Amalgamated Financial Corp. (AMAL) Q1 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the Amalgamated Bank First Quarter 2019 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Drew LaBenne, Chief Financial Officer for Amalgamated Bank. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate your participation today in our first quarter 2019 earnings call. With me today is Keith Mestrich, 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 presentation to complement today's discussion is available on the Investor Resources 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 2 of our earnings call presentation as well as our 2018 10-K filed on March 28, 2019, and our other periodic reports that we file from time to time with the FDIC 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 comparable GAAP measures can be found in our earnings release as well as on our website. At this point, I'll turn the call over to Keith.

Thank you, Drew, and good morning, everyone. We appreciate your time and attention today. I'm quite pleased with our first quarter results as they clearly demonstrate the attractive position that Amalgamated Bank holds as we work to service the needs of values-based institutions and further our reputation as America's socially responsible bank. As you will see, the investment thesis that we described at the launch of our IPO in August is generating positive results for the company. For the first quarter, we delivered net income of $10.8 million or $0.33 per diluted share, which compares to net income of $16 million or $0.49 per diluted share in the linked quarter and net income of $7.7 million or $0.27 per diluted share for the first quarter of 2018. As we have previously stated, core earnings continue to be a better representation of our financial performance as well as the run rate earnings power of the bank. For the first quarter, core earnings were $10.7 million or $0.33 per diluted share as compared to $9.7 million or $0.30 per diluted share in the linked quarter and $7.9 million or $0.28 per diluted share in the first quarter of 2018. As a reminder, core earnings in the fourth quarter of 2018 excludes a previously disclosed deferred tax realization of $7.6 million, $1.6 million of expenses related to our New Resource acquisition and other more minor onetime adjustments. Turning to the highlights of the quarter in more detail. I'm very pleased with the success that we achieved growing our deposit franchise as we continue to drive organic growth in our core markets of New York City, Washington, D.C., and San Francisco. For the quarter, deposits grew by $329 million or 35% annualized when you adjust for the $327 million of short-term deposits from 1 trust client, which came on to our balance sheet at year-end 2018 and subsequently exited the bank on January 2, 2019. You may recall that we discussed this deposit anomaly on our fourth quarter call. Importantly, the strength in our deposit franchise was broad-based as we continued to welcome new relationships from across the many business sectors that we focus on, including unions and their funds, nonprofits, social enterprises and philanthropies. Looking forward, our deposit pipeline remains strong in all 3 of our regions and across all of our business verticals. Our relationships continue to expand, which drives real deposit growth optimism for the balance of the year. As Drew will discuss in more detail, our political deposit growth was also a key driver of the strength this quarter, having bounced back strongly after the expected fourth quarter declines associated with the 2018 election. This strength was driven by the growing list of Democratic presidential candidates for the 2020 election and healthy fundraising activity across the country. For the quarter, political deposits grew $89 million to $271 million as compared to our year-end 2018 deposit balance of $182 million. We remain pleased with the success that we continue to achieve as we continue to work with the Democratic Party and numerous candidates. As we exit the first quarter, we are proud to be banking a majority of the Democratic candidates for the upcoming presidential election. While our deposit growth was very strong in the first quarter, we continued to experience a very benign pricing environment as our cost of funds remained relatively stable at 31 basis points, up only 4 basis points compared to the fourth quarter of 2018 and up 5 basis points from the year-ago quarter. The bank continues to benefit from our low cost of deposits, which remains a significant contributor to our strong profitability and a competitive advantage in the market. Turning to the other side of the