Q4 2023 Amalgamated Financial Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the amalgamated Financial Corporation fourth quarter and full year 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 fourth quarter 2023 earnings call.
With me today is <unk> Brown, our president and Chief Executive Officer.
As a reminder, a telephonic replay of this call will be available on our 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.
unknown: We caution investors that actual results may differ from the expectations indicated or implied by any such forward looking information or statements.
unknown: Investors should refer to slide two of our earnings deck.
unknown: Well as our 2022 10-K filed on March 19, 2023 for a list of risk factors that could cause actual results to differ materially from those indicated or implied by such statements.
unknown: Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance.
unknown: 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.
unknown: 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.
Priscilla: Now I'll turn the call over to Priscilla.
Priscilla Chan: Thank you, Jason and good morning, everyone.
Priscilla Chan: I'm happy to discuss our fourth quarter results.
Priscilla Chan: Thankful to our employees, whose talents and dedication to our company and our mission make winning in difficult situations as possible and for our investors clearly see our differentiated business model that enables our ability to rise above peer returns.
Priscilla Chan: It's incredibly rewarding to see your belief in our bank reflected in the price appreciation of our stock during the recent months.
Priscilla Chan: Thinking about the eventful year of 2023 perhaps what I'm most grateful for is stability and deep entrenchment, we have with our loyal customers, who support us when it matters most like during the banking crisis earlier in the year.
Priscilla Chan: One of my favorite stories from that period with one of them one of our best customers simply told one of our bankers were good and then immediately asked how are you doing.
Priscilla Chan: That level of customer appreciation transcends the standard vocabulary of customer service and there's the fabrics across the high quality of our deposit franchise that is what makes amalgamated different and it continues to shine through in our fourth quarter results.
Priscilla Chan: Looking at our results more closely our deposit franchise is a clear competitive advantage as we delivered stellar deposit growth in the fourth quarter driven by our political but also our union and nonprofit segments.
Priscilla Chan: Because of our neutral balance sheet strategy, our on balance sheet reported growth metrics $171 million. So only part of our deposit story.
Priscilla Chan: I'll take a moment to elaborate on some details.
Priscilla Chan: Starting with our political deposits, we saw strong inflows of $236 million as the presidential election continues to unfold.
Priscilla Chan: This growth is ahead of our historical trends and we're optimistic that we will continue to see political deposits billed through the early fall of 'twenty 'twenty four.
Priscilla Chan: Moving to our nonprofit and Union segment, we also experienced deposit strength, posting new bank relationships of $203 million.
Priscilla Chan: Understanding that these sales cycles are long, we're seeing our pipeline grow and we're optimistic as we continue winning sizable relationships overtime.
Priscilla Chan: In addition to the new to bank wins, we also saw nice growth in our existing relationships during this quarter.
Priscilla Chan: As we continue to grow our portion of the new to bank deposits are transitional and staged to move to our trust business. Additionally, we are moving out of the accumulation phase for political deposits as we are within 12 months of the 'twenty 'twenty four election, and we now treat newly raised political deposits, it's more trends.
Priscilla Chan: Actual with a shorter duration.
Priscilla Chan: As a result and in keeping with a neutral balance sheet strategy, we moved $303 million of transactional political deposits and transitional brass business deposits off balance sheet into a reciprocal network to mitigate the impact of their eventual outflow.
Priscilla Chan: Earning a positive spread on these deposits, which was recorded in noninterest income and which we expect to continue through the second quarter before these deposits began to be utilized in the third and fourth quarters.
To summarize we had a strong deposit gathering performance during the quarter with well over $400 million in new deposit.
Priscilla Chan: We recognize these deposit metrics reflect a point in time balances. We nonetheless are operating in an enviable position of managing deposit liquidity instead of searching for it.
Priscilla Chan: In today's highly constrained liquidity environment, we're punching well above our weight, giving us many options to deliver returns that are above peers.
Priscilla Chan: I'd now like to spend some time, telling you about what we've been doing with our liquidity and how we are structuring our balance sheet for sustainable profitability and returns.
Priscilla Chan: During the quarter, we utilized our on balance sheet deposits to reduce our much higher cost brokered Cds by nearly $150 million. As a reminder, we have more than $300 million in wholesale borrowings maturing through the first half of 'twenty 'twenty four timed to coincide with our political.
Deposit accumulation. This funding mix shift will help us to mitigate further deposit cost pressure and potentially provide modest margin expansion if deposit cost pressures began to ease.
Priscilla Chan: On the other side of our balance sheet, we continue to fund loan growth predominantly from the run off of our traditional securities portfolio augmented by select security sales.
Priscilla Chan: We changed it makes it very assets from securities to loans balance sheet health will benefit as the portfolio amortization, well naturally reduced unrealized loss position and replace those assets with loans at market rates.
It is also worth a reminder, that we have sold $550 million of total securities since the second quarter of 2022, and we've been pleased with the beneficial repositioning that has occurred within the last 18 months.
Priscilla Chan: Central to our perspective balance sheet structure is the repricing of the lower yielding loans that are maturing.
