Q3 2021 Amalgamated Bank Earnings Call
[music].
Greetings, ladies and gentlemen, and welcome to the amalgamated Financial Corporation third quarter 2021 earnings conference call.
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. Jason Darby Chief Financial Officer. Please go ahead Sir.
Thank you operator, and good morning, everyone. We appreciate your participation in our third quarter 2021 earnings call.
With me today is <unk> Brown, President and Chief Executive Officer.
As a reminder, a telephonic replay of this call will be available on the investors section of our website for an extended period of time.
Additionally, a slide deck to complement today's discussion is also available on the investors section of our website.
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.
Caution investors that actual results may differ from the expectations indicated or implied by any such forward looking statements or information.
Investors 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 a.
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.
Now I'll turn the call over to Priscilla.
Thank you Jason and good morning, everyone. We appreciate your time and interest today.
I will share a few highlights of our third quarter 2021 results. That's been the majority of my time, providing an update on our strategic plan development, including our recently announced acquisition of amalgamated bank of Chicago.
Jason will then offer the financial benefits of our acquisition in more detail along with a more in depth review of our third quarter results.
To start I'm very pleased with our third quarter as we delivered strong results across the dimensions revenues profitability credit quality and foundational growth drivers such as paper assessments and deposits.
Our total net loans, including pace assessments grew modestly by $31.4 million, marking our linked quarter continuous net positive growth without the effect of the run off on our residential loan portfolio, which we have strategically decided to allow growth was 83 point.
Or three 2%.
Also importantly, we had net positive growth at $9 $4 million in commercial and industrial lending and $26 $8 million in consumer lending each driven by solid growth in our sustainability segment. When we believe we have a competitive advantage.
While we acknowledge these results must improve we are encouraged by both the reversal of net loan portfolio declines experienced during the past few quarters and the signs of momentum as we see returns generated from the earliest stages of our lending strategy implementation.
Along these lines I am very happy to report that during the quarter. We also hired a new chief credit risk Officer, who will report directly to me.
He joins us with direct experience in the segments in which we do business and has demonstrated understanding the connection between production targets and prudent credit risk management.
Now I'd like to update you on the strategic initiatives, we've been working on to enhance our growth and better serve our customers.
To accomplish this we have established a four pillar strategy that focuses on number one building our business through mission.
And since we focus on customer segments that share our values, we are uniquely positioned to gather and leverage insights on these core customers and that's an important second pillar.
We're also developing and expanding relevant product offerings to grow our lending platform and our trust business.
And fourthly, we're prisons.
Prudent management of our data and technology to drive improved efficiency and effectiveness.
The first pillar and building our business through the mission as America's socially responsible bank.
It's one that I'll spend a few minutes on next.
Interest in the environment, social causes and community has never been greater and we're committed to being a boldly policy and public affairs that impact our customers and employees.
Our goal is to live the mission of building, an authentic culture, social responsibility and impact this will drive our existing customers' loyalty and attract many new prospects.
Our mission and values.
By way of example, I am proud to report that we have committed to being net zero by 2045.
Tablets, the science based target system to achieve this goal we have named a chief sustainability officer to support this process and deliver on our targets to the science based targets initiative.
We are promoting our team as thought leaders and are excited to participate in the U N climate change conference being held in Glasgow next week.
In addition to organic examples of mission, we certainly look for opportunistic expansion of our mission through partnerships as well as the plant fully leverage our mission to accelerate the pace of growth in the Midwest.
Acquisition of the amalgamated bank of Chicago, which I will say more about in a few minutes.
The second pillar is leveraging insights on core customers over the years, we have discussed our customers the political nonprofit and union sector as being deposit customers with little demand for loans or other traditional banking services.
I believe that within our core deposit led customer sentiment is a significant opportunity to drive additional revenue streams to accomplish this we have begun building on our data infrastructure examining customer information and behavior to identify demonstrated needs and interests.
And related profit tracks.
Our engineers are now organized around this objective and we recently augmented their expertise with data science resources.
The third pillar focuses on developing and expanding our product expertise.
In the same way the bank gathered a team are deeply connected relationship managers to grow our successful low cost deposit franchise. We're now focused on the assembly talented leaders with the same level of unique specialization and our mission driven lending segments, adding to our staff with bankers and underwriters with proven acumen and rizza.
And the commercial solar pace and sustainability project finance markets.
We've also repositioned some of our existing talent, allowing them to use their valuable expertise across our New York City, Boston D C, San Francisco and seem to be Chicago offices.
In tandem with our mission driven sleep lending segments staff Buildout. We're also revamping our traditional commercial real estate team by recruiting motivated and experienced leaders who have proven track records in this important marketplace.
<unk> real estate lending remains our largest asset class in the balance sheet and we intend to return to pre pandemic origination levels and be more successful in protecting our existing book of business as we head into 2022.
