Amalgamated Financial Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2024

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Amalgamated Financial First Quarter 2024 Earnings Call. During today's presentation, all parties will be in 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.

Operator

Jason Darby, Chief Financial Officer. Please go ahead, sir.

Speaker 1

Thank you, operator, and good morning, everyone. We appreciate your participation in our 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 in 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.

Speaker 1

And 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 2023 10 ks filed on March 7, 2024, 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.

Speaker 1

S. GAAP. A reconciliation of these non GAAP measures to the most comparable GAAP measure be found in our earnings release as well as on our website. Let me now turn the call over to Priscilla.

Speaker 2

Good morning, everyone, and thank you for joining us. It's great to be here today to discuss our Q1 results, which continue to show Amalgamated as a banking industry leader, highlighted by a 16% increase in core net income, 5 basis points of net interest margin expansion and stellar deposit growth. Despite continued turbulence in the banking sector during the quarter, this time centered around metropolitan real estate asset concerns, we proved once again that our unique and valuable business model is well positioned to thrive in varying economic conditions. This clearly separates Amalgamated from our peers and affirms my incredible optimism for the future. I used the word stellar a moment ago to describe our deposit growth, but I'd like to put that into context.

Speaker 2

It goes without saying that the deposit gathering landscape remains a challenging environment. Higher interest rates have not abated and recent economic data has certainly muted sentiment for rate cuts throughout the remainder of the year. The reality is that we cannot control any macroeconomic factors and so we must plan for variability. I speak often about our differentiated deposit gathering franchise and this is where it shines the brightest. For the quarter, our on balance sheet deposits excluding brokered CDs increased $374,000,000 or 5.5 percent.

Speaker 2

We also moved approximately $154,000,000 of dollars of deposits off balance sheet into our reciprocal network, and we are now managing over $450,000,000 of off balance sheet deposits. In total, we brought in over $480,000,000 in new deposits during the Q1, results that we consider to be stellar in this environment. Importantly, our deposit growth was broad based once again with strength in our political, our union, our non profit and our social advocacy segments. Our political segment delivered $250,000,000 of inflows as the presidential election continues to approach. This growth is ahead of our cycle over cycle historical trend as our political deposits totaled $1,400,000,000 atquarterend, well above the prior peak of $1,300,000,000 during the midterm election cycle in 2022 and forecasted to match the continuous record setting fundraising we see each presidential election year.

Speaker 2

While political deposit inflows have continued through April, we expect outflows to begin toward the end of Q2 and into the Q3 as campaigns begin to spend more aggressively in the ramp up to November's election. We also experienced deposit growth across our union, nonprofit and social advocacy customer segments with inflows of $230,000,000 representing a mix of both new and existing customers. As I've said before, this is a challenging deposit gathering environment and Amalgamated has something very few banks have, an undisputed reason to win the ties when they come up. Looking to the balance of the year, we remain focused on driving organic deposit growth across our core customer segments and we're encouraged that the success we have achieved will continue. A big opportunity is to offset the expected political deposit outflows with lower cost core deposits versus using higher cost borrowings.

Speaker 2

We are ahead of our deposit plan through the first quarter, which puts us on track to consider our conditional growth target for the second half of the year. Though we have been cautiously expanding our portfolio through the Q1, given the environment that we're in, we also remain optimistic that our socially responsible banking business will provide a source of growth over the balance of the year and beyond. This is a market segment where we have a dominant position and we expect significant investment over the next 10 years in order for the U. S. To achieve the goal of net 0 emissions by 2,050.

Speaker 2

The Inflation Reduction Act is a catalyst as monies are earmarked for critical projects in the renewables, Infrastructure and Water segments of the market. In fact, I've been spending much of my time building and expanding relationships with the organizations that will benefit most from these funds, of which the recipients are now being identified and whose funding is expected to begin flowing a substantial impact on lowering emissions in the United States. Wrapping up, our results show that we are in a path to continue delivering solid earnings and growth in tangible book value for our shareholders. Our quarterly results and optimism for the year would not be possible without the dedication and hard work of our very talented employees as well as our changemaker partners and our customers. To you all, I say congratulations and thank you.

Speaker 2

Jason, over to you.

Speaker 1

Thanks, Priscilla. Hi there and good morning everyone. Before I get started, I'd like to take a moment to note that we have revised the layout of our company earnings presentation. We've streamlined the information to spend more time on key highlights and also to shorten the length of our prepared remarks. We've moved many of the traditional detail slides to the appendix and have also created some new appendix slides such as a reconciliation of core deposits and the metrics index for you to conveniently refer.

