Amalgamated Financial Corp.
Q1 2020 Earnings Call Transcript

Published: 2 May 2020

[Operator:]

Good morning, ladies and gentlemen, and welcome to Amalgamated Bank first-quarter 2020 earnings conference call. As a reminder, the conference is being recorded. I would now like to turn the conference over to Mr. Drew LaBenne, chief financial officer. Please go ahead, sir.

[Drew LaBenne:]

Thank you, operator, and good morning, everyone. We appreciate your participation in our first-quarter 2020 earnings call. With me today is Keith Mestrich, 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 a number of factors, some of which are beyond our control could cause actual results to differ from the expectations indicated or implied by any such forward-looking information or statements

[Keith Mestrich:]

Thank you, Drew. And good morning everyone. We appreciate your time and attention today. On today's call, I will start with an overview of our operations, given the rapid spread of COVID-19 and its impact on New York City before reviewing our results and accomplishments in the first quarter. I will then turn the call over to Drew to discuss our first-quarter financial results in more detail. I'd like to start by thanking our employees for their extraordinary efforts during this challenging time. They have worked tirelessly to ensure that the bank's operations are running smoothly and our support to our customers and communities remains uninterrupted. The safety of our employees and customers is our top priority. I want to share with you all a brief story of how we found ourselves in the door of the COVID crisis. I had been attending a bank conference in Switzerland in February as the pandemic was beginning to flare uncontrollably in Italy, where I was also scheduled to travel for meetings. Needless to say, I cancelled my trip around and headed back to New York as my proximity to the pandemic opened my eyes to the risk that it held not only for the U.S., but New York City, in particular. This was truly a case of being in the wrong place at the right time and I knew that our crisis management team needed to put our pandemic plan into place as I believed the shut-in of New York was imminent. Our crisis team implemented plans to move to almost 100% of our employees to a work from home environment by the middle of March and we have quickly adapted to this new normal. Our managers are checking with their direct reports daily to ensure that our operations continue to run smoothly and I'm very pleased to report that our staff is also seamlessly handling transactions and making new loans. I'm very proud of their efforts and we have not missed a beat. Since our founding almost 100 years ago, we have had a commitment to the greater good, which has shaped the business model and our values.

[Drew LaBenne:]

Thank you, Keith. I will begin by reviewing our first-quarter results, before turning the line back to the operator to open for questions.Turning to Slide 7. In the fourth quarter, ending deposits increased $435.6 million or 37.5% annualized to $5.1 billion from the fourth quarter of 2019 while our average deposits for the quarter were $4.8 billion. Average non-interest bearing deposits increased $276.5 million from the prior quarter, primarily due to seasonality related to the election cycle, and now represent 48% of average deposits at quarter end. Our cost of deposits decreased to 33 basis points, down three basis points, compared to 36 basis points at year's end. As Keith mentioned, we expect the cost of deposits to continue decreasing as a result of repricing in reaction to the Fed cutting rates to near zero. Deposits from politically active customers, such as campaigns, PACs and state and national party committees, increased $196.2 million from $578.6 million at December 31, 2019 and in the first quarter at $774.8 million as outlined on Slide 8. The election environment continues to be a source of growth for our deposit franchise. The focus for this year will be the presidential race. We have and continue to be the partner supporting business needs of the majority of Democratic candidates. It's worth noting that in April, we continue to see an influx of deposits and balances have increased another $247 million since the end of the first quarter, of which $47 million were from political deposits. As a result of the deposit growth, the bank just crossed the $6 billion mark in total assets. As seen on Slide 11, we delivered loan growth of $76.2 million or 8.9% annualized as compared in December 31, 2019 and ended the quarter with $3.5 billion of total loans. This loan growth was driven primarily by an increase in C&I loans of $58 million of which $24 million was the purchase of government guaranteed loans. An increase in residential loans of $50 million and consumer loans of $26 million. The growth we've offset by a $53 million decrease in commercial real estate and multifamily loans due to payoffs, where we chose not to match the terms of other lenders to retain the loans. As a reminder, our balance of PACE assessments is now reported in the held-to-maturity securities portfolio, which is inclusive of approximately $255 million in purchases of PACE assessments. Our new investment in PACE Funding Group will allow the bank to continue adding PACE assessments in the future. So the trend maybe slower than originally anticipated due to the ongoing pandemic. As part of the Cares Act, the bank has implemented a payment deferral program for consumer and commercial customers.

