Amalgamated Financial : Second Quarter 2023 Earnings Call Transcript

Second Quarter 2023

Earnings Call Transcript

July 27, 2023

Amalgamated Financial Corp. - Second Quarter 2023 Earnings Conference Call, July 27, 2023

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, 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, JP Morgan

Christopher 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 Second Quarter 2023 Earnings Conference Call. (Operator Instructions)

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 second quarter 2023 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 compliment 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 information or statements. Investors should refer to Slide 2 o f our earnings deck, as well as our 2022 10-K filed on March 9, 2023, for a list of risk factors that could cause actual results to differ materially from those indicated or implied by such statements.

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Amalgamated Financial Corp. - Second Quarter 2023 Earnings Conference Call, July 27, 2023

Additionally, during today's call, we'll 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 o f these non-GAAP measures to the most appropriate or 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.

Now that we are a few months out from the banking events that occurred in early March, things have begun to return to the new normal environment of fierce competition for deposits, higher for longer interest rates, metropolitan office credit concerns, and more. We have been operating our business from a position of strength. Demonstrating agility, and the flexibility of our strategy, we quickly pivoted to a modified growth strategy centered on a flat balance sheet and building capital.

Loan growth is still expected, funded mainly from runoff of our securities portfolio, as is preparing our balance sheet to accommodate growing political deposits as the next presidential election cycle begins in earnest.

Despite nagging headline activity in the banking sector, I believe there's reason for optimism. The economy has proved quite resilient, inflation data has improved, large and medium bank earnings have been in line, and investors are starting to move back into the banking sector. At Amalgamated, it's a very exciting time as our differentiated, yet simple model, uniquely positions us to win.

Given that you've had our material financial information for almost two weeks, I'd like to spend our time together talking about three keys to our continued future success, those being our deposit franchise, our lending segments, and our earnings potential.

Our deposit franchise features an industry leading cost of funds and customers that have banked with us for decades given our shared values and union heritage. Given the strength and longevity of our customer relationships, we introduced a designation last quarter called super-core deposits in order to provide more transparency into our deposit base. Our super-core deposits come from loyal customers that bank with Amalgamated for more than five years, and cumulatively represent approximately $3.6 billion or 54% of our core-deposits at the end of the second quarter. These customer relationships have been with us for more than 17 years on average. When thinking about a bank's deposit stability, our super-core deposits are an incredible advantage, one earned from over 100 years of relationship-based banking.

Another deposit-based advantage for Amalgamated is our political banking franchise, which we began developing nearly a decade ago. We uniquely understand the needs of our political customers and our ability to execute on the demands of the most sophisticated campaign finance professionals sets us apart. Our political deposits balances trend with major election cycles and normally rise leading up to an election and then decline in the quarters near its conclusion. We experienced this once again following the midterm elections last November. As national election cycles have greatly lengthened, we are now in an accumulation phase boosted by the onset of presidential candidates announcing their intentions to run during the quarter.

Through the second quarter, we have seen a strong inflow of deposits from politically active customers as the election cycle begins to gain momentum. We anticipate these political inflows to continue through the balance of the year and into next year, which is a powerful driver for our bank. Our political franchise is a

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Amalgamated Financial Corp. - Second Quarter 2023 Earnings Conference Call, July 27, 2023

big contributor of non-interest bearing deposits as funds are largely in DDA accounts given their lifecycle, and this helps to mitigate the rise in deposit costs and add flexibility for us as some of our customers deposits move off balance sheet into our treasury investment services where they seek higher yields in the current rate environment.

Overall, we are maintaining our non-interest-bearing deposits and mitigating the rise in funding costs, all while reducing our uninsured deposit balances, which is quite an accomplishment given the current market backdrop.

Shifting to our lending segments, we spent much time discussing the expansion of our banking team over the last two years, which has driven a notable acceleration to loan growth and loan yields. This has provided an important lift to the earnings power of the bank. One area that I would like to spend more time on today are the initiatives we have around sustainable lending. This is a growing industry where it is estimated that $3 trillion of investment over the next 10 years is necessary for the U.S. to achieve the goal of net zero emissions by 2050. This is a significant market opportunity, which we believe will grow through economic cycles, given the importance, urgency, and the momentum to address climate change.

We have deeply experienced bankers in sustainable lending with customer relationships across renewable energy, energy efficiency, battery storage, and PACE to name a few. Our team includes recognized industry thought leaders and sustainable lending experts who help drive the dialogue around financing and source significant opportunities. More importantly, we have the sophistication to prudently underwrite emerging technologies. This leads directly into our future earnings potential.

