Amalgamated Financial Corp.
Q4 2019 Earnings Call Transcript

Published: 31 Jan 2020

[Operator:]

Good morning, ladies and gentlemen. And welcome to the Amalgamated Bank Fourth Quarter and Full Year 2019 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Drew LaBenne, Chief Financial Officer. Please go ahead, sir.

[Drew LaBenne:]

Thank you, operator, and good morning, everyone. We appreciate your participation in our fourth quarter and full year 2019 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 Web site for an extended period of time. Additionally, a slide deck to complement today's discussion is also available on the Investors section of our Web site.

[Keith Mestrich:]

Thank you, Drew, and good morning, everyone. We appreciate your time and attention today. This morning, I will discuss the high-level results of the fourth quarter and provide an update and our strategy to grow the bank before turning the call back over to Drew to discuss our financial results in more detail. To start, there are six key highlights of the fourth quarter and the full year of 2019 that I would like to focus on today. First, I am thrilled with the performance of the entire Amalgamated team in achieving the best financial results in a 97-year history of this great institution and propelling the bank past the $5 billion asset mark in 2019. I'm also very happy with our quarterly and full year earnings, which show the earnings potential the bank going forward. These are historic achievements and have motivated our entire organization to do even more in the coming year. Second, I'm thrilled with the success that our team achieved in growing our loan portfolio in 2019. I would note that we made the decision in the fourth quarter to move our PACE assets to securities given their structure, but no changes been made to the assets that we hold. As a result, we delivered 7% annual loan growth on top of the addition of $264 million in PACE assets. Taken together, our portfolio grew 15% for the full year 2019, which exceeded our expectations, especially when you consider the substantial runoff that we achieved in our indirect C&I portfolio as we continue to derisk our balance sheet.

[Drew LaBenne:]

Thank you, Keith. And I'll begin by reviewing our fourth quarter and full year results before turning the line back to the operator to open for questions. Turning the slide six, in the fourth quarter deposits increased $318.6 million, or 29.5% annualized to $4.6 billion from the third quarter of 2019, while average deposits for the quarter were $4.4 billion. As expected, average non-interest-bearing deposits increased $87.6 million from the prior quarter, primarily due to seasonality related to the election cycle, and now represent 46% of average deposits at year-end. Our deposit cost of funds remains relatively stable at 36 basis points. Deposits from politically active customers such as campaigns packs, and state and national party committees increased $67.7 million from $510.9 million at September 30, 2019, ending the year at $578.6 million, as outlined on slide seven. The election environment continues to be a source of growth for our deposit franchise. The focus for the year ahead will be the Presidential race. And as Keith mentioned, we haven't continued to be a partner supporting the business needs of the majority of democratic candidates.

[Operator:]

Thank you. Our first question comes from Alex Twerdahl with Piper Sandler. Please proceed with your question.

[AlexTwerdahl:]

Hey, good morning, guys. Just first question on the political deposits. Appreciate your commentary and expecting those to kind of level off early in the year and then decline into the election, which seems like it's pretty obvious, but do you have a sense for one, where you think those might decline to as we approach the election and then two, Drew, maybe you could remind us kind of what the implications on the margin would be when those deposits actually do flow out?

[DrewLaBenne:]

So sorry, on the first question just what will the timing be on those deposit outflows or is that.

[AlexTwerdahl:]

Yes. And then maybe where you envision, I mean, after the fourth quarter of 2018 that went down -others we are not getting in the year.

[DrewLaBenne:]

Yes, absolutely. So, the timing if we just look back to the last cycle, it was really, at the very end of Q3, and then the beginning of Q4, where we saw that outflow happens. So, almost no impact on Q3. I think this cycle may or may not be different, just given the number of candidates that are out there, and we're still very unclear on who's going to be the lead Democratic candidate going into the election.

[KeithMestrich:]

Yes, I mean Alex, I think it's a great question; it's a little hard to try and put a specific pin in it. Our money is not all money that's being raised for the current election cycle right there's six-year senate campaign money in there, some of the campaign committees don't spend down to zero. I think one of the important things to remember are we having adequate liquidity on the books to make sure that we can cover any runoff that there is. But it will go down substantially several hundred million dollars, and then it should start to build up again in the first and second quarters of 2021. But pretty hard to put a real specific pin on exactly where that number lands on the middle of November.