Priscilla Chan: <unk> 'twenty 'twenty four we have nearly $225 million in maturing lower priced commercial real estate loans and a total of nearly $375 million in maturing bonds.
Priscilla Chan: When paired with our Impac lending business. This makes for a terrific opportunity to drive margin expansion and profitability.
Priscilla Chan: As discussed last quarter our margins.
Priscilla Chan: Reaching an inflection point and I am pleased that our NIM expanded 15 basis point to 344% in the fourth quarter helped by a 12 basis point increase in our loan yield of 4.68%.
Priscilla Chan: Broadly I couldnt be more excited about our business space of social responsibility and banking.
Priscilla Chan: This is a space that we expect to thrive in the years to come and one where we have a dominant position.
Priscilla Chan: As we said on prior calls the market for climate risk alone is significant with an estimated three trillion dollars of investment needed over the next 10 years in order for the U S to achieve our goal of net zero emissions by 2050.
Priscilla Chan: Inflation reduction act signed by President Biden in 2022 is a catalyst as well as monies are being funneled the critical projects the renewables infrastructure and water segments of the market all areas that will need additional capital as projects get underway and this is capital that we are well.
Priscilla Chan: Suited to provide.
Priscilla Chan: When paired with our impact lending model, we have a potent ability to bring their specialization to life accompanied by our deposit gathering performance.
Priscilla Chan: Our deposit franchise is truly unique and it stood up to the most difficult of tests with undoubted success, I'm anytime again and proven once more with some significant segment wins during the quarter.
Priscilla Chan: Our ability to perform also leads to sustainable profitability and returns whether that's in the non-profit segment, where we have only a small share, but see an opportunity to meaningfully grow or labor unions, where we're well known but still only have a small share of the nation's entire labor market.
Priscilla Chan: Amalgamated has something very few other banks have an undisputed reason to win the ties.
Priscilla Chan: Wrapping up I'm pleased with our results and we are tracking according to our plan.
Priscilla Chan: As we build capital and earnings base strengthened our financial results and the visibility that we have the year ahead provides real optionality for our management team as we reviewed a wide range of possibilities.
Priscilla Chan: Hence our growth profile.
Priscilla Chan: That said, we recognize we are less than a year removed from the highly disruptive banking turmoil in early 2023 and we're cognizant of the higher for however, long interest rate environment patience will be a key theme for us in 'twenty 'twenty four as we execute our number one priority to be good stewards.
Of our customers money.
Priscilla Chan: As I always say, we are America's socially responsible bank.
Jason: Jason My friend and partner over to you.
Jason: Thanks, Priscilla Hi, there and good morning, everyone.
Jason: I'm going to start off on slide four of the earnings deck.
Pursuant: That's pursuant mentioned, our 2023 fourth quarter produced solid results.
Net income was $22 $7 million or 74 cents per diluted share.
Priscilla Chan: And core net income a non-GAAP measure was $22 $1 million or 72 cents per diluted share.
Priscilla Chan: The quarterly results featured significant growth in deposits across multiple segments.
Priscilla Chan: Increased net interest income margin expansion and our leverage ratio across 8%.
Priscilla Chan: All of which I will discuss in further detail. Additionally.
Priscilla Chan: Additionally.
During the quarter, we booked a $3 $3 million adjustment to tax expense.
Priscilla Chan: To record additional liabilities and a write down of deferred tax assets driven by state and city tax examination that reduced the bank's net operating loss carryforwards.
Priscilla Chan: The tax adjustment detracted 11 cents per share from both GAAP and core net income during the quarter, but we do not expect further tax adjustments of significance related matter.
Priscilla Chan: Taken as a whole we were very pleased with our core operating performance.
Turning to slide five I'd like to make a quick note that we are now excluding the timing impact of tax credits or accelerated depreciation related to our solar tax equity investments in our normal core net income calculation to simplify our business performance presentation.
Priscilla Chan: During the quarter, we had one new solar tax equity transaction.
Priscilla Chan: And an additional solar grid project go live related to a previously booked transactions.
Priscilla Chan: This resulted in recognition of $3 $3 million of solar tax credit income that was excluded from our core net income metrics.
Priscilla Chan: For forecasting purposes, we have updated the expected effects of these transactions for the next four quarters.
Moving to slide seven deposits on December 31st 2023 or $7 billion.
Priscilla Chan: An increase of $21.1 million from the linked quarter.
Priscilla Chan: And that's first of all a detailed earlier on balance sheet deposits, excluding brokered Cds increased by $179 million or two 6% to $6 $8 billion.
Priscilla Chan: But there was significant additional deposit growth during the quarter.
Priscilla Chan: In keeping with our neutral balance sheet strategy, we are managing $303 million of deposits off balance sheet comprised primarily of transactional political deposits and transitional deposit scheduled for our trust business.
Priscilla Chan: Looking at some deposit metrics noninterest bearing deposits, excluding brokered Cds represent approximately 43% of average deposits.
As well as 43% of ending deposits.
Priscilla Chan: Tribute to an average cost of deposits of 125 basis points in the fourth quarter up 14 basis points from the linked quarter.
Priscilla Chan: And while we exceeded our expectations with the level of noninterest bearing deposits given the rate environment. We believe this also reflects our deposit franchise differentiation well.
