Prepared remarks
Good morning, ladies and gentlemen. And welcome to the Amalgamated Financial Corporation Second Quarter 26 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode, with Q&A to follow. A replay of the call and the accompanying slides are available on our Investor Relations website. Please review the forward-looking statements and non-GAAP disclosures on slide 2. 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.
Operator, and good morning, everyone. We appreciate your participation in our earnings call. With me today is Priscilla Sims Brown, our President and Chief Executive Officer. Additionally, Sam D. Brown, our Chief Banking Officer, is here for the Q&A portion of today's call. We look forward to your questions and we will try to limit repeating details you have already reviewed in the earnings materials. I will now turn the call over to Priscilla.
Good morning, everyone. This quarter showcases the power of the franchise we have built. The strongest balance sheet in our history and one of the most differentiated deposit franchises in banking. We are successfully converting balance sheet growth into record earnings, record profitability, and a scalable platform that bodes well for future top performance. The bank has delivered outstanding results this quarter, including record net income of $34.8 million, core net income of $33.1 million, and profitability metrics that rank among the strongest in our history. Return on average assets exceeded 1.4%. Return on tangible common equity exceeded 16%. And our core efficiency ratio remained below 50%. Clear evidence that we are harvesting the earnings power of the franchise and creating a lasting platform for continued growth. Revenue approached $100 million and revenue per share exceeded $3.00 for the second consecutive quarter. These results supported our decision to raise full year 2026 guidance. Over the past several years, we have strengthened the balance sheet. We have expanded our deposit franchise, built lending capabilities, enhanced our technology infrastructure, and invested in the people, processes, and systems needed to support growth. This quarter demonstrates that those investments are translating into greater earnings capacity, stronger profitability, increasing operating leverage, and ultimately, shareholder value well into the future. Importantly, we achieved this growth while maintaining strong capital, liquidity, and credit discipline. Our portfolio continues to perform well, and we remain focused on disciplined risk management as we grow. These results reflect not only the growth of the franchise, but the quality and the resilience of that growth. On balance sheet, deposits increased $280 million, or 3.4%, during the quarter to a record $8.5 billion, highlighting the continued and differentiated performance of our deposit gathering franchise. Political deposits increased approximately $212 million to $2.1 billion. Labor increased $30 million. Social and philanthropy deposits increased $55 million. And off balance sheet deposits were over $1 billion. This deposit-led growth strategy provides unparalleled flexibility to shape our balance sheet. That funding strength allowed us to continue optimizing the asset side of the balance sheet and deploying capital into an attractive mix of loans, PACE assessments, and securities. Total loans increased approximately $115 million during the quarter while loans in growth mode, commercial lending, increased approximately $155 million, or 4.5%. As we continue to optimize the balance sheet and redeploy liquidity into higher-yielding assets, we believe there remains significant opportunity to further expand earnings power and operating leverage. At the same time, we continue investing for the future. We continue to invest in our people, alongside modernization initiatives across the organization, expanding our use of AI-enabled tools and building the technology infrastructure necessary to support efficient and scalable long-term growth. We believe these investments combined with the strength of our balance sheet and our franchise positions us well to deliver sustainable performance in the years ahead. With that, I will turn the call over to Jason.
Thanks, Priscilla. I will keep my remarks focused on what I believe is the defining theme of the quarter: harvesting the earnings power of the bank. Over the past several quarters, we have bolstered our capital position, strengthened the balance sheet, invested in technology, and positioned the bank for growth. In short, we have carefully built a better bank. This quarter's results offer a preview of the earnings potential we believe still lies ahead for Amalgamated. The first key takeaway is that the earnings profile of the company continues to strengthen. As we have discussed over several quarters, our objective has never been growth for growth's sake. The objective has been to build a bank capable of generating higher and more sustainable earnings while maintaining strong capital, liquidity, and credit discipline. The results this quarter provide further evidence the strategy is working. As Priscilla noted, revenue reached approximately $98 million, revenue per share was $3.18 and our core efficiency ratio was a well-managed 49.15%, demonstrating the scalability potential of the bank as it grows. The second key takeaway is that deposit-led balance sheet expansion is translating directly into earnings growth through continued improvement in asset optimization. Combined with approximately $461 million of average deposit growth, with remarkably stable cost, commercial loans, PACE assessments, and traditional securities totaling $276 million were added at attractive yields. And non-growth loan portfolios generated approximately $39 million of redeployed cash through planned runoff. This repositioning will be ongoing, and continue to convert into even stronger revenue generation and positive operating leverage. The third key takeaway is our outlook remains positive. Briefly addressing credit, overall portfolio performance was stable. Provision expense normalized following the reserve actions taken during the previous quarter. Criticized and classified balances declined by approximately $9 million and pass-rated loans continue to represent approximately 97% of the total portfolio. We remain actively engaged in managing the previously discussed multi-relationship and continue to believe our reserve position appropriately reflects current conditions and risk assessments. As a result, we are pleased to again raise guidance. For net interest income, we are increasing our outlook from the prior high-end target of $333 million to a new range of $338 million to $340 million. For core pretax pre-provision earnings, we are increasing our outlook from the prior high-end target of $185 million to a new range of $188 million to $190 million. These are meaningful increases that reflect our confidence in the bank, the momentum we are seeing across the balance sheet, and our ability to convert growth into earnings and sustainable shareholder value appreciation. We also believe we have got lots of runway left to go. I will close with some thoughts on tech and scale. As we look ahead, the underlying drivers of performance continue to strengthen, and we continue to invest in scalability. This quarter, we have introduced a view of our enterprise use of AI tools across multiple business functions. The building blocks for the tech infrastructure necessary to support efficient future growth. We will look forward to updating you in future quarters on our progress on AI adoption, utilization, and agentification as we move towards scalable efficiency. And now we are ready for questions.