balance sheet, loans increased 7% annualized during the first quarter or $56.4 million compared to the linked quarter and up 13.4% compared to the first quarter of 2018. Our loan growth was achieved despite the continued headwind from our decision to actively reduce our indirect C&I portfolio as part of our ongoing efforts to further derisk our balance sheet. Drew will detail the characteristics of this runoff in a few minutes. As part of our loan growth strategy, we are committed to doubling the loans and securities in the sustainable industries that the New Resource lending team had focused on. As we have previously discussed, we relocated New Resources' former Chief Credit Officer to New York to lead our relationship lending team. This is proven to be a wise move and has helped spark a better use of our larger balance sheet in industries like renewable energy, energy efficiency real estate, including both residential and commercial PACE financing, and social enterprise lending. I'm very pleased that between the closing of the acquisition in the spring of 2018 and the end of the first quarter, we have seen an increase of over $256 million in loans to mission-aligned industries. Moreover, the yields of the loans in these industries are quite attractive and are comparable to the yields on the indirect C&I loans that we are running off. We are also quite happy with the credit characteristics of these loans as many have offtaker contracts and/or third-party guarantees. Unlike the indirect C&I loans we are running off, most of the new loans we are originating are directly sourced and often come with deposit relationships. The combination of a very low cost of deposits and improved yields in both our loan book and securities portfolio resulted in an increase in our net interest margin this quarter of 1 basis point on an adjusted basis over last quarter and 22 basis points over the first quarter of 2018. Turning to our capital allocation strategy. I would like to remind everyone that we remain focused on growing our franchise through accretive acquisitions of banks that share the same mission and values as Amalgamated. During the quarter, we had the opportunity to take a deep look at one such bank that we thought would be a strong fit for Amalgamated. Unfortunately, the seller's valuation expectations were elevated and did not match the contraction in bank valuations in the public markets, and as a result, we decided not to pursue the opportunity at this time. We will be disciplined acquirers and will not pursue deals which unnecessarily dilute our shareholders. Additionally, we have the flexibility to be selective given the strong organic growth opportunities that we see in front of us. We will continue to be active in pursuing our M&A opportunities, which include community banks, specialty lenders and trust assets, but will remain focused and disciplined on opportunities that represent solid -- a solid strategic fit and a good economic return. Another barrier to our M&A strategy is the current level of our share price. As a result and as part of our disciplined capital allocation strategy, our Board and management team have proposed the authorization of a $25 million share repurchase plan. That plan is subject to approval by our shareholders and by the New York State Department of Financial Services. I am pleased to report that as of Monday, 89% of our shareholder base have voted and 99.99% of those voting have approved the repurchase. The approval will permit us the flexibility to be opportunistic when we see our shares trading meaningfully below intrinsic value. As we look forward, we will maintain a thoughtful and balanced capital allocation strategy with our priorities being: first, committing capital to attractive and accretive acquisitions; second, maintaining a steady return of capital to shareholders through our quarterly dividend; and third, being opportunistic with share repurchases when the circumstances warrant; all with the view of creating long-term value for shareholders. To conclude, I'm very pleased with our results and excited with the many opportunities that lie ahead of us as we work to grow our bank. As we focus on our core markets as well as our commercial banking business, we are well positioned to capture share in what is a very large market opportunity. Our brand is strengthening and our brand awareness is increasing as we work to service the needs of values-based institutions. As we partner with those both on the individual and organizational level who share our mission, we will continue to see our franchise grow. I'd now like to turn the call over to Drew for a more detailed review of our financial results.

