Amalgamated Financial Corp.
Q2 2020 Earnings Call Transcript

Published: 28 Jul 2020

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Amalgamated Bank Second Quarter 2020 Earnings Conference Call. . As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Drew LaBenne, Chief Financial Officer. Please go ahead, sir.

[Andrew LaBenne:]

Thank you, operator, and good morning, everyone. We appreciate your participation in our second 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 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 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 by providing an overview of our current operations and how we have diligently managed our business amid the ongoing COVID-19 pandemic. I will then turn the call over to Drew to discuss our second quarter results in more detail. First, I would like to begin by thanking our employees who are the center of our organization. They continue to work tirelessly to ensure that our operations run smoothly without sacrificing our banking standards and high level of service during this unprecedented time. The safety of our employees and customers remains our top priority, and I am pleased that we have been able to maintain our operations, while keeping more than 95% of our employees in a work-from-home environment. The second quarter has also been marked by social tension across our country. At Amalgamated, we have always believed that a financial institution's mission should include using its resources, money and influence to help society move forward. We are selected to be the banking partner for individuals and companies who share our mission allowing us to support their financial goals. Now more than ever, consumers, investors and workforces are holding companies to even higher levels of social responsibility and requiring them to focus on contributions over and above simply delivering profits and value for shareholders. We consider ourselves industry leaders in this regard and work hard every day to continue to build upon our reputation as America's socially responsible bank. Our second quarter does not only validate this view, but further emphasize the value and partnership that we provide to our core customer base, as can be seen in our average deposit growth of $606 million during the quarter, or 50.5% on an annualized basis as compared to the 2020 first quarter.

[Andrew LaBenne:]

Thank you, Keith. I'll begin by reviewing our second quarter results before turning the line back to the operator to open for questions. Turning to Slide 6. In the second quarter, ending deposits increased $793.8 million or 62.5% annualized to $5.9 billion for the first quarter of 2020, while average deposits grew $606 million for the quarter to $5.4 billion. Average noninterest-bearing deposits increased $445.5 million from the prior quarter, primarily due to seasonality related to the election cycle, and now represent 50.6% of average deposits at quarter end. Our cost of deposits decreased to 20 basis points, down 13 basis points compared to 33 basis points at the end of the first quarter. There is still some opportunity to reduce deposit costs in reaction to the Fed rate cuts that we are getting near the end of these moves. Deposits from politically active customers, such as campaigns, packs, advocacy-based organizations and state and national party committees increased $325.9 million from $774.8 million at March 31, 2020, ending the second quarter at $1.1 billion, as outlined on Slide 7. The election environment continues to be a source of growth for our deposit franchise. The focus for this year will be the presidential race, and we continue to be a partner to a majority of democratic candidates as we support their business needs. As seen on Slide 10, we delivered loan growth of $123.0 million or 14.1% annualized as compared to March 31, 2020 and ended the quarter with $3.6 billion of total loans.

[Operator:]

. Our first question comes from Steven Alexopoulos with JPMorgan.

[Janet Lee:]

This is Janet Lee on for Steve. My first question is on credit. So I think last quarter, you disclosed $120 million of loans or 3% of total in COVID-19 impacted industry. How has the exposure changed over the past quarter? And can you provide more color around the stress on the one hotel credit you called out and whether that's a systemic issue you're seeing on your broader hotel exposure? And any other stress you're seeing on the overall CRE book?

[Andrew LaBenne:]

Yes. Okay. Janet, this is Drew. I'll take that. So -- and then let Keith feel free to jump in. So on our impacted industries, nothing has really changed there. We're certainly not originating more into impacted industries. And as you can imagine, a lot of the impacted industries aren't paying off their loans right now. With regard to the hotel, this is -- as I was saying in the comments, this is a hotel loan that was originated in 2005, well before any of us were here. And it had gone through a -- it had been on our workout list. I think actually when I joined the company in 2015, we subsequently worked out an arrangement with that loan and then obviously, COVID has caused some issues with it. That loan is in Ohio. I would say that hotel is very unique to our portfolio. And I would not extrapolate what's happening with that loan to any other part of our portfolio at this point. So we took a pretty strong reserve on that. I think there's a reasonably high likelihood that we end up taking that property into OREO and having to dispose of it ourselves for the -- in 2020, most likely or maybe 2021. But again, I wouldn't extrapolate that out to the rest of our hotels. The rest of the hotel portfolio, which is a little under $20 million, is -- they're definitely on loan deferrals, and they've definitely seen loss of revenue. But I think they're in pretty strong locations and assuming the economy comes back in Colorado and California where those two are located, we think and hope that they'll be okay.

