Amalgamated Financial (AMAL) Q2 2024: Political Deposits Surge $400M Above Prior Peak, Driving Franchise Flexibility

July 25, 2024 | By EarningsIQ Research

Unprecedented political deposit inflows and robust nonpolitical growth powered Amalgamated’s second quarter, giving the bank rare funding flexibility as it navigates election-driven outflows and sector volatility. Management’s guidance raise reflects both balance sheet strength and a clear path to margin expansion into 2025, even as credit vigilance rises in consumer solar and real estate portfolios.

Summary

• Political Deposit Influx: Election cycle drove balances $400M above 2022’s midterm peak, amplifying funding optionality.
• Nonpolitical Deposit Momentum: Union and nonprofit segments outperformed plan, reducing reliance on wholesale funding.
• Margin Expansion Trajectory: Balance sheet repositioning and off-balance sheet levers set up for further NIM gains into 2025.

Business Overview

Amalgamated Financial operates as a mission-driven commercial bank, specializing in deposit and lending services for unions, nonprofits, political organizations, and climate-focused clients. The bank generates revenue from net interest income, non-interest income (notably from off-balance sheet deposit programs), and fee-based trust and asset management services. Major segments include commercial real estate, multifamily, C&I (commercial and industrial), climate-related lending, and a distinctive political deposit franchise that fluctuates with election cycles.

Performance Analysis

Amalgamated delivered a quarter marked by surging deposit growth, particularly in political deposits, which ended at $1.7 billion—well ahead of the prior $1.3 billion peak from 2022 midterm elections. Nonpolitical deposits also exceeded internal plans, with union deposits up $258 million and nonprofit deposits up $240 million, reflecting resonance of the bank’s mission-based approach. This funding strength allowed management to avoid wholesale borrowings and manage $1.1 billion of deposits off-balance sheet, generating $4.9 million of non-core, non-interest income.

Loan growth was healthy, led by commercial real estate and multifamily, though climate-related originations were muted by $87 million in C&I paydowns. Net interest margin (NIM) was impacted by a one-time amortization event, but underlying trends remain positive—excluding this, NIM would have risen seven basis points. Credit quality remained stable in CRE and multifamily, while consumer solar charge-offs rose, prompting a reserve build to 7% coverage for that portfolio.

• Deposit Franchise Outperformance: Political, union, and nonprofit segments all delivered above-peer growth, supporting balance sheet stability.
• Off-Balance Sheet Leverage: Active management of $1.1 billion in reciprocal network deposits provided non-interest income and funding agility.
• Credit Vigilance: CRE and multifamily portfolios remain stable, but consumer solar charge-offs at the high end of historical range signal ongoing risk management focus.

Overall, Amalgamated’s unique funding model and deposit mix enabled it to raise guidance, support margin expansion, and maintain capital build, even as it prepares for election-driven deposit outflows in the second half.

Executive Commentary

Strategic Positioning

1. Election Cycle Funding Engine

Political deposit balances climbed to $1.7 billion, $400 million above the 2022 midterm peak, providing a temporary but powerful funding tailwind. Management expects these deposits to trough at $700 million post-election, still above the last cycle’s low, and has preemptively moved $600 million off-balance sheet to cushion the outflow and avoid costly wholesale funding.

2. Nonpolitical Deposit Expansion

Union and nonprofit deposit growth exceeded internal plans, with referral networks and client relationships driving momentum. The union segment, with over 30,000 U.S. unions and growing, represents a long runway for future expansion, while nonprofit deposits are supported by strong brand recognition and word-of-mouth.

3. Balance Sheet Optimization and Margin Levers

Management actively repositioned the securities and loan portfolios, selling $140.1 million in securities and focusing on higher-yielding real estate assets. Off-balance sheet deposit income is being used to further restructure the balance sheet, with continued plans to sell lower-yielding residential loans and reinvest in higher-margin areas, setting up for incremental NIM expansion.

