Amalgamated Financial Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 7 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to the Amalgamated Financial Corporation Second Quarter 2023 Earnings Conference Call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the 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.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator, and good morning, everyone. We appreciate your participation in our Q2 2023 earnings call. With me today is Priscilla Sims Brown, President and Chief Executive Officer. As a reminder, a telephonic replay of this call will be available 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

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 information or statements. Investors should refer to Slide 2 of our earnings deck as well as our 2022 10 ks filed on March 9, 2023 for a list of risk factors that could cause actual results to differ materially from those indicated or implied by such statements. Additionally, during today's call, we will discuss certain non GAAP measures, which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.

Speaker 1

S. GAAP. A reconciliation of these non GAAP measures to the most appropriate or 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.

Speaker 2

Thank you, Jason. Good morning, everyone. We appreciate your time and interest today. Now that we are a few months out from the banking events that occurred in early March, things have begun to return to the new normal environment A fierce competition for deposits, higher for longer interest rates, Metropolitan office credit concerns and more. We have been operating our business from a position of strength.

Speaker 2

Demonstrating agility and the flexibility of our strategy, We quickly pivoted to a modified growth strategy centered on a flat balance sheet and building capital. Loan growth is still expected, funded mainly from runoff of our securities portfolio as is Despite nagging headline activity in the banking sector, I believe there's reason for optimism. The economy has proved quite resilient, Inflation data has improved, large and medium bank earnings have been in line and investors are starting to move back into the banking sector. At Amalgamated, it's a very exciting time as our differentiated yet simple model uniquely positions us to win. Given that you've had our material financial information for almost 2 weeks, I'd like to spend our time together talking about 3 keys to our continued future success.

Speaker 2

Those being our deposit franchise, our lending segments and our earnings potential. Our deposit franchise features an industry leading cost of funds and customers that have banked with us for decades given our shared values And Union Heritage. Given the strength and longevity of our customer relationships, we introduced a designation last quarter called Supercore deposits in order to provide more transparency into our deposit base. Our Supercore deposits come from loyal Customers that the bank was amalgamated for more than 5 years and cumulatively represent approximately $3,600,000,000 or 54% of our core deposits at the end of the second quarter. These customer relationships Have been with us for more than 17 years on average.

Speaker 2

When thinking about a bank's deposit stability, our super core deposits are Credible advantage, one earned from over 100 years of relationship based banking. Another deposit based advantage for Amalgamate is our political banking franchise, which we began developing nearly a decade ago. We uniquely understand the needs of our political customers and our ability to execute on the demands of the most sophisticated campaign finance professionals sets us apart. Our political deposits balances trend with major election cycles And normally rise leading up to an election and then decline in the quarters near its conclusion. We experienced this once again following the midterm elections last November.

Speaker 2

As national election cycles have greatly lengthened, we are now in an accumulation phase, Boosted by the onset of presidential candidates announcing their intentions to run during the quarter. Through the second quarter, we have seen a strong inflow from politically active customers as the election cycle begins to gain momentum. We anticipate these political inflows to continue through the balance of the year and into next year, which is a powerful driver for our bank. Our political franchise is a big contributor of non interest bearing deposits as funds are largely in DDA accounts given their life cycle, And this helps to mitigate the rise in deposit costs and adds flexibility for us as some of our customers' deposits move off balance sheet into our Treasury Investment Services, where they seek higher yields in the current rate environment. Overall, we are maintaining our non interest bearing deposits and mitigating the rise in funding costs, all while reducing Shifting to our lending segments.

Speaker 2

We spent much time discussing the expansion of our banking team over the last 2 years, which has driven a notable acceleration to loan growth and loan yields. This has provided an important lift to the earnings power of the bank. One area that I would like to spend more time on today are the initiatives we have around sustainable lending. This is a growing industry where it is estimated that $3,000,000,000,000 of investment over the next 10 years is necessary for the U. S.

Speaker 2

To achieve the goal of net zero emissions by 2,050. This is a significant market opportunity, which we believe will grow through economic cycles given the importance, urgency and the momentum to address climate change. We have deeply experienced bankers in sustainable lending with customer relationships across renewable energy, energy efficiency, Battery storage and pace to name a few. Our team includes recognized industry thought leaders and sustainable lending experts We'll help drive the dialogue around financing and source significant opportunities. But more importantly, We have the sophistication to prudently underwrite emerging technologies.

