Q1 2021 Amalgamated Bank Earnings Call
Good morning, ladies and gentlemen, and welcome to the amalgamated Financial Corp, first quarter 'twenty 'twenty One earnings conference call. During today's presentation, all parties will be in 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 is being recorded I would now like to turn the conference over to Mr. Drew <unk> Chief Financial Officer. Please go ahead, Sir Thank you operator, and good morning, everyone. We appreciate your participation in our first quarter 2021 earnings call.
With me today is Lynne Fox Board Chair, and interim President and Chief Executive Officer, and Jason <unk>, Chief Accounting Officer, who will become the interim CFO as of Monday.
As a reminder, a telephonic replay of this call will be available on the investors section of our website for an extended period of time.
Additionally, a slide deck to complement today's discussion is also available on the investors section of our website.
Before we begin let me remind everyone that this call may contain certain statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
We caution investors that actual results may differ from the expectations indicated or implied by any such forward looking information or statements.
You should refer to slides two and three of our earnings slide deck as well as our 2020 10-K filed on March 15th 2021 for a list of risk factors that could cause actual results to differ materially from those indicated or implied by such statements.
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 with U S. GAAP.
<unk> 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'll turn the call over to Lynn.
Thank you true and good morning, everyone. We appreciate your time and attention today.
First I would like to thank true for his many contributions over the past six years as he has been part of the team that has risen.
Egypt turnaround as the bank's operations.
Laid the foundation that positions amalgamated into future.
True well, we're sad to see you go we wish you great success on your new endeavor, we're looking forward to see what you accomplished snacks.
As chair of the board of amalgamated I, certainly recognize the uncertainty that our shareholders and employees must feel given the departure of true and Keith.
Given they have been the public face of amalgamated to investors since the IPO.
That said I'm very grateful for the senior leadership team that we have assembled over the past six years and their teams, which gives me great confidence that the bank's operations will continue to run at a very high level.
Jason Derby is an excellent example of the depth and breadth of our senior team.
Since joining amalgamated in 2015.
He has consistently demonstrated extraordinary leadership in <unk>.
Pressure financial acumen, and a deep knowledge of every facet of the amalgamated.
Jason has been instrumental in helping to build on our financial Department and I'm very pleased that he has accepted the position of interim Chief Financial Officer.
I'm extremely proud of our entire management team, who has maintained a strong focus on ensuring that business continues to perform which are financials clearly demonstrate.
Jason isn't great company, with Martin morale, and Sam Brown, who manage our consumer and commercial business for the company.
Both of whom have been instrumental in growing amalgamated to where it is today and improving the efficiency of our operations.
Martin who is our chief operating officer joined amalgamated from American Express five years ago, where he headed the strategic planning group International office in London.
Or to American Express.
Capital, one where he pioneered the first direct bank offering.
Damn who is our executive Vice President and director of commercial banking joined the company six years ago after serving as director of the White House business Council.
As president Obama's liaison to the private sector.
I have worked on economic policies to help America's working families and businesses succeed.
The contribution from Sam and his entire team to amalgamated it can be seen through the strong continued growth of our deposit franchise and transformation of our lending strategy.
As we talk about the great footing the bank as on today I'm does encourage and grateful.
For the team and all of that they have done to position us to meet its next CEO for continued success.
The incoming CEO will inherit a great institution, one that we are all very proud to be a part of.
As you know a special committee of the Board has been working with the Ali group are very well known and established search firm to help us identify our next day yeah.
This process has been robust and comprehensive and we have added numerous candidates all of which were highly qualified.
Amalgamated is a very special institution and finding the company's next CEO is of Paramount importance to both the board and the bank.
And in particular, a CEO that blends together financial expertise with mission driven leadership experience.
This was a process that requires time and utmost due diligence well I cannot yet name who our next CEO is at this time I'm pleased to announce that we are in the process of finalizing an employment agreement with a terrific executive who myself and the entire board is thrilled to have joined the bank I felt that because we are close to that.