Thank you, Keith. I will begin by reviewing our first quarter results before turning the line back to the operator to open the call for questions. Turning to Slide 4. In the first quarter, deposits were relatively flat compared to the $4.1 billion from the fourth quarter of 2018, while average deposits for the quarter were $3.9 billion. As Keith discussed, we experience strong organic deposit growth in the quarter when adjusting for the short-term deposits which came on to our balance sheet at year-end 2018 and exited on January 2, 2019. This organic growth was well ahead of our expectations, which we outlined on our fourth quarter earnings call. Noninterest-bearing deposits increased $144 million from the prior quarter and now represent 41.6% of average deposits at quarter end. Of note, our deposit beta continues to be low throughout the first quarter as our cost of funds increased only 4 basis points to 31 basis points, representing the continued value of our unique deposit franchise. Deposits from politically active customers, such as campaigns, PACs and state and national party committees, increased $89 million from $182 million at December 31, 2018, ending the quarter at $271 million, as outlined on Slide 5. As Keith touched on, we anticipate our political deposits to continue to trend upward as we near the 2020 presidential election. As campaigns are launched within the Democratic Party, we continue to actively support the business needs of these individuals and their campaigns. As seen on Slide 6, we delivered fourth quarter loan growth of $56.4 million or 7.0% annualized as compared to the fourth quarter of 2018 and ended the quarter with $3.3 billion of total loans. Loan growth was driven primarily by a $93.3 million increase in residential first liens and PACE loans offset by continued strategic reduction in our indirect C&I portfolio of $29.3 million and a $12.2 million reduction in commercial real estate. Our indirect C&I portfolio totaled $203 million at the end of the first quarter. We have seen a recovery in the syndicated and leverage lending credit markets since our last earnings update and have taken advantage of this recovery. Through a combination of sales and payoffs, we have reduced our indirect C&I balances by approximately $127 million since the end of the first quarter of 2019. Details of our remaining indirect C&I portfolio are outlined on Page 7 of the presentation. The remaining portfolio is approximately $80 million with $69 million in leverage loans and $11 million in nonleverage loans. The remaining portfolio is expected to run off at a more gradual pace. Skipping ahead to Slide 9, our net interest margin was 3.65% for the quarter compared to 3.57% in the fourth quarter of 2018 or 3.64% on an adjusted basis and 3.43% in the year-ago quarter. Our NIM expansion was better than expected resulting from a year-over-year increase in average loans and securities of $375 million and $276 million, respectively, and an increase in yields of 29 and 54 basis points, respectively. Net interest income for the first quarter of 2019 was $40.8 million, which compares to $40.2 million in the linked quarter and an approximately $8.0 million increase as compared to $32.8 million in the same quarter of 2018. Yield on average earning assets was 4.10% for the first quarter, an increase of 31 basis points as compared to the same period in 2018 driven by an increase in yields due to higher market rates. The yield on our total loans increased to 4.44% compared to 4.32% during the fourth quarter of 2018, an increase of 12 basis points, or 2 basis points after adjusting for the impact of the accounting adjustment in the fourth quarter of 2018. Now on to noninterest income. Noninterest income for the first quarter of 2019 was $7.4 million, decreasing slightly from $7.6 million in the fourth quarter of 2018 and a $400,000 increase compared to the first quarter of 2018. The year-over-year increase was primarily due to higher gains on the sale of investment securities of $300,000 in the first quarter of 2019 compared to a loss of $100,000 in the year-ago comparable period, combined with modest increases in trust department fees, service charges on deposit accounts and other income. In April, we have distributed $60 million in cash back to holders of our real estate fund that is winding down and expect income that we receive from that fund to decrease by approximately $50,000 per month going forward. This decline is in line with our estimates for 2019 and included in our previous guidance. Turning to Slide 10. Noninterest expense for the first quarter of 2019 was $31.4 million, which compares to $35 million in the fourth quarter of 2018 and $28.8 million in the first quarter of 2018. This contributed to a reduction in our efficiency ratio this quarter. We will continue to implement initiatives to reduce our expenses, including reviewing our most significant vendor contracts and identifying opportunities for continued real estate cost savings. Looking forward, we will continue to aggressively manage our expenses as we strive to improve our cost structure. Skipping ahead to Slide 12. The credit quality of our portfolio held steady throughout the fourth quarter after adjusting for the charged-off C&I loan as nonperforming assets totaled $56.6 million or 1.15% of period-end total assets at March 31, 2019, which was a decrease of $2.7 million from the linked quarter. The nonperforming assets include $7.2 million of loans 90 days past due and accruing, which are primarily related to the delay in renewal for 1 borrower on 4 loans. The provision for loan losses in the first quarter of 2019 was $2.2 million, which compares to $864,000 of provision in the fourth quarter of 2018. The provision expense in the first quarter was primarily driven by increased provision on the C&I portfolio. As previously reported, there was 1 indirect C&I leverage loan of $8.4 million that was charged off during the first quarter which was fully reserved and had a minimal impact on our P&L. The provision expense was partially offset by a $600,000 release in the off-balance-sheet reserve, which is a reduction in other expenses within total noninterest expense. Turning to Slide 13. The allowance for loan losses decreased $5.8 million to $31.4 million at March 31, 2019, from $37.2 million in the linked quarter primarily driven by the charge-off of $8.4 million and partially offset by increasing allowance on 2 leverage loans in increasing factors related to the charge-off. The increase was offset by a release of the previously mentioned off-balance-sheet provision of $600,000, which is reported through our noninterest expense. At March 31, 2019, the bank had $48.1 million of impaired loans, for which a specific allowance of $1.5 million was made, compared to $58.3 million of impaired loans in the linked quarter, for which a specific allowance of $9.6 million was made. The ratio of allowance to total loans was 95 basis points at March 31, 2019, and 115 basis points at December 31, 2018. Turning to Slide 14. Our GAAP and core return on tangible common equity were 10.31% and 10.18% respectively. The core return compares to 9.50% for the fourth quarter of 2018 and 9.46% for the comparable period in 2018. The increase in core return on tangible common equity in the linked quarter was primarily due to the previously discussed factors. Lastly, we remain well capitalized to support future growth. To conclude, we are extremely pleased with our performance during the first quarter and are optimistic about the outlook for the remainder of the year. Given that we are still early in the months of 2019, we are not making adjustments to our 2019 outlook. We plan to provide an update on our 2019 guidance on the second quarter call as appropriate. Thank you, again, for your time today. We look forward to updating everyone on the second quarter results in July. With that, I'd like to ask the operator to open up the line for any questions. Operator?

