Q3 2020 Amalgamated Bank Earnings Call
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Greetings and welcome to <unk>.
Third quarter 2020 earnings call.
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It's now my pleasure to address your host Toolbar do financial Officer. Please proceed Sir. Please proceed. Thank you operator and good morning, everyone. We appreciate your participation in the third quarter 2020 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 investors section of the website 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 90 95 week.
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.
Investors should refer to slide two of our earnings deck as well as our 2019 10-K filed on March 13, 2020, and our other periodic reports that we file from time to time with the FDIC typically under cautionary note regarding forward looking statements and risk factors.
For further description or explanation of those items that could cause actual results to differ materially from those indicated or implied by any forward looking statements that we may make.
Additionally, during today's call, we 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 in isolation or as a substitute for results prepared in accordance in accordance with U.S. gap.
A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release as well as on our website.
At this point I will turn the call over to Keith.
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 an update on our business given the ongoing COVID-19 pandemic.
Turning the call over to drew to discuss our third quarter results in more detail.
First as most of you are aware after eight rewarding and fulfilling years, serving this great institution I know my plan stepped down as president CEO of the bank at the end of January 2021.
A difficult decision and when I came to the conclusion after much reflecting about what I would say cheap.
Six years ago, when I assume by current position amalgamated within a very different place than it is today.
At this time that the board and I worked closely to establish a number of key objectives to be accomplished. These included resolving the consent order from the regulators setting a strategic direction for the bank aimed at growth.
Recruiting a new management team.
Turning to company to profitability and reestablishing the payment of the dividend and lastly, providing an excellent opportunity for our private equity investors.
Together as an organization we've achieved these goals there.
But they look at the bank today I'm. So proud of the fact that amalgamated is financially and operationally much stronger than it was when I assume that's well back in 2014 as demonstrated by our third quarter results.
During the past six years, we have cultivated and exceptional leadership team that first let us out of the precarious position. The bank found itself in following the financial crisis, and then put us on a solid path for growth highlighted by our acquisition of new resource bag and our successful initial public offering in 2018.
Together, we also responded to the unprecedented times that we continue to face instituting protocols that allowed it seamlessly transition into our remote working environment in the face of the Cobi 19 pandemic.
In addition to our financial operational success I'm proud that during my tenure amalgamated cemented its place as Americas socially responsible bank.
This has been demonstrated in the growth of our impact blending exceeding our commitment nearly half the time the countless positions. We took on social issues of the day, such a dozen safety reproductive rights and racial justice and the launching of the amalgamated foundation to enhance the bank's core forgiving.
All of these examples show how the bank's mission has been deeply ingrained in our culture and our walk and I'm confident it will continue after my time.
It was with the aforementioned goldmine that I felt very much like mission accomplished there cannot be a better time for me to step back identify the next challenge for myself and leave the bank in a very capable hands my colleagues who have been on this journey Whitney.
Deeply grateful to the board for providing me with the opportunity to lead this great institution.
Well the successor has not been identified a formal search committee has been formed and a leading executive search firm has been engaged I look forward to his 15 aboard and our next CEO with the transition to help ensure we continue to grow while remaining true to our value.
In order to ensure business as usual, it's not interrupted I have agreed to serve as a special advisor to the board next July and I'm very pleased that Lin Fox has agreed to step in as interim President and CEO. If our next leader is not identified prior to my departure on January 31st 2020 wins.
When does the organization exceptionally well as a board member for the last 20 years chair for the past four well also serving as the international President of walkers, United which owns 41% of amalgamates common shares.
Should we think about the take away for the third quarter I'm, most impressed with the banks improve operational execution, especially given the ongoing challenging environment.
We have taken to improve the bank performance clearly be seen in our third quarter results, which are testament to our entire leadership team here at amalgamated.
Turning to our third quarter highlights our average deposits grew $459 million during the quarter to $5.9 billion compared to the second quarter.