[AlexTwerdahl:]

Okay, I mean, it doesn't really matter which Democratic candidate winds up carrying the ticket. I mean, a lot of this money is pack money and kind of not necessarily the money that's raised by the specific candidate. Am I correct in that thinking?

[KeithMestrich:]

That's right. In fact, the presidential election money is just a small portion of the overall dollars that are in the political - the political dollars. It's money that PACs and super PACs are raising its money that other candidates are raising its money, that it's money that that political campaign committees like the DNC and others are raising. So, it's a variable base and it but again, hard to put it exactly in and where it lands in mid-November.

[DrewLaBenne:]

And then as far as the margin impact when it goes out, our current plan, certainly subject to change is that will backfill the outflow with borrowings in the short-term and then, hopefully fill it back up with deposits, both political and nonpolitical, political as the cycle starts again, in terms of fundraising.

[AlexTwerdahl:]

Okay. And then just in the guidance for a full year net income, what and I appreciate the yield curve commentary, but can you just remind us may be how your position from a NIM standpoint and kind of how we should expect that NIM to progress now that all the rate cuts are kind of factored into - seemingly all the rates are kind of now on the table now and kind of how you expect your loans street price, new loans coming on the books and deposit repricing?

[DrewLaBenne:]

Yes. So, on the, I think that with the last cut, there may still be a little bit of a bleeding or lag effect from that last cut coming into the next quarter. As far as assets coming on the books, it will really depend on the mix, but I can tell you, resi, multifamily, those are all coming in, in kind of the low to mid threes at this point in terms of the yields that are coming on the books. So, I think there's going to be pressure on asset yields as far as those asset categories. I think some of the other assets such as PACE have higher yields and as much as we're able to, and I'm sure we'll talk about that more in a minute, but as soon as it assuming we can add more PACE assets as well that will help to offset some of the pressure from those lower yielding assets coming on the books. With our deposit costs in particular, we had a 4% beta, deposit beta cumulatively in the up cycle. So, in the down cycle, we're not going to see a large amount of extensive repricing because it is going to - it's not going to go up slow and come down fast. So, I think our repricing options on the deposit side, while there are some are probably going to be more limited to some then some of banks that had much higher betas in the uptrend of the cycle.

[AlexTwerdahl:]

Okay. So, there's that kind of a long way of saying that you expect the margin to be mostly stable, maybe a little bit of down drift early in 2020, just based on some additional bleed through from the last raid cups?

[DrewLaBenne:]

It's - I would say that there would be in NIM pressure going into 2020. Let me just put it that way. I would - I think it will be more than a couple basis points that will see going forward. But you can see kind of how NIM compression happened from Q3, Q4 that obviously had rate cuts in it. But I think we will have some NIM compression going into next year as well.

[Operator:]

Thank you. Our next question is coming from the line of Brian Morton with Barclays. Please proceed with your question.

[BrianMorton:]

Good morning, guys. I was hoping we could get a little bit more detail on your 2020 guidance and kind of what are the factors that could drive us to the high end of the guidance and then conversely what to drive us to the low end?

[DrewLaBenne:]

I think balance sheet growth and we, obviously put a 10% target out there for overall asset growth and exceeding that asset growth, I think could be one of the levers obviously that would drive earnings higher. Fee income is another opportunity for us. We are doing some work in our trust and asset management space, where that could be a spot where we could grow at a faster pace. And then we expect, just so I can get the comment in there. We are still expecting run off of that one fund from our trust department. So, there will be a downward pole from that fund as well. But that's factored into our guidance already. And then expenses, I think we've - we're always looking at finances. I think we are - we've taken a lot of actions this year, we'll continue to look at what's possible in - I'm sorry, in 2019. We took a lot of actions in 2020. This year, we'll continue to look at what opportunities are out there as well.

[KeithMestrich:]

Yes. And I would add to I think just the vibrancy of our deposit growth particularly in the non-interest bearing space has really allowed us to keep, the small amount of borrowings that we keep on the books that are very, very modest level and as long as that pipeline, which is pretty robust right now, stays robust, that will help us even though we don't have, as Drew said, a lot of downward leavers that we can use in the pricing space, you know, the minimization of borrowings until we see the political runoff happen will be something that I think will really guide into the higher ranges of the guidance.