[Operator Instructions] Our first question comes from the line of Steven Alexopoulos with JPMorgan.

I want to start first on the loan side of this commentary about the recovery and the purchase -- the market for the C&I loans that you sold in the quarter, was that improved demand coming from banks or nonbanks?

It was -- well, when we sell, a lot of times, it's through the agent that we bought the deal from, so we don't know the buyer necessarily on the other end. So for example, it might be a large bank who we're doing the transaction through. So I don't have a -- I can't give you a clean answer on who's on the other side of that transaction in all cases.

Got you. Okay. But even with the accelerated pace of loan sales this quarter, you guys still feel good about the prior loan growth guidance for the year? Is that right?

So I think that's one that we're going to wait to evaluate when we get to Q2. Obviously, the sales that happen here or that we're disclosing that we did in Q2 are going to put some immediate pressure on the loan growth metrics. Our first quarter was a little bit on the low side of guidance at 7%, but we've historically been a little slow out of the gate in Q1 as well. So we're going to see where we come out in Q2 before updating. But I would say, as far as the guidance we gave previously, we're certainly trending to the low end of that and maybe a little lower depending on how we replenish the loans that we just sold off over the past 2 weeks.

Right. Okay. And then on the other side, the deposit side, I know you had guided down the political deposits in the first quarter but they've surged. What drove better-than-expected political deposits? Is it just banking many more Democratic candidates than you expected?

Yes. I think it's a wide variety of factors, Steve. One is, obviously, if you're looking at the scoreboard, there's 20 people running for the Democratic nomination for President and they're all raising money and they're all raising small-dollar money, which keeps those deposits increasing on a fairly steady basis. But it's across the board. I mean it's not just presidential candidates. I mean the party as a whole has had a tremendous fundraising quarter. And there are a lot of Democratic candidates who are our clients who won in marginal districts from a Democratic perspective and had -- needed to start raising funds right away again. So it's really just robust campaign fundraising across the board.

Okay. And given how strong the deposit quarter was, I know you're going to wait until 2Q to give the official update to guidance, but relative to the deposit guidance previously of 7% to 10%, do you feel like you're trending towards the upper end of that range?

Yes. Definitely, we are trending towards the upper end of that range. I mean we want to watch and make sure that there's stability on that. And while our political deposits did come back quite strongly, as you know, we saw nice deposit growth across all of our verticals. And it was very -- just good deposit growth for the franchise as a whole.

Our next question comes from the line of Matthew Keating with Barclays.

Yes. Maybe just sticking on the political deposit theme, can you remind us historically -- I mean, I guess, maybe there's not a good precedent for this given the large number of Democratic candidates, but maybe perhaps you can talk about the bank's success, obviously, with Biden coming out recently and raising a lot of money on the first day of his campaign, is that another account that the bank has access to?

