Q2 2023 Amalgamated Financial Corp Earnings Call
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Ladies and gentlemen, thank you for standing by the program will begin shortly once again, thank you for standing by and thank you for your patience, we will begin the program shortly.
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Good morning, ladies and gentlemen, and welcome to the amalgamated financial Corporation's second quarter 2023 earnings Conference call.
During todays presentation, all parties will be in a listen only mode.
Following the presentation. The conference will be opened 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.
Thank you operator, and good morning, everyone. We appreciate your participation in our second quarter 2023 earnings call with me today is Brazil, since Brown, 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.
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 two of our earnings deck as well as our 2022 10-K filed on March 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 S. GAAP.
A reconciliation of these non-GAAP measures to the most appropriate for comparable GAAP measure can be found in our earnings release as well as on our website.
Let me now turn the call over to Phil.
Thank you Jason Good morning, everyone. We appreciate your time and interest today.
Now that we're a few months out of Beijing.
In early March things have begun to return to the new normal environment, a fierce competition for deposits higher for longer interest rate Metropolitan office credit concerns and more.
We have been operating our business from a position right.
Demonstrating our agility and the flexibility of our strategy, we quickly pivoted to a modified quote strategy centered on a flat balance sheet and building capital.
Loan growth is still expected funded mainly from run off of our securities portfolio as is preparing our balance sheet to accommodate growing political deposit.
The next presidential election cycle began in earnest.
Despite nagging headline activity in the banking sector I believe there's reason for optimism there.
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 simple model uniquely positions us to win.
Given that you've had are material financial information for almost two weeks I'd like to spend our time together talking about three keys to our continued future success those being our deposit franchise.
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 this designation last quarter called Super core deposits in order to provide more transparency into our deposit base.
Our Super core deposit that's come from loyal customers to bank with amalgamated for more than five years and cumulatively represent approximately three points.
Dollars 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.
When thinking about a bank deposits stability are super core deposits aren't incredible advantage one earned from over 100 years of relationship based banking.
Another deposit base, they've managed or amalgamated is a 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 month.
Takeda campaign finance professionals.
Apart.
Our political deposit balances trends with major election cycle.
Normally right, leading up to an election, and then declined in the quarter neared its conclusion.
We experienced it once again following the midterm election last November .
As national election cycles have greatly linked than weird now and in the accumulation phase boosted by the onset of the presidential candidates announcing their intention to run during the quarter.
Second quarter, we have seen a strong inflow of deposits from politically active customers.
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.
Interest bearing deposits as funds are largely in DDA accounts, given their lifecycle and this helps to mitigate the rise in deposit costs and that flexibility for us as some of our customers' deposits moved off balance sheet into our treasury investment services.
Are 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 our uninsured deposit balances, which is quite an accomplishment given the current market backdrop.
Shifting to our lending segments. We spent much time discussing the expansion of our banking team over the last few 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.
But 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 the three trillion dollars of investment over the next 10 years, it's necessary for the U S to achieve the goal of net zero emissions by 2050.
This is a significant market opportunity, which we believe will grow through the economic cycle.
Given the important urgency and the momentum towards dress climate change.
We are deeply experienced bankers and 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, who help drive the dialogue about financing.
Source significant opportunities.
More importantly, we have the sophistication to prudently underwrite emerging technologies.
This leads directly into our future earnings potential.
We continue to demonstrate our expertise in sustainable lending, we are going to drive a powerful mix shift in our balance sheet as we replace lower yielding loans and securities with higher yielding sustainable.
It's important to remember that we are still turning over an older balance sheet 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 heels and as a result margin and earnings.
Paired with our already strong and well protected earnings stream, our ability to grow net interest income next year and maintain our margin over 3% is encouraging with great opportunity for margin to expand its debt interest rates normalize around at a lower terminal rate.
To conclude we are running a bank and a leading on issues. We care about in April we hosted the global Alliance for banking on values annual meeting in New York City.