[Operator:]

Thank you. Our first question comes from Steven Alexopoulos with JP Morgan. Please proceed with your question.

[Steven Alexopoulos:]

I wanted to start on the provision and regarding the commentary, do you expect an increase in the 2Q reserve tied to payment deferrals? So, you guys are not on CECL, you're selling to the incurred loss model. And in that regime, what do you need to see the change further to drive an increase in the reserves. Is it just new deferrals coming in?

[Drew LaBenne:]

So Steve, the keep in mind, and this is specifically the qualitative reserve that I was talking about and we're about to talk about here just to be clear. So when -- at 3/31, we did not have a lot of deferral, we had actually no deferral activity that we were starting to have inquiries come in at that point and starting to get our process in the place. So when we set the qualitative factors at 3/31, the only thing we really had to work off of where the downgrade of the economic factors, which we took from pretty much the lowest levels to the highest level, right. So, we did kind of the maximum qualitative impact on economic factors and we use the same standard nine factors that I think many other banks use. The factor that we'll probably -- that we will be looking at this time in 2Q is the trends of normally be the trends of past dues in the portfolio, but the trends of deferrals past dues, etc., in the portfolio, which again I think will move from pretty low levels too depending on the portfolio somewhere between, medium and high. But if we went from the lowest level to the highest level, that would again be a $3 million impacting qualitative and that's a Q2 event. It's not a Q1 event unfortunately.

[Steven Alexopoulos:]

Okay. Got it. Other banks are saying that they're seeing material drop off in new deferrals, though. I mean in terms of the pace, have you seen any abatement in terms of the pace of request or are those still increasing?

[Drew LaBenne:]

No. As I was just saying on the call, residential has basically slowed -- actually the last few days, we've had no deferral request at all come through or new deferral requests. So that part of the portfolio has pretty much stopped. Now, we're coming up to a new set of payments, so I don't know what that's going to mean, right. I don't think anyone really knows what that's going to mean for the next round. It might mean absolutely nothing. It might mean that we see some incremental deferrals come in, but I think the majority of it has probably already happened. On the multifamily commercial real estate, I think general commercial real estate and C&I has reacted pretty quickly. I think multifamily, a lot of April payments were made. I think they're probably waiting the landlords and is probably waiting to see the May payments and we may see some more deferrals come in through that. And I -- it would not surprise us at all. See more deferrals come in particularly in multifamily. The other thing I'll add is the processing on the commercial side, at least for us is slower because on the consumer side, the residential side, we ask the customer to describe their hardship, but we don't require any proof because to do so, would be difficult and unreliable. On the commercial side, we actually ask the borrowers to document for us their decrease in cash flows before we grant the deferral. So, the process takes a little longer to work through.

[Steven Alexopoulos:]

Okay. That's helpful. And then on Slide 16, the COVID-19 exposed sectors, I'm curious, what worries you most in terms of what you're calling out, and maybe in the CRE book, how much of that is retail?

[Drew LaBenne:]

In terms -- well, overall what worries me is probably more of a -- there's a lot to worry about, Steve, so let me just pick the one that probably worries me -- and I know, Keith, the most, because we talked about it -- is our portfolios that are based on real estate whether it's residential or multifamily commercial, I think, have very strong loan to values and implicit in that underwriting is that we will be able to control the property over time if needed to work out the credit. And I think given how widespread the impact of this pandemic has been, it's quite possible that the rules change in terms of foreclosure, how fast properties or tenants turnover and that could mean that the normal time to work out our credit across the industry changes. So, I'm not saying it will, but that is I think what kind of worries me maybe more than I would know normally be worried about it, if that makes sense.