Speaker 1

I'm going to start off on Slide 3 of the earnings deck. Our 2024 Q1 produced solid results. Net income was $27,200,000 or $0.89 per diluted share And core net income, which is a non GAAP measure, was $25,600,000 or $0.83 per diluted share. And as Priscilla mentioned, that was an increase of 16% from the previous quarter. The quarterly results also featured increased net interest income to $68,000,000 5 basis points of net interest margin expansion, a 22 basis point leverage ratio increase, a dividend increase announcement to $0.12 per share and significant growth in deposits across multiple segments, all of which I'll discuss in further detail.

Speaker 1

Taken as a whole, we are very pleased with our core operating performance. Continuing to Slide 4, we look at some of our key performance metrics during the Q1. Starting on the left, our tangible book value per share increased $0.99 or a healthy 5.29 percent to $19.73 primarily driven by our quarterly earnings. And our core revenue per diluted share was $2.48 for the Q1, essentially the same as last quarter. Moving across, let's take a quick look at our returns.

Speaker 1

Core return on average equity was a very strong 17.14%, which was a nice uptick from the prior quarter and in line with previous quarters in 2023 and also reflective of the bank's above peer net interest margin. We are especially pleased with our core return on average assets of 1.27%. And while we know we have more work to do to develop non interest income streams, our core return on average assets shows the bank firing on most cylinders and our earnings potential becoming reality. Moving to capital, as previously discussed, we've been unwavering on our building our capital position and saw our Tier 1 leverage ratio improve another 22 basis points to 8.29 percent as we are on track to achieve our 8 point 5% target by the end of the Q2 of 2024. Our tangible common equity to tangible assets was 7.41 percent for the quarter in comparison to 7.16% from the previous quarter, despite long term interest rates ticking up and we believe this nicely shows the result of us aggressively turning over our securities portfolio.

Speaker 1

As a reminder, we've sold more than $620,000,000 of securities over the past 8 quarters. Turning to Slide 5, total deposits at March 31, 2024 were $7,300,000,000 an increase of $293,800,000 from the linked quarter, but this only tells part of the story. On balance sheet deposits excluding brokered CDs increased by $373,800,000 or 5.5 percent to $7,100,000,000 though there were significant additional deposit growth during the quarter. Non interest bearing deposits represent 45% of average deposits and 45 percent of ending deposits excluding brokered CDs, contributing to an average cost of deposits of 146 basis points in the Q1 of 2024, up 11 basis points from the linked quarter. Additional details on this can be found in the index of the appendix.

Speaker 1

Now checking in on political deposits, we're up to approximately $1,400,000,000 as of March 31, 2024, an increase of $250,400,000 on a linked quarter basis and through April 17, 2024, we've had a further $87,500,000 of political deposit inflows, setting a new high watermark for our political deposit franchise. We do expect political deposits to begin flowing out towards the end of the second quarter, but balances have exceeded our expectations so far. We also note that we classify political deposits raised during the election year as non core deposits given their transactional nature. In keeping with our neutral balance sheet strategy, we are now managing $456,800,000 of deposits off balance sheet comprised primarily of transactional political deposits and certain transitional deposits scheduled for our trust business. Our continued deposit strength is also allowing us to reposition our balance sheet for sustainable profitability and returns.

Speaker 1

During the quarter, we utilized our on balance sheet deposits to pay down our higher cost borrowings and brokered CDs by a total of $250,000,000 which is faster than our expectations entering the year. This funding mix shift will help mitigate further cost pressure, especially if the recent rise in interest rates were to drive increased pressure on deposit costs. Jumping ahead to Slide 67, the book value of our traditional securities portfolio increased $3,300,000 during the quarter, primarily as a result of $128,000,000 in purchases, which were offset by $75,500,000 in strategic sales and $50,300,000 in traditional securities pay downs. Net PACE assessment growth was $10,100,000 and we anticipate our PACE production to increase to between $20,000,000 $25,000,000 in the second quarter as we add additional purchases. Our pre tax unrealized loss position in our traditional available for sale securities portfolio was $94,100,000 or 6.1% of the total portfolio balance, improving by $8,600,000 from the previous quarter, largely as a result of our continued repositioning of our portfolio by strategically offsetting underwater security sales with income generated by our off balance sheet deposit strategy.

