Amalgamated Financial Corp. (AMAL) Earnings Call Transcript & Summary

Good afternoon, and welcome back to our session. Next, we'd like to welcome back Amalgamated Bank for an encore presentation for our conference. This will be a fireside chat. And just to keep it interactive, you should be able to see answered questions on the left-hand side of your presentation. So please send in your questions, and we'll answer them as they begin real time. I recall Amalgamated went public in July of 2018 and has expanded into the San Francisco market with the purchase of New Resource Bank. From the company, we are excited to have Keith Mestrich, CEO; and Drew LaBenne, CFO. Guys, welcome to the conference.

Thanks, Brian.

Yes. Thanks for having us.

Great. For the first question, just to start off, kind of social justice issues have garnered significant attention of late. Kind of can you talk about how your brand proposition has resonated with clients and how this is impacting these relationships?

Sure. I'll take that one. You're right, Brian. It's been quite a year, 2020. We've had a pandemic, which has led to a variety of social issues around public health and engaged a number of the kinds of organizations that see Amalgamated as their natural banking partner. We've certainly seen our share of economic stresses and a number of organizations that work for social justice from the perspective of income inequality or worker representation have been quite busy. And obviously, with the depth in the killing of George Floyd and the resulting racial justice demonstrations and outpouring of that -- has resulted from that and other such instances. A number of the kinds of organizations that spend time banking with Amalgamated have seen an outpouring of contributions. They've been incredibly busy. They have been working double time to really do the kind of work that they have done. And in all of that, just like they do in other times, they want their financial compadre who helps them think through a lot of these issues. And we've certainly seen that in this time. And even with our bank operating completely remotely since March, we have seen tremendous outreach, both to and from our natural constituents. We've seen their organizations sustain some nice growth. We've seen significant deposit increases from that. And really just the number of people who wanted to be active with us, because we share that value set that they're working so hard on, the value proposition of our company to them has become quite apparent.

Excellent. And we've seen that. I think that show up kind of in your deposit growth. And it definitely has benefited from your marketing strategy and branding. Just kind of as you look forward, do you think this deposit growth can continue in a persistently low-rate environment?

I really do. A couple of just comments on the deposit growth that you've seen. A lot of banks, as you know, have seen a lot of deposit growth. And we've certainly seen some of the same trends that have led to the kind of deposit growth that other banks have seen because of maybe PPP money that gets deposited in the bank or whatever government programs that end up resulting in additional savings. But I do want to be clear that some of our deposit growth has also come from very, very real customer acquisition activity that has happened during this crisis, whether that's new organizations that have formed or people who have decided to come bank with Amalgamated for the reasons that they do, which is they like the social mission that we have. When they get to know us, they understand that we, from an operational perspective, are as strong and as solid a bank and offer all the same kind of commercial treasury management, depository services that all other banks offer. And that we also have a staff and a team of bankers who uniquely understands their needs because they come from the same world. So our deposit growth has continued really unabated since the pandemic in terms of the reasons people came to Amalgamated both before the pandemic and after the pandemic. And to the point of your question, I really do believe that our opportunity to have continued deposit growth will work its way just through the low rate environment that we have, too. Yes, we have a low rate of funds, but I continue to believe that people will continue to come to Amalgamated because of those social -- those mission-oriented reasons and the really good value proposition they get in terms of banking with our staff and our unique knowledge of those organizations' particular needs.

Great. Also related to another kind of current topic. Deposit growth has benefited from the political cycle. Could you discuss kind of the expected trend from political deposits through early 2021? And kind of what the impact is on the financial statements?

Sure. So as you know, we're one of the few banks that really focuses on doing political banking. We're not the only one, but we're probably the most prominent bank now in that space. We have certainly seen a substantial run-up in political deposits over this cycle. A part of that is because we've been able to take additional market share within our constituency there. And we just have more accounts to build up a deposit base during that time. But also because there's been 2 factors that I think have happened in the political environment. One has been tremendous fundraising. Joe Biden last month set the single month record by raising almost $350 million in a single month. And we are seeing that with candidates up and down of the ballot, if you will, in terms of that. And secondarily, there's been less things for campaigns to actually spend money in because of COVID. So there is fewer field staff, there's less travel. There's a lot of spending on TV and digital advertising and voter registration and outreach, but there's just less campaign activity. So we have still modeled out a significant decline in our overall political deposit balances between now and election day. We expect that to trough somewhere around the $300 million range. And then if past is prologue, and we expect it to be, the fundraising cycle will start over again, and we'll continue to see those deposits increase over time. I'm going to turn it to Drew just to talk about a couple of very specific financial implications of that runoff as it relates to both our overall asset size and NIM.

