 2023, a decrease from $7.84 billion at December 31, 2022[241] - Notable changes include a $123.3 million increase in loans receivable, net, a $119.0 million decrease in investment securities, and a $25.8 million decrease in resell agreements[241] Investment Securities The investment securities portfolio is managed for liquidity, return, and risk, with a focus on low-risk assets like GSE obligations and PACE assessments Investment Securities Portfolio Composition (Amounts in thousands) | Category | June 30, 2023 Amount | June 30, 2023 % of Total Securities | December 31, 2022 Amount | December 31, 2022 % of Total Securities | |:---|:---|:---|:---|:---|\ | Total available for sale | $1,580,248 | 48.8% | $1,812,476 | 54.0% | | Total held-to-maturity | $1,655,238 | 51.2% | $1,541,301 | 46.0% | | Total securities | $3,235,486 | 100.0% | $3,353,777 | 100.0% | - The held-to-maturity portfolio primarily consists of PACE assessments, tax-exempt municipal securities, and GSE certificates[244] - Approximately 84% of non-agency securities (commercial mortgage-backed, CLOs, non-agency mortgage-backed, and asset-backed) carry AAA credit ratings, and 16% carry A credit ratings or higher[256] Loans Lending is a primary driver of net interest income, with the portfolio showing growth in commercial loans, particularly multifamily, and a focus on mission-aligned businesses Loan Portfolio Composition (Amounts in thousands) | Portfolio | June 30, 2023 Amount | June 30, 2023 % of total loans | December 31, 2022 Amount | December 31, 2022 % of total loans | |:---|:---|:---|:---|:---|\ | Commercial portfolio | $2,407,159 | 56.6% | $2,265,991 | 55.2% | | Retail portfolio | $1,844,579 | 43.4% | $1,835,778 | 44.8% | | Total loans | $4,251,738 | 100.0% | $4,101,769 | 100.0% | - The multifamily loan portfolio increased by 13.3% to $1.10 billion at June 30, 2023, from $967.5 million at December 31, 2022[261] - Commercial and Industrial (C&I) loans increased by 2.6% to $949.4 million, focusing on mission-aligned businesses[260] Allowance for Credit Losses The allowance for credit losses (ACL) on loans increased significantly due to the adoption of the CECL standard and subsequent provisions - The allowance for credit losses on loans increased by $22.4 million to $67.4 million at June 30, 2023, from $45.0 million at December 31, 2022[273] - The adoption of the CECL standard on January 1, 2023, increased the ACL on loans by $21.2 million (Day 1 cumulative effect), primarily for the consumer solar portfolio[273] - The ratio of allowance to total loans was 1.59% at June 30, 2023, up from 1.10% at December 31, 2022[273] Nonperforming Assets Nonperforming assets increased at June 30, 2023, primarily driven by an increase in nonaccrual construction loans, while the ratio of nonperforming assets to total assets remained relatively stable Nonperforming Assets (Amounts in thousands) | Metric | June 30, 2023 | December 31, 2022 | |:---|:---|:---|\ | Total nonperforming assets | $35,265 | $28,649 | | Nonaccrual loans - Commercial | $28,078 | $18,308 | | Nonaccrual loans - Retail | $5,606 | $3,391 | | Nonperforming assets to total assets | 0.45% | 0.44% | | Nonaccrual loans to total loans | 0.79% | 0.53% | - The increase in nonperforming assets was primarily due to $8.8 million in construction loans placed on nonaccrual status in Q2 2023[281] - Potential problem loans (special mention and substandard-accruing commercial loans, or 30-89 days past due retail loans) totaled $81.4 million at June 30, 2023[282] Resell Agreements The Company had no outstanding short-term resell agreements backed by residential first-lien mortgage loans as of June 30, 2023, a decrease from the prior period - As of June 30, 2023, the Company had no outstanding short-term resell agreements, compared to $25.8 million at December 31, 2022[283] Deferred Tax Asset The net deferred tax asset increased slightly at June 30, 2023, and management concluded it was fully realizable with no valuation allowance - The deferred tax asset, net of deferred tax liabilities, was $63.5 million at June 30, 2023, up from $62.5 million at December 31, 2022[285] - Management concluded that the entire deferred tax asset was fully realizable with no valuation allowance held against the balance as of June 30, 2023[285] Deposits Deposits, the primary source of funds, increased at June 30, 2023, driven by relationship-based banking - Total deposits were $6.89 billion at June 30, 2023, an increase from $6.60 billion at December 31, 2022[286] - Political deposits totaled approximately $835.8 million at June 30, 2023, up from $643.6 million at December 31, 2022, exhibiting seasonality[287] - Total