[Keith Mestrich:]

Yes. I totally agree with Drew on that. I mean, look, what's in hotels and restaurants obviously, every bank that has those on their portfolio is going to be concerned about those individual names. It's not a huge percentage of the portfolio, so, while I don't love it, it's not the big worry. I think Drew is exactly right. What we can't predict, particularly with the New York City-centric multifamily portfolio and other things, is when the pressure will really come out on landlords. What will the impact of stimulus payments and potentially new stimulus payments individuals, people starting to receive, enhanced unemployment benefits, are they able to continue to make their rent and mortgage payments? And what will be the other countervailing political pressure that will be on the ability for anybody to be able to sort of deal with the property that they have and work it out in a normal way? It is a big, big unknowing to us and well, and I think we built a portfolio that in normal periods of economic stress, should be well-positioned to do well, the severity of this and the unknowing as you look at months out into the future here were there to be some extended double-digit unemployment kind of pressures is just the biggest worry that we have on that bank.

[Steven Alexopoulos:]

Yes, yes. Thank you. And then just finally, Drew, with deposit growth running so strong, it sounds like the pace demand has slowed a bit given the pandemic, maybe long growth, too. How do you see and what do you see for investing this cash? What kind of yield should we expect? Thanks.

[Drew LaBenne:]

Yes. It's all happened very quickly and clearly we haven't been able to thoughtfully and carefully deploy it out so in the near term, we've purchased a lot of floating rate agency securities. We do have a very strong residential pipeline from Q1 that we're working through. I think for Q2 -- and so I think pace assessments that come on the books on Q2 as well will be pretty strong. So I think Q2, I think we're okay, but we're going to end up with a lot of cash and a lot of floating rate agencies on the books. Now, keep in mind, we're also expecting to have the political deposits start to run off, maybe a little bit. I don't know if at the end of Q2 we'll see that, but I think we're going to want to stay more liquid in the near term just to be in this great position to be able to offset that upcoming run off and not necessarily have to go into borrowings although we may choose to do that and we'll just continue to grow our balance sheet. But our first and foremost thought here, and I think probably most banks are in the same boat is, be extremely careful with deploying cash and capital into credit right now and make sure we understand what we're getting into as best as we can in the new environment that we're dealing with.

[Operator:]

Our next question comes from Chris O'Connell with KBW. Please proceed with your question.

[Chris O'Connell:]

I was hoping you guys can dive into a little bit the PPP program you have going on and just how it is logistically working in terms of providing your customers with the referral.

[Keith Mestrich:]

Yes, yes. I'm happy to, Chris. We are not an SBA Certified lender and, as you know, we are not a bank that's particularly geared up to do small business loans. It has never been one of our focus. We don't really have the capacity to be able to handle the origination request and the loan servicing requests we handle a small business portfolio. And over the past several years, we've had a renewal relationship with one of the country's largest non-bank SBA lenders that has worked very well for us in normal times. And we made a decision early on -- probably not anticipating unlike a lot of banks quite with the demand would look like to do referrals for mostly small nonprofit organizations who are eligible for the PPP loan. They're not normally eligible for SBA loans, but were for the PPP program. We got about 850 referrals into that program. We referred them onto our partner to be able to handle those loans. And so our bankers have helped people through the process and then continue to fill out their applications, but our partner has really handled the underwriting and the origination of those of those loan requests

[Chris O'Connell:]

Got it. And do you know what the dollar amount is on the amount that you prefer?

[Keith Mestrich:]

I do. But, Chris, I'm going to have to get you that more accurately because I don't have that at my fingertips. Drew, do you know off the top of your head?

[Drew LaBenne:]

How many have funded?

[Keith Mestrich:]

What the total loan request volume was.

[Drew LaBenne:]

In units? I mean, it was over 800. I think in dollar amounts, it was probably -- yes, I don't know the number. Actually, I don't want to speculate.