So it's publicly disclosed that Joe Biden is our client. So that was a nice surge of deposits there. Historically, Matt, I think what you're trying to get is what does it look like over a cycle? And we really sort of see 3 periods of growth throughout our political cycles. Early in the cycle, we see campaigns raising more money than they're spending, and so we see an increase overall in deposits. We then see a period where campaigns raise and spend at roughly equilibrium. So dollars coming in are matching dollars going out, and our deposit base stays very solid during that period. Then right at the end of the cycle, we see a fairly substantial outflow of deposits. We have no reason to believe that, that won't be the case again this time. I would just point to the deck that we handed out that went along with the -- with our transcript here and sort of draw your attention to Page 5 on that. And if you look at the political trend, what we are seeing is very early on in the cycle here, I think a substantial increase in deposits, much earlier in the cycle than we've seen in the past. And if you look at what happened between the end of the last cycle from Q4 of 2016 and then the growth into Q1 of '17, you compare that to what happened at Q4 of '18 and Q1 of '19, not only from a real dollar perspective but from a percentage growth perspective, the increase in political deposits very, very early in the cycle is substantial. I think that both represents the ongoing maturation of our business and just the -- to kind of go back to what Steve was asking about, I think the strength of fundraising that's happening very early on in the cycle.

Understood. No, that's very helpful. And then maybe on -- and obviously, you're not updating your full year outlook at this point in the year, but certainly, the net interest margin starting at a much higher level than the 3% to -- 3.5% to 3.6% full-year outlook. So do you feel comfortable running towards the high end of that level at this point in broad terms?

Yes. I think in -- so there's competing factors here on the NIM, right? There's the strength of deposit growth and the, what I would call, pretty benign repricing we continue to experience, which is a positive to the NIM trajectory going forward. And then at least in the near term, there's going to be, how do we refresh the indirect C&I? How fast do we do it? And at what yield do we replace it? And given we just made the move a couple of weeks ago, we're still evaluating more purchases and -- in our pipeline, and can we do anything to expand it? So -- and that's going to be a pull-down in the NIM. So those 2 are competing. It's a little early in the quarter for us to say anything near term, but I think that still keeps us at the high end of the NIM range over the course of the year.

Understood. And then maybe just a question on the share buyback. So, obviously, that's good to see. Maybe just your thoughts on how the Board is evaluating buybacks versus liquidity in the stock at this point? How does the discussion go around that in particular?

So I think with the capital we have available, obviously, as we prioritize it, it's organic growth first, acquisitions with very positive economics and then dividend and share buyback. Given where the stock is trading, an acquisition of our own stock looks pretty attractive right now based on what we think the intrinsic value of the company is. I think specific volume at specific prices, we're not going to give guidance on that just as probably any active participant in the market would do. But I think we'll evaluate the use of -- the Board and management will evaluate the use of capital as the circumstances warrant on a quarter-by-quarter basis.

Yes. But I think it's fair to say we're very pleased to have the sort of arrow in our quiver here now to give us an additional option on how to think about capital allocation. We have a Board meeting later this week where we'll be talking about this more in detail with our Board.

Our next question comes from the line of Chris O'Connell with KBW.

So yes, I just wanted to kind of circle back on the NIM a little bit more and just the dynamics with the indirect C&I roll-off next quarter. So what is the yield on that indirect C&I? Is it like the mid-5% range?

Yes. It's -- there's a couple of fixed-rate loans. But just on a variable basis, it's about LIBOR plus 3.20% that those loans are coming off at. So yes. So you're about right on that 5.5%, little -- 5.75% in terms of what's coming off. So it's definitely higher yield than our average loan on the books.

And how much were the loan purchases this quarter? And what yield were those purchases?

So the loan purchases this quarter was only the PACE loan, which was $45 million PACE at 5.1% -- for Q1. Just to be clear, Q1 2019.

And are you guys looking toward maybe doing purchases to fill in just that gap from the -- like the kind of larger indirect C&I runoff next quarter? And we assume that, that still would be kind of at similar yields?

Yes. So we are -- well, we're always evaluating purchases and deciding what to do there. I think that some of the candidates for those purchases could be more PACE loans. We've put on a fair amount of residential -- as we call it, residential solar loans as well over the past several quarters. And we've been watching that in terms of how that's performed, and that might be a place where we add additional volume as well. I think as far as just pure residential loans, we have pretty good production organically from those loans, so I don't think we'll be doing any purchases in that space. But I don't have a definitive answer, Chris, because we took this action over the past couple of weeks. So we took advantage of the market when it was there, and we're maybe taking a little extra time to make sure we make the right decisions in terms of how we redeploy that into our loan book going forward.