Equally strong in both political and nonpolitical sectors and continues to demonstrate the competitive brand recognition amalgamated folk holds significant market segment.
We will discuss more in our political deposit outflows as we are on the eve of the net member third election day.
With the close of the third quarter. The bank continues to be well positioned as it concerns credit our strong capital base conservatively underwritten loan portfolio is further evidence as our loan deferrals declined to $201 million or 6% of our portfolio. This.
This compares to 13% at the end of the second quarter provision.
Provision for the third quarter declined to $3.4 million compared favorably the $8.2 million provision recorded during the second quarter.
This low level of remaining deferrals to flex a strong credit underwriting of the bank and we are excited to see our loan deferral activity largely behind US we are cautious in the potential of any impacts of a second wave you to coking related shutdowns.
We continue to monitor our loan portfolio and remain committed to working with our borrowers has problems arise.
As we transition our customers to our online banking platform throughout the pandemic, we were presented with the opportunity to consolidate some of our branch location.
We accelerated this initiative during the third quarter and took the opportunity to permit we closed six branches given the backdrop of the pandemic and the resulting decline in customer traffic.
This resulted in a $6.4 million onetime expense this quarter importantly, the branches were only close once we complete confidence at the high levels of adoption and customer satisfaction in our digital platform would prevent client losses.
Expect to realize an annual expense benefit of approximately $4 million over time due to the branch closures what the impact will gradually be felt as we place almost all employee from a branch and temporary and permanent positions in the bank.
Turning to capital allocation, we continue to like the growth opportunities that we have in front of us and will continue to prioritize investments as the strongest avenues to drive book value growth and shareholder value.
Our share, but our share buyback remains under suspension and our dividend is evaluated on a quarterly basis with our board of directors last.
Last night, we also received our first bank rating from Kroll, which is triple B plus slash triple B for senior and sub debt respectively. This is another independent validation of the strength of the franchise we had pills.
Before I close I want to highlight that amalgamated received some positive press coverage this quarter about our work to drive sustainability principles and finances first Motley fool named amalgamated is one of the few bank actively working to combat climate change, we also receive coverage and politico and several other publications for our leadership and the partnership for carbon accounting financial.
Our P. Caf and the recent banks that have joined that Atlas.
These examples are more our additional proof of our leadership in the SG investing space and I am proud to see them highlight.
To conclude I would like to take this opportunity to thank our employees for their tireless work and commitment to our important mission as Americas socially responsible bank together, we have made great team and a built in bank positioned to weather all economic cycles and I have every confidence that the bank is an excellent huh.
I consider myself extremely fortunate to have had the opportunity to work with a talented group of individuals.
I'd now like to turn the call over to drew for a more detailed review of our financial results.
Thank you Keith I will begin by reviewing our third quarter results before turning the line back to the operator to open for questions.
Turning to slide six in the third quarter, ending deposits increased $151 million or 10% annualized to $5.9 billion from the second quarter of 2020, while average deposits grew $459 million in the quarter to $5.9 billion.
Average non interest bearing deposits increased $445 million from the prior quarter, primarily due to seasonality related to the election cycle.
Total noninterest bearing deposits now represent 54% of average deposits at quarter end.
Our cost of deposits decreased to 14 basis points down six basis points compared to 20 basis points at the end of the second quarter.
Positives from politically active customers such as campaigns packs advocate advocacy based organizations in state and National Party committees increased $633 million from $578 million at December 30, Onest 2019, ending the third quarter at $1.2 billion.
As outlined on slide seven.
As of Monday, or political deposits were $805 million.
Although we had expected the nadir of $300 million in political deposits the momentum in the party continues to be exceptional and we now expect these deposits to be above $500 million at the end of the election.
We look forward to continuing our supported the Democrats during the presidential race and partnering with the majority of Democratic candidates in office.
Turning to loans total loans were $3.6 billion compared to $3.7 billion at the end of the second quarter.