200 people attended spanning a range of international bankers impact investors customers and software providers.
Because you can finance to deliver sustainable economic social and environmental development.
Our presence in this area grows so will our business.
We are America's socially responsible bank.
We're glad that people are starting to notice in the N results are what matters results for shareholders for customers and the <unk>.
And the entities we serve.
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.
Let me now turn the call back over to Jason to provide a review of our second quarter financial results.
Thank you Priscilla.
Net income for the second quarter of 2023, it was $21 $6 million or <unk> 70 cents per diluted share compared to $21 $3 million or 69 cents per diluted share for the first quarter of 2023.
The point $3 million increase for the second quarter of 2023. It was primarily a result of a $2.7 million increase in non interest income of $1.1 million decrease in provision expense of $1 $1 million decrease in noninterest expense, mostly offset by a $4 3 million dollar decrease in net interest income and a point $2 million increase in income.
Tax expense.
Yeah.
Beginning on slide five there were no exclusions related to solar tax equity investments for the second quarter of 2023.
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 is.
Is it helpful way to evaluate our current and historical performance.
Core net income excluding the impact of solar tax equity investments, our non-GAAP measure for the second quarter of 2023 was $22 million or 72 cents per diluted share compared to $23 million or 74 cents per diluted share for the first quarter of 2023.
Turning to slide seven deposits at June 30 of 2023 were $6 9 billion, a decrease of $146 $7 million from the first quarter of 2023, while deposits excluding brokered Cds remained essentially unchanged at $6 $4 billion, demonstrating a strong and stable deposit base.
Through July 21, 2023, total deposits has decreased by approximately $197 million to $6 $7 billion.
Which importantly includes a $242 million decline in brokerage Cds previously utilized to replace the political deposit outflows that we experienced in the fourth quarter last year.
Excluding brokered Cds total deposits have increased by $46 million.
Excluding brokered Cds again noninterest bearing deposits represented 48% of average deposits and 46% of ending deposits for the quarter ended June 30 of 2023.
Contributing to an average cost of deposits of 87 basis points up 26 basis points in the previous quarter as we continue to attractively price our deposits to reaching our customer base.
Our total cost of deposits, including brokered Cds was 110 basis points in the second quarter of 2023, or 29 basis point increase from the previous quarter.
Yeah.
Moving to slide eight our high quality Super core deposit base totaled $3 $6 billion are super core deposit base uniquely displays important insight into our impact customer segments.
At quarter end total uninsured deposits were $3 $9 billion or 57% of total deposits an improvement from $4 4 billion or 62% during the first quarter of 2023.
Excluding uninsured Super core deposits of approximately $2 $5 billion remaining uninsured deposits were approximately 20% to 23% of total deposits with immediate liquidity coverage improving to 183% from 137% in the prior quarter.
Consistent with prior quarters, we have maintained significant liquidity with cash and immediate borrowing capacity of $2.6 billion and $758 $3 million a two day capacity from Unpledged securities, resulting in $3 $3 billion of told two day liquidity.
Our liquidity covers 85% of our uninsured deposits an increase from 79% of our uninsured deposits in the prior quarter.
Excluding super core our liquidity covers 183% of our uninsured deposits.
Turning to slide nine.
Core deposit base continues to show stability and resiliency during the first 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 second quarter and into July .
Taking a closer look on slide 10 deposits held by politically active customers were $835 $8 million as of June 30 of 2023.
An increase of $157 $7 million on a linked quarter basis.
As noted we expected political deposit flows to rebuild in the second quarter of 2023, following the typical pattern of seasonality.
Additionally, we've experienced $11.2 million of incremental political deposit inflow through July 21 2023.
Yes.
Jumping ahead to slides 13, and 14 the book value of our investment securities portfolio decreased $12 million during the quarter, primarily as a result of $29 $5 million and strategic sales and $46 $2 million in traditional securities Paydowns.
Offset by $41 $4 million and 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.