I do think the other thing just on NIM, though, is cost of funds, right? And before somebody gets a chance to ask it, we should probably should address it a little bit. I mean we are not seeing significant pressure, right, on deposit pricing. I mean I know a lot of banks are sort of saying that they're seeing the release valves happen on that a little bit as well. I would echo that across the board in our commercial business, with an exception here or there, we're seeing very little deposit pricing pressure.

Got it. Yes, and then, I guess, could you just do -- or give us a breakdown? I mean it looks like that the noninterest-bearing deposits growth even outside of the political deposits was very strong for this quarter, and just what kind of relationships are driving that?

Sure. So again, going back and thinking about the core thesis here as a company where we really focus on our core customers in the unions space along with their funds, with nonprofits, with nonelectoral political actors that are political organizations in the space. And then this quarter in particular, we saw some very nice growth in our philanthropic space that really across all of those metrics, we saw some very nice, large relationships come in to the bank as well as with organic growth in -- of existing customers. So really, just across-the-board kind of growth in our franchise. We feel -- I mean if there's 2 things I feel really, really good about this quarter, it's that across-the-board organic growth in deposits, which is very strong and a very, very good pipeline in that, and very, very comfortable with the opportunity to continue derisking the balance sheet and sort of eliminating that potential drag on income that could come from future losses as the lending cycle turns here. Just those are very core pieces of our investment thesis, ones that we feel really good about nailing this quarter.

Great. And one last one. If you could just go over, I know you -- I think you had mentioned down $50,000 a month in trust fees related to the real estate fund, but I just missed the detail on that. If you could just go over the details again real quick?

Sure. So we have -- as I think we've talked about in past calls, we have a fund that's in runoff stage that's got a little less than $0.5 billion of assets remaining under management in that fund. As we have disposed of properties there, we have done allocations to our shareholders on a fairly regular basis in that fund, and it was a $50 million allocation to shareholders right at the end of the first quarter. Or is it, I'm sorry, second?

$60 million right at the end of the first quarter, right at the end of April.

$60 million right at the end of April that was distributed to shareholders.

So around last week.

Our next question comes from the line of Wally Wallace with Raymond James Financial.

Just real quick on the NIM, what was the benefit from purchase accounting in the quarter?

5 basis points, which I think was maybe -- I think the previous quarter is maybe 6 basis points, so pretty consistent.

Okay. And then on the loan sales that have occurred in the second quarter, the $127 million that you guys cited, if I'm reading the Slide 7 correctly, it looks like you have not sold any out of the indirect portfolio. It says the balance of $80 million at the end of April.

No. No, the indirect portfolio was about $210 -- slightly less than $210 million at the end of the first quarter. So we've sold, yes, $127 million.

Okay. I see, all right. So I was reading it wrong.

Yes.

All right. So the associated sales -- okay, it includes everything.

It all came from the indirect portfolio.

Yes, yes.

Okay. Great. So the 2 leverage loans that you guys built reserves on, can you just talk a little bit about what you saw? What were the characteristics of those loans to drive the increased provision expense?

Yes. So they were both having trouble on the revenue side of their income statement, which was causing some deterioration in terms of their debt service. So we downgraded them and took some provision on them, obviously as you just said. So building reserves, right now, they sit in the sub -- one is in the substandard and one is in the substandard unit tranche bucket of that Page 7 that you're referring to right now. So neither are on nonaccrual status. So they're still performing loans, but they do show up in the substandard category, which is the first spot where we really start building, at least what I would call, significant reserves on loans. So what you have...

You -- go ahead.

As I ended, so what you have there is you have 5 loans that are totaling about $38 million, which are in our substandard and nonaccrual buckets in our loan criticized and classified classifications.

The 2 downgrades in the quarter, is there any collateral support on those?

There is no collateral support. They're both covered by all assets of the company, as is pretty standard with the C&I loan. Unit tranche loan that we have that was downgraded, though, I know the unit tranche concept is maybe a little bit odd to people, but in that loan, we have about 70% of debt and equity behind us in that loan. So it's more well protected than just a standard C&I loan. The other one that was downgraded is not a unit tranche loan, just a standard leverage loan.