Final stages and making this earnings announcement it was important to provide you with an update.
However, this is the extent that I'm unable to comment on as things are not yet finalized.
I'm very excited about where we are and look forward to updating you more formally when the time is right.
The future of certainly break for our company as we embark upon the next chapter in our journey with amalgamated next CEO and further expand upon our socially responsible initiatives.
Today more than ever our long term positioning as a socially responsible company and a solid ESG investment is more relevant than ever.
Our reputation and our corporate values bind us together as an institution and drive our success as well.
One example of this during the first quarter is our public endorsement of HR 40, which sets up the commission to explore preparations for African Americans. We were the first major bank to endorse HR 40, I believe this is the first step in moving our country forward and building an equitable economy that creates opportunity for all.
All individuals to try.
Additionally, we have helped to orchestrate a commitment by financial institutions at the White House climate Summit. This week to double down on their commitment to net zero financed emissions.
These are great examples of how the bank's mission has been deeply ingrained in our culture, our wear and here to stay as we move forward.
This is also a terrific example of how we can drive positive change while also growing the value of the bank.
To that end, we're excited to announce that we've hired a new head of sales from our E. S. G suite of products that we're rolling out in our Trust Department. This is a terrific opportunity for amalgamated. Another example of how we are investing in our future. While also doing good in the world.
Before I turn the call back over to true I briefly want to touch on our share buyback, which we reauthorized last week after the formation of the holding company.
The board continues to be thoughtful and balanced in our capital allocation strategy with capital for our strong organic growth remains our top priority.
This decision to authorize the buyback program provides additional flexibility to create value for our shareholders. When we see our shares trading well below what we believe to be their intrinsic value and we also plan to use it to help offset dilution from current and future equity grants.
And so with that I'll turn the call back over your true.
Thank you Lynn and thank you for the opportunity to serve as <unk> CFO for the last six years.
Look back on all of them, that's been accomplished and I'm proud of what we've achieved together as a team.
Since joining in 2015, we re instill the conservative credit culture.
The risk profile of our loan portfolio return the company to profitability.
Charter in charter to a path of growth for the company.
Our achievements can clearly be seen in our navigation of the challenges that were presented as a result of the pandemic over the last year.
We have weathered the storm well on the credit quality of our loan portfolio with strong.
Importantly, the actions that we took during 'twenty 'twenty positioned the bank to begin releasing reserves.
And as a further testament to the conservative credit culture that has been built for.
For the first quarter, we released $3 3 million of reserves, which compares to provision expense of $4 $6 million in the fourth quarter of 2020 and $8 $6 million for the first quarter of 2020.
Recovery in the first quarter 2021 was primarily driven by a release of allowance for loan losses due to lower loan balances.
Great have a construction loan to a pass rating and improvement in other economic and portfolio factors.
The outlook on credit continues to improve.
We currently have only $8 $5 million on loans that are on deferral and accruing interest.
These loans appear to be the last cohort to go through the deferral process.
In addition, based upon recent information, we expect to upgrade into a pay off several loans in the second quarter.
To that point yesterday, we received a full payoff of the $8 6 million dollar construction loans that is contained in our non accrual loan too.
We continue to carefully watch the recovery in New York City.
We see progress from many borrowers, but we do anticipate.
It's paid some borrowers will continue to struggle for some period of time.
Looking beyond credit performance the initiatives that we've put into place to grow the franchise value of the company remain intact.
The expansion of our geographic reach into Boston has been a success and we have grown deposits to $34 million. Despite opening this location at the beginning of the pandemic.
This validates not only the market acceptance of our value based approach to banking.
But also the opportunity to further expand.
Today, there is a $90 billion commercial deposit opportunity in the U S with mission aligned institutions and the opportunity to further expand our geographic reach presents amalgamated with the significant opportunity to growth.
Additionally, our trust business is also an exciting growth engine for amalgamated.
As Lynn mentioned, we have recruited a very talented executive to head our ESG sales efforts to help drive the growth of our E. S. G suite of products, we've rolled out this past quarter.
