Amalgamated Financial Corp.
Q4 2020 Earnings Call Transcript

Published: 28 Jan 2021

[Operator:]

Good morning ladies and gentlemen and welcome to the Amalgamated Bank's Fourth Quarter and Full Year 2020 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 Drew LaBenne, Chief Financial Officer. Please go ahead.

[Drew LaBenne:]

Thank you operator and good morning everyone. We appreciate your participation in our fourth quarter and full year 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.

[Keith Mestrich:]

Thank you, Drew and good morning everyone. We appreciate your time and attention today. This morning I will discuss our current operations, followed by the high-level results of the fourth quarter, before turning the call back over to Drew to discuss our financial results in more detail. Today is the last time I'll be speaking with you as the CEO of Amalgamated and I'd like to thank our employees, customers, shareholders, and research analysts for all of your support. This has been an amazing journey and I'm so proud of what we have accomplished. Today the bank is in a strong position highlighted by a talented management team; an exceptional group of employees who are committed to our customers and the bank; a conservative credit culture which has served us well through the crisis; and a well-earned reputation as America's socially responsible bank, which continues to differentiate Amalgamated in the market and positions the bank for success in the coming years. These attributes can be seen in our fourth quarter and full year 2020 results and there are five key highlights that I would like to focus on today. First, the pandemic created unprecedented challenges for all of us over the past year and our team executed flawlessly to ensure we could transition our employees to a work-from-home environment, while seamlessly maintaining our operations. We executed very well under extremely difficult circumstances, which is a true credit to our entire team who I would like to thank for their tireless efforts.

[Drew LaBenne:]

Well, thank you, Keith. And thank you for the opportunity, to be a part of this incredible journey. On behalf of the entire bank, you are going to be missed greatly. Thank you. All right, turning to our financial results on slide 6, as Keith mentioned in the fourth quarter, deposits decreased $682.3 million as expected, primarily due to the election cycle to $5.3 billion from the third quarter of 2020, while average deposits for the quarter were $5.6 billion. Average non-interest-bearing deposits decreased $244.8 million from the prior quarter, primarily due to seasonality related to the election cycle. And now represent 53% of average deposits at year-end. Our deposit cost of funds, remain relatively stable at 13 basis points for the quarter, a decrease of one basis point from the third quarter of 2020. Deposits from politically active customers such as campaigns, PACs, and State and National Party Committees, decreased $609 million from $1.2 billion at September 30th 2020, ending the year at $603 million, as outlined on slide 7. This election cycle greatly exceeded our expectations, as we had strong success expanding our market share during this past year. Amalgamated continues to be a value partner, as we supported the business needs of the majority of Democratic candidates this cycle, which bodes well as we look to 2022. As seen on slide 10, our year-end 2020 total loans held relatively steady at $3.4 billion, as compared to December 31st, 2019. As Keith mentioned, loan growth in the fourth quarter was impacted by early payoffs of residential and CRE loans, as well as our diligent efforts to manage the credit profile of our portfolio. A bright spot in the fourth quarter was the growth of PACE assessments to $421 million. In addition, we signed another $150 million PACE purchase agreement, with PACE Funding Group which will allow us to continue this growth in 2021. The yield on average earning assets was 3.18% for the fourth quarter, a decrease of 63 basis points as compared to the same period in 2019, driven by lower market rates on loans and securities.

[Operator:]

Our first question is from Steven Alexopoulos with JPMorgan. Please proceed.

[Steven Alexopoulos:]

Hi, good morning everyone.

[Drew LaBenne:]

Hi Steve.

[Steven Alexopoulos:]

I wanted to start maybe Keith I know you're still working through the CEO transition. But maybe you could help us when should we learn of the new CEO and/or a mix of inside and outside candidates being considered?

