Q4 2019 Earnings Call

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 any listen only mode.

Following the presentation. The conference will be open for questions with instructions will follow at that time.

As a reminder, this conference call if being recorded I would now like turn the call over to Mr. drill then Chief Financial Officer. Please go ahead Sir.

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 keep Mastrich, President and Chief Executive Officer, as a reminder, telephonic replay of this call will be available on the Investor section of our website for an extended period of time.

Actually slide deck to complement today's discussion is also available on the Investor section of our web site.

Before we get 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 1995.

We caution investors that actual results may differ from the expectations indicated or implied by such forward looking information or statements investors should refer to slide two of our earnings slide deck as well as our 2018 10-K filed on March 28, 2019, and other periodic reports that we filed from time to time.

With the FDIC for a list of risk factors that could cause actual results to differ materially knows indicated or implied by such statements.

Additionally, during today's call will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered nice relation or it's a substitute for results prepared in accordance with the U.S. cabin.

A reconciliation of these non-GAAP measures to the most comparable GAAP measures can be found in our earnings release as well as on our website.

This point I'll turn the call over to Keith.

Thank you drew and good morning, everyone. We appreciate your time and attention today.

This morning, I will discuss the high level results, 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.

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 pass the 5 billion dollar 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 our historic achievements and if motivated our entire organization to do even more in the coming here.

Backend I'm thrilled with the success that our team achieved in growing our loan portfolio 2019 I.

I would note that we made the decision in the fourth quarter to move our pace assets to securities given their structure, but no change has 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 and pace assets.

Taken together our portfolio grew 15% for the full year, 2019, which exceeded our expectations, especially when you consider the substantial run off that we achieved in our indirect see an eye portfolio as we continue to de risk our balance sheet.

I mean, its mission and values remain a critical differentiator in the market and have positioned us for growth in a sustainable lending sector, which was a key driver to our success in this past year.

More importantly, we are poised for continued growth as we enter 2020 [noise].

Third our deposit franchise, because again proved to be a competitive advantage that amalgamated enjoys as we continue to experience healthy growth through the fourth quarter and full year 2019.

The success was broad based having achieved strong political deposit growth and expansion in our core relationships in the nonprofit labor in philanthropic sectors.

The percentage of noninterest bearing deposits expanded nicely in the quarter and the full year and our cost to fund positioning it remains a long term strategic differentiator for us.

Fourth our non interest expense was slightly elevated in the quarter, primarily associated with Sox readiness and we started to invest in new business initiatives and the trust department, which represent exciting growth opportunities for the bank that we expect to accelerate 2020, given the opportunity that we see a hat we will discuss these initiatives in more detail.

In a moment.

Yep credit remains very stable with the exception of one previously modified indirect see an eye credit that we moved to nonaccrual.

Over the course of 2019, we reduced the indirect see an eye portfolio by approximately $177 million and only $60 million remains in the portfolio.

And lastly, we continue to work hard everyday to build upon a reputation as America's socially responsible bag and are proud to announce our recent E.S.G. accomplishments this quarter, including a launch of our cross departmental corporate social responsibility Committee with board oversight.

Making additional E.S.T. related disclosures and continued support <unk> a policy advocacy efforts that helped build the more inclusive in sustainable world.

We believe that our long term positioning as a socially responsible company and a solid G.S.G. investment will be especially important in this era, where more and more consumers are demanding the companies. They do business with hold themselves accountable to a broad set of stakeholders.

Turning to the quarter, we witness nice growth in our residential portfolio as well as continued strengthening of our position in the renewable energy and energy efficiency space.

Towards the end of the quarter, we added approximately $177.5 million and paced assessments a category that we like for its mission alignment, it's relatively favorable returns and the credit strength of the assets in the portfolio.

We have provided more details on these assets and slide nine of the presentation.

We also saw additional activity in commercial solar and commercial pace again categories of assets that we like for the returns and safety as well as a mission align it with our overall business positioning as America's most socially responsible bank.