Priscilla Chan: Checking in on political deposits on slide nine.
Priscilla Chan: We were up to approximately $1 $2 billion as of December 31, 2023, an increase of $236 $1 million on a linked quarter basis and through January 17th 2024, We've had a further $32 $3 million of political deposit inflows.
Priscilla Chan: As the election cycle continues we're optimistic to match or exceed our previous high watermark in the coming quarters.
Priscilla Chan: Jumping ahead to slides 10 and 11.
Priscilla Chan: The book value of our traditional securities portfolio decreased $45 million during the quarter, primarily as a result of $36 $8 million in strategic sales and $48 $3 million in traditional securities pay downs.
Priscilla Chan: While net pace assessment growth was $21 $5 million.
Priscilla Chan: I'd like to note that our pace originations during the quarter were strong at nearly $60 million.
Priscilla Chan: And those originations were offset mainly by prepayments and normal cash receipts related to end of your tax remittances.
Priscilla Chan: Our pretax unrealized loss position in our available for sale securities portfolio was $102 $3 million.
Priscilla Chan: Or six 5% of the total portfolio balance improving by $26 $4 million from the previous quarter.
Priscilla Chan: As a result of the backup in rates towards the end of the year.
Priscilla Chan: Importantly, our U S portfolio duration was only two years, reflecting our conservative investment decisions.
Priscilla Chan: Turning to slide 12, net loans receivable at December 31, 2023 were $4 $3 billion, an increase of $48 $7 million or 1.1% compared to the linked quarter and.
Priscilla Chan: This increase was primarily driven by a $53 $2 million increase in multifamily loans.
Priscilla Chan: $29 $3 million increase in commercial real estate portfolio.
Priscilla Chan: $16 $1 million increase in residential loans offset by a $39 $4 million decrease in commercial and industrial loans, mainly related to pay downs on revolving lines of credit.
Priscilla Chan: Additionally, we furnished the composition of our multifamily portfolio to better illustrate our exposure to certain rent control legislation.
Priscilla Chan: And at year end less than 44% was related to pre 1974 or section eight rules.
Priscilla Chan: Finishing up on loans.
Priscilla Chan: The yield on our total loans increased 12 basis points to 468% during the quarter.
Priscilla Chan: Loan yield increase was mainly attributed to the improved yield of new loans generated during the previous quarters and we saw increases across all individual asset classes.
Priscilla Chan: On slide 14, net interest margin was 3.44% for the fourth quarter of 2023.
Priscilla Chan: An increase of 15 basis points from 3.29% in the linked quarter.
Priscilla Chan: The increase was largely due to increase yields and average balances of interest, earning assets as well as less pressure on cost of funds as deposits replace nearly $150 million.
Priscilla Chan: Of high cost brokered Cds.
Priscilla Chan: And while we are rather pleased with our margin expansion. We are acutely aware of the continuing higher rate environment and the ongoing competition for deposits.
Priscilla Chan: While we expect to see asset yields continue to grow as we turnover our balance sheet. We also believe deposit costs will continue to rise as well.
Priscilla Chan: A key advantage for us in 'twenty 'twenty, four will be maturing of more than $300 million of power cost borrowings that can be replaced with lower cost deposits.
Priscilla Chan: On page 15.
Priscilla Chan: Core noninterest income the non-GAAP measure was eight and a half a million dollars compared to $7.8 million in the linked quarter.
Priscilla Chan: The increase was primarily related to fees from our Treasury Bill investment offering.
Priscilla Chan: As well as fees earned from off balance sheet reciprocal deposits.
On page 16 core noninterest expense also a non-GAAP measure.
Priscilla Chan: It was $37 $8 million.
Priscilla Chan: Which is an increase of $2.5 million from the third quarter of 2023.
Priscilla Chan: This increase was mainly driven by point $2 million increase in professional fees.
Priscilla Chan: Point $4 million increase in other expenses, primarily as a result of accelerated residential loan servicing cost.
Priscilla Chan: Moving to slide 17, nonperforming assets totaled $34 $2 million or 4% of period end total assets at December 31, 2023.
Priscilla Chan: And our criticized assets increased by $22 million largely related to the downgrade of an $18 7 million dollar commercial industrial alone to substandard and accruing.
Priscilla Chan: On slide 18, the allowance for credit losses on loans decreased $2 $1 million to $65 $7 million at December 31, 2023.
And the ratio of allowance to total loans was 1.49% a decrease of 16 basis points from 1.55% in the linked quarter.
Priscilla Chan: Provision for credit losses totaled an expense of $3 $8 million for the fourth quarter compared to an expense of $2 million in the third quarter of 2023.
Priscilla Chan: The expense in the fourth quarter is primarily driven by a $4 $7 million construction loan charge off partially offset by improvements in macroeconomic forecast used in the seasonal model.
Priscilla Chan: Continuing to slide 19, we look at some of our key performance metrics during the fourth quarter.
Priscilla Chan: As previously discussed we have been laser focused on building our capital position and saw our tier one leverage ratio improved 18 basis points to eight point of 7% and we're on track to achieve our eight 5% target by the second quarter of 2024.