[Keith Mestrich:]

Yes. Let me give you a little bit more color than in my opening remarks. I'm really impressed with the rigor of the process that the Board has gone through is it talked to a lot of both internal and external candidates are really in the final stages of making a selection on a candidate. And I've just been myself personally really impressed with the caliber of the candidates both because they have uniquely been aligned with both the mission and the business strategy of the bank and bring really strong credentials from financial services world to the table. And it's just been a -- it's been a luxury of riches in terms of the quality of candidates that have come forward. I can't pinpoint an exact date, but I would anticipate an announcement in the next couple of weeks would be most likely. You never know what might hang up might come up, but I think that's the trajectory we're on here. And then the other thing I would just comment is we've also spent my last day at the bank is tomorrow and we've spent a lot of time really making sure that the transition here is very, very seamless and smooth. Lynne Fox our Chair will be hopping in as the interim CEO for the few weeks between my tenure and the new person's tenure or whatever that time period is. Lynne and I have known each other for a very, very long-time and have a great working relationship and that will continue. And he's been joining our management committee meetings and really working with the team. We've really thought through the transition. I really anticipate that this will be quite seamless.

[Steven Alexopoulos:]

Okay. That's very helpful color. I had a question probably for Drew. So if you look at the PACE investments they really kicked up in the fourth quarter. Maybe some color what drove so much more flow. I know you said, you signed another $150 billion deal for 2021. So how should we think about full year 2021 opportunity?

[Drew LaBenne:]

Yeah, absolutely. So it did very much pick up. And part of that is that during the pandemic, I think we've seen this phenomenon across a number of different areas, the home improvement demand has been very strong. And so some of that there's a bit of a lag in the process between signing up for a PACE assessment and actually closing and funding it onto our balance sheet. And so you're seeing a lot of the push from the summer and the fall come through on our balance sheet here at the end of the year which is great. As far as the $150 million going forward, this -- the first $150 million which we've now achieved happened faster than I thought it would have and I think faster than PACE Funding Group had projected it. I'd suspect we'll see a little bit of slowdown in that -- I don't want to use the word I guess for lack of a better term in the pace of those in 2021. I really didn't mean that pun. But it's -- it wouldn't surprise me to do the whole $150 million in 2021, but it also wouldn't surprise me if some of it -- some smaller portion of it slips into 2022.

[Steven Alexopoulos:]

Okay. So if you guys were $157 million for 2020, that's probably a realistic rough target again for 2021 about the same level. Is that the right way to think about it?

[Drew LaBenne:]

Yeah. I think so. I think it's a good estimate at this point.

[Steven Alexopoulos:]

Okay. And with those investments in securities, right, loans were pretty flat in 2020. Can you talk about the opportunity to drive loan growth in 2021, particularly when you're talking about 10% balance sheet growth? Thanks.

[Drew LaBenne:]

Yeah. Absolutely. And so the 10% balance sheet growth is definitely more driven by our forecast of deposits than loans at this point. So our forecast on loans is low single-digits right now, but I think there's a lot of variability in that number going forward. I think the greatest challenge we're going to face this year in 2021 is going to be loan prepayments and loan originations and it's something we're very focused on. And once the new CEO is on board, I'm sure that person will be very focused on it as well. But the need to find new origination channels where some of our once pre-pandemic, particularly multifamily and CRE have slowed down substantially we're going to need to do more there. But I think in the next just to give a little color on Q1 here, there are definitely going to be a higher level of prepayments in Q1 as well. So we're expecting that and we're planning around it.

[Steven Alexopoulos:]

Okay. That's helpful. Before I sign off, I want to echo Drew's comments, Keith it's been a real pleasure working with you. The transformation of Amalgamated has been remarkable under your lead. Best of luck. Thanks for taking my questions.

[Keith Mestrich:]

Thanks, Steve. Appreciate it.

[Operator:]

Our next question is from Brian Morton with Barclays. Please proceed.

[Brian Morton:]

Good morning everyone.

[Keith Mestrich:]

Hey, good morning.

[Drew LaBenne:]

Hi, Brian.

