Amalgamated Financial : Fourth Quarter 2022 Earnings Call Transcript

Fourth Quarter 2022

Earnings Call Transcript

January 26, 2023

Amalgamated Financial Corp. - Fourth Quarter 2022 Earnings Call, January 26, 2023

C O R P O R A T E P A R T I C I P A N T S

Jason Darby, Chief Financial Officer & Senior Executive Vice President

Priscilla Sims Brown, President, Chief Executive Officer & Director

C O N F E R E N C E C A L L P A R T I C I P A N T S

Janet Lee, JPMorgan

Alex Twerdahl, Piper Sandler

Chris O'Connell, KBW

P R E S E N T A T I O N

Operator

Good morning, ladies and gentlemen, and welcome to the Amalgamated Financial Corporation Fourth Quarter 2022 Earnings Conference Call. During today's presentation all parties will be on a listen-only mode. Following the presentation, the conference will be open 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.

Jason Darby

Thank you, Operator, and good morning, everyone. We appreciate your participation in our fourth quarter 2022 earnings call. With me today is Priscilla Sims Brown, President, and Chief Executive Officer. As a reminder, a telephonic replay of this call will be available on the Investor section of our website for an extended period of time. Additionally, a slide deck to complement today's discussion is also available on the Investor 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 statements or information.

Investors should refer to Slide 2 of our earnings slide deck, as well as our 2021 10-K filed on March 11, 2022, 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

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Amalgamated Financial Corp. - Fourth Quarter 2022 Earnings Call, January 26, 2023

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 measure can be found in our earnings release as well as on our website.

Let me now turn the call over to Priscilla.

Priscilla Sims Brown

Thank you, Jason. Good morning, everyone. We appreciate your time and interest today.

This morning, I will provide an update on the progress we have made on our Growth for Good strategic plan and my thoughts on the next leg of our strategy journey. Jason will then provide an in-depth review of our fourth quarter financial results.

With 2022 concluded, culminating in our third consecutive quarter of record earnings, I feel good about what we've accomplished and confident that we can execute the next leg. Before discussing future plans, I'd like to spend some time on the quarterly and full year results.

Starting off, we reported another record quarter of earnings at $0.80 per share, while we reported core earnings of $0.83 per share. For the full year 2022 we grew earnings per share 56% to $2.61.

Also, we delivered 6.1% loan growth as compared to the linked quarter, increasing nearly 24% or $785 million to $4.1 billion over the year. Our net interest income was $67 million for the quarter, and increased $66 million or 37.6%, to $240 million over the year.

I have spoken often about our commitment to credit quality and the efforts we have undertaken, beginning over 18 months ago, to better condition our balance sheet against future credit risk. Over the course of the year non-accrual loans decreased to $22 million or 0.5% of total loans, and equally as important, credit quality greatly improved as classified or criticized assets declined by $125 million or 54.3% to $106 million.

At the beginning of 2022, we set a macro target of a 1% return on average assets. While modest as an industry peer comparison, this target represented a 25% increase from our previous year performance. Given our improved profitability and earnings power, the return profile of the Bank is markedly improved and our return on average assets expanded 24 basis points to 1.05% by year end 2022.

Before leaving our results discussion, I'd like to take a moment now to discuss our fourth quarter deposit metrics. Average deposits decreased by $576 million to $6.7 billion, largely due to the $513 million expected run-off of our political deposits following the congressional elections. The run-off during the quarter was at the high end of the estimate that we communicated during our third quarter call as this election cycle was highly competitive, evidenced by the thin margin of both majorities in Congress. We were very pleased that our political deposits grew to approximately $1.3 billion during the year and our political deposit trends are interesting as both our high and our low balance points have grown over previous cycles. With another highly contested presidential election already in its early phase, political deposits have started to build already through January. We expect our political deposits to grow steadily throughout the year by approximately $250 million.

Also during the quarter, we had some nice nonpolitical deposit wins and I am encouraged by our deposit pipeline. Although we expect our deposit base, including political, to be more rate sensitive in 2023 based on a protracted higher rate environment, we believe our deposit gathering franchise and mission aligned thesis will be a differentiated and competitive advantage.

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Amalgamated Financial Corp. - Fourth Quarter 2022 Earnings Call, January 26, 2023

Over a year ago we described the fundamentals of the first leg of our strategy were to accelerate loan growth and improve our profitability, managing our risk exposure prudently, and growing our positive impact on society. Underlying these fundamentals were a set of financial targets that focus on us being the most improved bank in the country for financial performance. The combination of credit profile improvement, lending execution, deposit retention strategies, and our core earnings strength positions us well for a changing economic environment and success as we are on the precipice of our second century as a U.S. banking institution.

As we celebrate our full first 100 years, I cannot be more inspired by the team we have in place to propel this great bank into its next centennial.

The expansionof our lending platform has been a priority for our management team. The lending and credit risk management teams we have built over the last six quarters should continue to deliver results in the segments of the market where we see opportunity to grow, including real estate, sustainability and not for profit. In particular, we believe sustainable lending holds significant opportunity where it is estimated that $3 trillion will need to be invested in the United States to achieve net zero emissions by 2050. This is a significant market opportunity, which we believe will be less impacted by economic or cyclical factors. Our bankers are experts in sustainability and underwriting commercial loans across the sector, such as storage for solar energy, geothermal projects and biodiesel projects.