Questions and answers
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question comes from the line of Justin Crowley with Piper Sandler. Please proceed with your question.
Hey, good morning, everyone.
Good morning.
Wanted to start out on the loan growth — really impressive results here. I am curious if you could talk through a little more, perhaps the balance between originations and payoffs, and how you are thinking about that trend over the next couple of quarters.
Hey, Justin. It is Sam. Great question. We are really proud of what we are able to do in loan growth this quarter. $115 million is a great story, but the $155 million in growth mode from our commercial production is really fantastic. We like that we were positive in all of our asset classes. It is also great that we were able to take the $39 million we re-harvested out of lower-yielding assets and redeploy that into an even more optimized asset mix. We look forward to having all the levers across all of our asset types — between loan growth, PACE, and the securities portfolio — to continue driving that NII growth. We are continuing to invest in experts around the country to help support that origination effort, and feel like we are really hitting our stride where we are seeing all of the asset opportunity from the bank really being harvested here.
I will just add one or two other things. On the target, we like the high end of our sequential growth range. We have been saying 1.5% to 2% net loan growth on a quarterly basis. I think we are going to be closer to 2% for Q3 and Q4. And to Sam's point, the momentum that is starting to build from some of the investments we made previously should really play into 2027, which will continue balance sheet expansion and responsible deployment of assets across a variety of classes.
Okay. Great. That is super helpful. And then I guess just to pivot on the margin — you called out the prepayment penalties at 3 basis points, but I am not sure if I missed it in the materials — how big of an impact was that nonaccrual recovery in the period?
It was about the same amount. So the 3 basis points was probably a wash on the nonaccrual impact. We did not expect that recapture. It was very fortunate for us, but that was about the impact from the margin perspective on that recapture. And, obviously, it is the impact on the nonaccrual loans being improved, and there was a bit of a recapture as well that happened through the provision in relation to that loan.
Right. Okay. So trying to put it all together, how are you thinking about the margin trajectory from here as we get through the back half of the year? The average balance sheet may be impacted particularly in the fourth quarter, and I am trying to square all that with the NII guide you provided.
The margin story is that there was an outperformance in the current quarter because of the speed at which we were able to deploy the asset generation that Sam was referring to earlier. We pulled forward some margin NII into the current quarter that will stay with us throughout the year, but the margin ought to moderate as we get through the back half of the year. As you noted, we have to take a more disciplined approach to the balance sheet from a growth perspective heading into an election cycle because we have to make sure that we are not requiring leverage to support the inevitable deposit outflows. But we think right now the margin is at a good inflection point. There might be some modest compression in the fourth quarter because of the mix shift of deposits when the off balance sheet gets pulled back on to support the political deposit outflow. All in, the NII ought to be pretty stable with a modestly upward trajectory from here. Margin also should be moderate with possible compression in the fourth quarter. The real key is to think about 2027 as the restarting of the growth engine, rebuilding of the deposit base, as the presidential election cycle will start to kick off, and, therefore, you should start to see improvements in the growth trajectory again in the NII, the earnings overall, and the margin.
Okay. And related to that, what is the right way to think about that balance sheet impact on an average basis as we get towards the end of the year, as you use that off balance sheet source to fill the hole, if you will?
The way to think about the balance sheet: we have a target for $9.6 billion of assets that will continue to be funded through excess liquidity that typically would reside off balance sheet. We expect to achieve that target by the third quarter, likely early in the third quarter. That gives you an indication of how we are thinking about the average assets generating NII. For the remainder of the year, we expect to leave all balance sheet that which we think would support the political deposit outflow requirements. When we get to the end of the year, ideally, if we have optimally managed our balance sheet correctly, off balance sheet deposits would be near zero and leverage would be zero as well. The timing of everything is difficult to predict because outflows can start earlier or later in the cycle. But overall, we are targeting to be at $9.6 billion with very little off balance sheet and also very little to no debt or leverage.
So does that imply that you would try to keep the average balance sheet flat through that volatility? I know on any given day or at quarter end it can swing around, but on an average basis would you try to keep it relatively flat?