For the nine months ended September Thirtyth 2020, total loans increased $115.9 million driven by an increase of $187 million in cnine loans, including $95 million of government guaranteed and paycheck protection program loans.
And to $16 million increase in consumer loans, primarily consumer residential solar loans.
Our balance of pace assessments, which is reported in the held to maturity securities portfolio increased by $44 million in the third quarter to $367 million.
As Keith mentioned earlier, the bank continues to make progress on reducing loans on deferral.
In total we currently have $201 million or 6% of our loans on a deferral program, which is shown on slide 11.
This is down approximately $264 million from June Thirtyth 2020.
The number of new loans, asking for deferral has pretty much just.
Commercial loan that reached the end of their deferral have almost all started to pay and we expect almost all of the remaining commercial loans on referral to start paying.
As well.
There are a few customers where it isn't clear yet but in other words by the end of the fourth quarter. We believe the vast majority of commercial loans on deferral will be picked.
Residential deferrals have also decreased to lower levels.
Some customers have requested third deferral, which we grant based on legislative guidance, we're moving any loan that goes past 180 days of deferrals to non accrual for accounting purposes, and reversing any accrued interest.
Net interest income for the third quarter of 2020 was $45.2 million, which compares to $44.4 million in the linked quarter.
In at approximately $3.5 million increase as compared to $41.8 million in the same quarter of 2019.
The year over year increase is primarily attributable to a decrease in interest expense due to a decrease in deposit rates paid and FHLB advances and other borrowings.
And an increase in average securities and loans more than offsetting the lower yields earned on such assets.
As shown on slide 13, our net interest margin was 2.88% for the quarter a decrease of 22 basis points from the second quarter and the year over year decrease of 62 basis points the.
The accretion of the loan Mark from the loans, we acquired in our New resource Bank acquisition contributed two basis points to our net interest margin in the third quarter of 2020 compared to three and seven basis points in the second quarter of 2020 in the third quarter of 2019, respectively.
Prepayment penalty fees earned through loan income were higher this quarter and contributed $1.1 million or seven basis points to our net interest margin in the third quarter of 2020.
Fair to two zero basis points in the second quarter of 2020 in the third quarter of 2019, respectively.
A go forward basis, we expect NIM to benefit from the outflow political deposits, but still have pressure from lower rates over the long term, but having said that the majority of the pressure has already occurred.
Given the higher exit point out political deposits, we will likely use cash on hand to fund the outflow, which means minimal impact to earnings as a result.
Now onto non interest income noninterest income for the third quarter of 2020 was $12.8 million increasing from $8.7 million in the second quarter of 2020 and five.
$5.1 million increase compared with the third quarter of 2019.
The increase in the third quarter of 2020 compared to the like period. In 2019 is primarily due to a $4.3 million tax credit on an equity investment in the solar project.
Eight 0.6 million dollar gain on the sale of Securities and zero point $8 million increase in bank owned life insurance income due to the receipt of a death benefit payout and zero point $8 million increase in the gain on sale of residential loans. These.
These increases were partially offset by a $1.3 million decrease in trust department fees, primarily related to the decrease in revenue from a real estate fund that is that is liquidating assets the movement of funds to lower yielding but higher margin products and market volatility.
The $4.3 million gain from the tax credit, it's a timing issue.
We'll see a reversal of that income in the fourth quarter of $2.3 million and in the first quarter of $2.5 million and then we will have a lower level steady stream of income from the projects.
The trends are shown on slide 14.
These future impacts will likely be offset by new tax equity projects coming online in Q4, or Q1 2021, but the timing is uncertain.
As Keith discussed we've done a great deal of work, reducing our non interest expense on a go forward basis.
We had $6.4 million of onetime expenses, which we recognized in the third quarter related to the closing of six branches in New York City.
$500000 in advertising and promotion related to the Democratic National Convention as fleet as seen on slide 15.