Well, I guess, one perspective here I think on this overall page and why we wanted to make sure that we included it here, and it's a level of detail I think on our loan book that we haven't provided in the past, was given that there was some movement here, a lot of which happened because of the charged-off loan that happened and the change in some of the factors that were applied to certain loans as opposed to deterioration in one of the credits in particular itself was to, I think, be able to show shareholders here with some degree of accuracy or some degree of transparency that this is the stress in the portfolio to the extent that it exists, and there's not a lot beyond this. Our classes of loans that are here are in relatively safe space outside of this indirect C&I bucket. And I think we wanted to say with selling off a lot of these loans here, even though with a little movement on a couple of loans, there's a lot of other things to be worried about in the overall loan portfolio at this point.

Yes. And basically size it.

Yes.

Okay. And then my last question is just kind of helping us think about how you might make decisions to purchase these PACE loans? $45 million in the quarter, you've got a goal to provide -- I think it's $700 million of what you call socially responsible financing. Are there other lines of business that you guys currently operate in that gets you to that $700 million? I have to assume they are -- there are. And what are -- what is it that you see in a PACE loan that makes you -- or a pool of them that makes you just decide to go ahead and purchase them versus to wait and not purchase them?

Do you want to go ahead and take part of it?

Well, let me take the first part of it. So the commitment is from a perspective in terms of where we will allocate our dollars is to over the -- over 2-year period to double the number of socially responsible loans that are in our portfolio. When we did the New Resource transaction, that portfolio was about $350 million. That would take it to about $700 million by sometime in 2020. As we said in the formal presentation, we've already done a little bit more than $250 million of those loans, $45 million were the PACE purchase that we've done. The other categories where we have focused on that have been both commercial and residential solar purchases, a broad category of energy efficiency green real estate lending that we've done, and then primarily lending to other nonprofits and socially responsible enterprises. And in addition to that, it's not just loans we -- it's the securities that we've done, which have included some options to be able to purchase investment securities that are again in that environmental and sustainability space. And I'll let Drew talk a little bit about the characteristics of what makes a good PACE portfolio versus not a good PACE portfolio.

Yes. And just -- and so just to be clear, that $700 million is loans and securities. It's use of our balance sheet, it's not just loans. As far as PACE loans, so the $45 million we did was our first PACE transaction. And PACE lending is different than most other types of lendings because you're really dealing with a tax lien and it's a more structured deal than just going out and buying mortgage loans. In addition, a lot of the production is actually securitized on PACE loans, so finding the right partner to be able to purchase loans. We feel good about how the loans have been structured and putting those into place was I think a fair amount of effort for our first transaction. So we've gone back out and sourced a couple of more places where we could do additional purchases. And we're just getting comfortable with doing that, but I would suspect that there will be more PACE transactions in the future.

So just to get a sense of a $40 million pool, how many individual credits are represented if it was securitized?

If it was securitized, well, I don't...

You said they're mostly securitized, I'm assuming that this one was.

No. This one was not securitized. So...

Okay. So how many borrowers are in this pool?

Yes. So the average size on the PACE loans can go anywhere from $25,000 to $50,000 in terms of what's happening. And it isn't just solar, it can also be home improvement for anything related to energy efficiency, and also I think a lot of times, these are used for reconstructions related to a natural disaster event, such as hurricane or something of that nature, just to pick an example.

[Operator Instructions] Our next question comes from the line of Matthew Breese with Piper Jaffray.

I just wanted to follow up on the elevated provision. Along with the 2 leverage loans that you discussed, you also mentioned in the release historical -- increasing historical loss factors. Could you walk me through that change and what happened there?

Yes. So the historical loss factors that Keith was referring to was the leverage loan factor on the 1 charge-off that we had for $8.4 million. So what that does is that anything else that is substandard nonunit tranche, which was 1 loan only that was existing in that bucket in Q1 except for the downgrade that we just discussed, takes on an additional provision related to that increase in the loss factor. So it really only applies to substandard leverage loans that are nonunit tranche, which is a bucket of 2 at this point, 2 loans.

