Amalgamated Financial : First Quarter 2024 Earnings Call Transcript

First Quarter 2024

Earnings Call Transcript

April 25, 2024

Amalgamated Financial Corp. - First Quarter 2024 Earnings Call, April 25, 2024

C O R P O R A T E P A R T I C I P A N T S

Jason Darby, Senior Executive Vice President and Chief Financial Officer

Priscilla Sims Brown, President and Chief Executive Officer

C O N F E R E N C E C A L L P A R T I C I P A N T S

Alexander Twerdahl, Piper Sandler

Janet Lee, J.P. Morgan

Christopher O'Connell, KBW

P R E S E N T A T I O N

Operator

Good morning, ladies and gentlemen, and welcome to the Amalgamated Financial First Quarter 2024 Earnings Call.

As a reminder, this conference call is being recorded.

I would now like to turn the call over to Mr. Jason Darby, Chief Financial Officer. Please go ahead, sir.

Jason Darby

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 on the Investor's section of our website for an extended period of time. Additionally, a slide deck to complement today's discussion is also available on the Investor's section of our website.

Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We caution investors that actual results may differ from the expectations indicated or implied by any such forward-looking statements or information. Investors should refer to Slide 2 of our earnings slide deck as well as our 2023 10-K 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

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Amalgamated Financial Corp. - First Quarter 2024 Earnings Call, April 25, 2024

isolation or as a substitute for results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release as well as on our website.

Let me now turn the call over to Priscilla.

Priscilla Sims Brown

Good morning, everyone, and thank you for joining us.

It's great to be here today to discuss our first quarter 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. 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 CD's, increased $374 million, or 5.5%. We also moved approximately $154 million of deposits off-balance sheet into our reciprocal network, and we are now managing over $450 million of off-balance sheet deposits. In total, we brought in over $480 million in new deposits during the first quarter, 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 million 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 $1.4 billion at quarter end, well above the prior peak of $1.3 billion during the mid-term election cycle in 2022 and forecasted to match the continuous record-setting fundraising we see each presidential election year. While political deposit inflows have continued through April, we expect outflows to begin towards the end of the second quarter and into the third quarter as campaigns begin to spend more aggressively in the ramp-up to November's election.

We also experienced deposit growth across our union, non-profit and social advocacy customer segments with inflows of $230 million 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. 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.

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Amalgamated Financial Corp. - First Quarter 2024 Earnings Call, April 25, 2024

Though we have been cautiously expanding our loan portfolio through the first quarter 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 zero emissions by 2050.

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 have 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 before year-end. With our impact lending model, we are well positioned to win this business and make a substantial impact on lowering emissions in the United States.

Wrapping up, our results show that we are on 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.

Jason, over to you.

Jason Darby

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 accompanying 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 a metrics index for you to conveniently refer.

I'm going to start off on Slide 3 of the earnings deck. Our 2024 first quarter produced solid results. Net income was $27.2 million, or $0.89 per diluted share. Core net income, which is a non-GAAP measure, was $25.6 million, 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 million, 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 will discuss in further detail. 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 first quarter. Starting on the left, our tangible book value per share increased $0.99 or a healthy 5.29% to $19.73 primarily driven by our quarterly earnings. Our core revenue per diluted share was $2.48 for the first quarter, essentially the same as last quarter.

Moving across, let's take a quick look at our returns. 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%. 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.

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Amalgamated Financial Corp. - First Quarter 2024 Earnings Call, April 25, 2024

Moving to capital. As previously discussed, we have been unwavering on building our capital position and saw our Tier 1 leverage ratio improve another 22 basis points to 8.29% as we are on track to achieve our 8.5% target by the end of the second quarter of 2024. Our tangible common equity to tangible assets was 7.41% for the quarter in comparison to 7.16% from the previous quarter, despite long term interest rates ticking up. We believe this nicely shows the result of us aggressively turning over our securities portfolio. As a reminder, we have sold more than $620 million of securities over the past eight quarters.

Turning to Slide 5, total deposits at March 31, 2024, were $7.3 billion, an increase of $293.8 million from the linked quarter, but this only tells part of the story. On-balance sheet deposits, excluding brokered CDs, increased by $373.8 million or 5.5% to $7.1 billion, though there was significant additional deposit growth during the quarter. Non-interest bearing deposits represent approximately 45% of average deposits and 45% of ending deposits excluding brokered CDs, contributing to an average cost of deposits of 146 basis points in the first quarter of 2024, up 11 basis points from the linked quarter. Additional details on this can be found in the metrics index of the appendix.