As we continue to demonstrate our expertise and sustainable lending, we are going to drive a powerful mix shift in our balance sheet as we replace lower yielding loans and securities with higher yielding sustainable loans. It's important to remember that we are still turning over an older balance sheet as our lending strategy is just in its early innings. As lower yielding multi-family loans and securities roll off our balance sheet over the next 12 to 18 months, we should experience a strong lift in yields, and as a result, margins, and earnings.

Paired with our already strong and well protected earnings stream, our ability to grow net interest income next year and maintain a margin over 3% is encouraging, with great opportunity for margin to expand if Fed interest rates normalize around a lower terminal rate.

To conclude, we are running our bank and leading on issues we care about. In April, we host ed the Global Alliance for Banking on Values Annual Meeting in New York City. Over 200 people attended, spanning a range of international bankers, impact investors, customers, and software providers to discuss using finance to deliver sustainable economic, social, and environmental development. As our presence in this area grows, so will our business. We are America's socially responsible bank, and we're glad the people are starting to notice. In the end, results are what matters. Results for shareholders, for customers, and the communities we serve. Our second quarter results clearly demonstrate the strength o f our customer relationships as well as the significant opportunity that we possess to drive earnings growth for many years to come.

Let me now turn the call back over to Jason, to provide a review of our second quarter financial results.

Jason Darby

Thank you, Priscilla.

Net income for the second quarter of 2023 was $21.6 million or $0.70 per diluted share compared to $21.3 million or $0.69 per diluted share for the first quarter of 2023. The $0.3 million increase for the second quarter of 2023 is primarily a result of a $2.7 million increase in non-interest income, a $1.1 million decrease

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Amalgamated Financial Corp. - Second Quarter 2023 Earnings Conference Call, July 27, 2023

in provision expense, a $1.1 million decrease in non-interest expense, mostly offset by a $4.3 million decrease in net interest income, and a $0.2 million increase in income tax expense.

Beginning on Slide 5, there were no exclusions related to solar tax equity investments for the second quarter of 2023. 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 second quarter of 2023 was $22 million or $0.72 per diluted share, compared to $23 million or $0.74 per diluted share for the first quarter of 2023.

Turning to Slide 7, deposits at June 30, 2023, were $6.9 billion, a decrease of $146.7 million from the first quarter of 2023. While deposits excluding brokered CDs remained essentially unchanged at $6.4 billion, demonstrating a strong and stable deposit base. Through July 21, 2023, total deposits have decreased by approximately $197 million to $6.7 billion, which importantly includes a $242 million decline in brokered CDs previously utilized to replace the political deposit outflows that we experienced in the fourth quarter last year.

Excluding brokered CDs, total deposits have increased by $46 million. Excluding brokered CDs again, non- interest-bearing deposits represent the 48% of average deposits and 46% of ending deposits for the quarter ended June 30, 2023. Contributing to an average cost of deposits of 87 basis points up 26 basis points in the previous quarter as we continue to attractively price our deposits to retain our customer base. Our total cost of deposits, including brokered CDs, was 110 basis points in the second quarter of 2023, a 29 basis point increase from the previous quarter.

Moving to Slide 8, our high-qualitysuper-core deposit base totaled $3.6 billion. Our super-core deposit base uniquely displays important insight into our impact customer segments. At quarter end, total uninsured deposits were $3.9 billion or 57% of total deposits, an improvement from $4.4 billion or 62% during the first quarter of 2023. Excluding uninsured super-core deposits of approximately $2.5 billion, remaining uninsured deposits were approximately 20% to 23% of total deposits with immediate liquidity coverage improving to 183% from 137% in the prior quarter.

Consistent with prior quarters, we have maintained significant liquidity with cash and immediate borrowing capacity of $2.6 billion and $758.3 million of two-day capacity from unpledged securities, resulting in $3.3 billion of total two-day liquidity. Our liquidity covers 85% of our uninsured deposits, an increase from 79% of our uninsured deposits in the prior quarter. Again, excluding super-core, our liquidity covers 183% of our uninsured deposits.

Turning to Slide 9, our core-deposit base continues to show stability and resiliency during the first full quarter following the recent bank seizures. Importantly, our political balance flows have begun accumulating as the next election cycle gears up, and we have seen a nice acceleration through the second quarter and into July.

Taking a closer look on Slide 10, deposits held by politically active customers were $835.8 million as of June 30, 2023, an increase of $157.7 million on a linked quarter basis. As noted, we expected political deposit flows to rebuild in the second quarter of 2023 following the typical pattern of seasonality. Additionally, we've experienced $11.2 million of incremental political deposit inflow through July 21, 2023.

Jumping ahead to Slides 13 and 14, the book value of our investment securities portfolio decreased $12 million during the quarter, primarily as a result of $29.5 million in strategic sales and $46.2 million in traditional securities pay downs, offset by $41.4 million in net PACE assessment growth. Floating rate represented 46% of total securities, excluding PACE assessments at the end of the quarter, a 1% decline

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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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