We are also connecting our consumer and trust business to our commercial banking business to better serve our core customers across offerings. It is essential for amalgamated to fully identify ourselves as a true ESG institution with a wide array of banking and financial services moving us beyond the impression of some stakeholders.
But this is a deposit only institution.
We have added experienced talent in our ESG investments platform, including a leader who will manage our responsive fund suite of embed ESG investments with a focus on transforming our relationship bankers into referral engine. While also ensuring clients are earning appropriate market returns that in turn drive marginal.
<unk> ability to the bank.
The fourth pillar is focused on our infrastructure and digital platform to support our growth.
We are working to become a stronger digital bank offering our customers, both commercial and consumer the absolute best of banking experience.
Through the use of enhanced user friendly technology supported by exemplary in person support.
We offer our commercial customers a great digital experience now, but we want this interaction with all of our services to set us apart as we continue to evolve into becoming an even stronger digital bank.
Smart insight driven investments here, we will ensure that our customers value their differentiated online experience.
It's an exciting time for our bank on many fronts and most certainly contributing to that is our recent announcement of the acquisition of amalgamated bank of Chicago, known as a B and C.
One of the many strategic opportunities for the acquisition provides is an established entry into a market we have long desired.
And Youll see provides us entry into Chicago, which is a far reaching market that encompasses most of the Midwest.
Additionally, we bring to a b C and the customers and prospects the capabilities of a significantly larger bank can provide what we have found is that a D. O C has deep relationships with their customers and that their customers are rich referral sources for new prospects.
Combined we have a balance sheet to support these customers and prospects as they continue to grow and which will provide immediate revenue synergies yeah.
The acquisition also gives us a tremendous opportunity to export our multi segment customer model to the Midwest to capitalize on the segments that exist well beyond a POC foundational union customers.
We signaled last quarter that we would be exploring smart M&A opportunities and we will continue to do so and they also stated on our second quarter call, we will need to make investments in the people products and services and technology to foster the growth that we're expecting and are actively planning a thoughtful roadmap to consider is timing.
We prioritize investments.
Net neutral funding decisions and profitability.
We have much more work to do we are evolving in exciting things are happening I will now turn the call over to Jason who will fill you in on some of the details of the <unk> deal as well as the just completed quarter Jason.
Thank you Priscilla I would like to Echo <unk> comments that she speaks of the excitement with which our entire team is approaching the a P O C acquisition as.
As well as our four strategic pillars designed to accelerate growth, while effectively managing risk and build value for all of our stakeholders.
Well our September 22nd press release contains the details of the a b O C transaction I would like to briefly highlight several of the financial benefits and growth opportunities that a b O C provides amalgamated which are as follows.
First we see substantial cost savings opportunities through the elimination of duplicative functions, which we expect will drive earnings accretion of approximately 17%.
The bulk of the cost savings will be in SG&A will be reduced by about 25% or $8 $1 million on a pre tax basis.
We expect the full economic benefit from the acquisition to be in 2023, assuming the deal closes in the fourth quarter of 2021.
We also see revenue opportunities as we will redeploy a b S. She's excess liquidity into securities through the first quarter of 2022, which will drive margins and earnings.
Opportunities also exist to reinvigorate a b S. He's go to market strategy as well as to Reengage with their current customers to drive new business and revenue growth.
We are already working with a b O sees lender team to change their positioning to be proactive given our plans to grow their loan business.
Lastly, we are targeting to close the deal by the end of this year pending regulatory approval. We have deployed two of our senior people to Chicago to welcome our new associates and to assure a smooth transition. We are pleased with our progress to date and trust you can see why we're so excited with the many opportunities that this acquisition affords us.
Now I'd like to briefly highlight our third quarter results before taking your questions.
Net income was $14 $4 million or <unk> 46 per diluted share compared to $10 $4 million or <unk> 33 per diluted share for the second quarter of 2021, representing a 39% and earnings per share increase.
$4 million increase was primarily due to a $2.3 million release of provision for loan losses compared to a $1.7 million provision expense in the preceding quarter as well as the $1 $4 million increase in net interest income and a $1 $4 million increase in noninterest income.
These increases were partially offset by a $1 $6 million increase in noninterest expense.
Starting on slide eight deposits at September 30 of 2021 were $6 $2 billion, an increase of $314 $5 million or 21, 1% annualized as compared to $5 $9 billion as of June 30 of 2021.
Noninterest bearing deposits represented 52% of average deposits and 51% of ending deposits for the quarter ended September 30th 2021.
Contributing to an average cost of deposits of nine basis points in the third quarter of 2021 of.
One basis point decrease from the previous quarter.
As can be seen on slide eight deposits held by politically active customers such as campaigns Pacs advocacy based organizations and state and National Party committees or $1 billion as of September 30 of 2021, an increase of $223 $5 million as compared to $791.3 million as of June 32021.