[Keith Mestrich:]

The only thing I would add, Janet, is just to emphasize is Amalgamated has never made a business of doing loans in the hospitality industry, whether it's hotels and motels or restaurants. We have just a handful of them, and I would just give a lot of credit to our lending and credit teams. They are on each of these names. I think, as the economy has begun to reopen a little bit of course, we'll see what happens, but I think that, that story there has gotten a little bit better or stabilized at least. And this is a tiny portion of our portfolio, and I agree with Drew, there's no sort of systemic issue because of the one hotel in Ohio.

[Janet Lee:]

Yes, makes sense. So following up on credits included in your 2Q provision build was $3 million in reserves for loan deferrals, which -- is it overall reserves for low deferrals or which category of the loan deferral was the primary driver of the reserve build this quarter? And should we expect more reserves build due to deferral to continue in the coming quarters?

[Andrew LaBenne:]

Yes. So I think it was $3.2 million in Q2. It's the same category as the $3 million we took in Q1, which is in the qualitative reserves. So we've increased our qualitative factors related to COVID now, $6.2 million over the 2 quarters. I would say that as far as the qualitative reserves, those are pretty big numbers, and I don't think we'll see those size numbers again in Q3. There might be some qualitative reserve, but we've moved up the main factors to their highest level at this point. So -- and then what we would maybe see happening as we go through future quarters is as the loans come off the loan deferral, and if they are not making their normally scheduled P&I payments at that point, we would downgrade those loans, and then they would start to get reserves related to their risk rating or specific reserves if they become a TDR. So we could see that playing out in Q3 or Q4, depending on how the numbers evolve.

[Janet Lee:]

Okay. Got you. Shifting to the tax credit. So the $1.3 million tax credit on an equity investment in the solar project, and there was this new fee item line added this quarter. Can you give more color around this? And is this going to be a recurring fee item going forward?

[Andrew LaBenne:]

Yes. So it's an equity investment in a tax solar project, as we said. So these are pretty common in the industry. And I'm familiar with them from previous companies that I worked at as well. It does create some lumpy income trends over various quarters for these investments, as you take the tax credit and you write them down. So the $1.3 million we took this quarter over the next 2 quarters. The timing of when it will hit is always a little variable, but I think we'll see $1.4 million more in gains over the next 2 quarters. But it's quite likely we'll see a larger gain in Q3 and actually maybe a little bit of a reversal in Q4. But the net of those should be $1.4 million positive. And then there's a smaller stream of noninterest income that we'll receive over time from the projects, but it will be rather small compared to the numbers that we're talking about right now.

[Keith Mestrich:]

I would just add that, though, having now done a tax equity deal and having the regulators sign off on or having done that deal does sort of increase our access to potential opportunities in an industry. We feel like regardless of the pandemic, which is renewable energy and the solar industry in particular and this just gives us a few more tools in our toolbox and gets us a little bit more exposure to better deals by having the equity tools available to us.

[Janet Lee:]

Okay. That's helpful. And on -- just to clarify on your third quarter NIM guidance of staying low, is it fair to assume that net interest income and margin is going down, in fact, third quarter versus second quarter?

[Andrew LaBenne:]

Well, NIM is increasingly difficult to forecast just given the volatility in cash and floating rate securities on our balance sheet with the deposit inflow. So I'm really not going to say if it's going up or down. This quarter, just from the inflows, that was about 19 basis point impact based on the cash we held and the floating rate securities we added. So deposits continue to increase, which, so far, this quarter, they have done, that could put more downward pressure on NIM. Conversely and maybe a bit ironically as political deposits flow out, that will actually help NIM in terms of going up. As far as net interest income, I think the pressure is downward. I think from Q1 to Q2, we basically held flat with the exception of a decline in prepayment penalties. I think we'll be down a little bit from where we were in Q2 in terms of net interest income. But it will depend on what we do with the balance sheet over the course of the quarter.

[Janet Lee:]

Got it. That's helpful. And finally, my last one is on political deposits. I want to make sure that I understand this right. So political deposits, it's going to go down to $300 million range at the end of 4Q. How should I think about political deposit balances through the third quarter? Is it staying elevated at this level or running off versus second quarter?