Our unrealized loss position in our available for sale securities portfolio was $128 $1 million or seven 5% of the total portfolio balance.
Accordingly, our F. S 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 32023 were $4 $3 billion, an increase of $53 $5 million or one 3% compared to March 31st 2023.
This increase in loans was primarily driven by a $32 $9 million increase in multifamily loans of $25 $6 million increase in commercial and industrial loans, driven by our climate and sustainability loan segment.
And a $5 $9 million increase in the commercial real estate portfolio offset by a $1.6 million decrease in residential loans.
$9 $2 million decrease in construction loans, and an $8 million decrease in our consumer loan portfolio.
During the quarter, we had $5 $2 million of improvement in criticized or classified loans, including a pay off on a $3 $8 million office related loan as we continue to focus on improving the credit quality of the bank's commercial real estate portfolio.
The yield on our total loans was 4.33% compared to 4.40% in the first quarter of 2023.
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 million in office only exposures across six credits with an average LTV of approximately 37%.
Of the six credits all our past grade with the exception of one special mention Additionally, a $1.3 million commercial real estate loan that was considered nonperforming for documentation purposes at the end of the first quarter was returned to current status in the second quarter.
On slide 16, net interest margin was 333% for the second quarter of 2023, a decrease of 26 basis points from 3.59% in the first quarter of 2023 do you expected margin compression was largely due to increased rates and higher average balances of interest bearing liabilities, particularly interest bearing brokerage 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 and sustainability segment, which corner attractive yields at a premium to our traditional legacy sectors.
No prepayment penalties were earned in loan income in the first or second quarter of 2023.
On page 17.
Core noninterest income excluding the impact of solar tax equity investments, our non-GAAP measure was $8 $2 million for the second quarter of 2023 compared to $7 $5 million in the first quarter of 2023.
The increase of $27 million 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.
On page 18 core noninterest expense a non-GAAP measure.
For the second quarter of 2023 was $37 $2 million, a decrease of $1.4 million from the first quarter of 2023.
This was in line with the expected noninterest expense range provided on last quarter's call was primarily due to a point $8 million decrease in compensation and employee benefits given the timing of payroll taxes and corporate incentive payments.
Well as temporary personnel costs and benefit insurance costs incurred during the first quarter 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 noninterest expense to trend similarly.
Moving to slide 19, nonperforming assets totaled $35 $3 million or point for a 5% of period end total assets at June 32023.
A decrease of $3 $4 million compared with $38 $7 million or <unk>, 49% on a linked quarter basis.
The decrease in nonperforming assets was a result of the Silicon Valley Bank Senior note that was placed on nonaccrual in the first quarter, which was subsequently sold in the second quarter.
At $1.3 million commercial real estate loan that was brought current in the second quarter.
Additionally, a $1.7 million commercial loan was charged off in the quarter, which was substantially reserved for during the second quarter of 2022 offset by an additional $1 4 million in retail loans that were placed on nonaccrual status.
Our criticized assets decreased $6 $4 million or 6% to $103 $9 million on a linked quarter basis.
On January one 2023, the current expected credit loss or seesaw 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 $1 million to $67 $4 million at June 30 of 2023.
From $67 $3 million at March 31, 2023.
The ratio of allowance to total loans was 1.59% at June 30 of 2023 and $1 six 1% at March 31 2023.
The ratio of allowance to nonaccrual loans was 200.19% at June 30 of 2023.
Provision for credit losses totaled $3 $9 million for the second quarter of 2023 compared to $5 million in the first quarter of 2023.
The decrease in provision was mainly attributable to the previously mentioned impairment charge on the S. A V V. Senior note during the prior quarter, which was subsequently sold in the second 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 were 16, 8% and 17, 3% respectively for the second quarter of 2023.
We repurchased $2 $2 million of our common stock during the second quarter, and a $23 $5 million of remaining capacity under our $40 million share repurchase program. Additionally.
Additionally, we have declared a quarterly dividend of <unk> 10 cents 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 one 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 as expected the Federal Reserve board raise rates 25 basis points in May.