Turning to slide 11, our total net loans at September 30 of 2021 were $3 1 billion, a decrease of $50 million as compared to June 32021. The decline in loans was primarily driven by a $52 2 million dollar decrease in residential loans and $27 $2 million decrease in commercial real estate and multifamily loans due to refinancing.
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That said our balance of pace assessments, which is reported in the held to maturity securities portfolio increased by $81 $4 million in the third quarter to $627 $2 million as compared to the 2021 second quarter.
Factoring our strategic decision to not portfolio of long term fixed rate residential loans. We are encouraged by our combined portfolio growth, which is an important inflection point and provides confidence in our full year 2021 financial outlook.
The yield on our total loans was 3.84% compared to three 2% in the second quarter of 2021.
Adjusting for prepayment penalties.
Our loan yield was up six basis points in the third quarter as compared to the previous quarter.
On slide 13, our net interest margin was 2.7 O per cent for the third quarter of 2021 a decrease of five basis points from 275% in the second quarter of 2021, and a decrease of 18 basis points from 288% in the third quarter of 2020.
We estimate that our excess liquidity this quarter from balance sheet growth has suppressed our NIM by 24 basis points.
Turning to noninterest income it was $6 $7 million for the third quarter of 2021 compared to $5 $3 million in the linked quarter and $12 $8 million for the third quarter of 2020.
The sequential increase of $1.4 million was primarily due to an expected equity method investment depreciation related to investments in solar initiatives.
The decrease of $6 $1 million as compared to the year ago quarter was primarily due to depreciation.
$5 million related to equity investments in solar initiatives in the third quarter of 2021 compared to a $4 $3 million gain in the third quarter of 2020.
We are primarily recognized the benefit of the tax credits in 2020, the initial year of the equity investments and also the accelerated depreciation impacts in the current year.
We expect to recognize modest gains related to cash distributions from our solar equity method investments during the remainder of 2021 as well as over the remaining life of the investments through 2025.
These impacts do not include any benefits of new solar equity initiatives or investments that we may make in the future.
Non interest expense for the third quarter of 2021 was $33 million, an increase of $1.6 million from the second quarter of 2021, and a decrease of $4 $9 million from the third quarter of 2020 as outlined on slide 15.
This increase of $1.6 million from previous quarter includes point $4 million in a b O C related deal costs. The remaining difference was primarily due to a $1 2 million dollar increase to data processing related to the full impact of our trust Department outsourced operations.
$5 million increased compensation employee benefits and a point $4 million increase in reserves for unused loan commitments, partially offset by a $1 $2 million decrease in professional services expenses net of a b O C related deal costs.
Turning to slide 17, nonperforming assets totaled $67 $8 million or <unk>, 99% of period end total assets at September 30th 2021 a decrease of $3 $2 million compared with $71.8 million or one point O 8% of period end total assets at June 32021.
The decrease in nonperforming was primarily driven by the pay off of $4 2 million of non accruing multifamily loans.
I'm also happy to report that early in the fourth quarter, we completed the sale of one of our legacy leveraged loans as we continue to focus on our nonperforming assets metrics.
Provisions for loan losses totaled recovery of $2 3 million for the third quarter of 2021 compared to an expense of $1.7 million in the second quarter of 2021, and an expense of $3 $4 million for the third quarter of 2020, respectively.
The recovery in the third quarter of 2021 was driven by a decrease in the allowance mainly from improvement in loss in qualitative factors improved credit quality and lower loan balances.
Moving along to slide 18, our GAAP and core return on tangible average common equity were 10, 3% and 10, 6% respectively for the third quarter of 2021.
Importantly, we remain well capitalized to support our future growth initiatives.
Turning to slide 20, we are maintaining our guidance for the full year 2021 which includes core pretax pre provision earnings of $66 million to $72 million, which excludes the impact of solar tax equity income or losses.
And net income net interest income of $168 million to $174 million, which includes prepayment penalty income.
And with 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. If you'd like to ask a question. Please press star one on your telephone keypad.
Information tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys, one moment. Please we poll for questions.
Our first question comes from the line of Alex Tour at all with the Piper Sandler. Please proceed with your question.
Hey, good morning.
Good morning, Alex Good morning.
I was just.
First question for me certainly appreciate a lot of information here on this new strategic vision, which.
Obviously, a fairly comprehensive and includes several parts here and.
It will take some time to kind of probably fully implemented I'm. Just wondering you know if there is in the back of your mind any metrics in terms of profitability.
Profitability or efficiency ratio or growth or any other targets either stayed at sort of a soft targets that are that we can think about as you're rolling this out in sort of the timeframes.
Which which any of those could be achieved.
Jason.
Flip it to you to talk about the financial metrics I, just want to say Alex absolutely. In fact, we see this as a big part of the more effective and efficient way we want to operate.
Generally so there are in addition to what Jason will remind you of in a minute. There are a number of nonfinancial metrics, which we are.