Speaker 2

This leads directly into our future earnings potential. As we continue to demonstrate our expertise in sustainable lending, we are going to drive a powerful mix shift in our balance sheet as we replaced lower yielding loans and securities with higher yielding sustainable loans. It's important to remember So we are still turning over an older balance sheet as our lending strategy is just in its early innings. As lower yielding multifamily loans and securities roll off our balance sheet over the next 12 to 18 months, We should experience a strong lift in yields and as a result margins and earnings. Paired with our already strong and well protected earnings stream, our ability to grow net interest income next year and maintain a margin over 3% is encouraging With great opportunity for margin to expand as Fed interest rates normalize around a lower terminal rate.

Speaker 2

To conclude, we are running our bank and leading on issues we care about. In April, we hosted the Global Alliance for Banking on Values Annual Meeting in New York Over 200 people attended spanning a range of international bankers, impact investors, Customers and software providers to discuss using finance to deliver sustainable economic, social and environmental development. As our presence in this area grows, so will our business. We are America's socially responsible bank, and we're glad that people are starting to notice. In the end, results are what matters, results for shareholders, for customers and the communities we serve.

Speaker 2

Our 2nd quarter results clearly demonstrate the strength of our customer relationships as well as the significant opportunity that we possess to drive earnings growth for many years to come. Let me now turn the call back over to Jason to provide a review of our Q2 financial results.

Speaker 1

Thank you, Priscilla. Net

Speaker 3

income for

Speaker 1

the Q2 of 2023 was $21,600,000 or $0.70 per diluted share compared to $21,300,000 or $0.69 per diluted share for the Q1 of 2023. The $300,000 increase the Q2 of 2023, it was primarily a result of a $2,700,000 increase in non interest income, a $1,100,000 decrease in provision expense, a $1,100,000 decrease in non interest expense, mostly offset by a $4,300,000 decrease in net interest income and a $200,000 increase in income tax expense. Beginning on Slide 5, there were no exclusions related to solar tax equity investments Because of the income statement volatility associated with the accounting for these investments, we believe metrics excluding the timing impact of tax credits or accelerated depreciation It's a helpful way to evaluate our current and historical performance. Core net income, excluding the impact of Solartex Equity Investments, a non GAAP measure, Turning to Slide 7, deposits at June 30, 2023 were $6,900,000,000 A decrease of $146,700,000 from the Q1 of 2023, while deposits excluding brokered CDs remain essentially unchanged at $6,400,000,000 Demonstrating a strong and stable deposit base. 3rd July 21, 2023, total deposits have decreased by approximately $197,000,000 to 6.7 Which importantly includes a $242,000,000 decline in brokered CDs previously utilized to replace the political deposit outflows that we experienced in the Q4 last year.

Speaker 1

Excluding brokered CDs, total deposits have increased by $46,000,000 Excluding brokered CDs again, non interest bearing deposits represent 48% of average deposits and 46% of ending deposits for the quarter ended June 30, 2023, contributing to an average cost of deposits of 87 basis points, up 26 basis points from the previous quarter As we continue to attractively price our deposits to retain our customer base, our total cost of deposits, including brokered CDs, 110 basis points in the Q2 of 2023, a 29 basis point increase from the previous quarter. Moving to Slide 8, our high quality Supercore deposit base totaled $3,600,000,000 Our Supercore deposit base uniquely displays important insight into our At quarter end, total uninsured deposits were $3,900,000,000 or 57 percent of total deposits, an improvement from $4,400,000,000 or 62 percent during the Q1 of 2023. Excluding uninsured Supercore deposits of approximately $2,500,000,000 Remaining uninsured deposits were approximately 20% to 23% of total deposits with immediate liquidity coverage improving to 183% 137% in the prior quarter. Consistent with prior quarters, we have maintained significant liquidity with cash and immediate borrowing capacity of $2,600,000,000 $758,300,000 of 2 day capacity from unpledged securities, resulting in $3,300,000,000 of total 2 day liquidity.