[BrianMorton:]

Okay. Just one quick question. Did you re purchase any shares in the quarter?

[DrewLaBenne:]

Not as much as last quarter. We purchased little over 100,000 shares which happened really at the beginning of the quarter. And then the price moved up pretty rapidly and we were no longer in the market repurchasing

[BrianMorton:]

All right. And that's whole to how much in dollars you would say?

[DrewLaBenne:]

It was, I think it was about a little under $2 million, a 1.5 million somewhere in that range.

[BrianMorton:]

Okay, great. Thanks. Let me move my final question. Have you ever really looked into kind of the impact and timing of doing a Cecil adoption?

[DrewLaBenne:]

Well, we know what backend timing is obviously with 2023, part of our evaluation process is going to be looking at how smoothly, Cecil rolls out in Q1 for all those banks who are adopting in this next quarter here. So, I think after we do that evaluation, we'll think about our timing. We're, I'm talking to our investors as well and just trying to understand their thoughts on the timing.

[Operator:]

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

[ChrisO'Connell:]

So, I was hoping to drill down on some of the provision impacts from this quarter. Joe, do you have the exact impact of the PACE classification on the provision and then alternatively, the impact of single C&I alone moving to non-accrual?

[DrewLaBenne:]

Absolutely. So, with PACE that was sort of a meeting for a question. So, I could expand upon this a little bit. You know, we did determine in thinking with various constituencies that we work with, that the appropriate place to put the PACE assets was in securities that you know the space between loans and a security for an asset like this is somewhat gray. Because they are bonded assessments from various municipalities, but they don't have Q sips. They don't, freely trade in the market. But after that evaluation, we determined that moving them to the securities portfolio was appropriate. As a result of, we released the allowance on the PACE assets that we had on the balance sheet in Q3 and that released 700,000 from our allowance related to those assets. So, it's important to note that for the securities we have now, we do not have any provision against them. You know, we think they are very solid assets with very low LTVs, or I guess assessment values, but there's no longer any provision against those.

[KeithMestrich:]

Before Drew goes on and talks about the one Scene Island. Let me just add a little extra commentary on the PACE piece. Regardless if they're considered a security or alone, we think that we are very bullish on this asset class. We like the yields. We like the mission alignment that comes with it, that has additional, both reputational and public relations aspects that helps us build our deposit business as well. We like the credit quality of the asset very, very, very much. We like the efficiency with which we can put these assets on the books and the lack of servicing capacity that we have to have with them. And to be very frank now, you know, the classification with them as a security, and this was not the driving impact in any way, but the fact that we have to set little or no allowance with them just makes them even better in our minds. So, securities loans, we like the asset class. We will continue to be bullish on them that are why we will talk more and more about assets growth as opposed to just loan growth because we think this is an important part of our strategy moving forward. And frankly one that we don't have a ton of competition in right now. So, we feel like we've got some expertise here. This connection be very, very valuable to our franchise. And turn back to Drew to talk about the C&I loan.

[DrewLaBenne:]

So, with regards to the indirect C&I portfolio as a whole, you know, we're still just under $60 million in terms of the balances outstanding in that portfolio. And we've talked in the past about the three loans that had some issues in that portfolio. This is one of those three loans which we downgraded to non-accrual in the quarter. We built $1.7 million in specific reserves on that loan, one of the other loans actually started performing a little better. And we released $0.5 million on that loan. So, net-net between to 1.2 million in specific reserves on the indirect C&I portfolio.

[ChrisO'Connell:]

Got it. Great, thank you. And then looking forward toward I guess, excluding the indirect C&I reserves, where the actual preserved the loan will trend toward especially now that the PACE isn't really going to be a part of the provisioning going forward.

[DrewLaBenne:]

Yes, if everything stays as it is today, the allowance to loans excluding specific reserves should generally trend downward, right you're continuing to expand your look back period if you have no adverse credit impacts happening then the general trend will be probably small improvements in the factors leading to a release and then we'll have the normal balance build on top of that, but we're most of our growth has been lower factor loans that we put on the books.