estimated uninsured deposits were $3.93 billion at June 30, 2023, compared to $4.52 billion at December 31, 2022[288] Evaluation of Interest Rate Risk The Company uses simulation models to assess interest rate risk, evaluating the impact of hypothetical rising and declining rate scenarios on net interest income (NII) and economic value of equity (EVE) Sensitivity to Market Interest Rate Changes (June 30, 2023) | Immediate Shift | Economic Value of Equity Change | Year 1 Net Interest Income Change | |:---|:---|:---|\ | +400 basis points | -27.4% | -19.2% | | +300 basis points | -18.5% | -11.8% | | +200 basis points | -10.7% | -6.1% | | +100 basis points | -3.6% | -2.3% | | -100 basis points | -3.4% | -0.9% | | -200 basis points | -11.8% | -1.6% | - The simulation results are hypothetical and indicate that both NII and EVE are sensitive to changes in interest rates, with larger negative impacts in significant upward rate shifts[291][294] Liquidity The Company manages liquidity to meet operational needs and obligations, supported by liquid assets, liability management, and access to alternative funding sources - Cash and equivalents increased to $65.7 million at June 30, 2023, from $63.5 million at December 31, 2022[299] - Available for sale securities were $1.58 billion at June 30, 2023[299] - The Company had $2.6 billion of immediately available funds (cash and borrowing capacity) and $758.3 million in unpledged securities with two-day availability, providing 85% coverage for total uninsured deposits[299] Capital Resources Total stockholders' equity increased at June 30, 2023, driven by net income and AOCI improvement, partially offset by dividends, stock repurchases, and the CECL adoption - Total stockholders' equity increased by $19.7 million to $528.6 million at June 30, 2023, from $509.0 million at December 31, 2022[300] - The increase was driven by $43.0 million of net income and a $3.5 million improvement in AOCI, offset by $6.2 million of dividends, $4.6 million in stock repurchases, and a $17.8 million tax-effected charge to retained earnings from CECL adoption[300] Regulatory Capital Ratios (June 30, 2023, in thousands, except percentages) | Metric | Actual Amount | Actual Ratio | For Capital Adequacy Purposes Ratio | |:---|:---|:---|:---|\ | Consolidated Total capital to risk weighted assets | $750,668 | 15.26% | 8.00% | | Consolidated Tier 1 capital to risk weighted assets | $615,262 | 12.51% | 6.00% | | Consolidated Common equity tier 1 to risk weighted assets | $615,262 | 12.51% | 4.50% | | Bank Total capital to risk weighted assets | $745,912 | 15.17% | 8.00% | | Bank Tier I capital to risk weighted assets | $684,298 | 13.92% | 6.00% | | Bank Common equity tier 1 to risk weighted assets | $684,298 | 13.92% | 4.50% | Contractual Obligations This section summarizes the Company's contractual obligations, including subordinated debt, operating leases, purchase obligations, and certificates of deposit, categorized by maturity Contractual Obligations (June 30, 2023, in thousands) | Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |:---|:---|:---|:---|:---|:---|\ | Subordinated Debt | $73,737 | $— | $— | $— | $73,737 | | Operating Leases | $37,741 | $5,665 | $31,117 | $959 | $— | | Purchase Obligations | $23,754 | $4,612 | $9,224 | $4,718 | $5,200 | | Certificates of Deposit | $629,816 | $450,989 | $124,322 | $28,746 | $25,759 | | Total | $765,048 | $461,266 | $164,663 | $34,423 | $104,696 | Investment Obligations The Company has ongoing investment obligations related to the purchase of PACE assessment securities, with a remaining commitment until December 2023 - The Company has an estimated remaining commitment of $132.4 million for the purchase of PACE assessment securities until December 2023[308] - PACE assessments held in the Company's AFS and HTM portfolios at June 30, 2023, were $22.5 million and $1.04 billion, respectively[308] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk This section provides disclosures regarding the Company's exposure to market risks, particularly interest rate risk, and how these risks are managed and measured Market Risk Disclosures This section refers to the market risk disclosures provided in Management's Discussion and Analysis, specifically the 'Evaluation of Interest Rate Risk' table, for details on the Company's interest rate sensitivity position - Material changes in market risk from the 2022 Annual Report are described in Part II, Item 1A of this Form 10-Q[310] - The Company's interest rate sensitivity position as of June 30, 2023, is detailed in the 'Evaluation of Interest Rate Risk' table within Management's Discussion and Analysis[310] ITEM 