Speaker 1

Our liquidity covers 85 percent of our uninsured deposits, an increase from 79% of our uninsured deposits in the prior quarter. Again, excluding Super Core, our liquidity covers 183% of our uninsured deposits. Turning to Slide 9. Our core deposit base continues to show stability and resiliency during the 1st full quarter following the recent bank seizures. Importantly, our political balance flows have begun accumulating as the next election cycle gears up and we have seen a nice acceleration through the Q2 and into July.

Speaker 1

Taking a closer look on Slide 10, deposits held by politically active customers were $835,800,000 as of June 30, 2023, an increase of $157,700,000 on a linked quarter basis. As noted, we expected political deposit flows To rebuild in the Q2 of 2023 following the typical pattern of seasonality. Additionally, we've experienced $11,200,000 of incremental political deposit inflow July 21, 2023. Jumping ahead to Slides 13 and 14, the book value of our investment Q3's portfolio decreased $12,000,000 during the quarter, primarily as a result of $29,500,000 in strategic sales and $46,200,000 in traditional securities pay downs, offset by $41,400,000 in net PACE assessment growth. Floating rate represented 46% of total securities excluding PACE assessments at the end of the quarter, a 1% decline from the prior quarter, As we have modestly reduced that ratio over the past several quarters to protect our earnings stream.

Speaker 1

Our unrealized loss position in our available for Our AFS portfolio duration was only 1.9 years, reflecting our conservative investment decisions. Turning to Slide 15, total loans receivable net of deferred fees and costs at June 30, 2023 were $4,300,000,000 increase of $53,500,000 or 1.3 percent compared to March 31, 2023. This increase in loans is primarily driven by a $32,900,000 And a $5,900,000 increase in the commercial real estate portfolio, offset by a $1,600,000 decrease in residential loans, A $9,200,000 decrease in construction loans and an $8,000,000 decrease in our consumer loan portfolio. During the quarter, we had $5,200,000 of improvement in criticized or classified loans, including a payoff on a $3,800,000 office related loan as we continue to focus on improving the credit quality of the bank's commercial real estate portfolio. The yield in our total loans was 4.33% compared to 4.40% in the Q1 of 2023.

Speaker 1

The loan yield decline was mainly attributed to the charge offs or payoffs of higher rate consumer solar loans. Our commercial real estate portfolio has been a portfolio that we have been derisking for the past several quarters. At quarter end, we had $66,000,000 in office only exposures across 6 credits with an average LTV of approximately 37%. Of the 6 credits, all are past grade with the exception of one special mention. Additionally, a $1,300,000 commercial real estate loan that was considered non performing for documentation At the end of the Q1, it was returned to current status in the Q2.

Speaker 1

On Slide 16, net interest margin Was 3.33 percent for the Q2 of 2023, a decrease of 26 basis points from 3.59% in the Q1 of 2023. The expected margin compression was largely due to increased rates and higher average balances of interest bearing liabilities, particularly interest bearing brokered CDs And Savings Now and money market deposits as we continue to focus on deposit retention, partially offset by continued loan growth, particularly within our Climate Sustainability segment, which garnered attractive yields at a premium to our traditional legacy sectors. No prepayment penalties were earned in loan income in the first or Q2 of 2023. On Page 17, core non interest income excluding the impact of SolarTax Equity Investments, Our non GAAP measure was $8,200,000 for the Q2 of 2023 compared to $7,500,000 in the Q1 of 2023. The increase of $700,000 was primarily related to increased income from equity investments, higher trust department fees and fees on treasury investments for certain clients seeking alternative yields to deposit pricing.

Speaker 1

On Page 18, core non interest expense, a non GAAP measure, For the Q2 of 2023, it was $37,200,000 a decrease of $1,400,000 from the Q1 of 2023. This was in line with the expected non interest expense range provided on last quarter's call and was primarily due to a $800,000 decrease in compensation and employee benefits Given the timing of payroll taxes and corporate incentive payments as well as temporary personnel costs and benefit insurance costs incurred during the Q1 of 2023. Additionally, advertising expense and data processing expense decreased during the quarter, offset by increased reserves for FDIC depository insurance and increased professional fees. Going forward for the remainder of 2023, we anticipate our non interest expense to trend similarly. Moving to Slide 19, non performing assets totaled $35,300,000 or 0.45 percent of period end total assets at June 30, 2023, a decrease of $3,400,000 compared with $38,700,000 or 0.49 percent on a linked quarter basis.