Speaker 1

Turning to Slide 8, net loans receivable at March 31, 2024 were $4,400,000,000 an increase of $13,800,000 or 0.3 percent compared to the linked quarter. The increase in loans was primarily driven by $27,300,000 increase in multifamily loans and a $3,100,000 increase in commercial and industrial loans offset by a $9,800,000 decrease in consumer solar loans and a $6,300,000 decrease in residential loans. The yield on our total loans increased 8 basis points to 4.76% during the quarter. The loan yield increase was mainly attributed to the improved yield of new loans generated during the previous quarters and we saw increases across nearly all individual asset classes. Slides 9 through 11 are new additions to our earnings deck to better illustrate our exposure to certain real estate asset classes.

Speaker 1

As we've spoken about many times, we've been de risking our real estate portfolio for the past 2 plus years since our new real estate management team arrived and is evidenced by an over $112,000,000 improvement in related classified and criticized assets. We think it is very important to stipulate that all bank metropolitan real estate portfolios are not the same as evidenced by our strong underwritten DSCRs and our low LTVs. On Slide 10, over the balance of the year, we have $174,000,000 in maturing lower price commercial real estate and multifamily loans. We've already been working with all the borrowers well in advance of maturity and feel comfortable with our plans for action, relative risk and related allowance reserve coverage at this time. Spending a moment on Slide 11, we have identified office only commercial real estate loans and multifamily loans subject to pre-nineteen seventy four New York State rent stabilization rules as those with higher risk profiles within our total real estate portfolio.

Speaker 1

All that said, we recognize that our portfolio holdings viewed as a percent of multiple categories nicely reflects the bank's diversification and asset classes and relatively benign exposure profile as our office only commercial real estate portfolio was $61,000,000 comprised of all past grade credits and less than 23% of our multifamily portfolio had loans with units subject to pre-nineteen seventy four rent stabilization rules. On Slide 13, the net interest margin was 3.49 percent for the Q1 of 2024, an increase of 5 basis points from 3.44 percent in the quarter. The increase is largely due to increased yields and average balances of interest earning assets driven mainly by rising loan yields and securities purchases. While we are rather pleased with our margin expansion, we are acutely aware of continuing higher rate environment and the ongoing competition for deposits. Assuming no changes from the Fed, we expect to see asset yields continue to grow as we turn over our balance sheet.

Speaker 1

But we also believe deposit costs will continue to rise as well. A key offset for us is the retiring of more than $320,000,000 of higher cost borrowings in 2024 that can be replaced with lower cost deposits, dollars 250,000,000 of which occurred in the Q1 as I noted a few moments ago. On Page 14, core non interest income, which is a non GAAP measure was $8,300,000 compared to $8,500,000 in the linked quarter. The decrease was primarily related to lower BOLI income, partially offset by an increase from fees from our treasury investment services. As a reminder, we report non interest income generated from our off balance sheet deposit strategy as non core due to its temporary nature.

Speaker 1

Core non interest expense also a non GAAP measure was $38,500,000 an increase of $800,000 from the Q4 of 2023. And this was mainly driven by a $1,100,000 increase in compensation and employee benefits expense due to select differential investment in employees as well as increased payroll taxes. Moving to Slide 15, non performing assets totaled $34,000,000 or 0.42 percent of period end total assets at March 31, 2024 and our criticized assets decreased $9,000,000 to $100,900,000 on a linked quarter basis. The criticized or classified loans decrease was largely related to the payoff of $6,600,000 of commercial and industrial loans and the upgrade of $3,000,000 of commercial and industrial loans. On Slide 16, the allowance for credit losses on loans decreased $1,300,000 to $64,400,000 at March 31, 2024 from $65,700,000 in the previous quarter and the ratio of allowance to total loans was 1.46 percent, a decrease of 3 basis points from 1.49 percent in the linked quarter.

Speaker 1

Provision for credit losses totaled an expense of $1,600,000 for the 1st quarter compared to an expense of $3,800,000 in the Q4 of 2023. The expense in the Q1 is primarily driven by increases in required reserves and charge offs on the solar loan portfolio as well as reserve build for our multifamily portfolio, which we deemed prudent to reflect current market repricing conditions and was not driven by any particular credits. These were partially offset by improvements in macroeconomic forecasts used in the CECL model. Turning to Slide 17, we are modestly raising our full year 2024 guidance to core pre tax pre provision earnings of $145,000,000 to $149,000,000 and net interest income of $270,000,000 to $274,000,000 which considers the effect of the forward rate curve for 2024. To conclude, we will continue with our neutral balance sheet strategy through the Q2 as we continue to pursue our stated Tier 1 leverage target of 8.5%.

