Amalgamated Financial Corp. (NASDAQ:AMAL) Q2 2023 Earnings Call Transcript

Amalgamated Financial Corp. (NASDAQ:AMAL) Q2 2023 Earnings Call Transcript July 29, 2023

Operator: Good morning, ladies and gentlemen, and welcome to the Amalgamated Financial Corporation Second Quarter 2023 Earnings Conference Call. During today’s presentation, all parties will be in 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 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 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 information or statements.

Investors should refer to slide two of our earnings deck as well as our 2022 10-K filed on March 9th, 2023 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 US GAAP. A reconciliation of 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, a fierce competition for deposits, higher for longer interest rates, metropolitan office credit concerns, and more. We’ve 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 segment, 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 base advantage for Amalgamate 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 a decline in the quarter’s near its conclusion. We experienced this once again following the mid-term elections last November. As national election cycles have greatly likened in, we are now in an accumulation phase, boosted by the onset of presidential candidates announcing their attentions 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 big contributor of non-interest-bearing deposits as funds are largely in DDA accounts given their life cycle, and this helps to mitigate the rise in deposit costs and add flexibility for us as some of our customers’ deposits moved 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 segment.

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. The 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 at $3 trillion of investment over the next 10 years is necessary for the US to achieve a 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 will help drive the dialogue around financing and source significant opportunities. But 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 in 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 lows. 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 multifamily 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 as Fed interest rates normalize around the lower terminal rate. To conclude, we are running our bank and leading on issues we care about. In April, we hosted 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 choosing finance to deliver sustainable economic, social and environmental development. As our presence in this area grows, so of our business. We are America’s socially responsible bank, and we’re glad that 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 of 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 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 five. 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 seven. 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 21st, 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 represented 48% of average deposits and 46% of ending deposits for the quarter ended June 30th, 2023. Contributing to an average cost of deposits of 87 basis points, up 26 basis points from 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 eight, our high quality super-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 nine, 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 21st, 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 paydowns, 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 from the prior quarter, as we have modestly reduced that ratio over the past several quarters to protect our earnings stream. Our unrealized loss position in our available-for-sale securities portfolio was $128.1 million or 7.5% of the total portfolio balance. Importantly, our AFS portfolio duration was only 1.9 years, reflecting our conservative investment decisions.

Turning to slide 15, total loans receivable net of deferred fees and costs at June 30th, 2023, were $4.3 billion, an increase of $53.5 million or 1.3% compared to March 31st, 2023. This increase in loans was primarily driven by a $32.9 million increase in multifamily loans, a $25.6 million increase in commercial and industrial loans, driven by our climate and sustainability loan segment, and a $5.9 million increase in the commercial real estate portfolio, offset by a $1.6 million decrease in residential loans, a $9.2 million decrease in construction loans, and an $8 million decrease in our consumer loan portfolio. During the quarter, we had $5.2 million of improvement in criticized or classified loans, including a payoff on a $3.8 million office-related loan, as we continue to focus on improving the credit quality of the bank’s commercial real estate portfolio.

The yield on our total loans was 4.33% compared to 4.40% in the first quarter of 2023. The loan yield decline was mainly attributed to the charge-offs or payoffs of higher rate consumer solar loans. Our commercial real estate portfolio has been a portfolio that we have been de-risking for the past several quarters. At quarter end, we had $66 million in office-only exposures across six credits with an average LTV of approximately 37%. Of the six credits, all are past grade with the exception of one special mention. Additionally, a $1.3 million commercial real estate loan that was considered non-performing for documentation purposes at the end of the first quarter was returned to current status in the second quarter. On slide 16, net interest margin was 3.33% for the second quarter of 2023, a decrease of 26 basis points from 3.59% in the first quarter of 2023.