Speaker 1

The decrease in non performing assets was a result of the Silicon Valley Bank senior note that was placed on non accrual in the Q1, which was subsequently sold in the 2nd quarter And $1,300,000 commercial real estate loan that was brought current in the 2nd quarter. Additionally, a $1,700,000 commercial loan was charged off in the quarter, which was substantially reserved for during the Q2 of 2022, offset by an additional $1,400,000 in retail loans that were placed on non accrual status. Our criticized assets decreased $6,400,000 or 6 percent to $103,900,000 on a linked quarter basis. On January 1, 2023, the current expected credit loss or CECL methodology for establishing an allowance for credit losses was adopted, which increased the allowance for credit losses on loans and securities for on and off balance sheet credit exposures. During the quarter, The allowance for credit losses on loans remained essentially flat with an increase of $100,000 to $67,400,000 at June 30, 2023 from $67,300,000 at March 31, 2023.

Speaker 1

The ratio of allowance to total loans was 1.59% at June 30, 2023 and 1.61 percent at March 31, 2023. The ratio of allowance to non accrual loans was 200.19 percent at June 30, 2023. Provision for credit losses totaled $3,900,000 for the Q2 of 2023 compared to $5,000,000 in the Q1 of 2023. The decrease in provision was mainly attributable to the previously mentioned impairment charge on the SIVV senior note during the prior quarter, which was subsequently sold in the 2nd quarter. Continuing to Slide 21, our core return on average equity and core return on average tangible common equity excluding the impact of solar tax equity We're 16.8% and 17.3 percent respectively for the Q2 of 2023.

Speaker 1

We repurchased $2,200,000 of our common stock during the 2nd quarter And have $23,500,000 of remaining capacity under our $40,000,000 share repurchase program. Additionally, we have declared a quarterly dividend of $0.10 per share. As previously noted, we continue to closely manage our capital position based upon the state of the current economic environment and in the wake of the banking sector volatility. As a result and as shown on Slide 22, our Tier 1 leverage capital ratio improved 28 basis points to 7.78% as compared to the linked quarter, primarily driven by our strong quarterly earnings. Slide 23 shows a reconciliation of the change in tangible common equity and related tangible book value.

Speaker 1

As expected, the Federal Reserve Board raised rates 25 basis points in May, held rates unchanged at its June meeting and raised rates again 25 basis points yesterday. Our expectation is for at least 1 more 25 basis point increase this year, They're remaining higher for longer with potential interest rate reductions to occur during 2024. As a result of our $21,600,000 quarterly earnings, Partially offset by a $7,900,000 increase from the previous quarter in the tax affected AFS mark to market adjustment as well as share repurchase activity, Our tangible book value per share, a non GAAP measure, improved to $16.78 as of June 30, 2023, as compared to $16.42 in the prior quarter. We also remain pleased with our tangible common equity and tangible assets of 6.59 percent for the quarter in comparison to 6.43 percent from the previous quarter. We remind investors that we publicly set a general During the Q2, we achieved net loan growth of 1.3%, which was a bit below our anticipated target of 2% to 3%.

Speaker 1

However, we believe this is reflective of our selectivity and desire for relationship lending. Additionally, we took advantage of a strong PACE assessment origination environment, Growing our portfolio nearly 6% during the quarter. As a reminder, growth in loans and PACE assessments are primarily expected to be funded by reductions in securities. Turning to Slide 24, we note that the high degree of economic and banking industry uncertainty makes projections more difficult, We have maintained our full year 2023 guidance as follows: core pretax pre provision earnings ex Solar of $133,000,000 to $140,000,000 And in interest income of $248,000,000 to $255,000,000 which considers the effect of positive migration to interest bearing and the forward rate curve for the remainder of 2023. Going forward, we estimate an approximate $500,000 decrease in annual net To conclude, our focus remains on equally growing our capital position, Curtailing potential borrowings and balance sheet leverage and managing expenses.