[Keith Mestrich:]

We'll get to the number, Chris.

[Drew LaBenne:]

The other place where we are going to participate in PPP, which is really the only way that we have the ability to do so, is from a new tech, we will -- or we do plan to purchase some of their sales of the PPP loans, which it actually the duration of those loans matches very well with the political runoff cycle that we're anticipating. So that's a risk free short-term use of cash that we should be able to do, too, is kind of our way of helping the PPP program work.

[Chris O'Connell:]

Got it. Got it. And then, if we could shift to the balance sheet in particular loans. I think you mentioned in the press release that there is some loan purchases this quarter. If you could just go through maybe the amount and what type of loans those were? And then just overall your outlook on loan growth for the rest of the year, just given the big shift in the environment from last quarter to now.

[Drew LaBenne:]

Yes. So in terms of loan purchases, first of all we did purchase $35 million of residential loans on the West Coast, which normally we haven't been doing but we're doing that for CRA purposes. So those are going to be high quality residential loans. It's more about the geography that they're in than really anything else. We did do some more solar loan purchases. I think the amount there is probably about $35 million. There was one transaction we had been working on for a while that did finally close. I think for residential solar purchases at least for now, that's probably it for us in terms of what we'll be doing for residential loan purchases. And then SBA as well we, every quarter we seem to be purchasing some SBA or maybe more -- I should say SBA and USDA. They're government guaranteed loans that show up in the C&I portfolio. So we did do some more purchases for those as well. Our total government guaranteed loans sitting in C&I is now about $150 million. And so, it's a place we'd like to deploy capital risk free.

[Chris O'Connell:]

Got it.

[Keith Mestrich:]

Hey, Chris. Just to follow up on your past question, I emailed really quickly -- our head of commercial banking. The total loan request were approximately $65 million under the PPP program.

[Chris O'Connell:]

Great. Great. And then, just finishing up on the loan side, maybe dive into the outlook for the rest of the year, just given some of the changes in the economy?

[Drew LaBenne:]

Yes, outlook's cloudy. I'll be honest. I mean what we are seeing is -- I think there are more opportunities now in high-quality loans than there were before this began. I think the multifamily space has loosened up a little bit. But obviously, we're being very cautious there, only doing the highest quality of deals. We're requiring six months of P&I reserve for anything that we're currently underwriting. But those deals are now moving forward. Residential, we had so much come through in Q1 before all this happened, as a result of just rates continuing to go lower, that we actually sort of effectively turned off our pipeline. I think we're now looking at turning it on again in a very conservative manner. So I think that we should still see a bit growth there, but it's probably slower than we anticipated. And PACE will continue to come on as well in the securities portfolio. I'm actually pleasantly surprised with how PACE originations are going with our partners. It's certainly down, but it's not out. So, I think those will be some of our growth areas. And so then we continue to have a pipeline of C&I loans as well that we're looking at. But we've obviously turned the dial several matches in terms of the risk that we're willing to put on our balance sheet at this point but we're also still in business to originate.

[Chris O'Connell:]

Got it. And then on the deposit side, I mean, obviously political deposits were very strong this quarter and much stronger than I think even you guys were expecting. Did you give any outlook on kind of -- I mean, it's been strong coming into the second quarter as well, it seems like. I mean, is there any outlook I guess that you can provide or is it still kind of murky, given the election cycle?

[Keith Mestrich:]

Really, look one thing I would emphasize is we've seen, as we have in the past couple of quarters, nice deposit growth across our sectors, not just in the political sector, in our commercial bankers. Even though they're in a working home environment, they remain active in terms of talking to some number of our existing customers and looking for new relationships. So that activity has not stopped or slowed at all. The election cycle obviously is also in a bit of a murky environment. It's gotten a little bit more clarity on the presidential side, now that we have a presumably Democratic nominee. And I think you'll start to see and this -- in that piece of the race, will start to see a consolidation of contributions there that will help in that. We should continue to see some growth there. Vulnerable Democratic candidates who are in their first term had a very, very good first quarter of fundraising. Anticipate them having a good second quarter as well. But we should as in past years, start to see a plateau start to happen where people, as we've talked about before, raise and spend that an equal clip. And I think as campaigns make adjustments to figure out how to spend money in this environment, we should start to enter into a plateau phase and then again see the run-off of the deposit portfolio towards the end of the third quarter, beginning of the fourth quarter, as we've seen in past election cycles. So that's the best crystal ball I have at this point. I could be long by a little bit, but I think that would be the general pattern that we'll see, Chris.