The expected margin compression was largely due to increased rates and higher average balances of interest-bearing liabilities, particularly interest-bearing brokered CDs and savings now and money market deposits, as we continue to focus on deposit retention, partially offset by continued loan growth, particularly within our climate sustainability segment, which garnered attractive yields at a premium to our traditional legacy sectors. No prepayment penalties were earned in loan income in the first or second quarter of 2023. On page 17, core non-interest income, excluding the impact of solar tax equity investments are non-GAAP measure, was $8.2 million for the second quarter of 2023, compared to $7.5 million in the first quarter of 2023. The increase of $0.7 million was primarily related to increased income from equity investments, higher trust department fees and fees on treasury investments for certain clients seeking alternative yields to deposit pricing.

On page 18, core non-interest expense, a non-GAAP measure, for the second quarter of 2023 was $37.2 million, a decrease of $1.4 million from the first quarter of 2023. This was in line with the expected non-interest expense range provided on last quarter’s call, and was primarily due to a $0.8 million decrease in compensation and employee benefits, given the timing of payroll taxes and corporate incentive payments, as well as temporary personnel costs and benefit insurance costs incurred during the first quarter of 2023. Additionally, advertising expense and data processing expense decreased during the quarter, offset by increased reserves for FDIC depository insurance and increased professional fees. Going forward for the remainder of 2023, we anticipate our non-interest expense to trend similarly.

Moving to slide 19, non-performing assets totaled $35.3 million, or 0.45% of period-end total assets at June 30, 2023, a decrease of $3.4 million compared with $38.7 million, or 0.49% on a linked-quarter basis. The decrease in non-performing assets was a result of the Silicon Valley Bank senior note that was placed on non-accrual in the first quarter, which was subsequently sold in the second quarter and a $1.3 million commercial real estate loan that was brought current in the second quarter. Additionally, a $1.7 million commercial loan was charged off in the quarter, which was substantially reserved for during the second quarter of 2022, offset by an additional $1.4 million in retail loans that were placed on non-accrual status. Our criticized assets decreased $6.4 million or 6% to $103.9 million on a linked-quarter basis.

On January 1st, 2023, the current expected credit loss or CECL methodology for establishing the allowance for credit losses was adopted, which increased the allowance for credit losses on loans and securities for on and off-balance sheet credit exposures. During the quarter, the allowance for credit losses on loans remained essentially flat with an increase of $0.1 million to $67.4 million at June 30th, 2023, from $67.3 million at March 31st, 2023. The ratio of allowance to total loans was 1.59% at June 30th, 2023, and 1.61% at March 31st, 2023. The ratio of allowance to non-accrual loans was 200.19% at June 30th, 2023. Provision for credit losses totaled $3.9 million for the second quarter of 2023 compared to $5 million in the first quarter of 2023.

The decrease in provision was mainly attributable to the previously mentioned impairment charge on the SIVB senior note during the prior quarter, which was subsequently sold in the second quarter. Continuing to slide 21, our core return on average equity and core return on average tangible common equity, excluding the impact of solar tax equity were 16.8% and 17.3%, respectively, for the second quarter of 2023. We repurchased $2.2 million of our common stock during the second quarter and have $23.5 million of remaining capacity under our $40 million share repurchase program. Additionally, we have declared a quarterly dividend of $0.10 per share. As previously noted, we continue to closely manage our capital position based upon the state of the current economic environment and in the wake of the banking sector volatility.

As a result, and as shown on slide 22, our Tier 1 leverage capital ratio improved 28 basis points to 7.78% as compared to the linked-quarter, primarily driven by our strong quarterly earnings. Slide 23 shows a reconciliation of the change in tangible common equity and related tangible book value. As expected, the Federal Reserve Board raised rates 25 basis points in May, held rates unchanged at its June meeting, and raised rates again 25 basis points yesterday. Our expectation is for at least one more 25 basis point increase this year, though remaining higher for longer with potential interest rate reductions to occur during 2024. As a result of our $21.6 million quarterly earnings, partially offset by a $7.9 million increase from the previous quarter in the tax affected AFS mark-to-market adjustment, as well as share repurchase activity, our tangible book value per share, a non-GAAP measure, improved to $16.78 as of June 30th, 2023, as compared to $16.42 in the prior quarter.