Checking in on political deposits, we are up to approximately $1.4 billion as of March 31, 2024, an increase of $250.4 million on a linked quarter basis and through April 17, 2024, we have had a further $87.5 million of political deposit inflows, setting a new high-water mark 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 $456.8 million 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. 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 million, which is faster than our expectations entering the year. This funding mix shift will help to mitigate further cost pressure especially if the recent rise in interest rates were to drive increased pressure on deposit costs.

Jumping ahead to Slides 6 and 7, the book value of our traditional securities portfolio increased $3.3 million during the quarter, primarily as a result of $128 million in purchases, which were offset by $75.5 million in strategic sales and $50.3 million in traditional securities paydowns.

Net PACE assessment growth was $10.1 million. We anticipate R-PACE production to increase to between $20 million and $25 million in the second quarter as we add additional purchases.

Our pre-tax unrealized loss position in our traditional available-for-sale securities portfolio was $94.1 million or 6.1% of the total portfolio balance, improving by $8.6 million 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 deposit sheet strategy.

Turning to Slide 8, net loans receivable at March 31, 2024, were $4.4 billion, an increase of $13.8 million, or 0.3%, compared to the linked quarter. The increase in loans was primarily driven by a $27.3 million increase in multifamily loans, and a $3.1 million increase in commercial and industrial loans, offset by a $9.8 million decrease in consumer solar loans, and a $6.3 million 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. As we have spoken about many times, we have been de-risking our real estate

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Amalgamated Financial Corp. - First Quarter 2024 Earnings Call, April 25, 2024

portfolio for the past two-plus years since our new real estate management team arrived and as evidenced by an over $112 million 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 DSCR's and low LTV's.

On Slide 10, over the balance of the year, we have $174 million in maturing, lower priced commercial real estate and multifamily loans. We have already been working with all of 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-1974 New York State rent stabilization rules as those with higher risk profiles within our total real estate portfolio.

All that said, we recognize that our portfolio holdings viewed as a percent of multiple categories nicely reflect the bank's diversification in asset classes and relatively benign exposure profile as our office-only commercial real estate portfolio was $61 million, comprised of all pass-grade credits and less than 23% of our multifamily portfolio had loans with units subject to pre-1974 rent stabilization rules.

On Slide 13, the net interest margin was 3.49% for the first quarter of 2024, an increase of 5 basis points from 3.44% in the linked 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 the 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. But we also believe deposit costs will continue to rise as well. A key offset for us is the retiring of more than $320 million of higher cost borrowings in 2024 that can be replaced with lower cost deposits, $250 million of which occurred in the first quarter as I noted a few moments ago.

On Page 14, core non-interest income, which is a non-GAAP measure, was $8.3 million, compared to $8.5 million 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.

Core non-interest expense, also a non-GAAP measure, was $38.5 million, an increase of $0.8 million from the fourth quarter of 2023. This was mainly driven by a $1.1 million increase in compensation and employee benefits expense due to select differential investments in employees as well as increased payroll taxes.

Moving to Slide 15, non-performing assets totaled $34 million, or 0.42% of period-end total assets at March 31, 2024, and our criticized assets decreased $9 million to $100.9 million on a linked quarter basis. The criticized or classified loans decrease was largely related to the payoff of $6.6 million of commercial and industrial loans and the upgrade of $3 million of commercial and industrial loans.

On Slide 16, the allowance for credit losses on loans decreased $1.3 million to $64.4 million at March 31, 2024, from $65.7 million in the previous quarter and the ratio of allowance to total loans was 1.46%, a decrease of 3 basis points from 1.49% in the linked quarter.

Provision for credit losses totaled an expense of $1.6 million for the first quarter compared to an expense of $3.8 million in the fourth quarter of 2023. The expense in the first quarter is primarily driven by increases in required reserves and charge-offs on the solar loan portfolio as well as a reserve build for our multi-family portfolio which we deemed prudent to reflect current market repricing conditions and was not driven by any

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Amalgamated Financial Corp. - First Quarter 2024 Earnings Call, April 25, 2024

particular credits. These were partially offset by improvements in macro-economic forecasts used in the CECL model.

Turning to Slide 17, we are modestly raising our full year 2024 guidance to core pre-taxpre-provision earnings of $145 million to $149 million, and net interest income of $270 million to $274 million, which considers the effect of the forward rate curve for 2024.

To conclude, we will continue with our neutral balance sheet strategy through the second quarter as we continue to pursue our stated Tier 1 leverage target of 8.5%. 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 to 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 expect in the fourth quarter when the presidential election concludes. We remain optimistic with deposit growth that we have been experiencing in our core customer segments outside of political.