4. Credit and Risk Management Discipline

Despite sector concerns around New York CRE and rent-regulated multifamily, Amalgamated’s portfolio remained stable, with proactive renewals and strong reserve coverage, particularly in pre-1974 multifamily loans. Consumer solar charge-offs were elevated, prompting a conservative reserve build and ongoing recovery efforts.

5. Climate Finance and Trust Business Opportunity

Climate-related lending and alliances position Amalgamated for long-term growth, with new international partnerships and a promising pipeline for the second half. The trust business, especially in the union segment, is being consolidated under new leadership, with optimism for deeper penetration and incremental fee growth.

Key Considerations

Amalgamated’s quarter showcased the rare advantages of a mission-driven deposit base and election cycle dynamics, but also surfaced the operational complexities and risks inherent in such a model.

Key Considerations:

• Election-Driven Volatility: Political deposit inflows create funding surges, but require sophisticated off-balance sheet management to avoid post-election liquidity shocks.
• Nonpolitical Deposit Stickiness: Sustained growth in union and nonprofit deposits is critical for franchise value as political balances recede; referral-driven expansion remains a core differentiator.
• Margin Management: Proactive asset sales and off-balance sheet income provide levers for NIM expansion, but require continued discipline as funding mix shifts in Q4.
• Credit Risk Monitoring: CRE and multifamily exposures are well-managed, but consumer solar charge-offs warrant ongoing scrutiny and could pressure future loss rates if macro conditions deteriorate.

Risks

Election cycle deposit outflows remain the most acute near-term risk, with management’s off-balance sheet strategy designed to cushion the impact, but dependent on accurate forecasts of campaign spending. Consumer solar credit quality is another area of concern, as elevated charge-offs and model uncertainty could drive further reserve builds. Sector-wide CRE stress, especially in rent-regulated portfolios, requires ongoing vigilance, though Amalgamated’s proactive renewals and strong LTVs provide some insulation.

Forward Outlook

For Q3 2024, Amalgamated guided to:

• Net interest income of $69 to $71 million
• Net interest margin expansion of 2 to 4 basis points, absorbing deferred loan costs

For full-year 2024, management raised guidance:

• Core pre-tax, pre-provision earnings of $149 to $152 million
• Net interest income of $274 to $278 million

Management highlighted:

• Minimal need for wholesale funding even as political deposits flow out post-election
• Ongoing balance sheet repositioning and margin expansion levers into 2025

Takeaways

• Political Deposit Surge: Election-driven inflows delivered funding flexibility but require careful management as balances normalize in Q4.
• Nonpolitical Franchise Strength: Union and nonprofit deposit growth outperformed, underpinning the long-term value of Amalgamated’s mission-driven strategy.
• Margin and Credit Watch: Active asset management and off-balance sheet levers support NIM expansion, but consumer solar credit quality and CRE sector stress remain key watchpoints for investors.

Conclusion

Amalgamated’s Q2 results underscore the power—and complexity—of a franchise built on political, union, and social impact deposits. With guidance raised and margin levers intact, the bank is positioned for continued outperformance, though execution on credit and deposit mix will be critical as election season volatility unfolds.

Industry Read-Through

Amalgamated’s experience this quarter highlights the unique funding advantages available to banks with specialized, mission-driven deposit bases, particularly in an election year. The ability to manage large, cyclical inflows and outflows through off-balance sheet programs offers a blueprint for funding flexibility, but also underscores the need for sophisticated liquidity and risk management. Sector peers exposed to CRE and consumer solar should note Amalgamated’s proactive reserving and asset renewal strategies, while the ongoing expansion of climate finance partnerships signals growing opportunities—and competition—in sustainable lending. For regional and specialty banks, the quarter demonstrates both the upside and operational demands of niche deposit franchises in a volatile macro and political environment.

AMAL Financials Banking Political Deposits Union Banking Climate Finance Credit Risk Net Interest Margin