Priscilla Chan: Our tangible book value per share improved by a healthy 7.5% to $18.74.
Priscilla Chan: That said it should be noted that we had a $19.3 million improvement in book equity related to the tax affected mark to market on our securities portfolio.
We also remain pleased with our tangible common equity to tangible assets ratio of 7.16% for the quarter and comparison of $6 seven 2% from the previous quarter.
Priscilla Chan: Another key metric for us the focus is our core revenue per share as we continue to grow our net interest income earnings profile and also our ability to drive more meaningful noninterest income.
Priscilla Chan: Our core revenue per diluted share was $2.48 for the fourth quarter.
Priscilla Chan: Now turning to slide 20, and as is our normal cadence we are initiating full year 'twenty 'twenty four guidance of core pretax pre provision earnings between 143 and $148 million.
Priscilla Chan: Net interest income of $268 million to $272 million.
Priscilla Chan: And while we don't expect any significant fed rate changes during the first half of 'twenty 'twenty four we continue to consider the forward curve to inform our NII guidance.
Priscilla Chan: Additionally, we're initiating a conditional balance sheet growth target of approximately 3% starting in the second half of 'twenty 'twenty four.
We intend to continue with our neutral balance sheet strategy through the first half of 'twenty 'twenty four as we patiently pursue our state of tier one leverage target of approximately eight 5%.
Priscilla Chan: Additionally, we will be monitoring a number of macroeconomic factors to inform our decision making.
Priscilla Chan: Our credit quality metrics will be key.
Priscilla Chan: Perhaps most importantly, it will be the performance of our deposit gathering franchise throughout the year with the understanding that we will see significant political deposit outflows in the fourth quarter when the presidential election conclude.
Priscilla Chan: Briefly looking at the first quarter, we think our net interest margin has reached a point, where we were cautiously optimistic for potential expansion of around five basis points.
Priscilla Chan: Correspondingly, we anticipate our net interest income to range between 66.
Priscilla Chan: And $68 million.
Priscilla Chan: And in addition to our NII guidance. We also estimate an approximate $1.6 million decline in annual NII for an immediate parallel 25 basis point decrease.
Priscilla Chan: And with the forward curve currently suggests.
Priscilla Chan: Wrapping up we'd be remiss, if we didn't remember the 2023 or was your in banking as challenging as any distress.
Priscilla Chan: The stress and pressure was real and yet we emerge stronger.
Priscilla Chan: And while we were quite pleased with our fourth quarter and full year results. We aim to strike a cautious outlook for 'twenty 'twenty four as there remains much uncertainty.
Priscilla Chan: One thing we are quite certain of.
Priscilla Chan: Actually responsible banking can do well financially.
Priscilla Chan: And do good for the world at the same time.
Priscilla Chan: And we look forward to banking, our loyal change maker customers in 'twenty 'twenty, four and for many years to come.
Priscilla Chan: And with that I'd like to ask the operator to open up the line for questions.
Priscilla Chan: Operator.
Priscilla Chan: Thank you, ladies and gentlemen at this time well be conducting a question and answer session.
Priscilla Chan: If you'd like to ask a question you May press star one on your telephone keypad.
Priscilla Chan: A confirmation tone will indicate your line is in the question queue.
Priscilla Chan: You May press Star, two who would like to remove your question from the queue.
Priscilla Chan: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the snarky.
Priscilla Chan: Our first question comes from the line of Alex portal.
Priscilla Chan: Piper Sandler. Please proceed with your question.
Priscilla Chan: Yeah.
Priscilla Chan: Hey, good morning.
Hi, Alex Good morning, Alex.
Alexander Roberts Huxley Twerdahl: First off wanted to ask about you know within the context of a neutral balance sheet for the first half of the year assume we're going to get some remixing from securities into loans I know, we had a little bit of your work cut out for you just to keep the loan portfolio neutral given the maturities that you cited but maybe just talk a little bit about sort of expectations for the loan portfolio.
Alexander Roberts Huxley Twerdahl: For the first half of the year and maybe some of the.
Alexander Roberts Huxley Twerdahl: Specifically some of the sectors.
Alexander Roberts Huxley Twerdahl: You know within your various business lines that are that we might expect to see you know.
Alexander Roberts Huxley Twerdahl: It has some good momentum over the next couple of quarters.
Priscilla Chan: Sure happy to take that Alex Great to talk to you again I think for the.
Priscilla Chan: Upcoming two quarters as we think about that neutral balance sheet strategy, we've got a nice mix of lending opportunities within our pipeline to support all of that.
Priscilla Chan: Also looking at some of the maturities that we have on the on the borrowings profile.
Priscilla Chan: I think there'll be some interesting movement in terms of our funding mix and in our overall asset classes with regard to the lending pipeline in particular, we were pretty excited about some of the opportunities we're seeing in our C&I pipeline.
Priscilla Chan: When we think about our forecast for the first quarter and we have we have a decent amount of loans that we feel or highly probable of closing.
When I think about where we see a lot of opportunity, we think consumers I'm sorry community solar will be one of the asset classes that will see some advancement and we think battery storage and other which is in that climate risk space.
