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Amalgamated Financial Corp. (AMAL)

Q4 2022 Earnings Call· Thu, Jan 26, 2023

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Transcript

Operator

Operator

Good morning, ladies and gentlemen, and welcome to the Amalgamated Financial Corporation Fourth Quarter 2022 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

Analyst

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 Investors section of our website for an extended period of time. Additionally, a slide deck to complement today's discussion is also available to the -- 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 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 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

Analyst

Thank you, Jason. Good morning, everyone. We appreciate your time and your 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, an 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, nonaccrual 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…

Jason Darby

Analyst

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 million increase for the fourth quarter of 2022 was primarily a result of a $0.7 million decrease in 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 per 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 broker time deposits strategically issued to reduce fundings costs. Non-interest bearing deposits represent 53% of average deposits and 51% of ending deposits for the quarter…

Operator

Operator

[Operator Instructions] Our first question comes from the line of Janet Lee with JPMorgan.

Sun Lee

Analyst

I want to start off with your NII guidance of $256 million to $263 million. Are you guys still assuming that 33% interest bearing deposit beta that you guys gave in the third quarter?

Jason Darby

Analyst

We have a 40% beta on any incremental rate rises. So when we think about how we're modeling it out, it's really based on any forward increases to the Fed rate. But we're not taking it as 40% kind of across the entire portfolio on a blended basis, if that makes sense. As you've probably seen in the first 300 basis points of rate rises, our deposit beta was very, very low and only more recently in the last hike that happened in November and December, and as we're projecting into January-- I'm sorry, the February meeting and beyond -- 40% on those numbers. But we think that overall, our cost of funds should remain relatively stable when factoring in kind of the previous performance of the deposit base over the first 300 basis points of rate rise.

Sun Lee

Analyst

Okay, just to make sure I understand this correctly. So if we look at it in terms of the cycle to date-- I mean through the cycle, interest bearing deposit betas, is it going to be lower than 40%? Is that what you said?

Jason Darby

Analyst

I'm just saying, I think on the incremental increases that are coming from the Fed in the current year, we're going to look at 40% on the interest bearing deposits. That's kind of our model. But I'm not taking that as a number across the entire portfolio as a 40 basis point-- I'm sorry, as a 40% beta. What I'm trying to say is I think there's an implied benefit that we've received in the first 300 basis points of rate rise, and I think our overall blended cost of funds should remain stable from where we've been right now, other than the increases that we've seen in the November, December Fed hikes and then what we're projecting going forward. So it's really kind of a prospective 40% beta on interest bearing and nothing on any retrospective rate hikes.

Sun Lee

Analyst

All right. Got it, and I think there's a lot of moving pieces with the debt pay down. So in terms of the trajectory of NIM directionally through 2023-- so it's fair to assume a step down in margin from the 4Q 2022 level starting in 1Q '23, and then are you assuming a stabilized NIM after first quarter? How should we think about the trajectory of NIM?

Jason Darby

Analyst

I think that's exactly the way to think about it and the way we're thinking about it. There should be a little bit of margin compression in Q1 as the full effect of the deposit repricing we did near the end of the fourth quarter and also the effect of the borrowings that we've had take hold in our margin calculation in Q1, we do expect that to stabilize. Then, as we look out throughout the remainder of the year, our ability to really drive deposits through the deposit gathering franchise could favorably impact the margin if we're able to pay down more borrowings than we're modeling right now.

Sun Lee

Analyst

That's helpful, and just on the deposit growth, you're expecting around 3% balance sheet growth for 2023. Can you just give us more color around how you're seeing your deposit growth-- I mean, deposit trends being in 2023? I know there's a lot of seasonality to your deposit trends on a period-end basis, but if you look at it on an average deposit balance, like, how should we think about that growth prospect in 2023 versus full year 2022?