[ChrisO'Connell:]

Got it. I guess you know what the reserved the loan is excluding the indirect C&I book right now.

[DrewLaBenne:]

I didn't do that math, but it's - let me get back to you on that. I don't want to do it quick and get it wrong, but I think the specifics are about 7 million sitting in the portfolio.

[ChrisO'Connell:]

Got it. Thanks. And then in terms of the balance sheet growth the targeted 10% for next year, given the opportunities that you're seeing within the PACE space and I think you mentioned a partnership with Columbia solar as well in the deck. Given the opportunities you're seeing there, what, or how do you see that coming in between loans versus securities growth?

[DrewLaBenne:]

Yes, I think it's more heavily weighted to loans and PACE assessments than it is to securities we do have some level of securities growth in our forecast for next year as well. But I think that is all subject to change and opportunities based on we'll see available in the market and the relative risk adjusted returns of those assets at the given time.

[ChrisO'Connell:]

Got it, kind of was including PACE in the securities there. I just kind of meant know what's going to be coming into the actual loans on the balance sheet versus the pace of the securities together as a whole.

[DrewLaBenne:]

Yes, I think if you look at our balance sheet, we will continue right adding loans both in the residential space both from an origination standpoint and a purchase perspective, we'll continue adding loans in the multifamily space in New York. That market continues to be under some pressure post rent reform regulation, although we do have some pipeline and we are putting additional opportunities on the books. And then in the C&I bucket, we will continue to see opportunities to do non-PACE oriented solar renewable energy deals that will be traditional C&I loans, commercial solar installation, and other things is another sector we continue to be quite pleased with and seeing a lot of opportunities coming. And in the last quarter and I referenced this in the beginning part of the thing we did hire a lender who is really focused on in the community development space, and we have opportunity in affordable housing and working with other CDFIs opportunities have a nice pipeline of activities to do there, those feel like very traditional C&I loans. So, we're not just putting everything in the sort of new securities bucket, if you will, and just relying on PACE, we like that a lot. But our lenders are very active in the renewable energy and community development space as well.

[ChrisO'Connell:]

Great, thanks. And just last one for me, but do you have any idea on the timing of the two branch closures in this quarter?

[DrewLaBenne:]

Yes, they have been announced both branches will close at the end of February. I think actually February last day of February.

[Operator:]

Our next question comes from the line of Steven Alexopoulos, with JP Morgan. Please proceed with your question.

[StevenAlexopoulos:]

Hey, good morning, everyone. I want to first follow up on the NIM commentary. So, if we look at loan yields and potential compression Drew given the new loan yields, you called out. What's a reasonable pace of loan yield compression, like on a run rate basis, if the feds not cutting rates?

[DrewLaBenne:]

Well, it's going to depend on the mix again and the prepayments that come in as well. The 12 basis points of loan yield compression that we had this quarter, a little bit of that were caused by the movement as well as PACE going into HDM secured. S0, I think that was a little bit elevated. We obviously had the rate cut in there as well. So, I think it should be less than that. But it will depend on the pace and speed of new originations coming on. I think the other thing probably worth mentioning is, for example when we look at multifamily prepayments, which have actually - they're not what they used to be, but in Q4 there actually were a couple more prepayments, whereas in Q3, there were none. A lot of what is coming off the books is kind of the same rates as what's coming on the books. So, it's not as though at least in the multifamily space, we're having a big trade at this point in terms of yields rolling off and yields coming on. In residential mortgage, Q4 was a big as I'm sure you know, it was a big quarter for refi activity. And so, there was a little bit of yield compression that happens there, whenever you get that refinance activity and mortgage seems to have slowed down. But if rates continue to trend down at the long end of the curve, I'm sure it'll pick back up again.

[KeithMestrich:]

And, Steve, I would just add I mean, although the Fed has been cut rates, we've lost 32 basis points on treasuries right over the last two weeks. So, it's clean two basis points today. So, it's, a tricky thing that we're looking at. Because some of our loans, particularly the multi-families are pegged to that rate.