And we also feel like our real estate lending from an impact perspective has some really good opportunities as well.
Priscilla Chan: We're seeing a lot of opportunity excuse me in.
Priscilla Chan: Industrial real estate, we're seeing a lot of opportunity in homeless shelter opportunities I'm, sorry, Jamie twice and also education. So those might be some of the asset classes, where we see some real runway in the first half of the year and some of the things that we're focusing on to build up that lending part of our business for the 'twenty 'twenty four for planning.
Priscilla Chan: Sure.
That's great in terms of some of those segments just as we think about sort of rate sensitivity I know like you know real estate in general has been a maybe a little bit slower.
Jamie Dimon: As of five years, a little bit higher than maybe.
Jamie Dimon: People looking at deals and maybe they pencil a bit better as rates come down I mean is there is there a lot of sort of rate sensitivity or you know kind of deals that don't pencil that maybe when rates come down they work better or some of these you know some of these lines of businesses, you know kind of loans and expansions and things that kind of have to get done.
Jamie Dimon: And you know maybe benefit enough from some of the you know the inflation reduction act tax cuts and things like that that maybe there's just less sensitivity to you know to actually what's going on with the with the rates.
Alex: Yeah, I think there's a mix of both Alex too with regard to rate sensitivity.
There are certain deals that are certainly.
Alex: Susceptible or feeling the pressure regarding the higher rates and we've talked about this quite a bit.
Alex: Or new deals to the Bang things that may seem a little stretched and we are in a position to perhaps find alternate players to help satisfy our work with those particular customers that are on a mission aligned.
Alex: Space.
Alex: With our use of your balance sheet strategy, we still maintain that ability to be selective in terms of pricing and also the related credit quality will continue to move along that path now when I think about the loans that are rolling over and they will come I'm due for maturity during during 2020 for one of the things.
Alex: That's actually quite helpful. As the low ltvs that we have on the portfolio assets in place right now and so we'll be perfectly willing to work with borrowers to find an opportunity to refinance with us and maybe use a little bit of that L. T V embedded value to help find a path.
Jamie Dimon: For them to remain with the bank.
Jamie Dimon: So I think that's a couple of the ways that we're thinking about the portfolio opportunities and maybe some of the sensitivities for at least for the first half of the year when we get to the second half and maybe we'll see some pressure release from from the overall macro rate environment, and I think that will bring more players into the.
Jamie Dimon: Basket of credit, where we feel it's appropriate and we should be able to find more opportunities in the second half of the year. If the rates are rates abate a little bit.
Jamie Dimon: Got it that's all that's all helpful. And then can you just maybe just walk through and help us understand a little bit better the the strategy of moving to 303 million off.
Jamie Dimon: Off balance sheet are those I guess first off would those be included.
Jamie Dimon: In the political deposit I think he said primarily their political deposits in the political deposit slide you know the $1 2 billion in total and then kind of I guess it is it really more to provide insulation is as some of the borrowings come due and they'll come back on balance sheet or you know to replace those as those come due or how should we think about kind of the off balance sheet piece.
Jamie Dimon: And in the context of the overall balance sheet over the next couple of quarters as we head into the election.
Jamie Dimon: Maybe I'll start and I'll.
Jamie Dimon: Feel free to chime in but those are really you can really think of that as deposits in two categories. One is yes, we do expect that political deposits will.
Jamie Dimon: We will peak probably slightly earlier than we've seen in the past just because of the the ramp up that we've seen which has been early and fast.
Jamie Dimon: So where do you normally might see this drop off occur in fourth you might see it toward the end of second early third.
Jamie Dimon: And then the other category would be we have you know given our relationship with clients is as robust across our businesses. We have we have clients who have come to us primarily in the not for profit space coming from by the way money Center banks.
Jamie Dimon: Who who are looking at a really robust relationship across a number of lines, including.
Some of their pension business, which ultimately we know is moving into trust and in fact, we've seen some of that occur already.
Jamie Dimon: So far since the quarter end and so those were off balance sheet, because they are ultimately going to be going to trust.
Jamie Dimon: The trust business and actually the movement has started yeah I think that's right and then Alex I think to add on to Brazil is calm and the nature of the political deposits.
Jamie Dimon: As we get a little bit closer to the election were now inside of a year. It does become in our view are much more transactional in nature with shorter duration. So the ability for us to deploy funds against that is a bit limited, but I think more importantly, we're certainly proud of.
Priscilla Chan: <unk> capital and the building of that as a as.
Alex: That's one of our key focus in key objectives and moving some of the deposits off balance sheet helps maintain our opera trajectory on capital and the other side of that strategy really gets into how we've staged the wholesale funding that we have on our balance sheet right now we have another $220 million coming.
Alex: Due for maturity during the first half of this of this come up this year of 2024. So in a lot of ways will be also bringing those deposits back onto balance sheet to match off the funding extinguishment on the wholesale side as we go into the go into the half of this year.
Alex: Okay. That's that's helpful. It was it fair to assume that the sort of the economics of moving off balance sheet and the fee generator would be pretty comparable if they're just invested in cash if they're on your balance sheet yeah yeah.