[Andrew LaBenne:]

It's always a little hard to predict, but we know as we get towards the end of the cycle and get towards the election, we start to see more runoff than flow in, if you will, as people spend more money at the end of the cycle on television and final electoral prep and stuff. Our model has us going down to around $300-odd million. Now I would say we've peaked higher than we thought we had when that model was originally put together, but we're kind of holding to our model at that point. And that should be the trend around sort of end of September than through October and into November, if past this prologue here, that should be the kind of thing that we would actually see in the political deposit environment.

[Keith Mestrich:]

Yes. I would just -- the only thing I was going to add was that I think the end of Q3 number is probably a pretty difficult one to predict because it's right in the heart of when everything is happening with regard to the election spending.

[Operator:]

Our next question comes from Christ O'Connell with KBW.

[Christopher O'Connell:]

So I wanted to start off on the expense front. I may have not caught some of the guidance there as to the back half of the year, where we're going from here. But that is also -- so if you could maybe just go over that again? And then also as we're going into '21, what the net impact -- I guess, as the 6 closure branches being the $4.4 million, but is the Boston expansion kind of offsetting that a little bit?

[Andrew LaBenne:]

Yes. So what we've said on the guidance is that we expect to be below $32 million for the remaining two quarters of 2020. That's a core number. So it excludes the $6 million estimate that we have in Q3 for branch closure expense, the onetime cost which is -- we've closed the branches already or they've gone dark. We're negotiating lease exits with landlords, sometimes that happens, sometimes you just end up continuing to make the lease payments, but you take the charge upfront until the lease expires. So there's a little bit of variability in terms of what may happen there. The $4.4 million in 2021 is the annual run rate we expect to get when everything is completed with the branches. Now the one nuance there is we are moving a lot of staff into open positions in the company right now. So that kind of expense of the branch may not just fully go away. It may take time as we continue to experience vacancy and other positions and fill with those branch employees.

[Keith Mestrich:]

And then in terms of Boston, I wouldn't equate our effort in Boston to replacing any of the kind of expensive brick-and-mortar operation that one of our branches in New York has. So we have a small commercial team of 3 people that are operating in Boston. Right now, we're in sublet space. We're looking for an opportunity to have a more permanent office, but that's really a commercial banking office, although it's officially a branch, it's not the kind of typical branch that will have a full complement of staff and the kind of footprint that you would have. So while there's some expense associated with Boston, I think a very hopeful kind of start that we've had there should quickly justify that expense. And I wouldn't call it much of an offset at all to the expense savings that we get from the closure of the branches in the New York area.

[Christopher O'Connell:]

Okay. Great. That's helpful. And then in particular, on the data processing line, was there anything one-time or unusual this quarter? Because I know -- I think there is suppose -- there's vendor cost saves, which brought it down for the first quarter of this year. But then it kind of popped back up to -- at the level or even a little bit above the pre vendor cost saves.

[Andrew LaBenne:]

Yes. We had a onetime impact in there. So I think that number is probably more like 2.6-ish. That data processing should be running at. 2.6, 2.7.

[Christopher O'Connell:]

Great. And then in terms of -- could you just walk us through the $51 million of PPP loans? I know you're kind of partnering with another institution for those and not originating yourselves. So just maybe how that's going to run through income and if that's any different than if you had originated it yourselves?

[Andrew LaBenne:]

Yes. So basically for us, what it looks like is almost like a government-guaranteed loan that we purchased with the 1% yield. We purchased pretty much at par. These were almost entirely from the first round of PPP. So I think the forgiveness rules on that are much easier to process through than the second round. So we would expect that a high level of forgiveness to happen, and so they won't be on the balance sheet for all that long. And the only -- the difference for us versus other banks is we didn't originate. So we're not capturing any of the fee income related to that or any of the kind of operational hassle, shouldn't say hassle, the operational activity related to the PPP loans and the forgiveness as well.

[Christopher O'Connell:]

Okay. Great. All right. Great. And then just finally, on the PACE loan origin -- PACE investment origination front, I noticed that you kind of had a -- or you noted in the deck a little bit of a delay on the expansion to the New York market. Does that change your outlook or the demand that you're seeing, putting those kind of on the books going forward?