Speaker 1

We do expect our net interest margin to compress by approximately 5 to 10 basis points in the near term As pressure on our cost of funds continues. As a result, we anticipate our net interest income to decline slightly to approximately $61,000,000 to $62,000,000 in the Q3 of 2023. Looking forward, we will continue to protect existing deposits and work to attract new deposits to reduce our borrowings and provide liquidity to support our growth for good strategy. Our results this quarter demonstrate the strength of the bank as well as the mission based differentiation that we share with our customers and communities. And with that, I'd like to ask the operator to open up the line for any questions.

Speaker 1

Operator?

Operator

Thank you. One moment please while we poll for questions. Thank you. And our first question is from Alex Twerdahl with Piper Sandler. Please proceed with your question.

Speaker 1

Hey, good morning. Good morning, Alex. Good morning.

Speaker 4

I first want to hone in a little bit on this $3,000,000,000,000 of spending that you alluded to in your prepared remarks, Priscilla. Maybe if you could give us a little bit more about what's driving that. Is that public spending or private sector spending and The types of loans and really what you guys are doing, obviously, it's sustainable lending has been a big part of your model, but specific that you've been doing recently to kind of make sure that you get more than your fair share of the lending opportunities associated with that spending?

Speaker 5

Yes. Thanks for bringing that up. The number comes from external research on the topic and It's really just a mathematical calculation of what it will take for U. S. Companies to achieve the stated goal of getting to net 0 by 2,050.

Speaker 5

We see the opportunity in just Continuing to do what we do, we're not looking to expand very far beyond that. But as you know, We've done quite a lot in this area already. We have one of the really the world's, but certainly the country's Most engaged expert on some of these topics on our team as well as bankers, Underwriters and portfolio managers who understand this business. So we see a real opportunity to continue to do more of it.

Speaker 1

Yes. And Alex, I'll add to that. It lines up closely to how we've already been going through our staffing model. I think the Spend is a combination of public private, and again, as Priscilla mentioned, through external research. But The things that Amalgamated does well from a banker point of view, probably being mainly in the electrification space, energy efficiency space and battery space, Those are sort of the leading areas in terms of where the investment is going to go first, at least that's what we think and we have bankers that are already been aligned along those segments.

Speaker 1

And we talked about that a bunch, our ability to have expertise in that area, our ability to have been there first and our ability to have great referral sources, We think will give us a good position to really win. And as we've talked about before, we think the margins are good on these particular asset classes and we think that Yes. There's going to be a really good opportunity for us to turn over our balance sheet and move into these asset classes as the quarters and years go by.

Speaker 5

And the only other thing I'll add to that is, I should have mentioned, obviously, the IRA is A good step in the right direction. But by all accounts, this is Only going to get us about a third of get us as a country, only about a third of the way to that goal as well. So to Jason's point, it is public And private that will be required to make it happen.

Speaker 4

Got it. And then maybe you can talk a little bit more about that sort of mix shift You alluded to as well the multifamily is coming off, the pace in which we might expect to see some of that mix shift and how it could actually impact loan yields over the next 18

Speaker 1

Yes. I think that's sort of hidden or unlocked power of the bank's balance sheet and the bank's Earnings potential, as Priscilla pointed out in her comments, it's still a bit of an older balance sheet. Our lending strategy is still relatively in its early innings, had a nice start to it throughout last year and obviously we've modified our growth approach throughout the rest of this year for reasons we've discussed in the past. But again, if you sort of think about the earlier multifamily deals that are still on the books and the low spread and the low Margin that's on those, some of the residential assets that will continue to come off and our ability to play in the space of climate sustainability on the commercial side And having deals that will price out in the 6.75%, 7% range, there's a really good opportunity for us to See asset yield expansion as we get out into probably the early part of next year. And again, we're pretty excited about that and think that we spent a lot of time sort of preparing the balance sheet for this and we hope that the margin is going to benefit from it pretty great As we get out into next year.

Speaker 4

Okay, great. Thanks for taking my questions.

Speaker 1

Thanks, Alex.

Operator

Thank you. Our next question is from Janet Lee with JPMorgan. Please proceed with your question. Good morning.

Speaker 1

Hi, Janet. Hi.

Speaker 6

I wanted on that part about favorable remix Over time, can you give us a sense of that yield comparison for different types of sustainable lending loans that you originate today versus Conventional loans that are rolling off, I just want to see if there is any sort of data that you can provide us?