Briefly looking at the second quarter, 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 million and $70 million in the second quarter of 2024. While we do not expect a Fed rate cut in June, we estimate an approximate $2.2 million decrease in annual net interest income for a parallel 25 basis point decrease in interest rates beyond what the forward curve currently suggests.

In closing, we are very happy with our Q1 results and are cautiously optimistic for the remainder of the year. We'll look forward to updating you all again with our second quarter results in July.

With that, I'd like to ask the Operator to open up the line for any questions. Operator?

Operator

Thank you. Our first question comes from the line of Alex Twerdahl with Piper Sandler. Please proceed with your question.

Alexander Twerdahl

Hey, good morning.

Priscilla Sims Brown

Good morning.

Jason Darby

Good morning, Alex.

Alexander Twerdahl

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. 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. I was wondering if you could just give us a little bit more color and

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Amalgamated Financial Corp. - First Quarter 2024 Earnings Call, April 25, 2024

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?

Priscilla Sims Brown

Yes. Thank you, Alex. It's a great question and great timing for us. First of all, the distribution of funds could be done in a number of ways, 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.

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. 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. The advantage we have is that we know most of the awardees well, either they are customers or they're a part of, I would call them, coalitions, or groups, which have been formed. That group is a new one, but it's made up of a number of green banks, within which we've done business. An example of one that's been announced is the coalition of Green Capital. They're the aggregator of green banks. Again, that's a community we work well with.

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 have a unique understanding of the renewable energy financing programs and methods. We would like to continue to advise them, and we think we'll have a differential advantage in doing so. Really excited about that. We think it's going to be fun to deploy these assets in ways that both fulfill the mission and help grow the bank.

Alexander Twerdahl

Okay. It sounds like we've got a really wait till September to find out some of the specifics. But would you say that they could be balance sheet opportunities for Amalgamated or is it mostly just partnership?

Priscilla Sims Brown

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. It's $20 billion that's been announced thus far. There's another $7 billion to be announced. As we go down the line, there will be other activities.

Alexander Twerdahl

Okay. We'll wait to see how that progresses. 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. Being the more transactional political deposits, should we think of those as the first line of defense for the political deposit outflows that we expect in the second quarter so that maybe those political deposits start to decline towards the end of the second and into the third quarter, but the actual deposits on Amalgamated's balance sheets really aren't impacted?

Priscilla Sims Brown

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Amalgamated Financial Corp. - First Quarter 2024 Earnings Call, April 25, 2024

I'll take first part of that. One way to think about that is we have planned for this political deposit outflow. 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 other parts of the business and in other segments.

Jason Darby

Yes. Alex, 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 paydowns, 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.

Alexander Twerdahl

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

Jason Darby

Sure. The mission aligned nature of our business lends 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. We've spent a lot more of our time in the recent years lending into 421a style buildings, Section 8, those that have greater abilities to have support for repayment streams and a little bit less on some of the more onerous pre-1974 rent regulations.

But to maybe just roll the answer up more succinctly. I just 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 the particular assets that we invest in.

Alexander Twerdahl

Okay. That's helpful. Thanks for taking my questions.

Priscilla Sims Brown

Thanks, Alex.

Jason Darby

Thanks, Alex.

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Amalgamated Financial Corp. - First Quarter 2024 Earnings Call, April 25, 2024

Operator

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

Janet Lee

Morning.

Priscilla Sims Brown

Good morning.

Janet Lee

Appreciate all the comments on your multifamily portfolio, but if we can go back to what happened in the first quarter. 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 have to modify and extend if any, because they weren't getting refinanced?

Jason Darby

Sure. It wasn't an incredible amount. It was under $25 million that came due in the first quarter. We've got about $63 million of the pre-1974 multifamily real estate assets that are going to come due between now and the rest of the year. On average, it's about $100 million or so per year, which is fairly consistent with the runoff chart that we've had in the past, Janet. 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. I give a lot of 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. We had been in touch with the borrowers long before the renewals were set to take place. There weren't any surprises with regard to anything in the first quarter for us.

Looking outward, we see a very similar track. 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.

Again, we're aided by just a really nice profile relative to as underwritten DSCRs and lower LTVs, maybe than other peers are experiencing. Overall, we're in a pretty decent spot. We're certainly aware that there's risk and we're managing towards that. 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 build was really related to anything specific. It was more just a reaction to the general environment.

Janet Lee

Okay. Got it. Basically, is it fair to say, if I look at your criticized and classified balances only looks like it's only $10 million, no past due or NPLs in that part of the portfolio. You built reserves, but still at 38 basis points. Are you basically saying this is just a reflection of higher rates for longer and not an expectation for like lost content coming?

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