Speaker 1

We will also be monitoring a number of macroeconomic factors to inform our decision making and our credit quality metrics will be key as we determine whether to accelerate our balance sheet growth 3% in the second half of the year. The most important factor will be the performance of our deposit gathering franchise given the significant political deposit outflows that we'll expect in the Q4 when the presidential election concludes. And we remain optimistic with deposit growth that we've been experiencing our core customer segments outside of political. Briefly looking at the Q2, we are cautiously optimistic that our net interest margin can experience a possible 2 to 3 basis points of expansion. Correspondingly, we anticipate our net interest income to range between $68,000,000 $70,000,000 in the Q2 of 2024.

Speaker 1

And while we do not expect a Fed rate cut in June, we estimate an approximate $2,200,000 decrease in annual net interest income for a parallel 25 basis point decrease in interest rates beyond what the forward curve currently suggests. So in closing, we're very happy with our Q1 results and we're cautiously optimistic for the remainder of the year. We'll look forward to updating you all again with our Q2 results in July. And with that, I'd like to ask the operator open up the line for any questions. Operator?

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Alex Trodahl with Piper Sandler. Please proceed with your question.

Speaker 1

Hey, good morning.

Speaker 3

Good morning. Good morning, Alex.

Speaker 4

I wanted to start with some of the comments that you made, Priscilla, on some of the dollars that are earmarked in the IRA towards sustainability initiatives. And one that I was looking at recently was this Greenhouse Gas Reduction Fund, which seems like it's pretty new and some substantial dollars that are earmarked towards various projects. And I was wondering if you could just give us a little bit more color and thoughts on if you know how some of that money will actually flow and how amalgamated could actually play into some of these types of projects and initiatives?

Speaker 2

Yes. Thank you, Alex. It's a great question and great timing for us. Well, first of all, the distribution of funds could be done a number of ways, but and we don't know exactly how that's going to happen. We will know as of September when that disbursement is intended to occur or at least the announcement of how it's going to be happening.

Speaker 2

But look, we are well positioned to help organizations manage the receipt of those funds, whether it's for immediate use or whether the funds need to be placed in ways that will cause the use to occur over time. This is not inconsistent with what we have done in the past. We moved large sums of money in laddered fashion for our union clients over the last year or more using different tranches of treasuries to maintain liquidity when the customer needed it. So in that sense, it's much like the work we've already done. In addition to that, the political group that we have developed came out of the White House and has been very tuned into the IRA for quite some time now.

Speaker 2

And the advantage we have is that we know most of the awardees well, either they are customers or they are part of, I will call them coalitions or groups, which have been formed and that group is a new one. But it's made up of a number of green banks, which with whom which we've done business. So an example of one that's been announced is the Coalition of Green Capital. They're the aggregator of green banks. And again, that's a community we work well with.

Speaker 2

And the advantages for us in addition to the fact that we know a lot of these clients and have been helpful to them as they've gone through this process. We also we have a unique understanding of the renewable energy financing programs and methods. And so we would like to continue to advise them and we think we'll have a differential advantage in doing so. So we're really excited about this, Alex. We think it's going to be fun to deploy these assets in ways that both fulfill the mission and help grow the bank.

Speaker 4

Okay. So it sounds like, we got to really wait till September to find out some of the specifics. But I mean, would you say that they could be balance sheet opportunities for Amalgamated or is it mostly just partnership and yes, okay.

Speaker 2

No, no, no. I think there's opportunities both in deposits depending on how these funds are going to be dispersed as well as financing opportunities for us as well. And it's $20,000,000,000 that's been announced thus far. There's another $7,000,000,000 to be announced. And as we go down the line, there will be other activities.

Speaker 4

Okay. We'll wait to see how that progresses. And then I wanted to ask and maybe this is kind of a stupid question, but when we think about the deposits that are off balance sheet right now and kind of being the more transactional political deposits, should we think of those as like the first line of defense or the political deposit outflows that we expect in the Q2 so that maybe those political deposits start to decline towards the end of the second into the third quarter, but the actual deposits on amalgamated balance sheets really aren't impacted?

Speaker 2

Why don't we both? I'll take that first part of that. One way to think about that is we have planned for this political deposit outflow. And if you look at what's happened over the last couple of quarters, you'll see that you've seen deposits grow not only in political, which we consider to be somewhat transactional, but also deposit growth in our core areas and in other parts of the business and in other segments.