Speaker 1

I mean, I think, again, the assets that or the asset classes within sustainability and climate, Again, we're seeing, I think I said before, 6.75%, 7% type of yield opportunities. If you look at some of our more Dated commercial loans in the multifamily side, some of those are still in the 4% range, 3.5% So there's a good opportunity to find some spread there, Janet. But I don't have a specific quote for you other than you can really just think again about the aged nature of the balance sheet and we hadn't had really any loan growth on the book All the way up through 2021, I mean, we've kind of sat neutral from 2019 through 2021 in terms of loan growth. Then we started to pick that back up again in earnest when Priscilla arrived and we developed our lending strategy. So it gives you a little bit of a sense for the type of assets that are still in the books that are ready roll off and the types of opportunities we have in our climate sustainability section.

Speaker 6

Okay. That's helpful. And in terms of your NII sensitivity going back to your $1,500,000 comment, So as the Fed lowers rates, you would benefit on the net interest income side from your asset sensitivity point of view?

Speaker 1

I think so. I mean, it's going to we're in a pretty neutral position right now. So I don't think the benefit is going to be anything Significant in the immediate term, I think over time we absolutely would benefit from it. But the cost Funds are probably not going to drop as rapidly as the Fed rate goes down. But in theory, the bank should benefit as rates decline over time.

Speaker 1

I think we've done a pretty good job so far of protecting the earnings streams in our kind of Static situation right now, right? So not adding anything new to the books. We've got a well protected earnings stream. And as rates decline, we should see some benefit going forward.

Speaker 6

Okay. And I know it's tough to guess, but is it fair to say that we're nearing the trough for Your non interest bearing deposit outflows absent the seasonality with political deposits, Do you see a scenario where your non interest bearing deposits could continue to go down and dip below 40% of your total deposits?

Speaker 1

That's an interesting question. I suppose there's always that type of scenario. It's hard Predict what's going to happen in the rate environment going forward, just kind of looking at the churn that we had in Current quarter and having us only decline by about a percentage point on non interest bearing from a mix point of view. We're not Being below 40% at this point in time, but I think a 42% to 44% kind of landing spot by the end of the year is a reasonable prediction. But again, it's a little bit of a guess because a lot is dependent upon the flow of the political deposits, which we saw really Have a nice impact this quarter.

Speaker 1

And at the same time, if rates stay higher for longer, over time, we could see that ratio continue to drop. But right now, we're targeting between 42% 44% for the end of the year.

Speaker 6

All right. That's helpful. My last question, Can you give us more thoughts around your plan for share repurchases? Are you doing it as long as the Buyback is accretive to book value or what's your plan around that over the near to intermediate term?

Speaker 1

Yes. I think We've really always stood out with our repurchase authorization. I think we look for opportunities where We feel the price is attractive. Obviously, tangible book value is an important part of that calculus. But it really, Janet, becomes a function of accretive value when paired against Our stated desire to continue to grow our capital base.

Speaker 1

So I think there will always be some level of balance between the amount that we look repurchase and our ability to continue to provide a building capital base, so that we can achieve a leverage ratio that we think It's really appropriate for this bank to create optionality for growth going forward.

Speaker 6

What's the target leverage ratio for you?

Speaker 1

We want to be at 8% on a consolidated level at a minimum by the end of the year and continue to build that Into next year, I'd like to see us somewhere around 8.5% by the middle of next year. And the reason why I say that is 2 fold. Number 1, I think it's appropriate to have a capital base at that level, but also we want to make sure that we're not showing any type of unnecessary leverage drag as we get into Peak season for political deposit gathering as the presidential election will be nearing.

Speaker 6

Got it. Thanks for taking my questions.

Speaker 4

Thank you.

Operator

Thank you. Our next question is from Chris O'Connell with KBW. Please proceed with your question.

Speaker 3

Hey, good morning.

Speaker 5

Good morning.

Speaker 3

Hey. Just wanted to start on the balance sheet and the securities portfolio. I think the AFS book was down about $55,000,000 quarter over quarter. And I was Expecting maybe a little bit more of a reduction given the short duration of the book. And I think last quarter, as mentioned, there was about $50,000,000 per month Of outflows in that portfolio expected?