Excluding these charges from the $37.9 million of expense recorded in the third quarter provides a better run rate of our expense base and compares to the $31.1 million in expenses in the second quarter.
And $31.9 million.
In the year ago quarter.
Fourth quarter tends to be more volatile on expenses and we anticipate some incremental expense related to the bank holding company formation and the CEO transition.
On a go forward basis, we will see expense benefits from the branch closures and continue to operate as efficient levels of expense in 2021.
We'll have more guidance on the fourth quarter earnings call in January.
Skipping ahead to slide 17, nonperforming assets totaled $80.6 million or 1.22% a period end total assets at September 32020.
Which was an increase of $14 million compared to $66.7 million.
Or 1.25% a period to period end total assets at December 31st 2019.
The change was the result of the addition of one $8 million non accruing construction loan and one 8.1 million dollar accruing construction loan that was past due at September Thirtyth 2020 is subsequently paid off in full in October.
Of the three construction loans that we discussed last quarter. One is paid off one remains special mention.
In one is moved to non accrual.
The non accrual construction loan is well protected and we currently expect no losses on it but it may be an extended workout given their legal actions between the developer and the contractor.
As a reminder, we're not a construction lender.
These are loans remaining from the new resource acquisition.
The provision for loan losses in the third quarter of 2020 was $3.4 million, which compares to $8.2 million of provision in the linked quarter.
The provision expense in the third quarter of 2020 was primarily driven by $5.3 million in charge offs related to a hotel loan which was partially reserved for in the previous quarter and a small construction loan spin.
Specific reserves on non accrual sienna loans increased by $1.1 million.
Moving along to slide 18, our GAAP and core return on tangible average common equity were 9.6% and 13.4% for the third quarter of 2020, respectively. The.
The core return compares to 9.1% for the second quarter of 2020.
And 11.4% for the comparable period in 2019.
Lastly, as Keith mentioned, we remain well capitalized to support future growth.
To conclude and to reiterate with what keep touched upon we're very pleased with our third quarter results and where the bank is today operationally.
We have been able to grow our business, while supporting our customers and generating ongoing strong returns and what has been a very unusual and unprecedented environment.
Thank you again for your time today, we look forward to updating everyone on the fourth quarter results in January.
That I'd like to ask the operator to open up the line for any questions.
Operator.
Thank you, ladies and gentlemen, we will now be conducting a question and answer session I'd like to ask a question you May press star one on your telephone keypad a confirmation total indicate your line is in the question queue.
You May press Star two if you would like to sort of move your questions from the queue.
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Our first question comes from the line of Steve Alexopoulos with JP Morgan. Please proceed with your question.
Good morning. This is gently on for Steve not pledged.
First of all best of luck keep on your next chapter maybe for Keith and you're going to see a surge are you looking for someone who is in your market or someone with the specialized background working at the knee sector, you're any such as political organizations and nonprofits.
So the board is leading the charge.
Search and I have had a chance to review some of the materials and I know that the search is underway and I think the board is looking for someone who is really got a set of skills that both have.
Yeah.
Deep experience in banking and financial services, along with the ability to connect to R&D department are each market.
And there are and my understanding a number of very very good candidates to lesser.
Sure.
Yeah.
That's helpful.
And my follow up is on solar fretted showed a modest income you project out beyond one can you 21 implied 14, and just assuming that the deals are being chaotic trend level to that new potential deals. You also sand implied that you expected more deals over the next couple of quarters that are not included in the pitch.
Action. So just just wanted to double check to make sure that the run rate should be higher than the 1.8 million forecast for 2022 for example.
Correct, yes.
Yes, Hi, Gena, it's true yes, that's correct. The 1.8 million is that totally on that slide is that total income for the project stream over.
Over the life, we're showing there so what we're really doing is just giving you a longitudinal view of one set of projects. So as we add on more projects, which we intend to do.
We'll we'll add to those numbers. So that is not a forecast of non interest income for all projects going forward just to be clear.