[Brian Morton:]

I think my first question I just want maybe a little bit more color on the nonaccrual residential mortgage loans and kind of like how are they cash flowing? What are the kind of expectations for when they'll return to payment and kind of where they're marked on a loan-to-value basis?

[Drew LaBenne:]

Sure. Let's start with that first. On a loan-to-value basis, so this is going to be current outstanding principal to original appraisal. They are just below 60% LTV across all those nonaccruals. So -- and actually that -- I'm sorry that also includes the ones that are still in their second deferral and not yet on nonaccrual, but the amount will be similar. So these are very well protected loans. They're on nonaccrual, because the customer needed more than six months of deferral and that's the point at which we've decided to move loans to nonaccrual. So when they come back, it's going to be customer-by-customer. But for all these individuals, we are verifying that they're going through hardship and there are some people who are struggling right now. And it really isn't -- I'll tell you it's -- when you look across it, it's not lower-income borrowers versus higher-income borrowers. It is kind of across the spectrum as people have been affected in different ways by the pandemic. I think, currently the New York legislation extends out to approximately May in terms of when we are required to grant customers' payment deferrals. It doesn't mean that they won't move to nonaccrual on our books, but they don't need to pay us for the legislation. And then after that, we're going to work with these borrowers and figure out the best solution and do everything we can to keep them in their homes.

[Brian Morton:]

Right. And, kind of, given the good -- the strong loan to values on these and probably value has moved up, any thoughts on selling these loans or exiting some of these portfolios?

[Drew LaBenne:]

No, not right now. I mean, maybe later that could become a solution. But we don't -- at this point we don't really see any loss content in the vast majority of these residential loans. They just might be on our books for a while as nonaccruals that we're going to need to work through. But there's no urgency from our standpoint to go out and dispose off the portfolio. We have some experience from those legacy countrywide portfolios in how to handle these situations, and so we'll leverage that to work through this with that presumably a pretty good outcome.

[Brian Morton:]

Okay, great. And then just want to move to capital, kind of, you're standing at 13.11% on the CET ratio, I think it's more than adequate. I'm not sure like for the PACE loans, the growth of $150 million I don't know how much would be the risk weighting on those loans. And then beyond that, what are your priorities for capital deployment as you go into 2021? Are you thinking about restarting the share repurchases?

[Drew LaBenne:]

Yeah. So capital -- just to maybe answer those in different orders, the PACE assessments are carried in 50% risk weighting right now, the same as residential loan that we originate. So they're definitely lower in spectrum of utilizing risk capital. With the TCE where it is, we obviously have a lot of room to convert into liquid assets such as securities and cash into loans and utilize that capital without any concern whatsoever. It's more just making sure we find and underwrite the right loans that we want to have on the balance sheet from a mission and a risk standpoint. Our leverage ratio is just about 8% now. It's right about the middle of the range where we want to be and certainly not a constraint, but we are mindful of where we're at on that right now. And we're going to need -- as we said in the guidance, we expect the balance sheet to keep growing and keep bringing in deposits. So we are going to want to make sure we have the right amount of capital available to continue growth. Dividend, we'll continue -- we plan to continue to pay a dividend and we have our Board meetings usually right after these calls. So we'll discuss our usual topics of dividends and buybacks and see where we go from there. But no change to our current plans right now beyond that. Keith anything you want to add?

[Keith Mestrich:]

No. I think you hit it on the head, Drew. I think it's an ongoing conversation between senior management and the Board all the time. And I think when we started down this pandemic situation; we knew that as it got towards the end if we're getting towards the end we at least see light at the end of the tunnel. We set a good opportunity to be well-positioned from a capital perspective at the end of it, and that's I think where we are. And it gives the Board and new leadership, I think ample opportunity to think about lots of options.

[Drew LaBenne:]

And Brian, the one thing just before I turn it back over to you, the one thing I'll add is that we have no debt and we have no preferred equity out there right now. So those are other levers that we may consider using if there was any type of acquisition opportunity that looked attractive to us going forward. So I think there's a lot of levers in the capital and debt stack available to us besides just common equity if we were to look at doing something from a strategic perspective.