We also anticipate that the fee increases that we negotiated with our customers last year in the Trust business will take effect in 2023. I'm confident that the rolling of our Trust business under our Chief Banking Officer will provide the unified customer focus needed to drive better results. Similar to our digital and customer strategy, we see substantial growth to cross-belt banking services to our Trust customers and trust and asset management services to our banking customers.

As mentioned on previous calls, we will be focused this year on executing our digital transformation. We see a tremendous opportunity to tie our commercial business into a reimagined consumer business and reach through our commercial customers to their members. For instance, if we're doing business with a large non-profit, we want to attract their members and donors who are naturally aligned with Amalgamated. To be successful, we need to offer products and services that are competitive and meet their needs, as well as enhance the customer experience for both our commercial and consumer customers. To date, we have conducted an RFP for a digital plan and we expect to make a selection during the first quarter.

The combination of our efforts in both marketing and digital were reflected in the fourth quarter expense rate and we expect to remain constant on those expenses through 2023. We recognize these investments need to be made. As was the case with our lending strategy, we will make discipline choices funded through profitability with a requirement for timely returns.

I am excited moving Amalgamated into its next centennial and the next leg of our Growth For Good strategy. Our support of issues that are consistent with the social responsibility of a bank and importance to our employees, our customers and the majority of Americans will always be core to our mission. I expect continued discussion around positions we have taken, and I understand this and encourage a sensible dialogue to build a better understanding of views. Ultimately, I believe our mission, paired with our financial performance this year, shows the resilience of our strategy.

Now, let me turn the call over to Jason.

Jason Darby

Thank you, Priscilla. Net income for the fourth quarter of 2022 was a record $24.8 million or $0.80 per diluted share compared to $22.9 million or $0.74 per diluted share for the third quarter of 2022. The $1.9

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Amalgamated Financial Corp. - Fourth Quarter 2022 Earnings Call, January 26, 2023

million increase for the fourthquarter of 2022 was primarily a result of a $0.7 million decreasein noninterest expense, a $0.9 million decrease in provision for loan losses, and a $1.3 million decrease in income tax expense related to an elected change in taxable income recognition, offset by a $0.3 million decrease in net interest income and a $0.8 million decrease in noninterest income.

Beginning on Slide 5, exclusions related to solar tax equity investments were $1.7 million in accelerated depreciation for the fourth quarter of 2022. Because of the income statement volatility associated with the accounting for these investments, we believe metrics excluding the timing impact of tax credits or accelerated depreciation is a helpful way to evaluate our current and historical performance. Core net income, excluding the impact of solar tax equity investments, a non-GAAP measure, for the fourth quarter of 2022 was $27.2 million or $0.87 per diluted share compared to $24.8 million or $0.80 dollars diluted share for the third quarter of 2022.

Turning to Slide 7, deposits at December 31, 2022 were $6.6 billion, a decrease of $565.3 million from the third quarter of 2022. The decline in spot balances was primarily due to the expected decline in political deposits given the conclusion of the congressional elections in the fourth quarter of 2022. Through January 20, 2023, deposits have increased by approximately $225 million to $6.8 billion, including approximately $135 million of brokered time deposits, strategically issued to reduce fundings costs.

Noninterest bearing deposits represent 53% of average deposits and 51% of ending deposits for the quarter ended December 31, 2022, contributing to an average cost of deposits of 34-basis points in the fourth quarter of 2022, a 20-basis point increase from the previous quarter due to our repricing actions in response to the more competitive environment for deposits in our markets.

Deposits held by politically active customers were $643.6 million as of December 31, 2022, a decrease of $513.7 million on a linked quarter basis. As noted on our previous call, political deposit trends are difficult to predict, but we are at the natural low point of our balances as the election cycle concluded in November. We expect political deposits to begin rebuilding in the first quarter of 2023 and we have experienced $5.2 million of political deposit inflows through January 20, 2023.

Turning to Slide 12, total loans receivable, net of allowance and deferred fees and costs at December 31, 2022 were $4.1 billion, an increase of $231.8 million or 6.1% compared to September 30, 2022. The increase in loans is primarily driven by $120.6 million increase in commercial and industrial loans, an $82.7 million increasein multifamily loans, and a $39.8 million increase in residential loans, offset by a $3.8 million decrease in consumer and other loans, a $1.3 million decrease in constructionand land development loans, and a $2.9 million decrease in commercial real estate loans as we continue to reduce that asset class exposure.

During the quarter, we had $12.7 million of payoffs of criticized or classified loans as the Bank's credit quality continued to improve. The yield on our totalloans was 4.24% compared to 4.11% in the third quarter of 2022.

On Slide 13, our net interest margin was 3.56% for the fourth quarter of 2022, an increase of 6 basis points from 3.50% in the third quarter of 2022. The margin increase was driven by continued loan growth which substantially improved our asset yield mix, offset by increased rates and average balances of interest- bearing liabilities, particularly in short term borrowings. This increase in funding costs was expected as we communicated during our third quarter call that borrowings would elevate in the fourth quarter in relation to the decline in political deposits.

Prepayment penalties earned in loan income contributed 1 basis points to our net interest margin in the fourth quarter of 2022 compared to 4 basis points in the third quarter of 2022.

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ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only.

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