Jason Darby

Analyst

I think we're trying to take a very conservative view on deposit growth throughout the year and be realistic relative to the deposit market and the competitive environment that we're in as the liquidity has continued to tighten in the Fed. We're expecting a protracted higher rate environment. So a lot of what we're showing in our projections is assuming a conservative approach. If I were to think about it, probably, generally speaking, we'd see a 5% opportunity to grow deposits on an average basis throughout the year, and I would look at that as sort of accelerating as we get into Q2, Q3 and Q4, particularly as we would expect the political deposits to start to build at a more rapid pace, leading up to the 2024 elections. So that's generally how we're thinking about it right now, Janet.

Sun Lee

Analyst

So 5% on a full year basis for average deposits.

Jason Darby

Analyst

That's our conservative model, yes.

Sun Lee

Analyst

Okay, I want to shift to credit. It's good to see your NPLs going down. Looking at your net charge-offs in the fourth quarter, it looks like all of your charge-offs were coming from solar loans, and if I'm doing some rough math here, I think I'm getting about 1.5% loss ratio on that consumer solar loan balance, which is a little bit up from that 75 to 100 basis point range you mentioned in the previous call. How comfortable are you with that credit risk on this portfolio? I know you guys should be working on the CECL adoption started in January. So I assume you guys have done-- there's some expectation that you guys have with that portfolio, and do you expect a continued pickup in loss rates on this segment? Can you just help us think about that?

Jason Darby

Analyst

Absolutely. So yes, the consumer solar charge-offs have kind of ticked up a bit from where we were originally thinking they were going to be, I think, as rates have accelerated and remain in a little bit of a higher place. We've seen a little bit more stress in a little bit of a faster fashion in that portfolio than we were originally anticipating. That said, I think we're still just under some of the thresholds that we have with loss protections that we've got built into some of our arrangements right now. So most of the charge-offs that you're seeing are coming in before some of those protections kick in. So I feel like there's a little bit of a governor on that charge-off ratio kind of moving forward. But it is something that we think is going to be a little bit higher than 1%. Whether it gets till $150 million on an annualized basis is a little tough for us to project. But right now, I think there's really 2 things in the solar portfolio: number one, we're really not adding any more solar in the consumer space throughout the first-- at least the first half of this year -- maybe some minor things. But more importantly, I think what we've seen now is an opportunity for us to really tighten up on the credit box that we're offering-- I'm sorry, that we're requiring for additional purchases that we're going to be doing. With regard to things that are already on the books, we're paying very, very, very close attention to the individual loans that are, in fact, going delinquent, and we're working with the providers right now to make sure that we're getting all the benefit of what they offer in terms of collection services and other things that would potentially put a governor on the consumer solar charge-offs. To your point on the CECL-- obviously, it's a significant component of CECL. We factored that into what we've been doing to model right now. In terms of how it would lay out, we're not quite ready to talk about that since we haven't vetted our entire control structure through our audit team yet. But what we do see is not a significant impact on capital when we do the adoption and the build through retained earnings, but probably will have an overall increase in our coverage ratio, ALLL, that would obviously have a component of it related to solar.

Operator

Operator

Our next question will come from the line of Alex Twerdahl with Piper Sandler.

Alexander Roberts Twerdahl

Analyst

Wanted to ask about loan growth, I know you guys did a lot of hiring at the end of '21, early 2022. I'm just curious, as those teams-- or if those teams, in people that you've hired, are now kind of fully up to speed or if there is additional kind of low-hanging fruit to expand the loan portfolio earlier-- early in the new year.