[StevenAlexopoulos:]

Right. So, we think about the NIM guidance for 2019, I think was 355 to 360. You came in at the lower end of that range, but you were in the range? How are you thinking about a range of NIM? Sounds like you could have much more pressure in 2020 than in 2019.

[DrewLaBenne:]

Yes. And if you think about our original guide, that was our last guidance. I think our original guidance was probably still fair 350 to 360. And that included no rate cuts. So, I think we outperform the original guidance pretty well given what has happened in the marketplace. Yes, I mean we're not going to give guidance on NIM because there are so many factors going on. I think we are expecting our NII to grow. We are expecting our NIM to compress, but I think we will probably see that for most banks in the sector, especially if the yield curve starts keeps - looking as it is over the past week or so.

[KeithMestrich:]

Just to make the point to I mean, I'm urging Drew's encouraging our team right to think less about them and more about earnings and make sure that we make decisions that are good from an earnings perspective, even if they may have an adverse impact on NIM in the short term. So, and I think that's wise for us to do that, particularly as we look to balance both issues in our securities portfolio and our - and other opportunities that we have in front of us so.

[StevenAlexopoulos:]

Right. Okay. And then I just want to make sure I understand the commentary around PACE loans now being in securities. So, you're going to double digit balance sheet growth. Do you think you could do double digit loan growth without PACE loans, while PACE now being in securities?

[DrewLaBenne:]

I think it's possible certainly. And, we would - and I say this a little bit flippantly. We could buy our way to any loan growth that we wanted to do. That's not what we're going to do. We're going to be very careful on credit, as we've continued to do. And we're going to make sure we're putting on at least a large portion of mission aligned assets at the same time that have attractive risk adjusted returns. So, I do think it's possible. What we don't have this coming year or in 2020, that we had 2019 was $177 million of indirect C&I runoff that we had to also work through in 2019. So that's a big headwind, that's actually out of our way for the most part in 2020.

[KeithMestrich:]

And it's obvious when but lest it be said, we're not going to sort of make any sacrifice on credit in order to just drive long growth, just not going to do that. I mean, we had long-term to last night that we could have put on the books. I'm sure and it would have deteriorated our credit standards completely, and we're just not going to - we're not going to do that. I think that's an important principle given where we are in the cycle right now especially.

[StevenAlexopoulos:]

Okay. And wanted to drill deeper into the playoffs in the commercial real estate book this quarter. So, whether you're pure New York banks had good loan growth this quarter and called out how they had repurchased loans that they previously participated with other banks are any of your pay downs. Phenomenon, such as that one?

[DrewLaBenne:]

That, because we don't really have any participations maybe one in that space. So, the answer would be no.

[StevenAlexopoulos:]

No. Okay. Thanks. And then finally, good that you talk about expanding moving forward with Boston and LA. I assume that's in the $32 million per quarter guidance per expenses. Can you give us an update there, where are you with hiring and when should those offices being up and running?

[KeithMestrich:]

Yes, we are talking to lead candidates in both cities. I think we're a little farther ahead in Boston than we are in LA. And my desires to make sure I get a nice array of potential candidates to look at. So, I don't want to just take the first opportunity, but I'm hopeful that we will be able to make offers somebody at least in Boston pretty soon, a little bit negotiating depending on when availability is but I would imagine, Boston should be up and running easily in the second quarter. It will take somebody some time right to get a little pipeline and things developing. LA is a little bit behind that. But LA will also have a base given our presence in California already. But we're moving aggressively on this and want to get lead banker on our model has the addition of a junior bank in each city, and then somebody who really deserves an account executive role to do that. Again, stressing we're not opening branches, so we don't have a big search that we have to undergo for commercial office space and things. And so, I'm looking to do this pretty quick.

[Operator:]

Thank you. It appears we have no additional questions at this time. So, I'd like to turn the floor back over to management for any additional concluding comments.

[Keith Mestrich:]

Thanks, operator. I just want to thank everybody for taking a little time, bearing with us for the day change here. I appreciate everybody taking the time to hop on a day later. We're really happy about the quarter and we look forward to pretty vibrant first quarter of 2020 as well. We will talk to many of you in the coming days and see many of you at the end of April. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's teleconference. We thank you for your participation and you may disconnect your lines at this time.