Rates unchanged at its June meeting and raise rates again 25 basis points yesterday.
Our expectation is for at least one more 25 basis point increase this year, the remaining higher for longer with potential interest rate reductions to occur during 2024.
As a result of our $21 $6 million quarterly earnings, partially offset by a $7 $9 million increase from the previous quarter and the tax affected F S mark to market adjustment.
As well as share repurchase activity.
Tangible book value per share a non-GAAP measure improved to $16.78 as of June 30 of 2023 as compared to $16.42 in the prior quarter.
We also remain pleased with our tangible common equity to tangible assets of $6 five 9% for the quarter in comparison to $6 four 3% from the previous quarter.
We remind investors that we publicly set a general tangible common equity minimum of 6% back in the second quarter of 2022, and we've never been below that target.
During the second quarter, we achieved net loan growth of one, 3%, which was a bit below our anticipated target of 2% to 3%. 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 a portfolio of 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.
But we have maintained our full year 2023 guidance as follows.
Core pretax pre provision earnings ex solar of 133 million to $140 million and net interest income of 248 million to $255 million, which considers the effect of deposit migration to interest bearing and the forward rate curve for the remainder of 2023.
Going forward, we estimate an approximate $5 million decreasing annual net interest income for a parallel 25 basis point increase in interest rates.
Yeah.
To conclude our focus remains on equally growing our capital position curtailing potential borrowings in balance sheet leverage and managing expenses.
We do expect our net interest margin to compress by approximately five 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 declined slightly to approximately $61 million to $62 million in the third quarter 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 growth strategy.
Our results this quarter demonstrate the strength of the bank as well as a 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.
Operator.
Thank you.
We'll now be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad.
Tim will indicate that your line is in the question queue.
You May press star two if you'd like to remove your question from the queue.
For participants using speaker equipment it may be.
Sorry to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Thank you.
Our first question is from Alex toward all with Piper Sandler. Please proceed with your question.
Hey, good morning.
Good morning Al Good morning.
I first want to hone in a little bit on there's three trillion dollars of spending that you alluded to in your prepared remarks brucella, maybe if you could give us a little bit more about what's driving that is that a public spending or private sector spending and sort of the types of loans and really what you guys are doing obviously its sustained.
Lending has been a big part of your model, but you know sort of specific things that you've been doing recently to kind of make sure that you get.
You know more than your fair share of the the lending opportunities associated with that spending.
Yeah, Thanks for bringing that up the number comes from external research them.
On the topic and it's really it's really just a mathematical calculation of what it will take them for a U S companies to achieve our stated goal of getting to net zero by 2050.
We see the opportunity and 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, but certainly the countries 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 yes, and Alex I'll I'll add to that.
Lines are closely to how we've already been going through our staffing model and I think the the spend is a combination of public private and again as Michel mentioned through public or through external research, but you know the things that amalgamated does well from a banker point of view probably being more.
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 and we've talked about that a bunch you are 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.
The margins are good on these particular asset classes and we think that you know there's going to be a really good opportunity for us to turn over our balance sheet and move into these asset classes as a as the quarters and years go by and the only other thing I'll add to that is I should've mentioned.
Obviously, the IRA is a good step in the right direction, but by all accounts. This.
This is.
Only going to get us about a third of it 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'll be required to make it happen.
Got it and then maybe you can talk a little bit more about that sort of mix shift that 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 can actually impact loan yields over the next 18 months.
Yeah, I think that's a sort of a hidden or unlock power.
<unk> balance sheet and the banks earnings potential.
So I 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 got a nice.
Start to it throughout last year, and obviously, we've modified our growth approach.
Throughout the rest of this year for the 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 in a low spread and the low margin. That's on those some of the residential assets and will continue to come off and our ability to play in this space of of climate sustainability on the commercial side.
And having deals at all price out and 60 75, 7% range. There's a really good opportunity for us to see you know asset yield expansion.