Yes. Just as Keith said, it's been a tremendous run for growth in political deposits really over the last 2 quarters. And knowing that those deposits are going to hit their trough, their low point in Q4, we've been building up cash reserves and putting excess cash in floating rate agency securities. So certainly, that's had some downward impact on NIM in the near-term and has lowered our leverage ratio a bit as the balance sheet has rapidly expanded. So I think both of those things will move back in the other direction in Q4 as the deposits flow back out in the near term.

Great. Just kind of moving on from that topic. I noted vacancy rates for both residential and commercial properties in New York have been moving upward. Can you discuss any steps you've taken to proactively reach out and work with some of the landlords in order to stem delinquencies and charge-offs?

Sure. I can take that one. Keith, feel free to jump in whenever. We were very proactive, really in the cycle, if you will, with the COVID impacts, and I would applaud the government for the CARES Act they put in place because it gave banks like us a lot of flexibility in terms of how we deal with landlords and residential property owners over a short period of time. So we've been working actively, and I'll just talk about commercial for a second first, but we've been working actively with commercial landlords, and this is mainly in the New York City area where it's been -- where we've seen the impacts, to offer them principal and interest deferrals over a 3-month period if they showed hardship in their rent rolls or their revenues that came in. And certainly, we had a number of borrowers, landlords who took advantage of this. We've seen a really nice cure rate from that first deferral period of about 50% for commercial borrowers. We've allowed those landlords who are still having trouble making full P&I payments to take a second deferral for another 90 days. And that's been about a 50% roll rate thus far, though many of these have not reached their -- these landlords have not reached their second deferral. But we've also set the expectation that after 2 deferrals or 180 days that we expect those borrowers to start making P&I payments again, principal and interest payments again. And for the most part, I think the landlords understand that and they've taken appropriate actions to get themselves ready for when this deferral period ends. But we -- Keith and I both monitor this very closely along with our credit team. We have weekly meetings then we have monthly deep dives. And I'd say every meeting we have, the news is getting more positive in terms of vacancy rates going down, rent rolls going back up for our landlords. And so we're optimistic that most of our borrowers are going to end up back on their feet at the end of this. Keith, anything you want to add?

I'd only add one thing. I'd echo everything that Drew said and would sort of applaud our staff on I think how hard they've been working and how in contact they are with the sponsors of our properties that we extend credit to. I would also say, I think we have very strong sponsors of a lot of these credits. They have -- we're pretty conservative in our underwriting approach. As you know, Brian, pre-COVID LTVs are quite low. We think there's a lot of investment by the owners in these properties. So really, I think our alignment with the owners to make sure that we get to the point that these properties survive this crisis that we're in and can get back in, not only being productive properties, but well-paying properties from our perspective, I think we're very aligned with the landlords that we do business with.

Great. And while you've seen some of the deferral payments and the government stimulus programs have benefited delinquency and charge-off rates, any kind of concerns that charge-off rates could start moving up? And if they were to start moving up, kind of what time frame do you think you would expect that to start happening?

So the second deferral period that I discussed will end somewhat -- for some loans in the third quarter, but for all loans on the commercial side, in the fourth quarter. And at that point, we will -- they'll go into our workout process if they're not making full P&I payments. And depending on the situation, they're -- we may end up having to go through a workout. We may become what we call collateral-dependent on the value of the property, which would determine if we needed to take a charge-off or not for CRE and multifamily properties. I think the good news, as Keith alluded to, is we have very strong LTVs on these properties that are now under deferrals. So these are all pre-COVID LTVS. But we think even with the rates that we were at on the appraisals pre-COVID that we should have enough value in these properties that even if we got into a severe workout situation where a worst case we had to foreclose, we believe there's enough value in the properties that the charge-off content of the portfolio that's under deferral right now would not be substantial.

Great. Excellent. Then kind of looking at it, any other ways kind of the COVID-19 pandemic has impacted your business? And how have you continued to kind of work with clients to kind of respond to these challenges? And do you think you could see any change in your strategy kind of in a post-COVID-19 world?