Actually taken to the board next week and working through with management now and those nonfinancial metrics are really leading indicators that will help us get to the financial metrics.
Importantly, we think theres an opportunity to tie.
Compensation and and other drivers.
Drivers of behavior to the nonfinancial and financial metrics internally, so as we bring on new employees and also as we are.
Think about the the work to be done and the Accountabilities.
Existing leaders these metrics will be very tight and correlated to.
Their performance as.
As well.
Jason do you want to talk about that.
I think you know.
With growth in some of the objectives that we're trying to achieve we're looking mainly in the loans section of our of our balance sheet right now and targeting kind of a mid to upper single digits of annual growth for the for the email Standalone Bank Thats really not including a boc at this.
Point in time.
Say that in a matter of I.
Would love to see that metric move up as we start to deliver some momentum in on our quarterly results as we keep going through.
Loan strategy implementation so.
Starting with that as sort of a baseline again acknowledging some of the.
Hmm.
The loan kind of loan deficiency that we've had in growth over the past few quarters and we're even starting to change in the first.
Two quarters of facilities CEO tenure here, so I think thats kind of on the loan side from a core efficiency point of view.
65, which is kind of where we're at right now that's sort of the.
The Bell Mark where we want to never be higher than you know so we're trying to manage to lower than that.
I don't have a specific number in mind at the moment, but it's between that 65% to 60% efficiency ratio and as we kind of move forward and then with our deposits I think we would try to keep a reasonable pace similar to this year in terms of our deposit growth. Obviously, we're keeping a close eye on how that affects leverage.
And related to tier one capital, but basically that's kind of the overall metrics that we're starting to managed to from a growth perspective trying to be balanced and kind of thoughtful and sort of the trajectory that we want to take and build with momentum if if the results start to prove that out.
Coming quarters.
Right and something like a 65% efficiency ratio is that something that you think is achievable in 2022, obviously it will include the implications from the from the inaugurate a Chicago transaction as well.
Oh, sorry, I'm stripping out that from the.
From the you talked about the onetime charges, Alex or just sort of more more run rate.
More run rate.
Okay.
I think 65 is achievable in fact.
We'd like it to be lower.
The Oc charges, we feel a lot of that operational cost is going to be able to be achieved because most of its coming through through the kind of employee resource side of things. So it's a little bit less on inherent operations and other types of costs related that way. So right now feel pretty good about what that.
With that projection looks like.
Awesome and then you made a comment about revamping the commercial real estate team and hiring some seasoned lenders I was just curious where you are in the process of that.
I'd say, we were early stage on that so we talked about basically a two pronged approach with our real estate.
Business, one being protecting what we have.
I have on the books today and showing existing customers and then also pursuing new ones in an entity that we certainly think that there is an opportunity to bring on new talent. We've begun the process of looking looking at talent.
Awesome, Thanks for taking my questions.
Thank you. Thank you.
Our next question comes from the line of Janet Lee with Jpmorgan. Please proceed with your question.
Hi, good morning.
On this sustainability Pac man hour Nigel I'm asked a clarification questions I think it was like.
Second quarter of last year in 2020 sustainability across all Yale West you guys define as a combination of pace acuity commercial solar and residential solar I think those portfolio was around 600 million over and obviously right now painful acuity is you guys have right now is already.
$600 million, where all right.
Whereas the portfolio balance today.
Today, and how much my background over the past year, and and and looking out into 'twenty, two and beyond like how much do you expect this portfolio to crowd is that acquire them you know a part of the lending segment.
Focus on.
Yes.
Yeah, So so I think.
I'll start with the portfolio is probably let me see here I'm just kind of getting my my numbers that he's really kind of close to about $1 billion. When you add in the kind of the C&I portion of sustainability. When you talk about C pace of being over $600 million right now and consumer solar is about $245 million. So.
You know theres been a nice growth in those sections, we sort of see that as a continued shoots for us to continue to grow into just this quarter alone C. Pace again was up another Washington, <unk> Facebook pace in total was up another $81 million that was about 15% growth in the quarter sustain.
Sustainability C&I portion of our business was up another $25 million.
Relatively small in terms of growth, but on a net basis still has a significant impact relative to our C&I portfolio in total and then consumer solar was up another $30 million.
Or 13% quarter over quarter.
When we think about that going forward I think there's plenty of room on the balance sheet in terms of potential concentration limits for us to continue to grow in the C pace space and you know when we look at our pipeline we still see.
Pretty strong growth opportunities for Q4 and heading into the next year, particularly as we focus our bankers in that particular area.
Turning to like consumer the consumer solar side of things.
We definitely see that as a continuing shoot probably hopefully near the clip that I just talked about in this quarter $30 million or even possibly more.
We've just initiated some some new flow arrangements with providers.
That are going to kind of increase that capacity and so we feel pretty good about that channel and then on the sustainability side, meaning in the C&I, that's probably where there's the best opportunity to to really make meaningful impacts in Brazil had talked a little bit about that in her strategy, where we start to position bankers.