Got it. Okay, understood. And then as we think about the political deposits, I just wanted to gain a sense for how that bucket is broken up. How much of it is tied to presidential candidates? How much is tied to PACs or state campaigns? Could you break it up a little bit and give us a sense for what the components are?

So sort of roughly about $70 million of it is associated with presidential campaigns. Then of what is remaining there, I would say that -- I'm just getting some numbers here that'll give me some additional perspective. So then I would say about $40 million of it is sort of federal election campaigns, about $20 million of it roughly is sort of what I'm calling institutional business, like the big institutions of the parties, and then the balance is a variety of different kinds of categories. So it's nicely dispersed across different kinds of categories of people who are running for office. It's much more sort of federal election activity than it is state and local activity, but it is dispersed across the presidential and the sort of other campaign activity, which you want.

And as we think about the change from 4Q to this quarter, I think it was the $89 million pickup, was that mostly in the presidential campaign? Or could you break up the change as well?

I don't know that I have that level of detail, Matt, to be able to do it. But a substantial -- obviously, in Q4, there wasn't a lot of presidential money out there, so that was -- so a lot of it came from presidential.

I think it was disclosed that maybe $70 million in presidential money was raised. So that's probably about as -- without giving any more detail on any individuals.

Okay. No, that's very helpful. And then just thinking about loan growth for the year, I know you provided some commentary earlier, but could you give us a sense for where the loan pipeline stood at quarter end versus year-end? And if you can't give us that level of detail, perhaps characterize it as -- in terms of percentage difference?

Percentage difference. Actually, I -- because I can't remember what the Q4 pipeline was honestly. All I'll say, Matt, I guess, is that I think the pipeline feels pretty good at this point and it's a mix of both CRE transactions and non-CRE transactions. So I think we feel pretty good about the lending pipeline. I'd watch and see what converts out of that. I wish that yield curve was a little steeper than it is right now. So things that are coming on in the multifamily space are kind of in the 3.75% to 4% land again, but that might just be where we're at this point in terms of yields coming on. But clearly, with the $127 million we're running off in the C&I book, that puts additional pressure on our loan growth targets, which I think -- some of which I think we'll be able to makeup through purchases as well.

Got it. Okay. And then just staying on the multifamily comment, some are suspecting that rent regulated apartments, the valuation of those buildings or apartments might be impacted by the upcoming June rent guideline report. Could you give us a sense for the average LTV of that portfolio? And then more recently, what kind of the -- from an underwriting perspective, what the average LTV is?

Yes. So the -- I think the average LTV in our portfolio was low 60s on our multifamily portfolio. And I'll tell you, this is my perspective, but I suspect most members of our Credit Committee agree with this as well because we've certainly discussed it, is we find debt service coverage to be maybe a better metric in terms of the credit worthiness than LTV because you're looking at real cash flows that are coming through the business, whereas LTVs move around, obviously, based on appraisals, cap rates. But also things like the potential regulation that you were just discussing can have a big impact on LTVs. So while they're also a reliable measure, I think maybe a little less reliable for your underwriting standards than debt service coverage can be in terms of how you think about these loans. But I think we have certainly sacrificed yield for better credit quality in multifamily and CRE to be able to make sure that for any type of event like this that happens, hopefully, we're as well underwritten or maybe even better underwritten than the competition around us.

And I would just add, even if the rent regulation does come into play, I don't think it's going to change our approach to market all that much. Unlike players who are primarily underwriting market rate deals, we are very comfortable, and a bunch of our portfolio already has substantial affordable components to it. Given -- through the size of our loans in that space and where we tend to lend, I think we're going to be very comfortable with whatever comes out of Albany.

Right. I guess I was just trying to get a sense for if we were to call a portion of your portfolio potentially at risk from a valuation perspective, I would think it's the higher LTV segment. And so I wanted to gain a sense for is there a portion you book that, call it, average LTVs north of 70% or 75%?

No. No, we're not in that space at all.

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Mestrich for any final comments.

So I just want to say thank you to everybody for joining us for a little bit today. We're very happy with the quarter, and we had an investment thesis that we have stuck to that we talked in The Street back in August when we first went public. We think it's a smart business strategy. We're executing very well on it, and I think you can see that in the results from this quarter. And I look forward to being in touch with many of you in the future. So thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.