This is a terrific opportunity for Nov debated and another example of how we're investing in our future. While also doing good in the world.
To conclude and leave knowing amalgamated is in a very strong financial position with a bright future ahead.
I have complete confidence in Jason and his team and I am very excited that he will succeed me as interim CFO.
I know, Jason well, let me first worked with him at capital, one and 2007 and over the last 15 years as our working relationship continues.
Personally and that was the rate time for me to move on to my next career challenge and I leave you in excellent hands.
With that I will turn the call over to Jason Thank.
Thank you drew I really appreciate the opportunity to work with you and look forward to getting to know everyone on the call today better as I take on this new role.
Turning to our financial results on slide six and as Lynne mentioned deposits in the first quarter increased $381.4 million to $5 $7 billion from the fourth quarter of 2020, while average deposits for the quarter were $5 $6 billion.
Average noninterest bearing deposits decreased $165 million from the prior quarter, primarily due to seasonality related to the election cycle and now represent 50 per cent of average deposits at quarter's end.
Our deposit cost of funds remained relatively stable at 11 basis points for the quarter, a decrease of two basis points from the fourth quarter of 2020.
The yield on average, earning assets was $2 96 per cent for the first quarter.
A decrease of 81 basis points as compared to the same period in 2020, driven by lower market rates on loans and securities. The yield on our total loans was $3 83 per cent compared to 4.04 per cent in the fourth quarter of 2020.
After adjusting for prepayment penalty fees or loan yield was down six basis points in the first quarter as compared to the previous quarter.
Total net loans as of March 31, 2021 were $3 2 billion.
A decrease of $224 $5 million compared to December 31, 2020.
The decline in loans was primarily driven by a 100.8 million dollar decrease in residential loans and a $73 4 million dollar decrease in commercial real estate and multifamily loans, given heavy refinancing by our existing customers.
Importantly, we've made the decision to sell our 30 year mortgage originations given the current interest rate environment, which we believe is a prudent decision low.
Looking forward, we have seen a slowdown in our refinancing and our residential portfolio and are optimistic that we will also see prepayments slow down in our CRE and multifamily portfolios as we move through the second quarter as a result, our loan portfolio should begin to stabilize through the year before returning to growth as we exit 2021.
Our balance of pace <expletive>essments, which is reported in the held to maturity securities portfolio increased by $36 million in the first quarter to $452 million and we plan to continue adding these <expletive>ets in the future.
Turning to slide 11, our net interest margin was 2.85 per cent for the quarter, a decrease of 21 basis points from the fourth quarter and a year over year decrease of 61 basis points.
Prepayment penalties positively impacted margin as they added four basis points to our net interest margin in the first quarter of 2021 compared to 13 and six basis points in the fourth and first quarter of 2020, respectively.
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 first quarter of 2021 compared to two and four basis points in the fourth and first quarter of 2020.
Net interest income for the first quarter of 2021 was $41.8 million, which compares to $45 $7 million in the linked quarter and an approximately $2.8 million decrease as compared to $44 $7 million in the same quarter of 2020.
Now on to noninterest income.
Noninterest income for the first quarter of 2021 was $4.1 million decreasing from $10.0 million in the linked quarter and $9 $1 million in the first quarter of 2020.
The sequential quarter decrease was primarily due to an anticipated decrease of $5 $7 million in tax credits on equity investments in solar projects.
The quarterly decrease as compared to the year ago period was primarily due to a loss of $3 $8 million in tax credits on equity investments in solar projects in the first quarter of 2020, one versus no activity in the prior period quarter.
For the first quarter noninterest expense was $32 $8 million, an increase of $100000 from the fourth quarter of 2020, and a $500000 increase from the year ago period. The increase from the sequential quarter was primarily due to a 1.1 million dollar charge for severance related to the modernization of our trust department, partially offset.
By decreases in advertising and professional service expenses.