Is there a Mac do you sort of a magnitude.
Oh, but inc.
Ben you get.
One additional deal or the size or the number or the size of the deal do you expect to book.
Book over the next few quarters.
Yes. So this this type of investment is constrained by our taxable income so when we're looking at how many deals we can do in the future we need to consider how much federal taxable income we're going to have available to use. These tax credits. So I would say this is just one deal I'm, referring to is actually four related deals with.
With one.
With one.
Probably with one project sponsor so I suspect we could probably do about two of these the year on a normalized basis as long as taxable income.
Looks looks positive in the future.
And then what's what's really not on the slide but related to this is along with the tax equity investment. We're making we're also doing the term loan on the projects as well so there's other benefits.
That are related to making these tax equity investments. Besides just the economic shown on this page.
Okay. That's helpful. Thanks for taking my questions.
Thanks Janet.
Sure.
Our next question comes from the line of Brian Martin with Barclays. Please proceed with your question.
Hi, Good morning, guys, how you doing.
Hey, good morning.
Good morning, Brett should.
I'm just wondering you've highlighted the high levels of cash impacted the NIM by about 31 basis points.
I have seen pre penalty payments are added back a seven basis point.
Yes.
The expected decline in political deposits for next quarter.
31 basis points, you think you can get back.
I will then apply you can get a 3% NIM would be achievable, even possibly lower prepayment penalties.
It would imply that I mean, there is still going to be some some pressure on more from the longer end of the curve being lower now on new originations coming in refinances. So we do also have to offset that pressure. That's that's going to continue as long as low rates exist, but I think we you know besides just the cash coming off the.
Balance sheet I mean, we do have obviously, a large securities portfolio and a lot of lower yielding assets that can be deployed into higher yielding assets.
In the form of more loans or pace assessment. So that's what we'll be working on to help counteract.
Some of that longer term pressure on NIM.
Okay, Great and then.
A question just on capital are you seeing capital levels continue to creep up and next quarter, you will get a lift in the leverage ratio in the political upon is running off.
Could you just go through your capital priorities again.
And if acquisitions and buybacks or an old.
I will point does it become more appropriate particular closer look at the dividend.
Yeah, great. So the dividend is a conversation every quarter with the board and we'll continue to have that that conversation.
The first priority for capital is always going to be organic growth and we see a lot of that in our future I think our growth rate has been.
Very strong over the past several years and we and we see it continuing to be strong going forward. Obviously in Q4, we're going to have a little bit of drop.
Political deposits, but I think less so than we've been forecasting as the outlook there looks higher and then we'll continue to grow our core franchise as well and I think we are going to need some capital to continue doing that.
So as we plan for next year are finalized our plans for next year will look at the capital levels and determine what the best course of action is.
Buybacks dividends acquisitions et cetera, and I think the other thing to note here too is there's still a lot of dry powder in terms of Keith mentioned in the call rating. That's just been established in the bank holding company is coming here, we actually have no sub debt issued we have no preferred stock now that were.
Planning on issuing either of those right now but.
But those are those are levels to think about non organic or those are levers to available to to use as we're thinking about non organic growth as well.
Okay, great well. Thanks, those were all my questions.
Thanks, Brian.
Our next question comes from the line of Chris O'connell with KBW. Please proceed with your question.
Hi, good morning, gentlemen.
Chris.
So I would like to circle back I guess kind of to the margin and.
To to capital or two.
Liquidity deployment.
And just how you see the peace pipeline or the opportunities that you're seeing.
Sure pace growth or just.
Where.
You are seeing as well.
And opportunities given some of the declines this quarter.
Yes, great. So I'll I'll take that one and Keith can jump in.
The base assessments, we continue to have.
We continue to believe we will originate and put more of those on the balance sheet. So that will be a source of growth.
Partnership with pace funding group has continued to strengthen in other ways as well and I think we see a lot of opportunities for growth and continuing to work with them.