We're also pleased to announce that post our acquisition of new resorts Bank, we doubled our commitment to impact lending and investing to $700 million. This initiative to your goal was achieved this past December delivering upon our goal eight months ahead of schedule.

Our unique deposit franchise continues to deliver achieving 29.5% annualized growth during the quarter and 13% for the full year or 23% after adjusting for the $327 million of short term deposits at yearend 2018.

At quarter end, our political deposits totaled $578.6 million, which is a record high for amalgamated.

I'm, particularly encouraged by the strength of our brand and the success that our bankers have achieved over the course of 2019 as we continued to take share in the political deposit market as we greatly expanded our share of both political candidates and major party committees.

In order to further expand our franchise, we hired inexperienced political banker in our San Francisco office in the fourth quarter Who's made very good progress expanding our reach in California, where we have an opportunity to grow our presence.

The other political deposit franchise, we also experienced broad based deposit growth in our other key verticals, we brought a new labour relationships in our Western region office and hired a banker this month to focus on our union relationships in the west.

We also saw a nice increase in our lending to labor unions in our northeast region and open new relationships with major unions in our mid Atlantic region.

Our nonprofit banking team is growing and they had an excellent year in 2019, adding new relationships with environmental organizations LGBTQ groups women's organizations and community development groups.

Hired a lender to focus on building relationships with the C.D.F.I. community and towards the end of the year, we saw those relationships starting to bear fruit.

In 2019 was a year, we really began to solidify our presence with philanthropies, adding robust cash management relationships. Some innovative lending partnerships and we are well poised to discuss investment management opportunities with their down that managers in the future.

Looking ahead to 2020, our deposit pipeline is strong and all of our teams in all three regions are off to a strong start.

As we announced in our last call. We plan to open commercial offices later this year in Boston in Los Angeles, and I expect to see us, adding new relationships in those markets as well.

Our deposit cost of funds held relatively steady at 36 basis points in the fourth quarter down one basis point from the third quarter 2019, and up 11 basis points from a year ago quarter.

Looking forward, we would expect our political deposits to remain relatively stable before declining towards the latter part of the third quarter. It's campaign funds get spent through the election.

If the passes prologue I fully expect and I fully expect it to be the funding cycle seen in previous elections should repeat itself and campaign fund raising will begin again in earnest in the first and second quarters of 2021.

Our non interest expense for the quarter was $33.5 million, an increase of $1.6 million from the linked quarter, primarily as a result of noncore expenses, consisting of $1.1 million related to the acceleration of expenses associated with the closing of two branches in New York City, and 2020 and the previously.

I mentioned costs related to socks, and our trust Department work.

Of note our trust study as an example of the investment spending that we are undertaking to expand the growth potential. The bank. We believed that we have the opportunity to grow our trust business and have been exploring ways to more effectively deliver the investment management funds that are currently on our platform and to expand our offerings.

During the quarter, we announced our agreement with Invesco to become a sub advisor for investment management business.

This relationship is based on our mission to expand opportunities for socially responsible investments.

Given the Vascos leadership in providing S.G. a mission focused products, we believe our clients will benefit from the breadth and depth of Invesco is passive equity fixed income and alternative investment capabilities.

We are coupling this expanded investment capability with the serious commitment to improving the delivery of our core custody offering.

I'm personally very focused on the transformation of our trust business as I believe the value of our franchise can be greatly enhanced through a vibrant side of investment in custody offerings that can increase the banks noninterest income something that I think is extremely important in the current perhaps prolonged low interest environment.

Looking to the year ahead, we also see an opportunity to expand our geographic reach as well as our product offerings, given the large market opportunity that we see.

Amalgamated continues to be the banking partner of choice for individuals and companies who share our strong values in Michigan and we continue to estimate that there is a 90 mill billion dollar commercial deposit opportunity in the United States.