Alex: Yeah, we were we've been able to negotiate a pretty competitive rage for the off balance sheet movement and some of that has started to flow through noninterest income. So we made a conscious decision to to.
Priscilla Chan: Do you think about the off balance sheet deposits in that way, we obviously could have done something through a through NII, but there I think the reality of it is we can have a flow through of noninterest income on that spread and still maintain our capital targets at the same time, which is the essence of the strategy.
Jamie Dimon: That's great. Thanks for walking through that for me that's all my questions for now.
Alex: Thanks, Alex.
Alex: Our next question comes from the line of generally with J P. Morgan. Please proceed with your question.
Alex: Hello, Good morning, Hello.
Jamie Dimon: I'll start with what loan growth is the 2% to 3% sequential loan growth that we've talked about still viable. It appears that the paydowns on C&I revolving lines impacted the fourth Q results, but if you look into 'twenty 'twenty four can we expect the pace of loan growth to pick back up versus a more muted.
A lot of growth in the fourth quarter.
Jamie Dimon: Yes, Jana I think that that's exactly right we were still.
Jamie Dimon: Very comfortable with a 2% to 3% sequential loan growth target, particularly in a neutral balance sheet position through the first half of the year and.
While we had some lower loan growth in the fourth quarter.
Jamie Dimon: The originations were certainly are robust and we also feel like the pipeline that we've got established and they talked about a moment ago, we'll have some nice pull through in the first quarter in the second quarter to support that.
Jana: Okay and the key driver of that is gonna be from your impact lending area like including sustainability CNI.
Jana: And CRE okay.
Priscilla Chan: It's correct.
Priscilla Chan: And your NII outlook for 'twenty 'twenty four can you talk a.
Jamie Dimon: Talk us through that the interest bearing deposit beta that's assumed on the way down.
Jamie Dimon: Absolutely so.
Jamie Dimon: On the way down we're assuming a 35% deposit beta on our interest bearing accounts.
Jamie Dimon: And that is a lower rate than what we would assume and have assumed on an up scenario simply because we just feel like the rates aren't going to be able to move as quickly in relation to how the fed would move but we are taking a conservative approach and 35%.
Jamie Dimon: As a as a move but I think there's there's obviously room for that to be an improved number but we're not going to model. It that way I think we're going to be very cautious about.
Jamie Dimon: How we would affect our customers' rates and make sure that our customer feels very comfortable with how they're being compensated by the bank and what the things Ah patient movement as we we certainly don't want to be one that's snapple reacting to be dropping rates because.
Jamie Dimon: With our profile as it is right now we have a little bit of an ability to be patient and really allow our customers to feel as much benefit as possible and downgrade scenario.
Jamie Dimon: Okay and in terms of your NII sensitivity, if I heard that right 1.6 million annualized decline in NII for a 25 basis point movement in rates.
It's a little bit of step down versus maybe half a million that you talked about in the prior quarter what is changed.
Jamie Dimon: Over the past quarter in terms of your sensitivity cause a lot a lot of other banks have reduced your asset sensitivity is on a more incremental basis, but still.
Jamie Dimon: Yeah, I think the I think the.
Jamie Dimon: Guidance that we're giving in the prior quarters was really.
Mainly based on an increase in interest rates and so that half a million dollar reduction was really on an increase in interest rates as we start to think about it on a decrease moving to one $6 million is a little bit more or a shift for us from where we had previously been now that said what we're.
Jamie Dimon: Modeling and that's on top of what the forward curve is already suggesting so we baked into our NII guidance for 2024.
Jamie Dimon: Sumption around a conservative assumption around what the forward curves suggest for rate cuts.
Jamie Dimon: Through the back half, we're really through all 24, but not accelerating in the back half of 'twenty four.
Jamie Dimon: And that additional $1 $6 million and remember it would be a parallel shift with short term and long term, but that $1 $6 million as incrementals should be should the rates decline at a rate further than what the forward curve is currently are suggesting.
Jamie Dimon: Okay. That's that's helpful. Thanks for that clarification.
And lastly on pay securities and so nice origination number, but some big offset with the pay downs. It looks like you keep originating at a I mean at a stronger pace than what you guided to in terms of quarterly P Securities growth.
Jamie Dimon: If you look at like on a net basis after pay down normal levels of pay down for 'twenty 'twenty. Four is 35 to 40 million per quarter still got good pace to assume any any reason why you would expect higher versus lower pace on both commercial and residential.
Jamie Dimon: That's a really good question I think.
Jamie Dimon: $35 million to $40 million is a comfortable mark for us to communicate for the future quarters part of.
Jamie Dimon: Part of the part of the peace arrangement really depends on the production flow and we're not always able to.
Jamie Dimon: Predict with any certainty how much it's going to be greater than what we normally guide to I think the payments in this particular quarter or higher than normal. We saw some prepayments that we were not expecting relative to commercial pace and we also see the normal seasonality of the year and tax payments.
Jamie Dimon: Provide a little bit of a higher netting effect, but in terms of production.
Jamie Dimon: I think the our pace is relatively stable and in line, usually quote that 35 or $40 million I'm thinking mainly of the RP securities. She paces is somewhat selective and as we find opportunities. We will look to book those particular assets in terms of what we're thinking about it.