As can be seen on slide 15, our nonperforming <expletive>ets totaled $81.0 million or 1.27 per cent a period end total <expletive>ets at March 31 2021.
A decrease of $1.2 million compared with $82 $2 million or 138% at December 31 2020.
The decrease in nonperforming <expletive>ets was primarily driven by a decrease of $4.5 million of non accruing construction and multifamily loans, partially offset by an increase of $2 $7 million of those loans moved into other real estate on.
We continue to see very few requests for deferrals and as drew mentioned are very pleased with our credit trends. We know the COVID-19 pandemic is still very much here and we remain vigilant in managing credit and working with our borrowers to resolve any issues that may arise.
Moving along to slide 16, our GAAP and core return on tangible average common equity were $9 one per cent and 10, 1% respectively for the first quarter of 2021.
The core return compares to $10 seven per cent for the fourth quarter of 2020, and seven seven per cent per the year ago quarter.
The modest decrease in core return on tangible equity in the linked quarter was primarily due to the previously discussed factors.
Lastly, as drew mentioned, we remain well capitalized to support future growth.
To conclude we're extremely pleased with our performance during the fourth quarter and are optimistic about the outlook for the remainder of the year given that we're still early in the months of 2021, we're not making adjustments to our 2021 outlook, we plan to provide an update on our 2021 guidance on the second quarter call as appropriate. Thank.
Thank you again for your time today, we look forward to updating everyone on our second quarter results in July.
With that I'd like to ask the operator to open up the line for any questions operator.
Thank you at this time, we will conduct a question and answer session.
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Once again Thats star one to ask a question at this time.
One moment, while we poll for questions.
Uh huh.
Yeah.
Our first question comes from Crystal corner with K B W. Please proceed.
Hi, good morning, everyone.
And a true great job you know worked with you in the past few years and good luck on your next chapter.
Yeah. Thanks, Chris it's been great and I've really enjoyed working with working with you and the team as well.
Absolutely. So I just wanted to start off on the on the balance sheet.
Obviously.
Really strong deposit growth.
And it really.
A large increase in cash.
Quarter over quarter.
We're just you know walk us through that.
The target still for 10% balance sheet, which is going to be deposit driven so just the management of the excess liquidity and you know what are how much cash you expect to put to work here into the securities book in.
On what kind of rate you're getting on those investments.
Yeah. So day the cash build was obviously pretty large and we had a large amount of prepayments as we as we just said as well both from residential and we had two of our largest loans pay off in the quarter. So I think be the speed of prepayments has definitely slowed down for us and I think across the industry.
Which will help the.
The loan originations and security purchases to eat into that cash balance going forward. So I think the growth will be a combination.
Loan growth.
Over there over the remainder of this year and putting those that cash to work in the securities portfolio.
We are obviously still not excited about.
I'm, putting a lot of duration on the securities portfolio in particular with rates, where they're at right now so we're going to do.
Be selective in how we do that and we built up quite a bit of floating rate <expletive>ets on the securities portfolio and I think we'll probably look to maintain a modest level of duration growth in that portfolio at least in the near term as we watch the rate environment.
Got it and did you guys do you have what day the rate was on what.
We're putting on in the Securities book during the quarter.
If you exclude pace, it's probably in the.
Low 1% range in terms of what's coming on there.
Sometimes even less out of floating rate securities.
Okay got it and then and then can you just give us the outlook on on the pace of growth.
Figure out what's going to be this growth through the year and maybe you know.
What rate those are coming on it.
So Chris I'm happy to jump in and answer that so I think per pace, you know, where we're maintaining our our plan for about $150 million of.
On <expletive>et purchases throughout the year.
Fleet at about 30 $36 million of that in Q1, and we have availability under our existing flow deals to to accommodate the targets that we have for the remainder of the year. So we feel like that's a.
That's a commitment that we're going to be able to reach.
In terms of how they come on the books the residential pace, they're coming on at.
Just below 4%.
At this point in time and again.
To reiterate you know we think that.
With $150 million target is a is one that we're going to retain.