Priscilla Sims Brown

Analyst

Yes, Alex, you're right. We've talked about this on prior earnings calls, too, which is that our-- we had a robust pipeline due to the banker growth and hiring initiatives that took place back in first and second quarter of '22, and that materialized through both the third and fourth quarter as those banker relationships developed into securing loan originations at a pace ahead of plan. In the quarter, the biggest drivers were our commercial portfolio with our C&I book at $120.6 million -- primarily a function of our unique climate finance products -- and we had an increase of $82.5 million or so in multifamily. The retail resi book was also supportive at nearly $40 million. So that was the quarter. We think that you'll still continue to see nice opportunities coming our way and a very nice pipeline on both the multifamily book and also in the areas of sustainability. When you've got a net zero sector that's looking like it's valued at around $3 trillion -- we've got bankers now, both existing and some of those that we brought on with unique skills and expertise in these areas, and so we're really seeing the opportunity to bring on additional loans, but also we have the opportunity to be quite choosy in this environment and bring on the kind of quality that we want to see in the book.

Alexander Roberts Twerdahl

Analyst

Great, and then when you think about the sustainability loan and C&I loan -- since I think a lot of us probably aren't familiar exactly what that might look like -- what sort of spreads or pricing or indexes would those be repricing off of, and what are new loan yields today that we could maybe help to think about where the overall loan yield could be going over the next couple of quarters?

Jason Darby

Analyst

So I think the-- let's maybe focus a little bit more on the yields. I think they're coming in right now, call it, 5.75% to 6%. They move around a little bit, depends on sort of the underwriting criteria, Alex. But I think in general, the spreads are fairly wide for us, in terms of being able to have profitability and good return on those. I'd have to get back to you on some specifics. It might be easier to-- because I need to break it down a little bit between the types of sustainability deals that we get into -- it might be a little bit easier to share some detail that way. But right now, I'd say, generally speaking, they're coming on in the upper 5% to 6% range.

Alexander Roberts Twerdahl

Analyst

Okay, and then just kind of looking forward a little bit, you guys are pretty asset sensitive. You really enjoyed the lift up in rates and now seeing that the forward curve now has a number of rate cuts baked into...I'm just curious what kind of steps you're taking to try to shield net interest income for the possibility of rates going down at some point towards the end of this year or early next year.

Jason Darby

Analyst

Yes, that's a great question. I mean, I think we've been kind of doing that throughout the year. We've been-- in certain cases, we've been taking security sales losses and repositioning those proceeds into fixed rates, so trying to blend down the overall portion of our portfolio, particularly in securities, for example, to more of a 50-50 mix between fixed and floating. If you recall, we were much higher on the floating side as we entered the year and slowly, we've been mixing that down to put in built-in hedges to interest rate declines. But I think the more important thing has been the overall migration from the security portfolio and from cash into the lending portfolio. So the more we grow the lending book -- and we're up almost $800 million this year in net loans -- the more we grow the lending book, roughly 75% to 80% of that book is fixed rate. So we're really doing a lot to protect ourselves from that down interest rate sensitivity, and I would think if I were to characterize ourselves right now, we're probably pretty close to neutral in terms of sensitivity to an interest rate drop at this point.

Operator

Operator

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

Christopher O'Connell

Analyst

So I was hoping to dig a little bit into the commentary around deposit pricing and being a little bit more rate sensitive for next year. Could you give us a breakdown of how much of the political deposit business is non-interest bearing and what might be subject to some sort of rate sensitivity next year? And how much longer term you expect to remain in non-interest bearing?

Jason Darby

Analyst

Thanks, Chris. Normally, we've been operating at about 2/3 DDA or non-interest bearing and 1/3 interest bearing. That number has been sort of moving over time in the past year towards almost the exact opposite direction. Right now, I would say we're probably at about 40% DDA and 60% interest bearing at this point in time, and the way we sort of think about it is -- of the remaining $650 million that we have right now, roughly $150 million is how we model out as being potentially subject to shifting from interest bearing to-- sorry, from a non-interest bearing to an interest bearing position. So that's the risk that we have baked into our DDA mix right now for cost of funds adjustments. But in general, what we think will happen this year is because it's sort of a building year for political deposits. We think more of those will come in requiring some form of compensation. We don't think it's going to be top of the market in terms of pricing. I think there's still very much a mission-aligned value proposition that has benefit for the bank in terms of when these deposits come on, even if they are interest bearing. But over the course of this year, it's likely that there'll be some form of compensation that will be required for these deposits because they'll be in a building phase. As we move into next year, 2024, and we've become much more in a transactional-style year heading up to the election, I think we would naturally expect there to be less requirement for pricing on those deposits and just more ability for it to be placed and then executed in terms of the way campaigns typically want their accounts to service by a bank.