Jamie Dimon: From an opportunity space without thinking about flow, we see roughly $50 million to $100 million of potential C pace opportunities throughout this year, Janet but again coming back to that 35 or $40 million I don't normally include C pace in that thought process has been warmly my RFP flow and so on top of that you could potential.
Jamie Dimon: We see another $50 million to $100 million in C pace throughout the year, albeit I don't see anything immediately happening and <unk> in the first quarter, but there's still a possibility something could but I don't see anything immediate in the first quarter.
Jamie Dimon: Okay.
Jamie Dimon: And sorry, I lied I'm, if I can squeeze in just one more question sorry, if I if I missed this in your remarks, so basically all and given the repricing.
Janet Smith: The benefit of the fixed asset repricing and the.
Janet Smith: Deposit repricing down that's expected for 'twenty 'twenty four can we assume a steady gradual improvement and then is that what what is baked into the 'twenty 'twenty four for a guide.
Janet Smith: Yes, Janet debt that is included in the 2024 guide I did not specifically comment on our expectation on margin in my opening remarks, but the way that we've had planned out.
Janet Smith: Do think there is a possibility a good possibility of incremental steady margin expansion, particularly given the turning over of the balance sheet from a loan perspective, we have about $375 million or so of loans are going.
Janet Smith: To mature a need repricing during the year about 225 of that is related to our commercial lending.
Janet Smith: Lending portfolio, so great opportunity to redeploy into some of the things we talked about earlier with our sustainability C&I and her impact real estate and.
Janet Smith: Again as I mentioned, we have a nice funding mix changing that's going to occur during the first half of the year with about $220 million of.
Janet Smith: Our term debt or brokerage Cds maturing as well and with the.
With the political deposit balances and other deposit balances that we're seeing come into the bank. We think there's a great opportunity to be able to offset any potential increases in the cost of funds on deposit side with that with that mix shift down on on the on the wholesale borrowings or wholesale fundings and so it's it's real.
Janet Smith: And what do you assume that we should have incremental growth on a on a steady and consistent basis and the margin through 2024 that said.
Janet Smith: Lots of things can occur during the year and obviously is as we see events unfold and if we see an increased pressure on cost of funds or there's other macroeconomic factors that occur that could change the outlook that margin expansion may be a bit more muted or even compress, but all things equal and based on the outlook that we see right now we do.
Janet Smith: There is an opportunity for expansion.
Janet Smith: Great. Thanks for taking my questions.
Janet Smith: Thanks Janet.
Janet Smith: As a reminder, it is star one to ask your question.
Janet Smith: Question comes from the line of Chris O'connell with K B W.
Janet Smith: Proceed with your question.
Janet Smith: Hey, good morning, Hey.
Chris O'connell: Hey, Chris.
Chris O'connell: Hey, just just wanted to make sure that the off balance sheet deposits.
Chris O'connell: The fee that you guys are getting off of those that's included in the coffee in our guide right.
Chris O'connell: That's a great question that is not included in the core pretax pre provision guide them. The reason being is that it's very difficult to predict how that's going to be able to play out over.
Chris O'connell: Over the course of the year. So we've elected to exclude that from the from the pretax pre provision guide and we'll report it as a separate number. So you can clearly see it in upcoming quarters, but we don't want it to be something that could.
Chris O'connell: Could be can be baked into the forecast simply because a lot can change with regard to the political election cycle and it's really difficult to actually predict how much we'll have available at any one point in time to continue to push it into the off balance sheet strategy.
Chris O'connell: Got it got it.
Chris O'connell: That's helpful and do you have a sense of just if they let's say they were to stick around off balance sheet for like the entirety of the first quarter, because what that impact would be.
Chris O'connell: All things equal and based on the way we have it structured right now I can see that contributing somewhere between a million and a million and a half.
Chris O'connell: Of noninterest income for the quarter.
Chris O'connell: Great that's helpful.
Chris O'connell: Uh huh.
And then.
Chris O'connell: So the increase I think 22 million.
Chris O'connell: Of the criticized and classified.
Chris O'connell: You guys said in the prepared comments about 18.7 million was due to one C&I downgrades you just walk through.
Chris O'connell: Any details around that credit.
Chris O'connell: Yeah absolutely.
Chris O'connell: So this was this is a credit that is in agency deal and.
Speaker Change: It's been a little bit stressed by the higher rate environment, we saw a.
Speaker Change: Early quick.
Speaker Change: Uptick or downtick in the debt service coverage ratio it.
Speaker Change: It'll be albeit no payments have been missed in the loan is still accruing between the agent and ourselves you know as we took a look at the current credit metrics. It warranted a movement to a sub standard grade now that said, there's a lot of interested parties in this particular credit.
Speaker Change: There's an amendment that's being worked on in the current quarter.
Chris O'connell: We think there might be a couple of new lenders and some new money in the deal and we're also working on potentially reducing our own exposure at the same time, so all things all things equal Chris It's it's a conservative position on the loan it's a big loan from the bank, we obviously don't want to.
Chris O'connell: B.