And in addition, I'd say the other opportunity in pace, which we don't speak about or we haven't spoken about that much in the past as commercial pace, which is a is a.
Attractive <expletive>et cl<expletive> as well for us and so I think we will look to do or we are looking to do more commercial pace deals than we've done in the past and in the future quarters as well.
Okay.
Great.
And as far as the loan comments.
And in the prepared remarks.
Jason.
It sounds like that there that the loan growth is going to be.
So flat, maybe even down a little into Q and kind of you know.
You know overall kind of on average flattish for the next couple of quarters.
With with growth, probably not coming until 'twenty, one or <unk> 22 on a net basis is that accurate or.
No I think that's a fair <expletive>essment.
Obviously, we've got we've got our eyes on loan growth and you know we've been building up a pretty strong pipeline and I think our pipeline right. Now is about $600 million part of that is paced commitments on on flow, but we think theres opportunities for us to to really improve and the loan growth space, but I think youre right.
As the year progresses, and the economic outlook, you know starts to get realized in terms of what's being predicted we feel like that's probably where the growth opportunities are going to be in and you know are sort of looking forward to that.
Okay.
Great. That's helpful. And then can you just remind us how big those are those two largest building relationships where that paid down during the first quarter.
Yeah, one of them was the largest loan was.
A little over $70 million.
I think for probably very important to note for a loan that large it was extremely well collateralized. So there was a there was a mission aligned I shouldn't say it was it is a mission aligned relationship.
Where the line pay down.
We may or may not see some some increase in utilization of that line going forward, but it's really for.
This this group to use it for.
Mission aligned activities in the in the U S and in different communities.
Okay got it.
And so on nothing of that nature, you know on the horizon for the second quarter here.
No I wouldn't I wouldn't want to commit to that no. I mean, you know, it's always possible, but we're not planning on a big drawdown on that line.
Gotcha.
Okay got it and then.
Tying you know the cash you know together here.
And you know the.
Investments in the securities from the pace in what seems like blended long long growth from the near term at least yeah. How are you guys feeling about the margin drag.
Directionally going forward.
Yeah. So yeah, we think quite a bit about the margin and obviously the compressed rate environment has hum.
It has impacted it.
I think theres, a theres a consequence to our you know basically our strong low cost deposit franchise, making is <expletive>et sensitive so the lower rates negatively impact on him.
Accordingly, but you know when I think about the NIM right. Now there is there is the excess liquidity, that's creating a drag we started thinking that is about 14 basis points.
Drag and had that'd be deployed into higher yielding <expletive>ets, we'd be somewhere probably in the in the 3% NIM range, which we feel would be a.
Pretty good in the current environment.
So really the thought process here is really on that day that excess liquidity.
And in doing so it's always that striking the right balance between the prudent credit underwriting and loan growth opportunities, but I think as I was just talking about before.
Are you optimistic about what the future looks like just given the economic outlook in our in our pipeline.
And I think there's some strong opportunities to put submission on wind <expletive>ets on the books.
And really we're probably going to grow the NIM, mainly out of just trading on its cash and securities like we talked about before.
And I think lastly would be.
Just from an overall perspective as the short term rates start to rise I think the bank is really well positioned for for for net.
Sorry from margin improvement on you know over the next few quarters.
Yeah, No I'm just throwing this reminders, Mike because it's the last time I'll get to say it is a you know.
We don't know when short term rates are going to rise, but eventually we think they will but you know it it's worth reminding all are long term investors, we had a 4% deposit beta in the last rising rate environment, which I think was probably industry, leading are pretty darn close. So you know while the rate environment is pretty tough for all banks right now, especially.
Asset sensitive banks.
Long term the the outlook for the bank, especially in a rising rate environment is really strong.
Yes.
Got it.
And.
Donna.
I'm, just trying to arm them, but just curious on on the next quarters, starting part or the near term implications.
Before this cash can you know the timing of how this cash gets put to work here.
No the noninterest bearing.
