Third Quarter 2021 Earnings Call Transcript

Third Quarter 2021 Earnings Call

Transcript

October 28, 2021

Amalgamated Financial - Third Quarter 2021 Earnings Conference Call, October 28, 2021

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

Jason Darby, Senior Executive Vice President and Chief Financial Officer

Priscilla Sims Brown, President and Chief Executive Officer

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

Alexander Twerdahl, Piper Sandler

Janet Lee, J.P. Morgan

Brian Morton, Barclays

Chris O'Connell, KBW

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

Operator

Welcome to the Amalgamated Financial Corp. Third Quarter 2021 Earnings Conference Call.

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.

Good morning, everyone. We appreciate your participation in our Third Quarter 2021 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 Investors section of our website for an extended period of time. Additionally, a slide deck to complement today's discussion is also available on the Investors 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 Slides 2 and 3 of our earnings slide deck as well as our 2020 10-K filed on March 15, 2021, 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 - Third Quarter 2021 Earnings Conference Call, October 28, 2021

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 share a few highlights of our third quarter 2021 results but spend the majority of my time providing an update on our strategic plan development, including our recently announced acquisition of Amalgamated Bank of Chicago. Jason will then offer the financial benefits of our acquisition in more detail, along with a more in-depth review of our third quarter results.

To start, I'm very pleased with our third quarter, as we've delivered strong results across the dimensions of revenue, profitability, credit quality and foundational growth drivers, such as PACE assessments and deposits.

Our total net loans, including PACE assessments, grew modestly by $31.4 million, marking a linked- quarter continuance of net positive growth. Without the effect of the runoff on our residential loan portfolio, which we have strategically decided to allow, growth was $83.7 million, or 3.2%. Also importantly, we had net positive growth of $9.4 million in commercial and industrial lending and $26.8 million in consumer lending, each driven by solid growth in our Sustainability segment where we believe we have a competitive advantage. While we acknowledge these results must improve, we are encouraged by both the reversal of net loan portfolio declines experienced during the past few quarters and the signs of momentum as we see returns generated from the earliest stages of our lending strategy implementation.

Along these lines, I am very happy to report that, during the quarter, we also hired a new Chief Credit Risk Officer, who will report directly to me. He joins us with direct experience in the segments in which we do business and has demonstrated understanding the connection between production targets and prudent credit risk management.

Now I'd like to update you on the strategic initiatives we've been working on to enhance our growth and better serve our customers. To accomplish this, we have established a four-pillar strategy that focuses on, number one, building our business through mission. Two, and since we focus on Customer segments that share our values we are uniquely positioned to gather and leverage insights on these core customers, and that's an important second pillar. We're also developing and expanding relevant product offerings to grow our lending platform and our trust business. And fourthly, we're improving the management of our data and technology to drive improved efficiency and effectiveness.

The first pillar on building our business through the mission as America's socially responsible bank is one that I'll spend a few minutes on next. Interest in the environment, social causes and communities have never been greater, and we're committed to being a bold leader of policy and public affairs that impact our customers and employees. Our goal is to live the mission by building an authentic culture of social responsibility and impact. This will drive our existing customers' loyalty and attract many new prospects that share our mission and values.

By way of example, I am proud to report that we have committed to being net-zero by 2045, and we've established a science-based target system to achieve this goal. We have named a Chief Sustainability Officer to support this process and deliver on our targets for the science-based targets initiative. We are promoting our team as thought-leaders and are excited to participate in the U.N. Climate Change Conference being held in Glasgow next week.

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Amalgamated Financial - Third Quarter 2021 Earnings Conference Call, October 28, 2021

In addition to organic examples of mission, we certainly look for opportunistic expansion of our mission through partnerships as well as to plan to fully leverage our mission to accelerate the pace of growth in the Midwest through our acquisition of the Amalgamated Bank of Chicago, which I will say more about in a few minutes.

The second pillar is leveraging insights on core customers. Over the years, we have discussed our customers in the political, not-for-profit and union sectors as being deposit customers with little demand for loans or other traditional banking services. I believe that within our core deposit-led Customer segment, there's a significant opportunity to drive additional revenue streams. To accomplish this, we have begun building on our data infrastructure, examining customer information and behavior to identify demonstrated needs and interests, and related profit tracks.

Our engineers are now organized around this objective, and we recently augmented their expertise with data science resources.

The third pillar focuses on developing and expanding our product expertise. In the same way, the bank added a team of deeply connected relationship managers to grow our successful low-cost deposit franchise, we're now focused on assembling talented leaders with the same level of unique specialization in our mission-driven Lending segment, adding to our staff of bankers and underwriters with proven acumen and results in the commercial solar, PACE and sustainability project finance markets.

