Amalgamated Financial Corp. (NASDAQ:AMAL) Q1 2024 Earnings Call Transcript April 25, 2024
Amalgamated Financial Corp. beats earnings expectations. Reported EPS is $0.83, expectations were $0.74. Amalgamated Financial Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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 a brief presentation, the conference will be open for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Jason Darby, Chief Financial Officer. Please go ahead, sir.
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 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. 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-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 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 CDs, 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 nonprofit 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 midterm 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 toward the end of 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, nonprofit 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 is 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.
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 a goal of net 0 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’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 those funding is expected to begin slowing 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 change maker 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 detailed 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. So 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 and 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’ll 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 healthy 5.29% to $19.73 primarily driven by our quarterly earnings. And 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%. And while we know we have more work to do to develop noninterest 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 improved 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, and 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 in 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 were significant additional deposit growth during the quarter. Noninterest-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. Now checking in on political deposits were 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’ve had a further $87.5 million 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 and noncore 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 during 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 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, and we anticipate our PACE production to increase to between $20 million and $25 million in the second quarter as we add additional purchases. Our pretax 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 sheet deposit 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 $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’ve spoken about many times, we have 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 million improvement in related classified and crystalize 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 had $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 reflects the bank’s diversification and asset classes and relatively benign exposure profile as our office-only commercial real estate portfolio was $61 million. Comprised of all past 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. And 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. 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 noninterest 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 noninterest income generated from our off-balance sheet deposit strategy as noncore due to its temporary nature. Core noninterest expense, also a non-GAAP measure, was $38.5 million, an increase of $0.8 million in 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 investment in employees as well as increased payroll taxes. Moving to Slide 15. Nonperforming 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 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 forecast used in the CECL model. Now turning to Slide 17. We are modestly raising our full-year 2024 guidance to core pretax pre-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 will expect in the fourth quarter when the presidential election concludes. And we remain optimistic with deposit growth that we’ve 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. And while we do not expect the 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.
So in closing, we’re very happy with our Q1 results, and we’re cautiously optimistic for the remainder of the year. We look forward to updating you all again with our second quarter results in July. And with that, I’d like to ask the operator to open up the line for any questions. Operator?
See also 11 Oversold Growth Stocks to Buy Right Now and 10 Leisure and Recreation Services Stocks to Buy.
To continue reading the Q&A session, please click here.