Speaker 3

Yes. And Alex, I think you're thinking about it similar to the way we are in the sense that the off balance sheet deposits likely would be the first line of defense for the inevitable outflow of these political deposits the closer we get to the conclusion of the election cycle. That said, we still have the ability to time or advance some borrowings pay downs and we may choose to do that first, in which case you could see deposits on balance sheet being used to support political outflow. But given the nature or the size of the off balance sheet deposits right now and the relatively low amount of wholesale funding that we would have able to be paid off here in the second quarter, it's very likely that the first line of defense will be the off balance sheet deposits to support the initial outflow of the political deposits.

Speaker 4

Okay. That's great. And then just a final question, just to dig a little bit more into the multifamily and appreciate all the additional disclosure that you guys provided this quarter. When we think about sort of the mission aligned portion of multifamily, can you help us think about that a little bit more and sort of maybe some of the factors that would differentiate what Amalgamid has on its balance sheet and the types of new multifamily loans that Amalgamid is making today versus maybe the overall perception of what's happening in the market?

Speaker 3

Sure. The mission aligned nature of our business, I think, lends itself itself mainly to relationships and our ability to really understand the clients that we're lending to that we're doing business with and being able to better understand also the financing requirements of these organizations. Now at the same time, we've certainly identified asset classes that have less restriction relative to rent stabilization rules versus greater. And we've spent a lot more of our time in the recent years lending into 421a style buildings, Section 8s, those that have greater abilities to have support for repayment streams and a little bit less so on some of the more onerous for 20 1, I'm sorry, pre-nineteen seventy four rent regulations. But to maybe just roll the answer up more succinctly, I think it's really relationship driven, knowing who your customer actually is, knowing what the financing requirements are before getting into the transactions and being very acutely aware of where the regulation sensitivities are and trying to lend away from areas where we have free market constraints and really stay more in areas where we have the ability to gain competitive market on our particular assets that we invest in.

Speaker 4

Okay, that's helpful. Thanks for taking my questions. Thanks, Alex. Thanks, Alex.

Operator

Thank you. Our next question comes from the line of Janet Lee with JPMorgan. Please proceed with your question.

Speaker 5

Good morning.

Speaker 6

Good morning.

Speaker 5

Good morning. I appreciate all the comments on your multifamily portfolio, but if we can go back to what happened in the Q1, can you just walk us through how much of your rent regulated multifamily portfolio might have come due and got refinanced or paid off? How much you had to modify and extend if any because they weren't getting refinanced?

Speaker 3

Sure. It wasn't an incredible amount. I think it was under $25,000,000 that came due in the first quarter. We've got about $63,000,000 of the pre-nineteen seventy four multifamily real estate assets are going to come due between now and the rest of the year. So on average, it's about $100,000,000 or so per year, which is fairly consistent with the runoff chart that we've had in the past, Janet.

Speaker 3

There wasn't any significant concessions that we had to make in any of the refinances that we made in this particular quarter. It was fairly neutral in terms of being able to roll those assets over like in I give a lot credit to the fact that there were strong LTVs on the properties already. The borrowers had the ability to put cash into deals where needed and we have been in touch with borrowers long before the renewals were set to take place. So there weren't any surprises with regard to anything in the Q1 for us. Looking outward, we see a very similar track.

Speaker 3

We have identified individually all of the credits obviously that we're going to be renewing. We've been in conversation with all of those borrowers where there is potential stress in some of these deals. We've been working on various arrangements to help the borrowers stay in their properties and keep the cash flow moving for the bank. And again, I think we're aided by just a really nice profile relative to as underwritten DSCRs and lower LTVs maybe than other peers are experiencing. So overall, I think we're in a pretty decent spot.

Speaker 3

We're certainly aware that there is risk and we're managing towards that. And we did a little bit of reserve buildup in our multifamily portfolio just to account for the general environment relative to the multifamily or the real estate profile in general for Metropolitan Banks. But none of our reserve bill was really related to anything specific. It was more just reaction to the general environment.

Speaker 5

Okay. Got it. And so basically, is it fair to say? I mean, if I look at your criticized and classified balances only looks like it's only $10,000,000 no past due or NPLs in that part of the portfolio. And I mean, you built reserves, but still at 38 basis points.

Speaker 5

Are you basically saying this is just a reflection of higher rates for longer and not an expectation for like lost content coming?