We do have some other partners, which are of a similar variety that we're working with <unk> to continue to look for loan growth opportunities that we have a pretty strong.
See a nice pipeline for new loan growth as well more so in the renewable energy space. So I think there's a lot of opportunities for loan growth there.
Two big headwinds for us are going to be the ones that we saw this quarter. The first is.
Multifamily, which for US is primarily in the New York City market.
I think what we're seeing in terms of credit and deferrals is great and I think we're very happy with where outcome will be in Q4 with centrally all of those loans beginning repayment, but same time it refinancing activity and purchase activity has really slowed down. So I think originations will be challenge there, but we continue to look for opportunities and.
Then in residential.
Our pipeline and originations are the strongest they've ever been but at the same time, we've made a strategic decision that.
At a 2.5% rate or thereabout, we're not looking to put 30 year mortgage on the books at this point except for relationships something we can if we could we could change that in the future, but in the meantime, thats going to mean.
Continued stream of higher higher noninterest income.
But some pressure on the loan side of the balance sheet.
Got it.
That's helpful. Thank you.
And then I appreciate you gave the updated political positive balance dropping.
800 million or so.
As of October, but do you guys have any view as to where that will bottom out towards the end of the fourth quarter at this point.
Well I think one of the things that we're seeing Chris is that we are seeing spending later in the cycle than we normally have we are seeing some of our clients in this space.
Recognizing that there could be post election.
Let's call it activity if there is uncertainty around the outcome either in a presidential level, which gets a lot of attention, but you could have that at that at.
At the state and local level as well and so I think you know there is some likelihood that we might see some continued spend.
That makes it a little hard to project.
Exactly where we where we will be.
At the end of that at the end of the fourth quarter.
It up a.
A little bit lower than it is today.
I think you know the projection that drew had given in terms of where it is this is a range and I think it's probably a pretty good range.
What's likely to happen by the end of Q4.
Got it.
Thank you and then you know given just kind of putting all the moving parts together with.
The political deposits dropping.
And the cash balances dropping kind of along with that in the fourth quarter.
But then adding to that are there.
Our liquidity deployment opportunities or mix shift opportunities.
Given the liquidity levels do you guys have an idea of where the margin will shake out going forward.
I don't think we're ready to give guidance on that I think we've.
I don't want to Pat ourselves on the back too much but I think we've done a pretty good job of holding now.
Net interest income.
Pretty steady over the past few quarters, while absorbing obviously, a massive decline in the yield curve.
And.
We're pretty happy about that I think our sources for increasing net interest income in the future are really going to be continued balance sheet growth.
Excluding the political deposits impact and then.
Continuing to work on growing the loan portfolio. So theres a lot of factors that go into it. So I don't want to give you a queue for them right now, but we're very focused on you know.
Holding and then increasing net interest income into the future.
Got it.
Understood.
And then one last quick one for.
For the for the bully fees this quarter.
Well there was somewhat elevated in I guess, if they were what do you think they might jump down to kind of on a normalized level. Yeah. I think if you look at where we were and it's actually pretty steady except for when unfortunate events happened.
End of increases up, but if you look back to where we were.
Q3, it's in the earnings release in Q3 of 2019 little.
Little over 400000 per quarter, that's probably a good approximation of where we'll run in the near term.
Excluding any worried I'm events.
Great. Thank you that's helpful. That's all I had.
Thanks, Chris.
So no further questions in the queue I'd like their hand, the call back to Steve that's good for closing remarks. Thank.
Thanks, Operator, I just want to thank everybody for joining us today, we're really pleased with the strong results. We put forward this quarter. It's a testament to the strategy that we've developed a.
Terrific franchise that weve been able to create and really the strength of so many people on our management team and all of our staff.
That that work so hard every day.
So I just want to thank all of you and stay safe.
We will talk to you at the end of the year. Thanks.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
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