Much more focused on what they do best in there and whether that be renewable energy.
Segment within the sustainability or would that be <unk> or things of that nature.
That's the opportunity for us to really grow and make a meaningful impact in the overall book and then you sort of pair that up with the with the hiring of our new <unk>.
<unk> credit risk officer, who we consciously went out.
And recruited for the purpose of being able to evaluate deals specifically in this type of space and also <unk>.
Person that's a that's been that's been correlated to two book growth in the past with with a real understanding of credit quality, that's kind of jam I think makes the best opportunity for us I don't have a full set of numbers for you for the for the 2020 outlook other than it sort of ties into that overall.
<unk>.
Mid to high single digit.
Growth rate on the on the loan portfolio and I would say the majority of that growth really would come from the sustainability part of C&I and the AR and the consumers or.
Okay. That's that's helpful and or the pace purchase car Guy I believe it was one <unk> million in FY 2020. One so it's a look in 2022 how should we think about that.
Purchase target for the year and how does the acquisition.
A b or C impacted targeting first day Standalone amalgamated.
Yeah, Great question, so for the for the projection for the end of the year, we're right on track for the $150 million.
In purchase through our PFG arrangement.
On the on the pace side of things and we've actually got some additional capacity now out of that relationship as we start to head into 2022, we've done some some repricing to be able to create.
Flexibility of greater competitiveness for for them is the kind of the consumer unsecured space kind of came racing back. During this year. So I think we did a lot of work to protect our our flow arrangement heading into next year.
Their growth has been has been much better as we looked into their fourth quarter projections and.
When we talk about other.
Other opportunities within that relationship.
We're hopeful that that are that are our new York offering we have a we have a kind of.
Exclusive deal with PFG to do the New York offering on the pace program. We're excited that that could potentially expand capacity I don't really know when that might take off I'm, hoping you know first quarter of next year, but it could be in second quarter, so that could actually add to possibly the $150 million flow.
So I think there's still a great opportunity for that to actually look like a bigger number than it was for this year on a on a flow basis. When you think about Chicago.
I don't know that it didn't necessarily correlates directly because we have to find a legislative opportunities for that too to be kind of put into place, Illinois is definitely one of the states that's going through the processes right now Janet.
Kind of building the legislation around potential our pace of activity, but I think where it's more interesting is on the C pace side, and you know us being able to export our C pace kind of business knowledge into that market. If you recall, we really weren't able to participate at all in that market based on our previous agreement between a b S.
And I'm not going to bank of New York and now that that's going to go away you know our ability to kind of get into those commercial projects and introduce our pace knowledge. There I think that's where it is a great opportunity to expand that capacity and capability in that market.
Okay. That's a great color if I can squeeze just one more question. So on long growth apologize since you guys have already talked about this but is the elevated paydown and prepayment level like is that largely behind us or is that going to continue impacting loan growth.
In the fourth quarter or maybe over the next two quarters and can you also comment on when new loan pipeline, how that compares to let's say the second.
And that's I couldn't quite hear.
Yeah, Yeah. So so really it's two different pieces within the business that are still experiencing some paydowns from refi.
On the residential side, we did see a slowing of still about $50 million of payoffs that occurred in the resi and our portfolio in Q3, although that has been slowing I think we're also getting to the point now where we're starting to contemplate keeping our own production on our books.
The refi activity is.
It's certainly starting to slow down and we saw some of that Janet with with art with our whole loan.
Resale agreement coming due and you're just seeing a lack of production out there to refill that.
So so we feel like.
Hopefully you're reaching the end of that on the residential side and we've got some thoughts around making sure that we get to hopefully net neutral you know with our residential portfolio for this for this last quarter as we kind of look out a little ways on the commercial side, though I think it's a little bit it's a little bit better suited meaning Brazil talked about it a lot.
On the CRE and multi side, we want to be much more aggressive in protecting our book from the refinancing that's occurring out there.
Having a new <unk> is going to really help them that matters that we can be as competitive as the market is dictating relative to our best credits and really kind of stem the tide, there and then outside of that.
We do have some exposure to two larger customers that pay off lines fairly quickly. So we had some of that occur again late in the quarter in Q3, but we're happy about that in the sense that there's still existing customers and we expect them to draw back into their line. So I feel like that would be something that.
You know that we can kind of count on and to stem some of that tied as well as we head into the fourth quarter and into next year and you have one more part of your question Janet Forgive me I lost track of it was that what was the second part yeah, just a new production levels loan pipeline.
Yes.
Yeah.
So that's yeah. That's been that's been a kind of an interesting story. So we are starting to see a lot more deal flow coming in because this positioning of bankers that really started right around with the short one for solar arrive. So this isn't like a new thing we'd just start thinking about it in Q3 really started getting bankers kind of motivated around around driving opportunities our new CRO has.