Speaker 3

Not an expectation for lost content. And I think your observation of the asset facts from a non performing and from a criticized asset and past due point of view are accurate. We just haven't really seen the loss rates in our actual portfolio, maybe that has been reflected in other reporting for other institutions. And that said, we also have seen fairly stable past due performance. I think we did have a blip at the end of the Q4 and we had communicated that that was a documentation issue and that returned to current status and you see see that in the Q1 numbers, but it's really just a reflection of the current market environment as you point out.

Speaker 3

We think that the interest rate environment will probably remain in a higher state than maybe was originally being thought of earlier in this particular year. And we just felt it would be prudent to have a little bit more reserve on our books at this particular time. But we feel good about the assets that we have and we feel really good about what's coming due through the maturity schedule and that we have a good plan of action to be able to manage the assets appropriately.

Speaker 5

Okay, great. And back to comment about bringing in lower cost or deposits to plug the hole of expected political deposit outflows in the second half. How much are we thinking here? I mean, traditionally you guys have tapped FHLB. What sort of gives you better confidence this time around?

Speaker 5

And besides political, where specifically are you seeing growth momentum in deposits picking up of all the niche segments?

Speaker 3

Sure. I'll go in reverse for the questions, Jen. And forgive me if I missed one, I may ask you just refresh me on it. But the growth in the other deposits, we see the social advocacy and not for profit really leading the charge in terms of new deposit attraction. We are also seeing some fairly substantial wins in our union based business.

Speaker 3

We saw a little bit of that last quarter and that had fairly sizable balances, but those tend to take a lot longer on the cycle for new account generation. So I would expect we're going to see a tremendous amount of new union deposits throughout the year. That said, we are seeing increased balances as well from our existing union clients. And so taken as a whole between social advocacy, not for profit and union, that's where we're seeing the majority of the non political deposit growth occurring. Forgive me, Janet.

Speaker 3

What was

Speaker 1

the first part of your question

Speaker 3

on the political? Just was it outflows and what we should expect to say?

Speaker 5

Yes. I mean, how much are we thinking in terms of being able to plug that hole of expected political deposit outflows? Any like any way to quantify or in terms of like the magnitude?

Speaker 3

It's difficult to really predict it at this point in time. What I can say is a little bit about what we've seen in the past and really where we target. Generally speaking, we target between $500,000,000 $600,000,000 of funding requirements in the Q4 of an election year to plug the hole if you will for deposits that would leave to support these campaigns. And that really is a back end number that depends upon how well we did relative to our political targets to begin with in addition to how well or how close to plan we are with our other non political deposit segments. Where we are right now is we are ahead of plan fairly well for both the political deposit gathering and the non political, right?

Speaker 3

So where we come in now, we're about $1,400,000,000 maybe even a little bit over midway through April on political deposits. That certainly exceeded what we expected where we expected to be at this point. That will probably mean we're going to end up having more outflow, but it's really again difficult to say how things are going to ultimately end up. But all that equal, the other deposits, the non political deposits are also proceeding ahead of our plan as well. Now if we're able to stay on this particular pace, we would think it would be likely we would not need to use $500,000,000 or $600,000,000 of wholesale funding to plug the deposit outflow.

Speaker 3

It may be some number less. I don't really know, Jenn, I don't have a good number to give you at that point in time. But it's also very much what factors into our conditional balance sheet growth strategy for the back half of the year. So as we get more clarity a little bit further into this year, we'll be able to communicate a little bit better and you might even see that end up in balance sheet growth manifestation as well.

Speaker 5

Got it. And if I can add just final question, since you guys are approaching that 8.5 percent Tier 1 leverage target, how should we think about buyback in the second half of twenty twenty four?

Speaker 3

For stock buyback? Right.

Speaker 2

I think it's

Speaker 3

yes, I think it's always an arrow in our quiver. We will look at the situation as it presents itself relative to the market value of the stock at a particular point in time relative to the book value of the company. As we approach that 8.5 percent Tier 1 leverage, we're certainly seeing a corresponding increase in tangible book value. And we know that we're ready and able to step in our stock wherever we feel that it's not appropriately valued. The other thing is we in our capital building plan, we do allow for a provision for stock buyback.

Speaker 3

And so, as we go to that 8.5% lever, we're not constrained by any way in terms of being able to perform buybacks within a quarter and still try to achieve that target. So that's generally how we look at it and it's very much a as the world turns type of scenario.

Speaker 5

All right. I'll step back. Thanks.

Speaker 4

Thanks, Janet. Thanks, Janet.

Operator

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

Speaker 6

Hey, Priscilla and Jason. Just wanted to quickly circle back to the multifamily. I appreciate all the commentary so far. Was there is some growth this quarter. Was that growth in rent regulated segments or is that I guess or what segment was it in?