Out into you know probably the early part of next year.
And again, we're pretty excited about that and we think that you know we spent a lot of times are preparing the balance sheet for this and we hope that the.
The margin is going to benefit from it pretty greatly here as we get out into next year.
Okay, great. Thanks for taking my questions.
Thanks, Alex.
Thank you. Our next question is from Janet Lee with J P. Morgan. Please proceed with your question.
Yeah.
Good morning.
Hi, Janet.
That hard about favorable mix over time can you give us a sense of that yields comparisons for different types of sustainable lending loans that you originate today versus conventional loans that are rolling off I just wanted to see if theres that'd be great.
The data that you can provide us.
Hum.
Again, the assets that they are the asset classes within the sustainability and climate.
You know again, we're seeing I think I said before 66 63, 7% type of yield opportunities and when you look at some of our more data in commercial loans in the multifamily side. Some of those are still in the you know in the 4% range three 5% range and so there's a good opportunity to find some on some.
Fred there Janet but I don't have a specific code for you other than you can really just think again about the aged nature of the balance sheet and we haven't had really any loan growth on the book you know all the way up through 2021, and we were kind of sad you know neutral from 2019 through 2021 in terms of loan growth and then we started to.
Pick that back up again in earnest when for solo arrived and we developed our lending strategy. So it gives you a little bit of a sense for the type of assets that are that are still on the books that are ready to roll off and the types of opportunities we have in our in our climate sustainability section.
Okay. That's that's helpful and in terms of your NII sensitivity going back to your $1 5 million comment so that's fed lowers rate.
You wouldn't you would benefit on the net interest income side from your asset sensitivity point of view.
I think so I mean, it's kind of where we're in a pretty neutral position right. Now. So I don't think the benefit is going to be any.
Anything significant at you know in the immediate term.
Over time, we absolutely would benefit from it.
But you know the cost of 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, and I think we've done a pretty good job so far of protecting the earning streams and are in our kind of.
Static situation right now right, so not adding anything new to the box, we've got a well protected earnings stream as rates decline, we should see some benefit going forward.
Okay.
And I know, it's tough to guess Budd.
Is it fair to say that we're nearing the trough for your noninterest bearing deposit outflows absent the seasonality seasonality with political deposits.
You see a scenario where your noninterest bearing deposits.
You know continue to go down and dipped below 40% of your total deposit.
It's it's it's an interesting question.
I suppose there's always that type of scenario, it's hard to predict what's going to happen in the rate environment.
Going forward can you just kind of looking at the churn that we had in the current quarter and then having us only decline by about a percentage point on on noninterest bearing from a mix point of view, we're not seeing a low 40 at this point in time, but I think of 42% to 44% kind of landing spot by the end of the year.
There is a reasonable prediction.
But again, it's it's it's a little bit of a of a guess because a lot is dependent upon the flow of the political deposits, which we saw it you don't really have a nice impact this quarter.
The same time.
If rates stay higher for longer you know over time, we could see that ratio continue to drop but right now we're targeting between 42 and 44% for the end of the year.
Alright, that's helpful. My My last thing can you.
Can you give us more thought.
Around your plans 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.
Yep.
I think.
We've really always stood out with our without repurchased authorization I think we look for opportunities where we feel the price is attractive.
You know obviously tangible book value is an important part of that calculus.
But it really Janet becomes a function of of accretive value.
When paired against our stated desire to continue to grow our capital base and so I think they'll always be some level of balance between the amount that we look to repurchase and our ability to continue to provide a building capital base. So that we can we can achieve a leverage ratio that we think is really appropriate for this bank to create optionality for growth going.
Forward.
What's the target leverage ratio for you.
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 is somewhere around eight 5% by the middle of next year and the reason why I say that is twofold. You know number one 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 the peak season for political deposit gathering as the as the presidential election will be nearing.
Got it thanks for taking my questions.
Thank you.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is from Chris O'connell with K B W.
Proceed with your question.
