Amalgamated Financial (AMAL) Q1 2023: Super Core Deposits Reach 54%, Reinforcing Liquidity Insulation
Amalgamated Financial’s Q1 highlighted the durability of its mission-driven deposit base, with super core deposits now comprising over half of core balances and demonstrating remarkable longevity. Management’s conservative posture on liquidity and capital allocation stands out amid sector volatility, while guidance signals near-term net interest margin compression as deposit costs rise. Investors should watch for evolving funding mix, loan growth discipline, and expense containment as the bank navigates industry headwinds and positions for longer-term values-based growth.
Summary
- Deposit Franchise Stickiness: Super core deposits now represent 54% of core balances, supporting funding stability.
- Liquidity Buffer Expansion: Immediate liquidity covers 137% of non-super core uninsured deposits, far exceeding peer averages.
- Margin Compression Ahead: Higher deposit costs and funding mix shifts will pressure net interest income in coming quarters.
Business Overview
Amalgamated Financial is a mission-driven commercial bank focused on serving labor unions, sustainability organizations, philanthropy, social advocacy, not-for-profits, and political clients. The bank generates revenue primarily through net interest income by lending to multifamily, commercial, and residential borrowers, and investing in securities. Its deposit base is anchored by long-standing, values-aligned customers, and it maintains a diversified loan portfolio with a growing emphasis on multifamily and sustainability segments.
Performance Analysis
Amalgamated delivered solid first quarter results despite industry turbulence after high-profile bank failures. Net income and core earnings declined sequentially, reflecting higher non-interest expense, a modest loss on securities, and increased provision expense, but net interest income exceeded internal expectations. Loan growth was led by multifamily and PACE, property assessed clean energy lending, with total loans up 2.2% and PACE up 9.3% quarter-over-quarter. The bank’s net interest margin expanded five basis points to 3.59%, aided by loan yield improvement, though management signaled upcoming compression due to deposit repricing and funding mix changes.
Deposit trends were mixed: total deposits increased by $446 million from Q4, but core deposits declined 1% due to pension timing, client diversification, and slower new customer acquisition post-sector turmoil. Notably, noninterest-bearing deposits made up 48% of average deposits, but this is expected to shift as customers seek higher yields and insurance. Brokered CDs, certificates of deposit, were used tactically to manage liquidity, with balances expected to remain flexible. Credit quality remained stable, with criticized assets rising only modestly and allowance coverage ratios increasing with the CECL, current expected credit loss, adoption.
- Super Core Deposit Longevity: Over $3.5 billion of deposits have an average duration of 17 years, providing rare funding stability.
- Expense Pressure Emerges: Quarterly non-interest expense rose due to payroll timing and temporary staffing but is expected to normalize.
- Loan Mix Shifts: Multifamily and sustainability C&I, commercial and industrial, lending drive growth as consumer solar and CRE, commercial real estate, are de-emphasized.
Amalgamated’s ability to maintain liquidity and capital ratios above stated floors while navigating sector stress underscores its conservative risk posture, but the path forward will test its cost discipline and ability to grow core deposits in a more competitive environment.
Executive Commentary
"Our deposit franchise is a true differentiator for us, and it has experienced strong organic growth since segmenting our customer base in 2015 and recruiting constituent-focused bankers to gather deposits. We have grown our mission-aligned core deposit base from $2.7 billion then to $6.6 billion today, a compound annual growth rate of 12.8%."
Priscilla Sims-Brown, President and Chief Executive Officer
"We have maintained significant liquidity with cash and immediate borrowing capacity of $2.6 billion and $868 million of two-day capacity from unpledged securities, resulting in $3.4 billion of total two-day liquidity. We believe our core deposit base has demonstrated stability and resiliency in the early innings of post-bank seizures."
Jason Darby, Chief Financial Officer
Strategic Positioning
1. Values-Based Franchise as a Defensive Moat
Amalgamated’s mission-aligned customer base gives it a unique competitive advantage, especially in periods of sector instability. The long average life of super core deposits (17 years) and deep relationships with labor and advocacy organizations reduce run risk and provide stable, low-cost funding. This “stickiness” is a rare asset in a volatile banking environment.
2. Conservative Liquidity and Capital Management
The bank’s liquidity coverage ratios are well above industry norms, with immediate liquidity covering 137% of non-super core uninsured deposits. Capital ratios remain robust even after CECL adoption, and management is committed to a minimum tangible common equity of 6%. This approach prioritizes balance sheet defense over aggressive asset growth.