Speaker 3

Yes, it's generally in the 421A or the Section 8 housing. I shouldn't even say generally, it's majority if not all in those particular sections, where I mentioned earlier really trying to navigate some of the free market restrictions with what the assets are that we put on the portfolio. And so we're spending more time in the space where we can get some better market opportunity for ourselves and also for of course the borrowers.

Speaker 6

Got it. And to the extent that you're putting on growth in those segments going forward or maybe even just using the Q1 actuals as an example. I mean, what are the general credit metrics that you're looking to target in terms of what's the yield on it and what's the debt service coverage ratio and what are the LTVs? Are they higher than they've been in the past given some of the stresses?

Speaker 1

Yes. I think

Speaker 3

we certainly are looking at credits with a sharper eye and I think also we've been more conscious of what we're allowing to make its way into our pipeline. So I don't think on balance we'll have the same type of net loan growth numbers in the real estate portfolio this year that we had in last year. But we still think that there's really good opportunities to put on quality assets. And so we talked a moment ago about doing some 421A and Section 8 style housing loans. There's also great opportunities in the industrial asset class as well.

Speaker 3

Thinking about LTVs and DSCRs, when we have a standard for DSCRs and I would generally think of now as 1.3 is sort of a measuring stick for what we think makes a good credit for the time being. On market rates, we've said this multiple times, we really want to be at where market pricing actually is. We can see things in the 6.5 range. We can see things maybe a little bit below if there is quality deposits that help us hurdle a little bit better on in terms of our returns. And from an LTV point of view, really thinking somewhere in that 55% range, 60% range, somewhere in that range are the standards that we're really looking at today.

Speaker 3

And those things can change over time. But right now, given the environment we're in and the way that the bank is trying to protect its balance sheet and its risk profile, that's pretty much where we're at in terms of new deal flow.

Speaker 6

That's helpful. And what are the market rates generally that you guys are seeing out there right now on that?

Speaker 3

We're seeing things it's moved around a little bit, but we're seeing things between as low as 6% and we're seeing things in the 6.5%, six 0.7% range as well.

Speaker 6

Got it. And when you've looked at these recent deals and you've gotten like the updated appraisals, just like generally, do you have a sense of how much they were down from when they were last appraised?

Speaker 3

I don't have a great number to for you. I mean, our overall average weighted average DSCRs have risen a bit. Generally, we used to be in the high 40s to low 50s. I think we're now up in the high 50s and low 60s in certain LTVs. So, we still feel really good about our LTV profile, but maybe that gives you an indication of the erosion of market point of view, at least from what we've seen.

Speaker 6

Great. And then I think you mentioned the pace production increase in Q2. Is it $20,000,000 to $20,000,000 to $25,000,000 an increase over Q1 production or was that the targeted total production in 2Q? Yes.

Speaker 4

Yes. Yes. Yes. Yes. Of course.

Speaker 2

Well, generally, we are production is for 1Q slightly lower than the mid-30s production we typically had. But what's also different is that there was generally around $5,000,000 to $8,000,000 I think, Jason, of pay down to those, right? And this time, I think it was up to around 17.

Speaker 1

Yes.

Speaker 2

So I think the difference, the net number difference that you're seeing reflects both sides.

Speaker 3

Right. And to talk about what you should see in Q2, Chris, I think it would be around $20,000,000 $25,000,000 net production, not in addition to the $10,000,000 that we did in this particular quarter as Priscilla was mentioning a moment ago. The originations, we think there is a couple of good opportunities for us to add some additional purchases outside our normal production provider to make sure we're at our $20,000,000 $25,000,000 net target for Q2. And that's really on the R PACE side. We still have good opportunities in our pipeline for CPAACE that we could see flowing through as well.

Speaker 3

So when I talk about those numbers and I think Priscilla mentioned it in her comments as well, we're really referring to the residential pace as those quoted volumes of $20,000,000 $25,000,000 and anything from the C PACE would be incremental to that PACE number that we just talked about.

Speaker 6

Great. And you mentioned some of the securities movements in Q1. What was the amount sold in purchase?

Speaker 3

Yes. So we did about $128,000,000 of purchases during the quarter And we had that largely offset by sales of about $75,000,000 which is a little bit more aggressive than we normally do, but we had the ICS income to offset that with. And we also had our normal $50,000,000 of pay downs or so. We got a little bit more active in the securities market really to augment the loan production that was a little bit muted during the quarter and rightfully so and I don't think it is an outlier relative to any other bank. But we did want to make sure we put some of the liquidity that we had to work in shorter term securities.