We have also repositioned some of our existing talent, allowing them to use their valuable expertise across our New York City, Boston, D.C., San Francisco and soon to be Chicago offices. In tandem with our mission-driven Lending segment's staff build-out, we are also revamping our traditional commercial real estate team by recruiting motivated and experienced leaders who have proven track records in this important marketplace. Commercial real estate lending remains our largest asset class on the balance sheet, and we intend to return to pre-pandemic origination levels and be more successful at protecting our existing book of business as we head into 2022.

We are also connecting our consumer and trust business to our commercial banking business to better serve core customers across offerings. It is essential for Amalgamated to fully identify ourselves as a true ESG institution with a wide array of banking and financial services, moving us beyond the impression of some stakeholders that this is a deposit-only institution. We have added experienced talent in our ESG investments platform, including a leader who will manage our Responsifunds suite of ESG investments, with a focus on transforming our relationship bankers into referral engines while also ensuring clients are earning appropriate market returns that, in turn, drive marginal profitability to the bank.

The fourth pillar is focused on our infrastructure and digital platform to support our growth. We are working to become a stronger digital bank, offering our customers, both commercial and consumer, the absolute best of banking experience through the use of enhanced user-friendly technology supported by exemplary in-person support. We offer our commercial customers a great digital experience now, but we want this interaction with all of our services to set us apart as we continue to evolve into becoming an even stronger digital bank. Smart insight-driven investments here will ensure that our customers value their differentiated online experience.

It's an exciting time for our bank on many fronts, and most certainly contributing to that is our recent announcement of the acquisition of Amalgamated Bank of Chicago, known as ABOC.

One of the many strategic opportunities that the acquisition provides is an established entry into a market we have long desired. ABOC provides us entry into Chicago, which is a far-reaching market that encompasses most of the Midwest. Additionally, we bring to ABOC and its customers and prospects the capability that a significantly larger bank can provide. What we have found is that ABOC has deep relationships with their customers and that their customers are rich referral sources for new prospects. Combined, we have the balance sheet to support ABOC's customers and prospects as they continue to grow and which will provide immediate revenue synergies. The acquisition also gives us a tremendous

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Amalgamated Financial - Third Quarter 2021 Earnings Conference Call, October 28, 2021

opportunity to export our multi-segment customer model to the Midwest to capitalize on the segments that exist well beyond ABOC's foundational union customers.

We signaled last quarter that we would be exploring smart M&A opportunities, and we will continue to do so. As I also stated on our second quarter call, we will need to make investments into people, products, and services and technology to foster the growth that we are expecting; and are actively planning a thoughtful roadmap that considers timing, prioritized investments, net neutral funding decisions and profitability. Although we have much more work to do, we are evolving and exciting things are happening.

I will now turn the call over to Jason, who will fill you in on some of the details of the ABOC deal as well as the just completed quarter.

Jason.

Jason Darby

Thank you, Priscilla.

I would like to echo Priscilla's comments as she speaks of the excitement with which our entire team is approaching the ABOC acquisition as well as our four strategic pillars designed to accelerate growth while effectively managing risk and build value for all of our stakeholders.

While our September 22 press release contains the details of the ABOC transaction, I would like to briefly highlight several of the financial benefits and growth opportunities that ABOC provides Amalgamated, which are as follows.

First, we see substantial cost savings opportunities through the elimination of duplicative functions, which we expect will drive earnings accretion of approximately 17%. The bulk of the cost savings will be in SG&A, which will be reduced by about 25%, or $8.1 million, on a pre-tax basis. We expect the full economic benefit from the acquisition to be in 2023, assuming the deal closes in the fourth quarter of 2021.

We also see revenue opportunities, as we will redeploy ABOC's excess liquidity into securities through the first quarter of 2022, which will drive margins and earnings. Opportunities also exist to reinvigorate ABOC's go-to-market strategy as well as to reengage with their current customers to drive new business and revenue growth. We are already working with ABOC's lender team to change their positioning to be proactive, given our plans to grow their loan business.

Lastly, we are targeting to close the deal by the end of this year, pending regulatory approval. We have deployed two of our senior people to Chicago to welcome our new associates and to assure a smooth transition. We are pleased with our progress to date and trust you can see why we are so excited with the many opportunities that this acquisition affords us.

Now I'd like to briefly highlight our third quarter results before taking your questions.

Net income was $14.4 million, or $0.46 per diluted share, compared to $10.4 million, or $0.33 per diluted share, for the second quarter of 2021, representing a 39% earnings per share increase. The $4.0 million increase was primarily due to a $2.3 million release of provision for loan losses compared to a $1.7 million provision expense in the preceding quarter, as well as a $1.4 million increase in net interest income and a $1.4 million increase in non-interest income. These increases were partially offset by a $1.6 million increase in noninterest expense.

Starting on Slide 8, deposits at September 30, 2021, were $6.2 billion, an increase of $314.5 million, or 21.1% annualized, as compared to $5.9 billion as of June 30, 2021. Non-interest-bearing deposits represent 52% of average deposits and 51% of ending deposits for the quarter ended September 30,

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