3. Disciplined Loan Growth and Portfolio Rotation
Loan growth is concentrated in multifamily and sustainability-linked C&I and PACE products, while exposure to riskier commercial real estate and consumer solar is being reduced. This selective approach is designed to optimize risk-adjusted returns and align with the bank’s values-driven mission.
4. Tactical Use of Brokered Deposits and Funding Mix Flexibility
Brokered CDs are deployed as a liquidity lever to supplement core deposits and manage funding costs. Management is prepared to flex balances based on market pricing, maintaining a neutral total asset stance while optimizing funding mix as customer preferences evolve.
5. Expense Discipline Amid Investment Needs
While expense pressure is evident, particularly from payroll and benefits, management is committed to offsetting investment in technology and business development with efficiencies elsewhere. Digital transformation remains a priority, but will be paced to ensure profitability and timely returns.
Key Considerations
This quarter’s results highlight Amalgamated’s defensive strengths but also surface challenges as the sector transitions to a higher-rate, more competitive deposit environment. The bank’s unique customer base and liquidity posture are clear differentiators, yet margin and expense pressures are intensifying.
Key Considerations:
- Deposit Stickiness as a Buffer: Super core deposits’ longevity insulates the bank from rapid outflows seen elsewhere, but incremental growth may slow as customer acquisition is delayed by sector volatility.
- Margin Compression Risk: Net interest margin is set to decline 15 to 20 basis points near term as higher deposit betas and funding mix changes raise costs.
- Loan Growth Moderation: Management targets 2% to 3% loan growth, with a focus on low-risk, mission-aligned segments, while consumer solar and CRE are de-emphasized.
- Expense Management Challenge: Temporary upticks in non-interest expense are expected to normalize, but maintaining a $37 million quarterly run rate will require ongoing discipline.
- Capital Allocation Flexibility: Share repurchases are possible as capital builds, but the priority remains on maintaining strong capital ratios in a volatile environment.
Risks
Key risks include margin compression from elevated deposit costs, potential difficulty in reaccelerating new customer acquisition, and credit risk from specialized lending segments such as consumer solar and multifamily real estate. Although the deposit base is sticky, competitive pressures for yield and insurance could challenge funding stability if sector stress persists. Expense discipline will be tested as the bank pursues digital transformation and growth initiatives.
Forward Outlook
For Q2 2023, Amalgamated guided to:
- Net interest income of $62 to $63 million, reflecting margin compression from deposit cost pressure.
- Expense run rate of approximately $37 million per quarter, with normalization expected after temporary Q1 upticks.
For full-year 2023, management maintained guidance of:
- Core pre-tax pre-provision earnings (ex-solar) of $133 to $140 million.
- Net loan growth of 2% to 3%, funded by securities portfolio reductions.
Management highlighted that deposit growth expectations have been revised down to 2% (ex-brokered CDs) and that the funding mix will remain flexible as market conditions evolve. Liquidity and capital defense remain top priorities, with loan growth and digital investment paced to profitability.
- Margin compression from deposit repricing is expected to persist near term.
- Loan growth will be concentrated in multifamily and sustainability-linked segments.
Takeaways
Amalgamated’s Q1 underscores the strategic value of a mission-driven, sticky deposit base and conservative liquidity management, but also reveals the operational and margin pressures facing even well-positioned banks in today’s environment.
- Deposit Quality as a Differentiator: The super core deposit base, with its 17-year average life and values alignment, is a rare funding strength that enhances resilience.
- Cost and Margin Pressures Mount: Expense normalization and disciplined loan growth will be critical to offsetting margin compression from rising deposit costs and evolving funding mix.
- Future Watchpoints: Investors should monitor the pace of new customer acquisition, expense containment, and how management balances capital return with balance sheet defense as sector volatility persists.
Conclusion
Amalgamated Financial’s conservative strategy and unique deposit franchise provide insulation in a turbulent banking sector, but the next phase will test its ability to sustain growth and profitability as margin and cost pressures intensify.
Industry Read-Through
Amalgamated’s results reinforce the premium on funding stability and liquidity in today’s banking sector. The bank’s super core deposit concept and proactive liquidity management offer a blueprint for peers seeking to mitigate run risk and funding volatility. The tactical use of brokered CDs and flexible funding mix are likely to become more common as banks adapt to changing customer preferences and competitive pressures. Margin compression and expense management will remain industry-wide themes, with values-based and relationship-driven franchises better positioned to defend profitability and customer loyalty. The sector’s focus is shifting from growth to stability, with balance sheet resilience and capital discipline now the primary investor watchpoints.