Tap into this large market and as I referenced earlier, we continue to move forward with our strategy to open commercial banking offices in Boston in Los Angeles in 2020.

Were currently recruiting bankers and secure in commercial office space as we will not be opening branches to support this effort.

We will also continue to return capital to shareholders and are pleased with our boards approval of a 33% increase in our quarterly dividend to eight cents per share.

Importantly, we will maintain a disciplined capital allocation strategy as remain as we remain focused on maximizing value for our shareholders.

To conclude we are entering 2020, very well positioned for the future I'm pleased with the progress that our team has achieved and the strides we have made to prudently grow our franchise. This past year. Additionally, 2019 proved to be a year, where our reputation as America's socially responsible bank started to become more widely recognized in the market as.

We were recognized with several notable awards, including your old monies Best Bank for corporate social responsibility in North America, and Forbes Best Bank in California.

I'm very excited with the you're ahead, given the many opportunities that I see and I would like to thank all of our employees for their hard work.

Now I'd like to turn the call over to drew for a more detailed review of our financial results.

Thank you Keith 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 to slide six in the fourth quarter deposits increased $318.6 million or 29.5% annualized to $4.6 billion from the third quarter of 29 team while average deposits for the quarter were $4.4 billion.

As expected average noninterest 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.

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 500 $510.9 million at September Thirtyth 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 continue to be a partner supporting the business needs of the majority of Democratic candidates.

As seen on slide eight we delivered annual loan growth of $228.1 million or 7.1% as compared to December 30, Onest 2018 and ended the year with $3.4 billion of total loans.

There's low growth was achieved while following through on our diligent efforts runoff or indirect cnine portfolio.

Additionally, as Keith mentioned, we increased our balance of pace assessments, which are now reported in the held to maturity securities portfolio to $263.8 million, which is inclusive of approximately $171 million in purchase residential pace assessments this quarter.

Looking forward, we continue to like the yielding credit profile the pace assets and see this as an important driver to our portfolio growth in 2020 and beyond.

[noise] yield on average, earning assets was 3.81% for the fourth quarter, a decrease of 14 basis points as compared to the same period in 2018, driven by lower market rates on loans and securities.

The yield on our total loans was four point.

One zero percent compared to 4.22% in the third quarter of 2019 due to lower market rates on new loan originations and the impact of lower Fed fund rate.

Turning to slide 10, our net interest margin was 3.43% for the quarter decreased to seven basis points from the third quarter and a year over year decrease of 14 basis points.

The decrease in NIM compared to the linked quarter was primarily due to the decrease in yield on interest earning assets.

Fourth quarter NIM includes five basis points of accretion of loan Mark from the at our be acquisition.

Net interest income for the fourth quarter of 2019 was $42.3 million, which compares to $41.8 billion in the linked quarter at approximately $2.0 million increase as compared to $40.2 million in the same quarter of 2018.

For the year net interest income was $166.7 million, which compares to $149.7 million in the year price.

Now onto non interest income.

Non interest income for the fourth quarter of 29 team was $7.8 million, increasing slightly from $7.7 million <unk> third quarter of 2019, and a 221000 dollar increase compared with the fourth quarter 2018.

Noninterest income for the full year was $29.2 million, an increase of 3.1% compared to 2018.

Keeps us already hit on many of the drivers for our expense increase in the fourth quarter.

For the full year 29 team our noninterest expense remained relatively flat and up at $127.8 million decrease of $177000 <unk>, 0.1% from the $128 million for the year ended December 31st 2018.

The slight decrease was primarily due to increases in compensation and benefit costs of 2.9 million some of which was for temporary workers for special projects.

You could see and depreciation also increased zero point $7 million due to scheduled branch closures in 2020.

The increases were offset by <unk> by a decrease of $1.8 million and professional fees associated with the IPO and at our be acquisition. In 2018. There was also $1.6 million of decrease in other expenses associated with lower FDIC expense and release of off balance sheet provision.