[Brian Morton:]

Excellent. Thanks. That’s all the questions I had, and I just wanted to wish Keith best of luck in your next endeavors. Thank you.

[Keith Mestrich:]

Thanks, Brian.

[Operator:]

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

[Chris O’Connell:]

Good morning, gentlemen. So, I guess, I just wanted to start off with the balance sheet growth. I mean, you guys seem pretty confident in the 10% balance sheet growth driven by the deposit side. But in the past, you haven't been totally positive on the political deposit guidance. So, do you have a better read into that right now that's driving the 10% balance sheet growth outlook?

[Keith Mestrich:]

Sure. We've already seen our -- well a couple of comments on the political deposits and then a few comments about things outside of the political realm. We were quite pleased with where political deposits troughed at the end of the last election -- the 2020 election cycle. I think, if you go back to some of our early projections, we thought that that would originally trough around $300 million and it ended up around $600 million. So, really, really a good jump point from that standpoint going off. So we've already seen -- in the first month really of the 2022 election cycle, we've already seen an increase of political deposits as you can see from the presentation of around $50 million. So good growth. And one can never predict exactly what's going to happen in a fundraising cycle and you've certainly seen some things where some corporate PACs and others have been holding off on political contributions. That won't last for an entire cycle. And with a 50-50 Senate and a competitive house of representatives, I think it's highly anticipatory that there would be a very, very vibrant fundraising season -- political fundraising season in 2022. So, I think that augurs quite well. But really I think, more importantly, for the story going forward is, our growth in deposits really was much more than just political growth in deposits. We focus on that because it's unique to Amalgamated, but across all of our sectors. Whether it's our labor union customers, or our social justice organization customers, or our philanthropic customers, we have seen tremendous new opportunities in all four of our geographic markets. And the pipeline has remained robust even with our commercial banking teams working remotely. And I just don't see that ending. We've always talked about one of the values for this franchise being a long runway of potential customers. And that just continues particularly on the deposit and treasury management side and that just continues to come to fruitions.

[Chris O'Connell:]

Got it. Makes sense. And then, for -- as you guys are looking at the ESG fund that you started kind of in the first quarter here and then with the real estate fund kind of rolling off on the fees there, how do you see the Trust fees setting out in the first quarter of 2021 and maybe progressing through the year?

[Keith Mestrich:]

Yes. I always -- look, we're going to launch a sleeve of new ESG funds, probably next month, certainly this quarter that will provide a variety of new options available to people to make some both fixed income and equity options as they think about making ESG investments which will be a little bit unique in the marketplace. As you know though, Chris, certainly the sales cycle for investment management products is not the quickest kind of thing that there is and it'll take a little time to not only get out on the road and sell all these products, but then Trust committees and investment committees and other things will have to meet to make that ultimate decision. So, I think it will take a little while to ramp up on some of the new fee income. Certainly, I think, you'll see some movement on fees, just given what has happened to the markets thus far in 2021. That will help our fee position, especially if it holds throughout the quarter. And then as Drew said, with our ULTRA Construction real estate fund closing, all but closed down, really down to its last couple of properties, we did make the decision to stop charging investors in those funds fees and that should be about $100,000 a quarter in terms of lost fee revenue on a year-over-year basis. Drew, you want to add anything?

[Drew LaBenne:]

$400,000 Keith, $400,000.

[Keith Mestrich:]

$400,000 -- $400,000 pardon me.

[Drew LaBenne:]

Yes.

[Chris O'Connell:]

So -- I'm sorry, just -- so on the year-over-year basis, I guess, so what do you -- I guess just boiling that down, what is the baseline level coming into the first quarter on that one?