Chris O'connell: You know overly optimistic with regard to how we grade at the end of the year, but at the same time, you can imagine the amount of attention that it's getting from not just from us but from the other parties involved in the deal and the fact that there's there's new potential lenders coming into the deal I think there's a really good opportunity for this to find its way too.
Chris O'connell: Two a strong amendment with a with a reduced rate and an improvement on the ability the company's ability to cash flow and with any luck as we get towards the end of the year. This can potentially move back around into a pass grade but for now that's the current status of the loan in a lot remains to be seen here in the first quarter and regarding the amendment process.
Chris O'connell: Got it and do you guys have a specific reserve set against that.
Chris O'connell: There is no specific reserve set against it mainly because it's accruing there may well be a a small specific that is.
Chris O'connell: That is generated by the seasonal model that that relates to the accruing part of it but I don't exactly know what that number is but if there is something that's gonna be reasonably small.
Chris O'connell: But it obviously will and drives some of the overall coverage factors in our system model and so the coverage on that particular asset class through seasonal went up during the quarter.
Chris O'connell: Okay.
Chris O'connell: Got it.
Chris O'connell:
Chris O'connell: And for the for the net charge offs this quarter on the on the one construction loan.
Chris O'connell:
Chris O'connell: Was that.
Chris O'connell: Most of the previously reserved for.
Chris O'connell: It was about it was about <unk>, 25% to 30% reserved for in prior quarters. So we charged off about $4 $7 million on on this one construction loan we had about a million three reserved for in prior quarters.
Chris O'connell: So we took an additional $3 million or so charge.
Chris O'connell: Through the provision in the current quarter to to charges loan off now we.
Jamie Dimon: It made an election to charge it off we might have been able to take a little bit less of an overall position on this but we made an election to charge it off.
Jamie Dimon: Simply because the outlook on where payment is.
Jamie Dimon: He and probably long in duration.
Jamie Dimon: And rather than have that loan.
Jamie Dimon: You kind of go through death by a thousand cuts in terms of additional charges of reserves all throughout next year and we really wanted to have that be.
Jamie Dimon: Remove from our nonperforming metrics havent flown through the P&L and as we work it out over time potentially get some type of recovery that we can work through and in future years to come.
Jamie Dimon: Oh God.
Jamie Dimon: Got it.
Jamie Dimon:
Jamie Dimon: And I guess it was there was there any other driver of.
Jamie Dimon: The decline in the allowance ratio understood.
Jamie Dimon: You know not the dollar amount, but on a percentage basis.
Jamie Dimon: Yeah, we we.
Jamie Dimon: We do our.
Jamie Dimon: Annual refresher, where first year seasonal adopter, but we do a refresh of our baseline loss rates at the end of the year and we did see a little bit of improvement in a couple of the different asset classes.
Jamie Dimon: So that that had part of it but the biggest driver of the decline was the release of that specific reserve through the charge offs that that million three was probably the biggest influencer of that decline.
Jamie Dimon: <unk> declined to two I think it was a $1 47 in coverage ratio from $1 55.
Jamie Dimon: Got it.
And.
As you guys are kind of you know pretty pretty well on track to hit your tier one leverage.
Jamie Dimon: <unk> ratio target just given the recent moves in the market.
Jamie Dimon: How are you guys thinking about.
Jamie Dimon: Any buyback utilization going forward.
So buyback utilization remains a arrow in the quiver Chris it's.
Chris O'connell: Certainly part of our capital plan, where we where we buy is somewhat subjective and we'll take a close look at where the prices relative to our tangible book value, but certainly it's going to be available for us to to go to but I don't necessarily see us being at the same pace.
Chris O'connell: In terms of buybacks that we were in the earlier part of 2023 at least not for the for the immediate future.
Chris O'connell: Okay got it that's helpful.
Chris O'connell: That's all I had thanks for taking my questions.
Chris O'connell: Thanks, Chris.
Chris O'connell: There are no further questions in the queue I'd like to hand, the call back to pursue lessons brown for closing remarks.
Chris O'connell: Thank you operator.
Chris O'connell: And thank you all today for your questions and your continued interest.
Chris O'connell: We appreciate all of that and the opportunity to discuss our fourth quarter, which demonstrates the strength and competitive advantages that amalgamated enjoys as we look to the year ahead.
Chris O'connell: While the market environment remains challenging we're in a solid position, we believe and our deposit franchise continues to deliver strong inflows as the presidential cycle is in full swing as well as across our key customer segments, where we are uniquely positioned to win we like the pipeline. We think it's strong and it has to.
Chris O'connell: Deliberate.
Chris O'connell: As you've seen.
Chris O'connell: We're also a leader in sustainable lending, which will provide growth and margin expansion as we replace older lower yielding loans and securities with higher yielding sustainable loans. This is a powerful mix shift that has started to deliver results and we think it will continue over the year.
Chris O'connell: I couldn't be more excited about what the future holds for amalgamated for our shareholders and our customers. Thank you again for your time today and we look forward to talking with some of you are as you have detailed questions as we go along thank you.
Chris O'connell: Yeah.
Chris O'connell: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a one.
Chris O'connell: Wonderful day.