As we head into 2020, we will continue a moderate level of strategic strategic investment in the trust business and the expansion into Boston and Los Angeles.

Additionally, there are always some inflationary pressures on normal expenses. These increases will mostly be offset by the savings we have secured and 29 team and the two branch closures in early 2020.

We estimate the branch closures will average run rate expense savings of approximately $2 million annually.

We forecast our core expenses to run at approximately $32 million per quarter in 2020 with some variation in the quarters.

Skipping ahead to slide 14, the credit quality of our portfolio held steady steady throughout the fourth quarter as nonperforming assets totaled $66.7 million or 1.25% of period and total assets at December 31st 2019.

Fair to 1.42% as of September Thirtyth 2090, a decrease of $4.9 million from the linked quarter and an increase of 7.4 million as compared to December 30, Onest 2018.

Criticized and classified loans decreased by approximately $9 million in the fourth quarter compared to the linked quarter.

The provision for loan losses in the fourth quarter of 2019 totaling an expense of $83000, which compares to a recovery of $600000 in the third quarter of 29 team.

The provision expense in the fourth quarter was primarily driven by an increase in specific reserves from our indirect see an eye portfolio due to one loan moving to nonaccrual, partially offset by released an allowance related to the movement of pace assessments to held to maturity securities.

[noise] skipping to slide 16, our GAAP and core return on tangible average common equity were 9.7% and 10.7% respectively for the fourth quarter 2019.

The core return compares to 11.4% for the third quarter of 2019, and 9.5% for the comparable period in 2018.

A modest decrease in core return on tangible equity in the linked quarter was primarily due to the previously discussed factors lastly, we remain well capitalized to support future growth.

To conclude we're pleased with our 2019 results in terms of growing the business and positioning ourselves for increasing profitability.

Turning to slide 17, we have outlined our expectations for 2020.

This guidance assumes a year end 2019 yield curve with no change in the fed funds target for 2020.

We are assuming pretax pre provision earnings of $70 million to $78 million.

We're targeting 10% balance sheet growth.

You're targeting a core efficiency ratio of 64% or better.

Thank you again for your time today, we look forward to updating everyone on our first quarter results in April.

With that I'd like to ask the operator to open up the line for any questions operator.

Thank you we will now be conducting the question and answer session. If he would like to ask a question. Please press star one on your telephone keypad confirmation to indicate that your line isn't the question Q you May press star to if he would like to remove your question from the Q for participants using speaker equipment and may be necessary to pick up your had said before press.

During the start he's one moment, please let me pull for questions.

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

Hey, good morning, guys.

Hi, Alex starting out.

Just first question on 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 for one where do 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 when those deposits actually do flow out.

<unk>.

So.

So sorry on the first question just what will the timing beyond those deposit outflows or is that yeah. Yeah, and then and then maybe where you envision I mean after the fourth quarter of 18 or they went out yes.

Yes, and the year.

Yes, absolutely. So that you know 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 believe that outflow happened 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.

Area unclear on who's going to be to lead Democratic candidate I'm going into the into the into the election. Yeah. I mean now it's I think it's great question, it's a little hard to try and put a specific opinion that.

No our money is not all money that's being rates for the current election cycle right.

There are six years Ciena campaign money on there is some of the campaign committees does that don't spend down to zero I think when important things remember as we have adequate liquidity on the books to make sure that we can cover any run off that there that there is.

You know, but it will it will go to <unk>, you know substantially several hundred million dollars and then it should start to build up again in the first and second quarters by 21, but pretty hard to put a specific pin on exactly where that number number lands on the middle of <unk>.

Okay, and if it doesn't really matter, which democratic.

Candidate winds up carrying the ticket right I mean, a lot of this money is pac money and and kind of not necessarily the money. That's raised by the specific candidate am I correct and that thinking that that that's right in fact, the presidential election, Mike.