Is actively looking for opportunities to review so I think that's a helpful partnership that's being built on the production side.
Also we had some deals that closed in the third quarter, we got a little bit unlucky or some of the funding you know moved out into the fourth quarter. So we're kind of excited about that and those deals that we closed are fairly robust.
Think that opens up a way for us to be able to do more of those types of deals as we head into Q4 and Q1.
So more to come on that we need to show you. The results obviously, but the pipeline has been has been fairly encouraging as we are.
Seen so far.
Okay, great. Thanks for taking my questions.
Very welcome.
Thank you as a reminder, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Brian Morton with Barclays. Please proceed with your question.
Good morning, everyone. Thanks for taking my questions.
Good morning, Good morning, I think I'll start off with some of the implications of the <unk> deal.
And kind of the way you think about de Novo versus inorganic strategies do you think as you work on the integration.
C B.
Do you think that you can still continue to pursue de novo strategies, particularly as it was.
It relates to the L. A office.
[laughter] excuse me.
The answer to that is yes, I think we will continue to look at both inorganic and organic ways to expand the expertise that we're building in sort of key areas and take it across.
The country to other markets, where we see real opportunities in the segments that we're in.
So.
As you know Boston is a de Novo office for us.
We're really excited about now.
Accelerating the work that's going on there and in Los Angeles is also continuing to be of interest to us.
Okay, Great and then now that you have some experience with a kind of an inorganic strategy.
How quickly you think it would be in a position to maybe consider additional deals or is this kind of more of a onetime event.
Yeah. So that's a great question.
So I think.
The ability for us to do additional deals isn't.
Tremendously far off in the future I think we have a couple of things we want to be able to prove first number one is really get an efficient integration done and start to really show the COO.
Cost saves and the synergies that we've been projecting and I don't think it will take us too long start to prove that out I think the other part of that is going to be.
Making sure that we have appropriate levels of capital right to to deploy against an opportunity. So part of our strategy here is going to be a little bit of a build back of capital is as you would probably expect because we're going to work.
To take on some leverage in order to do the apoc deal.
So as we build back a little bit of capital that creates a bit more capacity for us, but more importantly, I think.
For the first time in a while.
The phones ringing on our side for potential partners and people that are looking to.
Find more about find out more about our story and what we're willing to do and I think as.
We as we kind of listened to those discussions and we see what that footprint that might look like as we kind of look out into the future. It's it's certainly appealing to us and so we'll we'll evaluate capital and will evaluate buying power and what some of our levers are to pull in order to see if those opportunities make sense for us in the future.
Great, maybe a little bit more on the capital side I mean it.
It looks like you were in doing any repurchases.
Have your.
Thoughts on capital deployment and the trajectory going forward of maybe when you would do share repurchases in the future.
Yeah. So so we pause doing share repurchases during during Q3 and again it was on a we have a.
$7 $5 million remaining availability from a from a capital.
Approval.
Two to repurchase shares we paused in Q3.
We were contemplating the oce deal.
Now all of our capital projections as they look out going forward include our normal kind of dividend.
Dividend run rate and also the.
The utilization of our remaining capital allocation for the share buybacks. So that's still within our within our capital plan in terms of how aggressive we would get out in terms of buying back shares.
I wouldn't say, we'd be tremendously aggressive we'd probably have a benchmark in mind.
<unk> tangible book, where we might become buyers.
Of our stock and Fortunately right now we're trading a little bit above that but yeah, we will maintain that dry powder for us to get back in the market probably if the share start trading below a level that we feel is.
Is properly valued.
Thanks, and then I guess, one on expenses I, just wanted to get a little bit more detail on kind of your expense dynamics.
It looks like you know you have some cost saves built.
Built in with the <unk> deal you also have some.
Data and technology investment initiatives.
And maybe also some other efficiency initiatives possible so kind of as you look at 2022.
Kind of how how do you think about maybe the overall I think the dollar expense level do you think you can keep the static or is it you're looking at it from an efficiency ratio basis and.
Wood wood positive operating leverage for next year kind of be a goal or not necessarily.
Yeah.
A high level.
Yeah.
I think the answer is yes.
Yes, and yes.
No. We do think obviously about maintaining expense levels given the.
A bit of an aberration, we had to the plan when we started to look at the a b C opportunity, but we do think that going into next year, we should be able to do that yeah I think.
Yeah, we're probably going to be a little bit higher in expense run rate as I start to look out I think I think this quarter probably at that just on the on the bank bank proper or email proper prior to apoc, we're probably going to be in that $32 million to $33 million expense run rate at least for for the next quarter coming up.
I think we've we've made the.
Investments that they want but we want to make right now in.
And the outsourced.
Infrastructure model, particularly for our trust organization, which will start to see paying back for us.
As the Apoc truck portfolio starts to migrate onto our platform.