On the average balance, yes. It should be flattish. I think there is still a little bit of growth, probably under 1% on an average basis in Q3 and Q4. But generally, for the back half of the year there will be a flattish, much more stable trajectory on the balance sheet side, particularly on the averages, in anticipation of the deposit outflows at the end of the election cycle. Then you will start to see growth in the average assets on a spot basis as we get into 2027.
Gotcha. That is super helpful. Maybe one last one quickly on expenses. You called out in the release elevated compensation costs and some technology expense. Is there anything that comes back out of the run rate or are we talking more about growth off current levels?
It is more of the latter — growth off current levels. We do expect to see expenses continue to increase in Q3 and Q4. I would target $49 million in each of those two quarters as a general benchmark for where we are trying to finish the year. That would naturally push up our total expense guidance from the $188 million we have been talking about to around $190 million. When I talk about what is going to happen in future quarters, there is going to be a little bit of tapering out of one-time expenses and layering of recurring expense. In the third quarter, the bill will largely be related to planned costs that we have as we move out of our existing headquarter building into a new facility, which we are very excited about. We think that will be great for the bank going forward, but there will be an expense impact that we are expecting in the third quarter. In the fourth quarter, those expenses related to the move will not be with us anymore. But we will continue to see layered expenses relative to the build-out we have in technology infrastructure, back office, risk and compliance, and also some additional compensation-related expenses. So overall, the trajectory will continue to include a bit of trading between one-timers in future quarters versus continued layers of expense.
I just want to reiterate and add that our focus on expenses remains on investing in the future while maintaining strong operating discipline that you have seen. We are not pursuing growth at any cost. The investments we are making in technology, modernization, talent, and infrastructure will provide scalability and efficiency over time.
Is any of this related to gearing up for being a $10 billion bank at some point?
Those investments have been made over a long period of time. We have been planning on $10 billion for quite some time. There is nothing specific to that which is meaningful in the numbers. It is really what we talked about in the script — investing in technology, investing in people to move to our new office space, for example. It is customer-focused, increasing our ability to allow customers to have forums and better ways to interact. It is really about building a better bank, continuing to invest for the future, and remaining competitive in a continually growing digital environment. Nothing specific in the way of $10 billion as we have been investing in the risk areas of the bank for quite some time.
Perfect. Really appreciate it. I will leave it there. Thank you.
Thank you. Our next question comes from the line of David Konrad with KBW. Please proceed with your question.
Hey. Good morning, everyone. Jason, I have a question for you. I know there are so many moving parts in the next couple of quarters, but taking a step back, there seems to be such a large runway of this balance sheet. Have you ever given any thought to what the normalized NIM could be for the company?
I would want to be careful because normally I will give more guidance when we come out with a 2027 plan. But I do think a way to think about it is what we were able to accomplish with the average asset growth we had this quarter. We brought on about $250 million across commercial lending, the PACE assets, and our investment in traditional securities. Blended, we brought it in at about a 5.7% to 6% yield range. When we apply a simple cost of funds to that, the yield was around 4.1%. As I think about that, I can look forward and say that is very reflective of the asset turnover philosophy that we are deploying right now, and I could see that as being something we could reach over time as realistic.
That makes sense. Okay. And then maybe Sam, the world seems to be changing this year quite a bit. Some high-level thoughts on clean energy demand? Is that increasing now in this environment, and what are your thoughts there?
Thanks, David. Great question. Certainly, there is a lot of change in the environment, but there is also a lot of consistency in that demand continues to increase and our role in financing that demand is still very strong. A couple of data points set the table for the market. One study suggested a need of 30 to 66 gigawatts of renewable power generation by 2030, but the total need is estimated to be about 225 gigawatts, which excludes the 105 that is already identified for retirement. Renewables and storage have a cost advantage over gas, and the country cannot meet demand without all of it. We view that landscape as wide open for us. We will be very careful about the assets we identify, ensuring we have long-term contracted revenues, investment-grade counterparties, and fixed-rate amortizing debt. We continue to feel bullish on the space and see a lot of runway ahead for us.
Great. That will do it for me. I have no more questions on credit this quarter.
Great, David. Thank you.
And we have reached the end of the question and answer session. I would like to turn the floor back to Priscilla Sims Brown for closing remarks.
Great. Thank you all. Thank you for those thoughtful questions. I also want to, as always, thank our colleagues across the bank for their continued focus and execution and, of course, our customers and our shareholders for your trust and partnership. Looking ahead, we believe Amalgamated is exceptionally well positioned. We have a strong balance sheet, a differentiated and growing deposit franchise, improving profitability, and a clear strategy for scaling the company through continued investments in people, technology, and AI-enabled capabilities. The momentum we are seeing today reinforces our confidence in the future. We remain focused on delivering long-term value for all stakeholders. Thank you for your continued support, and we look forward to speaking with you in follow-up calls and in upcoming meetings. Have a great day.
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.