Well, sure. Obviously, there's the most obvious answer, which is our staff has been working remotely since mid-March. And again, the team just did a terrific job in terms of doing what many other banks and so many organizations have done, which is really just to turn on a dime and move out of their comfort zone of coming into an office every day and doing work the way they've done it for years, if not decades, and now doing it remotely and working at home. And I'm just -- I think our team has done a wonderful and a terrific job of doing that. We've barely missed a beat when it comes to servicing our customers. I don't think many of our customers even realize that the entire bank is operating remotely. It's been that smooth. And of course, that does give us the opportunity to think about some organizational work issues and does that allow us to think about occupancy and space and real estate in a different way. Just like many other institutions, we'll be looking at that and studying that as well. Certainly, major question, how much you actually have to travel. And for somebody who spends a lot of time on the road, there's a lot that you can get done using this kind of technology and other things. And if nothing else, the forcing of using technology like Zoom and video conferencing and other kinds of technologies will probably move forward into the future faster than we would have otherwise. Without a doubt, the crisis has clearly impacted the banking sector as a whole. And our stock has, like other bank company stocks, has suffered because of that. And I think it's made us, between the combination of stock price and uncertainty of opportunity, certainly put thinking about things like M&A and other things on the sideline for now and how we would do that. And I think the general proposition in our minds is, we believe when we get on the other side of this because we've done -- because we've got a conservative credit culture, hopefully, we escape from this terrible crisis and come out of it relatively unscathed from a credit position with a good capital standing and are positioned to be able to take advantage of that. Brian, as you know from our conversations, this year, we had talked about expanding into both Boston and L.A., even if we couldn't do it by acquisition, that we would do it organically. Well, we did kick off in Boston and timing might not have been the best because the next week, we shut down all of those operations. But our small team up there has dug in and they have been adding new customer accounts. And they'll be opening a physical office soon. And we are open and doing business in Boston. Maybe it's a little slower than it would have been otherwise, but the team there is dedicated and doing a good job. We did put L.A. on hold for now. And we'll be revisiting that as we go through planning for 2021 to think about when we do that. So I would say for the most part, we have continued operating the bank as we have always done it. Some of our growth initiatives, we've, I think, smartly decided to either pursue or put on hold as the situation becomes clearer in terms of what the economy is going to look like and other things. But at the end of the day, I think the core of our business strategy, which is developing a top-notch deposit franchise and building the size of the bank by being a great commercial depository and treasury management services for our core customers, rotating that funding source into conservatively underwritten loans and generating a decent margin from that. And then over time, as we have talked about, adding additional lines of revenue, additional geographies and ways to think about organic growth is a smart business strategy for us. And it's on pause a little bit because of the pandemic, but only partly. And I think it's still the business strategy for the future. I'm very happy that we have the franchise that we do. I think it's unique in the banking industry and will continue to give us an opportunity to really pursue the long-term vision that we laid out when we went public 2 years ago. And it was a good strategy then, and it will be a good strategy in the future as well.

Excellent. And I noticed you recently put out a slide deck and you mentioned you formed a bank holding company. I'm kind of trying to think deeper into like what kind of additional products or services do you think you'll be focusing under this structure? And then would you be kind of focusing growth to be entirely organic? Are you looking at potential acquisitions to gain scale in some of these areas quickly?

Yes. It's really building on what I was kind of just talking about. When we're in conversations with so many of our clients, they are talking to us, oftentimes, for the first time they ever have about optimizing their banking relationship with a financial institution. And we've always thought, does that give us an opportunity to talk to them about other kinds of services? One of the things we don't talk with the investment community about enough is our investment management business. That has -- that is a business that's about $45 billion in assets under custody and management. It does give us a line of fee income. We have announced previously that we've changed our subadvisory partner there to work with Invesco, which gives us an opportunity to think about new fund opportunities that we can offer to our clients. But that notion of thinking about other things that we can cross-sell to some of our clients is something that's been in our mind and a holding company would give us the ability to think about having a structure in place to be able to do that. And then obviously, a holding company, and it gives you other tools in the capital toolbox as well. M&A activity is not necessarily dependent on having a holding company. If we did a bank acquisition or a lending team acquisition, those are all the kinds of things that we think about on the table. And as we think about what the future holds, we try to be more expansive rather than just limited in our thinking.