We also remain pleased with our tangible common equity to tangible assets of 6.59% for the quarter in comparison to 6.43% from the previous quarter. We remind investors that we publicly set a general tangible common equity minimum of 6% back in the second quarter of 2022, and we have never been below that target. During the second quarter, we achieved net loan growth of 1.3%, which was a bit below our anticipated target of 2% to 3%. However, we believe this is reflective of our selectivity and desire for relationship lending. Additionally, we took advantage of a strong pace assessment origination environment, growing our portfolio nearly 6% during the quarter. As a reminder, growth in loans and pace assessments are primarily expected to be funded by reductions in securities.

Turning to slide 24, we note that the high degree of economic and banking industry uncertainty makes projections more difficult. But we have maintained our full year 2023 guidance as follows. Core pre-tax pre-provision earnings ex-solar of $133 million to $140 million, and net interest income of $248 million to $255 million, which considers the effect of the positive migration to interest-bearing and the forward rate curve for the remainder of 2023. Going forward, we estimate an approximate $0.5 million decrease in annual net interest income for a parallel 25 basis point increase in interest rates. To conclude, our focus remains on equally growing our capital position, curtailing potential borrowings and balance sheet leverage, and managing expenses.

We do expect our net interest margin to compress by approximately five basis points to 10 basis points in the near-term, as pressure on our cost of funds continues. As a result, we anticipate our net interest income to decline slightly to approximately $61 million to $62 million in the third quarter of 2023. Looking forward, we will continue to protect existing deposits and work to attract new deposits to reduce our borrowings and provide liquidity to support our growth for good strategy. Our results this quarter demonstrate the strength of the bank, as well as the mission-based differentiation that we share with our customers and communities. And with that, I’d like to ask the operator to open up the line for any questions. Operator?

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question is from Alex Twerdahl with Piper Sandler. Please proceed with your question.

Alex Twerdahl: Hey good morning.

Priscilla Sims Brown: Good morning Alex.

Jason Darby: Good morning.

Alex Twerdahl: I first want to hone in a little bit on this $3 trillion of spending that you alluded to in your prepared remarks, Priscilla. Maybe if you could give us a little bit more about what’s driving that? Is that public spending or private sector spending and sort of the types of loans and really what you guys are doing? Obviously, it’s — sustainable lending has been a big part of your model, but sort of specific things that you’ve been doing recently to kind of make sure that you get more than your fair share of the lending opportunities associated with that spending?

Priscilla Sims Brown: Yes. Thanks for bringing that up. The number comes from external research on the topic, and it’s really just a mathematical calculation of what it will take for US companies to achieve the stated goal of getting to net zero by 2050. We see the opportunity in just continuing to do what we do. We’re not looking to expand very far beyond that, but as you know, we’ve done quite a lot in this area already. We have one of the — really the world, but certainly the country’s most engaged expert on some of these topics, on our team as well as bankers, underwriters and portfolio managers who understand this business. So, we see a real opportunity to continue to do more of it.

Jason Darby: Yes. And Alex I’ll add to that. It lines up closely to how we’ve already been going through our staffing model. I think the spend is a combination of public private. And again, as Priscilla mentioned, through public — through external research. But the things that Amalgamated does well from a banker point of view, probably being mainly in the electrification space, energy efficiency space and battery space. Those are sort of the leading areas in terms of where the investment is going to go first, at least that’s what we think. And we have bankers that have already been aligned along those segments. We talked about that a bunch. Our ability to have expertise in that area, our ability to have been there first and our ability to have great referral sources.

We think will give us a good position to really win. And as we’ve talked about before, we think the margins are good on these particular asset classes, and we think that there’s going to be a really good opportunity for us to turn over our balance sheet and move into these asset classes as the quarters and years go by.

Priscilla Sims Brown: And the only other thing I’ll add to that is, I should have mentioned, obviously, the IRA is a good step in the right direction. But by all accounts, this is only going to give us about a third of — get us as a country only about a third of the way to that goal as well. So, to Jason’s point, it is public and private that will be required to make it happen.