[Drew LaBenne:]

Yes. I think we're going to be a little lower from where you see us in Q4 because of the Trust fees coming out and a little bit of pickup in asset size. And then, if all goes according to plan, the Invesco benefits should start feathering in over the later quarters in terms of performance. And I think the timing on that is obviously -- and kind of the level of that is, obviously somewhat uncertain, just given its new products that we're launching. But long-term, pretty excited about the addition of that strategy.

[Chris O'Connell:]

Got it. Makes sense. And then as far as the loan sale game line, some really good numbers in the back half of this year in 2020. How do you see that progressing in 2021?

[Drew LaBenne:]

Yes. Well I think the Q4 number, $1.3 million that was a phenomenal number probably not going to hit that level very often. So I wouldn't take that and run it forward. But I think $0.5 million to $1 million is probably about where we're targeting. Q1 might be a little light on the lower end of that range just because we did so much in Q4. But kind of as we go forward for the full year that's our best estimate right now. Obviously, if rates move up substantially things like that that could impact the volume coming through the mortgage market but it doesn't seem to be a huge risk at this juncture.

[Chris O'Connell:]

Yes. Got it. Makes sense. And then I appreciate the guidance on the operating expenses with the first half of the year kind of trending higher and then getting some progression lower in the second half of the year. Do you guys have a sense of where the first half of the year I guess is going to be starting off just given some of the movement you had with the efficiency initiatives in the back half of this year?

[Drew LaBenne:]

Yes. I mean there's always some seasonality in Q1 as well, right? You have the payroll tax issues. You have the audit finishing up and everything that goes with that et cetera, et cetera. So if we think of kind of our – I don't know if I want to give you a number Chris but it's probably closer to where we're at this quarter for the next quarter or two and then should come down to where we've been closer to where we've been previously in the latter half.

[Chris O'Connell:]

Got it. That makes sense. Okay, great. And then finally I guess just looking at the tax rate, given some of the initiatives that you guys put into place, where do you guys see that coming in for – going from a go-forward basis?

[Drew LaBenne:]

I don't see a lot of change to the effective tax rate right now. The solar tax equity is – which is a tax strategy but the GAAP accounting puts it through non-interest income. So I'm going to just sort of put that to the side for a second. I don't see a lot of change right now but the big unknown is obviously what's going to happen with the federal tax rate and what are the state and local municipalities going to do New York is talking about a tax, tax hike in the city and the state. So we're just going to have to watch that and see where it goes. But we've been doing things from a tax strategy standpoint that maybe aren't totally obvious in the effective tax rate on the GAAP. There's the solar tax equity obviously. But we've also added to our bully plans at the end of the year. We've done a little bit in the municipal space, where we've seen very, very strong deals, which would benefit with – if there's any type of tax hike. But I think our best estimate for now is what you're seeing in the numbers today.

[Chris O'Connell:]

Okay. Great. That’s all I have. Thank you and congratulations Keith on the next steps and great job here at Amalgamated.

[Keith Mestrich:]

Thanks, Chris.

[Operator:]

Thank you. This does conclude our question-and-answer session. I would like to turn the conference back over to Mr. Keith Mestrich to do final comments.

[Keith Mestrich:]

Thanks, Sherry. Appreciate it. I just want to thank everybody for joining today and for all the investors and really want to just sort of say special thanks to all of the research analysts to Steve and Alex and Janet and the other Alex and Walley and Chris and Brian. It's been a real pleasure getting to know all of you and work with all of you since our IPO in 2018, and I've learned a lot from you. And when we have got to spend some time together on the non-deal roadshows and other things that we did, it was a joy spending time together. So I just appreciate really the sort of time that we had together and I really did appreciate getting to know all of you so much. And I just want to do a final special shout out to our IR team, Jamie Lillis and Shannon Devine, Peter Caruso, who really have helped to get all of our earnings calls together and I'm just deeply grateful for all the work that you have done and contributed to our company. So thank you everybody. Stay safe and we'll be in touch in the future. Bye-bye.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Have a wonderful day.