Hey, good morning.
Morning.
Hey, just wanted to start on the.
The balance sheet and the securities portfolio.
The first book was down about 55 million 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 a $50 million per month.
Yeah.
Outflows in that portfolio are expected.
Any reason why that was kept up a little bit larger this quarter yeah.
Yeah, Great Great question transformation really we put one of our pace purchase tasteful purchases into available for sale are in.
This particular quarter, we wanted to have a little bit more flexibility to be able to move with that asset class and that was the first.
Purchase that we'd never classified as available for sale it was about $20 million.
And that's probably the difference Chris because the actual paydown on the traditional like we're really kind of trying to make sure. We get our this terminology aperture traditional securities portfolio, which would exclude pace. So if you look at traditional SaaS, we actually did have a decline excluding the mark of about $70 million, which should've track pretty.
<unk> to the each of the cash flow that we had talked about in previous quarters.
Okay got it that makes sense and a go.
A go forward basis, how how are you thinking about you know the traditional securities portfolio.
How much those balances move in the back half of the year.
Versus you know the base portfolio.
I think they're going to move a bit in opposite directions. We still think taste is a 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 are given kind of the current rate environment.
Energy efficient improvement opportunities for for resident sees is greatly improved and we benefited also from them from a consolidation in the market and our providers got more access to origination in the flow opportunity for US is great. So I think you'll see that continue to move you know, possibly in the same type of pace that we were.
Excuse me.
Lastly at the same the same rate as you saw in the first quarter I'm sorry in this current quarter, which is about a net of $40 million $45 million somewhere in that range and but with regards to the traditional portfolio. We're going to see that continue to come down we're not looking to add any positions are in that particular portfolio from an age.
See our non agency position, where you're going to be using the cash flow to fund the growth I think the $70 million I quoted for you just a moment ago is a good way to think about you know that between the third and the fourth quarter in terms of a run rate and so again, a little bit of a of an opposite moving direction between pace and traditional securities, but we do expect that to continue.
Run down.
And be the primary funding source for our for our origination side on the.
Tastes.
Yeah.
Okay.
Okay got it that's helpful.
And.
As far as the multifamily book goes I know you guys are talking about running it down but it was the biggest growth driver. This quarter I'm just maybe if you could break down kind of you know where the loan pipeline is.
On various law and various lending segments.
You know the decision you know to grow multifamily I think it's up about.
About 100 million or so this year.
Hmm.
Versus what you guys were talking about with the rundown overtime.
Yeah. So I just I wanted to maybe make a quick clarification I think that the run down or the de risking we've talked about has been mainly in our in our traditional commercial real estate portfolio.
And not specifically multifamily.
Commercial real estate, we're really looking at you know the portfolio. It houses any type of office exposure or things of that nature. The multifamily I think that's the spot where we wanted to see some growth and we talked about you know having that be one of our one of our drivers for the year.
I think we did about 32 or $33 million net in multifamily I think the good side of that story is that you know 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 its workforce housing.
And hasn't really strong mission impact for us as well and we're able to find pretty decent returns on these and also it allows us to continue to turn over that portfolio for some of the legacy assets that we've had for us, but I think the what we're really trying to focus on was was really reducing their commercial real estate.
Side of our portfolio and I think we've done that to a large degree and we had a little bit of an uptick in that portfolio this quarter.
We talked before and you know we're not totally out of the asset class. We're just simply not looking for you know office only related exposure, but if we find and it's it's a unique opportunity for US you know give me some of our our union routes. If we find a really strong opportunity to do an owner occupied.
Commercial real estate type of deal and that has a lot of security a lot of a lot of deposits that may come with it I think theres opportunities for us to be able to put down the books.
And that's really what you've heard mostly in this quarter I hope I answered your question.
Yeah definitely.
I see I mean that you are putting on are what kind of origination yields are you getting on those.