Speaker 3

Just any reason why that was kept up a little bit larger this quarter?

Speaker 1

Yes, great question, great observation. Really, we put one of our PACE purchase PACE pool purchases into available for sale In this particular quarter, we want to have a little bit more flexibility to be able to move with that asset class. So that was the first Purchase that we've ever classified as available for sale is about $20,000,000 and that's probably the difference, Chris, because the actual Paydown on the traditional, we're really trying to make sure we get this terminology out, but traditional securities portfolio, which would exclude PACE. So if you look at traditional AFS, we actually did have a decline excluding the mark of about $70,000,000 which should have tracked pretty close to the cash flow that we had talked about in previous quarters.

Speaker 3

Okay, got it. That makes sense. And on a go forward basis, How are you thinking about the traditional securities portfolio and how much those balances move in the back half of the year Versus the PACE portfolio?

Speaker 1

Yes. I think they're going to move a bit in opposite directions. We still think PACE It's a great asset class for us. It's highly credit secure, has really nice attractive returns. And because people are Staying in their homes, given kind of the current rate environment, the energy efficient improvement opportunities for residences has greatly improved and We benefited also from the consolidation in the market.

Speaker 1

So our providers got more access to origination and the flow opportunity for us Great. So I think you'll see that continue to move possibly in the same type of pace that we are not these words, but possibly at the Same rate as you saw in the Q1 I'm sorry, in this current quarter, which is about a net of $40,000,000 $45,000,000 somewhere in that range. But With regard to the traditional portfolio, we're going to see that continue to come down. We're not looking to add any positions in that particular portfolio From an agency or non agency position, we're going to be using the cash flow to fund the growth. I think the $70,000,000 that I quoted for you just a moment ago is a good Way to think about that between the 3rd and the 4th quarter in terms of a run rate.

Speaker 1

So again, a little bit of an opposite moving direction between PACE and traditional Securities, but we do expect that to continue to run down and be the primary funding source for our origination side on the lender pace.

Speaker 3

Okay, got it. That's helpful. And as far as the multifamily book goes, I know you guys are talking about running Down, but it was the biggest growth driver this quarter. Just maybe if you could break down kind of where the loan pipeline is On various lending segments, and just the decision to grow multifamily, I think it's up About $100,000,000 or so this year versus what you guys are talking about with the rundown over time?

Speaker 1

Yes. So I want to maybe make a quick clarification. I think the rundown or the derisking we've talked about is mainly in our Traditional commercial real estate portfolio and not specifically multifamily. I think for the commercial real estate, we're really looking at The portfolio that houses any type of office exposure or things of that nature. The multifamily, I think that's a spot where we wanted to see some growth And we talked about having that be one of our drivers for the year.

Speaker 1

And I think we did about $32,000,000 or $33,000,000 net in multifamily. I think the good side of that story is that it really gets right into the sweet spot of the team that we brought over from M and T a while back. The originations are largely impact oriented and it's workforce housing and has a really strong mission impact for us And we're able to find pretty decent returns on these and also it allows us to continue to turn over that portfolio some of the legacy assets that we've had, Chris. But I think the what we're really trying to focus on was really reducing the commercial real estate side of our portfolio and I think we've done that to a large degree. We had a little bit of an uptick in that portfolio this quarter.

Speaker 1

I think we talked before, We're not totally out of the asset class. We're just simply not looking for office only related exposure. But if we find and it's a unique opportunity for us, Given some of our union roots, if we find a really strong opportunity to do an owner occupied commercial real estate Type of deal that has a lot of security, a lot of deposits that might come with it. I think there's opportunities for us to Be able to put that on the books, and that's really what occurred mostly in this quarter. I hope that answers your question.

Speaker 3

Yes, definitely. And of the multifamily that you're putting on, what kind of origination yields are you getting on those?

Speaker 1

They're coming in $575,000,000 to $6,000,000 to $6,000,000 right now. So we're getting a good clip. It's a little tighter, obviously, than what we could do in the C and I Sustainability space and we're trying to balance out our capital allocation between good solid multifamily deals that have Mission alignment and higher yielding C and I deals. But I think what you're seeing from us is an opportunity for us to be really selective And basically take our time with making sure we're putting on the right type of assets.