[Andrew LaBenne:]

No. I mean, we really have never included any New York production in our estimates because it's unproven, unapproved program right now, which means it can be subject to delays and COVID is certainly not helping with that.

[Operator:]

. Our next question comes from Brian Morton with Barclays Bank.

[Brian Morton:]

Thanks for the kind of additional guidance on the NIM in the third quarter. But I was just curious, once you kind of get past the decline in political deposits going into average balances in the fourth quarter, do you think you could recapture any of that 19 basis point impact on the NIM from higher cash levels?

[Andrew LaBenne:]

Yes. I think we would recapture most of the 19 basis points. The question is, which I won't provide an answer right now is, what's going to happen everything else in terms of NIM, right? So that you might have that 19 basis point increase, but you're still going to have continued pressure downward from just lower yields coming on the books from everything that's being originated at this point, given the interest rate environment.

[Brian Morton:]

Okay. Great. And then maybe a little bit more on capital. Just kind of what are you looking at? And under what kind of scenarios do you think you'd be willing to restart the share repurchase program? What kind of levels do you think you're going to end the year kind of on CET1?

[Andrew LaBenne:]

Keith, do you want to take the repurchase one? And then I'll talk about capital.

[Keith Mestrich:]

Yes. Brian, I think that most important factor on the share repurchase right now really just is the external environment and, I think, the dour sentiment that policymakers and the public at large have around share repurchases at this point and the Fed's guidance even on sort of uses of capital, I think before we would even consider that program, again, we would need to see an overall change. And again, I don't think we're very different than the rest of the industry here. I think we need to see a very different change in the external environment and the viewpoint on share repurchases before we would restart that program.

[Andrew LaBenne:]

Okay. And then on capital. So leverage capital has come down as the balance sheet has grown. And I think in Q3 just given where we see our deposits today and probably political, not really coming off that much in Q3, but more in Q4. I think leverage ratio will probably decrease again next quarter a little bit and then rebound in Q4. CET1, given most of the assets we've been putting in cash and floating rate securities, I don't see CET1 making any big moves. Probably a little bit down as we grow the balance sheet, but I don't see major moves in CET1.

[Keith Mestrich:]

Yes. Yes, given that flow in the cash line, right, I think we all feel very comfortable with our capital position at this point.

[Andrew LaBenne:]

Yes. Absolutely.

[Operator:]

Our next question comes from Christ O'Connell with KBW.

[Christopher O'Connell:]

Just wanted to hop back on for a quick one. For the $10.2 million Ohio hotel loan, you guys put a $2.7 million specific reserve on that this quarter. What's the total specific reserve against that?

[Andrew LaBenne:]

So actually, I'm glad you asked that, Chris, because we probably didn't totally clarify that. So it's $10.2 million, but we have a $2 million standby letter of credit on it, which brings it to $8.2 million, and then -- which we fully expect to be paid out on. And then the $8.2 million takes -- has the $2.7 million specific reserve. So that's your net.

[Christopher O'Connell:]

Okay, great. And I mean, as things stand, given just the lack of activity likely across the board for the hotel space, but for this one in particular, as you move through the back half of the year, if there's not significant improvement in overall kind of travel and activity levels, do you think that, that specific reserve is going to have to go higher? Or do you see yourselves getting paid out on the collateral there?

[Andrew LaBenne:]

So it's maybe on the first one. I mean, we had a third-party appraisal done, and we marked it, I think, pretty well as deeply as we could based on the appraisal. But I think it's a very volatile market right now and price discovery is happening. So it's possible we might need more reserve on that. I don't think you're looking at another $2.7 million, that would shock me, but I guess anything is possible nowadays. But it's a pretty heavy mark from where the last appraisal was at this point. So I think we've put pretty good discount on it. I think we'll look at the economic case to carry at an OREO and rehabilitate versus sell it to -- sell it in auction or other method.

[Operator:]

Ladies and gentlemen, we reached the end of the question-and-answer session. At this time, I'd like to turn the call over to Keith Mestrich for closing comments.

[Keith Mestrich:]

Thank you, operator. I just want to thank everybody for taking a little bit of time today. I know it's a busy season in the earnings world and a couple of conferences going on that's got everybody very busy. I think we'll be seeing many of you at the KBW conference over the next couple of days and look forward to continuing on those conversations. And I just want to thank everybody for taking some time to join us today.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.