Coming in 575 to six to six right now so we're getting a good a good clip. It's you know it's a little tighter obviously when we could do in the C&I, a sustainability space and we're trying to balance out our capital allocation between you know a good solid multifamily deals that had a mission alignment and in higher yielding.
And ideas, but I think what you're seeing from US is an opportunity for us to be to be really selective and and basically take our time with making sure that we're putting on the right type of assets.
Got it.
And I was just surprised I guess this quarter to see the loan yield moved down a bit on a quarter over quarter basis, and any specific factors driving that and how.
I mean, if you have any look into kind of.
Where do you think loan yields can move it back half of the year that'd be helpful.
Yeah, Great question and it it was a little surprising for us as well.
I'm not.
Not that it's something that we think is going to continue I think it was really some discreet events that occurred within the the.
The consumer solar portfolio I think the first we made a we made it an accounting election change in terms of how we run.
Our our discount accretions on some of these portfolios, which lowered the yield a little bit in core, 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 I think the second was it was really related to.
Some of the higher yielding consumer solar loans that we've had.
The charge offs or the payoffs that were real.
Today, as you know clipped down to get a little bit so figure that blip really as 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 have in our portfolio were up on average yield. So you can get a sense for the kind of the balancing or the bouncing out effect of the of how the asset yields you know work with one another in the quarter and you know, Chris I think where we're at right now we should be able to see continued yield expansion.
You know in a controlled maverick yield expansion going forward and I'm not expecting there to be more erosion.
Yeah.
Okay got it.
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And then lastly, just yeah and Andy.
Can do you know how.
How are you guys are feeling about credit moving forward it looks like the consumer solar charge offs were down a bit.
From the past couple of quarters pace.
Any outlook as to if that is somewhat of a downtrend can continue going forward.
And then just any update as to I know you guys mentioned, a few items, including.
Our return pay around the office, but there's.
Any outlook or what you're seeing inside your office portfolio in terms of the relative risk you know moving forward as these things mature over the next year year and a half.
Absolutely so on Chris I got I did get a note from them from my group just back to your multifamily yields I was probably a little low interest and that's between six and a quarter and in six and a half that they are coming on right now so a little bit wider margin just want to correct myself I'm going to take a moment there on the.
On the charge on the charge offs for consumer solar.
And Janet asked a couple of times in previous quarters about this I think what we're able to see is some of the the governors and the credit structuring that we've put together for these starting to take hold and limit the amount of charge offs at the bank needs to incur.
You know, we're reaching buyback provisions with our providers and we're reaching a loss recoveries.
Our original providers and so I see I feel like we're in a decent spot there relative to a stability in that charge off line. As you know we're not we're not adding any new flow from those original providers that are that have the bulk of the assets on the books in any of the new providers that we've been working with them very very very tight.
Our credit standards, and they're performing quite well, it's pretty early in their cycle, so not ready to declare a declining trend at this point, but I feel good about you know what I'm, saying stable looks 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 releases is down from last quarter, it's down to about 66 million from 71 in the previous quarter, we had a nearly $4 million payoff of one of our special mention and classified assets.
Which you know I think we talked about last quarter as well, we still felt really good about collectability and our AR and our special mentioned group for our commercial real estate portfolio. So all of the six remaining Theres still one that's classified as special mention that's set to mature.
First quarter of next year, we're in regular contact with the borrower.
And we feel pretty good about our ability to.
And work with them and maintain that in an accruing and paying status at this time and then again nothing's really changed characteristically is still really low LTV on those assets in that office only portfolio about 37, 37% or so of our adult T V.
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 and then we were carrying you know roughly 75 basis points of coverage through our allowance anyway on those so we feel like from a from an all in risk point of view, we're where we're in a good spot relative to commercial real estate office in particular.
Okay, Great that's helpful.
That's all I had been taking my questions.
Welcome Chris Thank you.
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 of Brazil, a brown for closing comments.
Well. Thank you operator, and thank you for those are great questions and for your continued interest in the company. We look forward to taking your questions offline and and I wish you all a great day.
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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