Speaker 3

Got it. And I was just surprised, I guess this quarter to see the loan yield move down a bit on a quarter over quarter basis. Any specific factors driving that? And I mean, if you have any look into kind of Where you think loan yields could move it back half of the year that would be helpful?

Speaker 1

Yes, great question. It was a little surprising for us as well Not that it's something that we think is going to continue. I think it was really some discrete events that occurred within The consumer solar portfolio, I think the first we made an accounting election change in terms of how we Run our discount accretions on some of these portfolios, which lowered the yield a little bit in quarter, but you can see that as being something Predictable going forward is not going to be another blip that way. That's kind of the first piece of it. And then I think the second was really related to Some of the higher yielding consumer solar loans that we've had, the charge offs or the pay offs that were related to those clipped down the yield a little bit.

Speaker 1

So figure that blip really is a in quarter event only in our mind. It's not really a Continuing erosion as far as we see from our yield projections, all of the other asset classes that we had in our portfolio were up on Average yield, so you can get a sense for the kind of the balancing or the balancing out effect of how the asset yields worked with one another in the quarter. And Chris, I think where we're at right now, we should be able to see continued yield expansion, in a controlled manner, but yield expansion Going forward and I'm not expecting there to be more erosion.

Speaker 3

Okay, got it. And then lastly, just any look into how you guys are feeling about credit moving forward? Looks like the consumer solar charge offs were down a bit from the past couple of quarters pace. Any outlook as to if that somewhat of a downtrend can continue going forward? And then just Any update as to I know you guys mentioned a few items, including a return payer on the office, but just any outlook in or What you're seeing inside your office portfolio in terms of the relative risk moving forward as these things mature over the next Year, year

Speaker 1

and a half. Absolutely. So on and Chris, I did get a note from my group just back to your multifamily yields. It was probably a little low on our estimates. It's between 6.25% and 6.5% that they're coming on right now.

Speaker 1

So a little bit wider margin. I just want to correct myself and take a moment there. On the charge offs for consumer solar, I think and Janet asked a couple of times in previous quarters about this. Think what we're able to see is some of the governors in the credit structuring that we've put together for these starting to take hold and limit The amount of charge offs that the bank needs to incur. We're reaching buyback provisions with our providers.

Speaker 1

We're reaching loss recoveries with our original providers. So I feel like we're in a decent spot there relative to Stability in that charge off line. As you know, we're not adding any new flow from those original providers that That have the bulk of the assets on the books and any of the new providers that we've been working with have very, very, very tight credit standards and they're performing quite well, albeit it's pretty early in their cycle. So not ready to declare declining trend at this point, but I feel good about saying stable looks pretty good going forward right now. With regard to the commercial real estate portfolio, our office exposure, I think we pointed out in our release is Down from last quarter, it's down to about $66,000,000 from $71,000,000 in the previous quarter.

Speaker 1

We had a nearly $4,000,000 payoff of 1 of our special mentioned Classified assets, which I think we talked about last quarter as well. We still felt really good about collectability in our special mention group For our commercial real estate portfolio, so of the 6 remaining, there is still one that's classified as special mention that's set to mature Q1 of next year, we're in regular contact with the borrower, and we feel pretty good about our ability to Work with them and maintain that in an accruing and paying status at this time. And then again, nothing's really changed characteristically, Still really low LTV on those assets in that office only portfolio about 37% or so of LTV. So All of them are performing, all are paying and good collateral value right now. So on a relative risk basis, I think we're good.

Speaker 1

And then we are carrying roughly 75 basis points of coverage through our allowance anyway on those. So we feel like from an all in risk point of view, we're We're in a good spot relative to commercial real estate office in particular.

Speaker 3

Okay, great. That's helpful. That's all I had. Thanks for taking my questions.

Speaker 1

Welcome, Chris. Thank you.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to President and Chief Executive Officer, Priscilla Brown closing comments.

Speaker 5

Well, thank you, operator, and thank you for those great questions and for your continued interest We look forward to taking your questions offline and wish you all a great day.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your day.

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Earnings Conference Call
Amalgamated Financial Q2 2023
00:00 / 00:00