Christopher O'Connell

Analyst

Got it. So it sounds like some modest near-term pressure, but given the high velocity of those deposits in general that they're still pretty insulated from rates longer term?

Jason Darby

Analyst

I think that's a fair characterization.

Priscilla Sims Brown

Analyst

And it's not totally insulated -- you would say, partially insulated.

Jason Darby

Analyst

Yes, yes.

Priscilla Sims Brown

Analyst

I mean, it would be in a-- in other words, we think that this unusual rate environment is going to lead to a greater focus on rates than we would have had in the first 300 basis points, but we don't expect to have to go to market.

Christopher O'Connell

Analyst

And for the-- you mentioned some success recently, and some pipeline success potentially from kind of the rest of the sustainability or SRO, broader clients outside of political deposits for deposit gathering. Maybe just some of the categories or types of clients that you guys are having success there outside of political deposits?

Jason Darby

Analyst

So I think one of the interesting things-- we gave a little bit of an update on deposits through January 20, and we're up $225 million or so, and we're granted $135 million is our issued broker CDs, but that leaves a $90 million delta, which is all new customer attraction, and it's been things that we were talking about towards the end of Q4 update, where we thought our-- the pipeline looked good, and we still think it does even after these wins. They've been kind of spread across some of our-- some of them are union-based customers, some of them were really relationship-driven accounts based on the real estate lending we've been doing prior. Then, there's been others that have been very mission aligned in the philanthropic space...Priscilla, if you to want to...

Priscilla Sims Brown

Analyst

Yes, that's right. It's been not-for-profits. That's where you're going to see that continue as we look at the pipeline today.

Christopher O'Connell

Analyst

Great, and on the Trust segment and those fees, when do the 2023 fee adjustments take hold, and how material is that increase on those fees? And just any other kind of success or updates that you're having on that side of the business?

Priscilla Sims Brown

Analyst

Why don't I start with just generally what's happening, you might have the numbers. So those fee adjustments and also cost adjustments -- meaning the pass-through of some of our costs related to custody -- those adjustments are-- you're starting to see come through in the beginning of 2023 and on through, and maybe you have the actual...

Jason Darby

Analyst

Yes, it's going to be an evolutionary process in the trust business. There's a lot of opportunity for us to drive results out of that business. But I think it's going to be a staged approach. I think in the current year, we'll see some incremental benefit to the trust fee line as it runs through the income statement. I don't have an exact number to quote for you, Chris, but I do think you can think of where we are right now, or how we finish the year at about $13.5 million as sort of a baseline and that it should be improving from there. It's going to be based on the existing book of pension-based business. It's not really new products or anything that we're hoping, it's really things that are already embedded and just additional margin contributions that we've been working with our partners to be able to accommodate on, then, I think over time, we'll continue to focus on the trust business. But as it pertains to overall non-interest income, I don't think it will have a significant impact relative to the ratio of our non-interest income to interest income over the course of 2023.

Operator

Operator

There are no further questions in the queue. I'd like to hand the call back to Priscilla Sims Brown for closing remarks.

Priscilla Sims Brown

Analyst

Well, thank you all. Thank you for your questions, and thanks for your interest today, and thanks for listening to our optimism for the bank as we go forward this year, in particular with great enthusiasm on our 100th anniversary. We look forward to follow-up calls with most of you one-on-one as we go through the rest of the day and next week. But thank you for your participation.

Operator

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.