4. Controls and Procedures This section addresses the effectiveness of the Company's disclosure controls and procedures and any changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures Management, including the principal executive and financial officers, concluded that the Company's disclosure controls and procedures were effective as of June 30, 2023 - The Company's disclosure controls and procedures were evaluated and deemed effective as of June 30, 2023[311] Changes in Internal Control Over Financial Reporting There were no material changes in the Company's internal control over financial reporting during the quarter ended June 30, 2023 - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2023[312] PART II - OTHER INFORMATION This section contains additional information not covered in Part I, including legal proceedings, risk factors, equity sales, other disclosures, and exhibits ITEM 1. Legal Proceedings The Company is involved in various legal proceedings in the ordinary course of business, but management believes that none will have a material adverse effect on its financial condition or results of operations - Management believes that no pending or threatened legal matter will result in a material adverse effect on the Company's consolidated financial condition or results of operation[314] ITEM 1A. Risk Factors This section updates the Company's risk factors, emphasizing new and heightened risks related to stress and volatility in the banking sector, increased credit risk, liquidity risk, and potential stock volatility following recent bank failures, as well as fiscal challenges facing the U.S. government - Recent bank failures have generated concerns about the banking sector's health and liquidity, potentially impacting the Company's ability to attract and maintain deposits and increasing FDIC assessment costs[316] - Increased credit risk is noted due to interdependencies in the financial system, with potential for additional credit losses if counterparties or customers face difficulties[317] - Liquidity risk is a significant concern, with potential impairment of funding sources due to market downturns, regulatory actions, or deposit outflows, especially from political deposits and uninsured deposits[318][319][322] - Fiscal challenges facing the U.S. government, including credit rating downgrades, could negatively impact the value of investments in GSEs and the broader financial markets[325][326] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section provides details on the Company's common stock repurchase activities during the three months ended June 30, 2023, including the number of shares purchased and the remaining authorization under its repurchase program Common Stock Repurchases (Three Months Ended June 30, 2023) | Period | Total Shares Purchased | Average Price Paid Per Share | Shares Purchased Under Publicly Announced Plans/Programs | Approximate Dollar Value Remaining Under Plans/Programs | |:---|:---|:---|:---|:---|\ | April 1 through April 30, 2023 | — | — | — | $25,672,104 | | May 1 through May 31, 2023 | 69,800 | $15.03 | 69,800 | $24,622,884 | | June 1 through June 30, 2023 | 92,554 | $15.74 | 69,162 | $23,514,795 | | Total | 162,354 | $15.44 | 138,962 | | - The Company repurchased 138,962 shares as part of its publicly announced program during the quarter, with $2.2 million of common stock purchased under this authorization[329][330] - As of June 30, 2023, approximately $23.5 million remained authorized for repurchase under the program[329] ITEM 5. Other Information This section confirms that no directors or executive officers adopted or terminated any Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements during the three months ended June 30, 2023 - No directors or executive officers adopted or terminated any Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements during the three months ended June 30, 2023[332] ITEM 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including organizational documents, certifications, and interactive data files - Key exhibits include the Certificate of Incorporation, Bylaws, Equity Incentive Plan, Rule 13a-14(a) Certifications of the CEO and CFO, Section 1350 Certifications, and Interactive Data Files (iXBRL)[334][335][337][338][339] Signatures This section contains the required signatures of the Company's principal executive officer, principal financial officer, and principal accounting officer, certifying the report's submission - The report is signed by Priscilla Sims Brown (President and CEO), Jason Darby (Chief Financial Officer), and Leslie Veluswamy (Chief Accounting Officer) on August 4, 2023[343]