Speaker 3

We have that really planned to largely be either available to us through maturity or through sale by the end of this year to help with cash flow needs relative to the political deposit outflows. And more importantly though, just taking advantage of this really unique opportunity we have with the ICS income that's coming in through our off balance sheet strategy to match off as much as we can on the securities portfolio for sales and repositioning and really help us work on our sensitivity to down rate sorry, down interest rate scenarios.

Speaker 6

Yes, makes sense. And do you have the yields on what was purchased or sold?

Speaker 3

Let's see. On the purchase, we're coming in roughly around 6%, a little bit higher, call it 6 to maybe 6.25%. We largely focused on fixed rate assets again talking about that down rate sensitivity profile. But so we could have clipped a little bit more yield on floaters, but in this particular environment, we really want to be in the fixed market. And on the sales, I don't have an exact number for you other than it had a nice impact on the unrealized mark that was going through the AFS portfolio.

Speaker 3

I think the yields about 4.95 percent somewhere in that range, Chris, for the sales, somewhere in that range.

Speaker 6

Okay, great. That's helpful. And then on the specific reserve, I think it was 1 point $6,000,000 increase in those provisions in the quarter. What was what types of loans were those related to?

Speaker 3

Yes. Really came through on 2 loans and the one loan was a construction loan that we have been watching for a bit and we ended up taking about $850,000 or so on that particular credit. It's had some issues. We've been watching it. We think there might even be another leg down on this that's coming up.

Speaker 3

So it's a little bit more to come, but we took about a third of the principal balance in specific reserve on that particular credit. The other was a C and I loan that was for about $1,000,000 in principal balance and we saw that one rather quickly move into a deteriorated state where we really couldn't find a good way out. So an unfortunate credit, but small relative to our overall portfolio size and the upside on that is there isn't another credit at least that we've seen right now that's moving in that direction with that type of speed. So it's really those two credits and we felt it appropriate to put those reserves on.

Speaker 6

Great. And then you mentioned another C and I loan that was upgraded. Could you just walk us through the dynamics that played out there?

Speaker 3

I don't have a lot of specifics for that other than we are pretty active in our portfolio management and any credits that have made their way back into an upgrade, generally speaking, have not needed the bank to step into the deal and make a modification. It doesn't happen ever, but in this particular case, it's really a question of the borrower working on their business the right way, spending their adequate amount of time to generate the cash flows necessary to meet our reporting metrics and putting enough time into that level of performance where the bank is comfortable with an upgrade. What I can say specifically though is, we take upgrades very, very seriously as I hope most banks do. It's not an easy process for us to upgrade a credit because we have a lot of expectations on the borrowers to adhere to the covenants or to adhere to the metric standards that have been put into the deal. But when the borrowers have reached those particular measures and they've been able to demonstrate history with meeting them.

Speaker 3

I think we are very fair and being able to upgrade those and we feel good about being able to report them as not only upgradable, but able to remain in an upgraded status.

Speaker 6

Awesome. Thanks for all the color. Great quarter.

Speaker 4

Thanks, Chris. Thank you.

Operator

Thank you. There are no further questions at this time. I'd like to turn the Priscilla Sims Brown for closing comments.

Speaker 2

Thank you, operator, And thank you all for your time today and your continued interest. We appreciate your questions. We know we're going to get more after this call and we appreciate those in advance because we enjoy talking about these Q1 results because we they demonstrate the strength and competitive advantages that Amalgamated enjoys as we look to the balance of the year. This is an exciting time for Amalgamated as we reposition our balance sheet to drive margin expansion, improve capital and a foundation for continued earnings growth. Our deposit franchise continues to deliver strong inflows across our key customer segments where we are uniquely positioned to win.

Speaker 2

Importantly, we are optimistic that inflows can mitigate the eventual out outflows of our political deposits, which we discussed today and which could provide a source of margin upside as we look to the end of the year. Additionally, we're beginning to see monies released from the Inflation Reduction Act, which will provide growth opportunities for our sustainable lending franchise where we are a leader. As we replace older lower yielding loans and securities with higher yielding sustainable loans, we expect a powerful mix shift in our balance sheet and further improved profitability. I couldn't be more excited with what the future holds for Amalgamated, our shareholders and our customers. Thank you again for your time today.

Speaker 2

Operator?

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Earnings Conference Call
Amalgamated Financial Q1 2024
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