The I think the salaries kind of returned to a little bit more of a normalized level.
Some of our.
Our executive comp kind of kind of normalized we didn't have our.
Our previous CEO and CFO on the last couple of quarters in terms of our salary run rate. So I kind of look out a little bit I think we're sort of normalizing at the current run rate here and we will be actively managing.
Opportunities for neutralizing offsets I think we tried to show that in this quarter, two where we have a limit of our.
As expected expense increase and we offset that with some decreases in professional services or other type of supplementary cost that were incurring and to kind of look at it on an <unk>.
Outward basis, I think I was talking about slip it before with Alex you know that the core efficiency ratio right now it hovers around 65%.
Definitely opportunities to move that down some of the levers to pull there a little bit harder than others, just given kind of the unique structure of this bank, but when I look at overall Opex I think that 65, and I'm trying to get lower than that you know as we get into 2022 is really the target and that would be based on like a 30 to 33 per quarter run rate on expenses.
Okay, great well. Thank you very much that's all for my questions.
Thank you. Thank you.
Thank you. Our next question comes from the line of Chris O'connell with <unk>. Please proceed with your question.
Good morning.
I was hoping to just start off on the balance sheet and.
The residential run off.
Sure.
I guess, one when did it become like the strategic decision to not balance sheet any of the residential production and just like the strategic rationale behind that versus.
Keeping it on balance sheet at this point given the pace of those pay downs.
Yeah, well you know we've been trying to keep as much of the production flow as as we can in the form of a gain on sale right. So while we've been allowing it to run off and you know that.
That kind of that trade on on profitability, we felt there's still appropriate going through the gain on sale line up through at least this current quarter.
Yes.
I think at this point right now that's kind of an.
Open discussion internally here as to whether we start keeping our production I mean, the big thing is we're still seeing a lot of 30 year, which is fixed rate long term and it's a pretty low coupon that's kind of hovering in that two and a half two and three quarter range, which we're not.
That crazy about given the fact that you can kind of make it up on the on the noninterest income line right now, but as as that starts to slow down and this is sort of maybe home prices start to.
Start to exceed what people were able to pay you know, there's probably going to be opportunities for different types of residential structures, maybe seven or 10 year arms start to come back into play.
Those things start to move in a direction when we feel like we can really count on that.
Probably when we'll start to make.
Make the switch flip and really kind of start to balance sheet those assets again.
Like all I can say on that right now is it's an active discussion for us and we're certainly cognizant of the of the trade and the balance sheet runoff versus versus the gain on sale right now.
Got it thank you and then.
It looks like the loan.
Loan deferrals picked up a bit this quarter.
And then they sit but if you could just provide some color around that and what was the driver there.
Sorry, the deferrals relative to Covid.
I'm, sorry, Chris I didn't quite follow the on the deferral side.
Yeah.
Yeah, the the Covid deferrals.
Oh, Okay. That's caused that just a little bit on the on the residential side I think there is there is a little bit of sort of you know.
Waving water that occurs there, but the majority of our of our.
Virtually all of our of our Covid related deferrals already kind of flow through in our criticized a criticized asset table right now.
I don't spend a lot of time really worrying about too much because I think we already took the pain of certain moving that into into our classifieds or sub standards in the residential is.
Not something that I lose a tremendous amount of sleep on and you know not really.
Not really that worried about it at the moment.
Got it makes sense.
And then.
As far as the political deposits it looks like the head.
I had a bit of a drop off.
<unk>.
And Oh go up very strongly in the end of period basis for the quarter.
If you could just explain some of the dynamics there and then maybe the outlook is.
<unk> in early next year.
Yeah.
The political deposits they started behave that way they sort of reach.
Level points at the end of the quarter they might get subsequent to that and we'd like to show that just to show a little bit of kind of the volatility that comes along with the political deposits I think the more important trend, though is that on.
On a steady basis quarter over quarter, we keep building on balances and I'm expecting those balances to continue to increase as we sort of run up to the to the midterm elections.
And next year.
As we've kind of seen the kind of the election cycle is almost blended together now there's almost like one long continuous fundraising cycle in local elections homelessness as prominent in certain cases is some of the national one. So we do expect to see that to continue to rise.
Then obviously, we will probably see some type of drop as we get into Q4.
Or Q3, a little bit.
You will get spent but I think more importantly, we are very conscious of what that looks like from a forecasting point of view.
And we're very conscious about what we need on our balance sheet in order to support that because we do feel that while the political deposits tick up a little bit of space in terms of capital at the same time, they're really rich with with referral sources. The folks that we're dealing with with regard to the political raises.
Open up a tremendous amount of doors for us for further business relationship opportunities and so that's something we very carefully manage but again kind of I would expect us to continue to rise.
As we look to yards towards Q3 of next year.
Okay great.
And then.
Was hoping to get just a little bit of color on me I think it was the.
The second pillar a good plan.
And kind of deepening their relationships.