[Chris O'Connell:]

Great. Thank you. And then, just one last one on the NIM. Appreciate the guidance. Probably down next quarter, and I know there's a lot of moving parts here, particularly with the political deposits from kind of unknown -- how that might end up for the quarter. But assuming maybe they stay flat here for the remainder of 2Q at the balances payout that you guys gave in the deck, just given all the movement on short-term rates, can you give any look into just maybe a range or how it might factor into the quarter over quarter and NIM for 2Q?

[Drew LaBenne:]

Yes. It's going to be -- it's tough to see where it is this early in the quarter, given all the movements that have happened. I mean I think you're probably going to be looking at just -- and it's a combination of a little bit of NII starting to flatten or maybe drop a little bit, and then our balance sheet growth just expanding very rapidly because keep in mind the averages that you're looking at for the Q1 NIM are probably -- just given all the end of quarter activity, are probably $200 million light compared to where they would be if you just take the April or the kind of end of March average, if that makes sense. But it's going to be on lower yielding assets because of where we've deployed it. I think maybe in terms of NII with -- and I'm a little more comfortable talking about at this point, just given all the volatility, when we model -- we obviously had our disclosure last quarter where it was I think about $13 million, down for 100 basis point drop, which just happened. I think we're looking at more like $7 million down when we factor everything in, which is a pretty decent sized improvement, and that's a combination of I think a little better performance in terms of some prepayment speeds, LIBOR. That assumes LIBOR comes down a little bit from where it was, which it's already doing. I think our deposit repricing has been more effective than we thought it would be in the model. And so, a part of that is just how fast it happened and money market yields, which are sometimes competition for us effectively going to zero. So I'm very pleased at least with our outlook, which is why it's subject to some error in terms of where NII is going to go versus what we had originally projected with the down scenario.

[Chris O'Connell:]

Got it. And that $7 million that's coming off the $44.7 million number this quarter?

[Drew LaBenne:]

No, no, no. Annually. Annually.

[Chris O'Connell:]

Got it. Just wanted to confirm that.

[Drew LaBenne:]

Yes, it's a good one to confirm, Chris. Yes, yes. Call it $1 million to $2 million a quarter.

[Chris O'Connell:]

Great. All right. That's all I had. Thank you.

[Operator:]

There are no further questions in queue. I would like to turn the call back over to management for closing comments.

[Keith Mestrich:]

Thank you, operator. I just want to thank everyone who joined our call today. We hope that you and your families continue to stay safe and calm. We're certainly living through a challenging time, and I want to leave you with just a few concluding thoughts. First, I continue to be very proud every day of our employees who work so hard to support our customers since we moved to remote working environment. Secondly, our commitment to our employees, customers, and communities remains true to our mission and values. Third, we have many levers for growth, including our sustainable lending, geographic expansion, and new product development in our trust business, to name just a few. Fourth, we also have the ability to drive additional operational efficiencies and are reviewing opportunities to further reduce our expenses without impacting our competitive positioning. And taken together, and despite the challenging backdrop, we're optimistic that we can continue to grow the bank and are confident in our financial positioning, such that we will be able to take advantage of market dislocations as the economy begins to normalize again. And as a reminder, we anticipate filing our 10-Q this evening. So thank you again for your time today and, everyone, we will see you soon. Thanks.

[Operator:]

This does conclude today’s teleconference. You may disconnect your lines this time and have a great day.