Bridge deposits, all will be up next quarter, as well, which helps but from the cash for the quarter on average.
It was about $380 million.
And you guys kind of ended the quarter closer to $500 million do you think you can put on enough.
Enough of that cash to work into the Securities book This quarter, where were you know it'll be you know not up too much or do you do you expect it to be.
Up on a quarter over quarter basis and into 2021.
You mean, the average or the ending.
Yeah.
The average.
Have you all Oh I won't be here I'll, let Jason decided he wants to commit to that I mean, what I would say is there's been a lot of our effort at the bank to.
Make some hires in the lending space. There has been some redirection of resources to focus more on lending. So I think all efforts are moving.
Moving towards that it's you know we're there there are still going to be prepayments that happens it's great that it's slowing down from Q1 to Q2, but we're still going to see some so you know I think we're going to put our best efforts forward to to use that cash and.
Maintained or improved NIM, but I don't I wouldn't call that a guaranteed certainly I think it's it we'll see how much progress we made during the quarter I think our focus Chris has always been more on NII then on NIM itself. So.
I think our goal there continues to be too.
Do you know generate as much net interest income is as we can in a in a very conservative using our very conservative credit culture to make sure that our credit costs remain.
Controlled.
Balanced.
Understood got it.
And ER.
Two two quick cleanup quick cleanup questions and then I'll hop out.
It looks like the doubtful loans increased by around <unk>.
$3 million or so.
Was there a specific driver is out there you guys can speak to when and how well it's reserved for and that was kind of likelihood of low near term out from here.
Yeah sure that that is one multifamily loans at 3.173 million you see there and that's the multifamily loan that we took $2 million.
Charge off on this quarter as well. So there are still I think it's maybe 250 300000 in specific reserves on that loan. So that mean, which means you know we think there'll be a few more charges on it before we know it.
Come to a resolution, but that's you know that's always up in the air. This is this is really the only multifamily property that we've had you know just kind of significant issues coming out of Covid with and it's more.
Having to do with the structure on nature of the property itself than anything else.
Got it okay.
Okay and then.
No.
I heard your.
Your comments are you know Linda Linda in the prepared remarks.
But if you could just update.
Updating us on that thought on on the share repurchases and you know.
How are you thinking about them in terms of the pricing on tangible book value and.
Our capital levels are.
Right.
Oh, Yeah sure nice to meet you sort of price.
Yes, nice to meet you more.
So we recognize that our share count reflects the opportunity that lies ahead.
We often below authorized our share repurchase plan after the formation of a bank holding company.
And this was to provide additional flexibility to create value for our shareholders. When we see our share is trading well below what we believe to be their intrinsic value.
We also plan to use it to help offset dilution from current and future equity agreements.
So that really was our thinking on that.
Got it and there.
Is there anything.
That would make you have not one of them being aggressive near term.
Based on you know where the market's at right now.
Well the board reviews, it quarterly and evaluate the plan based on the most recent information so that's kind of how we do it.
Not the plan using it.
Yeah.
Oh, you mean are there going on.
Yeah.
Is there any reason why you wouldn't be aggressive in.
In executing share repurchases near term.
Okay.
Yeah.
Yeah, well, we have not traditionally been aggressive on I don't see any change on that.
Yeah.
Okay.
Got it that's all I had thank you.
Sure.
Once again, ladies and gentlemen to ask a question. Please press star one on your telephone keypad, one moment, while we poll for more questions.
Okay.
Yeah.
Once again Thats star one to ask a question at this time.
There are no further questions in queue at this time I would like to turn the call back over to Len Fox for closing comments.
Thank you very much on thank you to all of you on the call. We appreciate you joining today.
This is an exciting time at amalgamated that's our unique business strategy continues to generate strong results and the company continues to be well positioned for growth as we move through the year ahead.
As I addressed previously was very close to announcing our next CEO and I couldn't be more excited to embark on this next chapter of our journey on this.
All of you and thank you again for your time.
Thank you ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time and thank you for your participation and have a great day.