With the core customers.
On the.
Social enterprise nonprofit labor, but the customers.
And just a little color around the opportunity there.
And is that.
Mostly looking to make those customers long loan customers not just deposit customers.
And.
If so maybe examples.
And how that can happen.
Yeah.
I'll start that Jason if you want to add to it.
I think one thing that you have to think about is that our current model capitalizes on kind of the local localized expertise and leadership we have in each of the four cities. We're currently in.
We think that you know to optimize the value of the platform. What we'll do is cross pollinate sort of the secret sauce, we have around certain segments. So.
The depth, we have with for example unions in New York and political organizations in D C.
Sustainable financing and San Francisco will now be incubated and in other markets.
Chicago, the rest of California and Boston.
And so we think that this will result in all of them, having a little bit more depth and breadth.
Jason's point is a good one is that.
You think of some of these markets as having some of these segments is having very little interest in lending, we actually are finding pockets within them that you and more importantly, they they really helped as referral sources to come.
Customers, who are lenders who are interested in lending.
So we see the opportunity really in just taking more of a national approach and hitting all cities not as special.
Areas of competence, but actually having breadth across each of the areas of the business, that's where we see some real real opportunity. Another. Good example, Jason gave one earlier, but another example is that in Chicago, they're doing quite a lot of corporate trust business.
That's not something that we're doing a lot of in other places. So there are real specific product things and then there are segment opportunities that are where.
We are stronger in some places we can get stronger than others.
Maybe just add one bit to that in the Chicago market. If you just think about kind of our new our new entry there with <unk>.
Historically their customer lens has been has been union.
Now what <unk> mentioned earlier in her remarks, we've learned that there they are deep in terms of referral sources and when you expand the market.
In Chicago, and the greater Midwest, you find that there's a pretty big space for social advocacy and philanthropies in areas that really lineup very well with our kind of segment lending and our ability to serve export our national knowledge, what Bristow is talking about.
Into that market and really look at an <unk> customer and follow that customer to a social advocacy.
Referral.
That's really where there's a great opportunity for us to expand the overall lending platform and get deeper in the segments and that hopefully is Chris a bit of an example fruit as to how we think of the existing platform or the existing customers and how it could expand into into the newer segments.
Great that's really helpful. Thank you.
And then last final one if I could is just.
And any color around I know theres, a lot of moving parts here with the balance sheet.
Still having some run off.
As well as the political deposit segment.
But kind of excluding the acquisition.
How you guys are thinking about.
The NIM directionally over the next couple of quarters.
Yep Yep, so so the NIM.
And then eroded about five basis points on kind of a straight level.
Just looking at it quarter over quarter, if we factor out.
Prepayments and some of the Mark accretion it was pretty flat at least between Q2 and Q3 I think it's about a two basis point decline, maybe one basis point decline something like that so.
So hopefully.
Reaching a bottoming of what the NIM would look like I can't always predict what that what thats going to be because as you pointed out theres. Some theres some noise that rolls through on the deposit gathering side, maybe some timing.
Issues on the asset generation side, I think what's important for US right now is really developing that origination that lending origination platforms that we can have a accountable engine to deploy the liquidity that we have.
So that's kind of top of mind for me the other thing I try not to manage.
Very very specifically to NIM I focus a lot more on NII and making sure that I am growing that and I think that the NIM will sort of functionally reflect that as we move along and so I was fairly happy with where we came in on Q3 on an NII basis, but that's kind of my my my prevailing thoughts right now.
On NIM in terms of where we are and hopefully where it's where it's heading.
Great. That's helpful. Thank you.
Thank you.
Ladies and gentlemen at this time there are no further questions I would like to turn the floor back to management for closing comments.
Well I just wanted to say thank you for your questions and for your active engagement over time.
Recent weeks.
Really.
And guidance quite a bit by the.
Any thoughts of our investors and analysts in this market.
Thank you operator.
So thank you for your time today.
We appreciate your great questions and the opportunity to do it.
<unk> with you about the bright future of the company going forward.
We believe this momentum is building for the opportunities that we just talked about and I've been speaking with many of you and with our customers about emerging strategies for our loan and truck businesses and the acquisition of Apoc and have been met with a lot of enthusiasm and a lot of genuine interest.
When we talk about doing good for more customers and developing new customer relationships.
So that we can continue to.
Be proud of.
We are really really pleased that you are encouraging in this and you understand this strategy.
We think that the mission driven services that we provide are going to be exciting for more and more customers in each of the markets. We're in.
So theres really an entry route around where we're headed from here and I Trust that you will follow us on that journey and partnered with US as we go through it and look forward to coming back to you next quarter and talking to you about the early results of implementing these new strategies and more details on incorporating a market to the amalgamated family and also that all of the other.
Initiatives that we'll be anxious to share with you at that time.
You again for your time, and we look forward to dialogue in the future.
Operator.
Ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.