Earnings Call Transcript - AMAL Q4 2020

Operator, Operator

Good morning ladies and gentlemen and welcome to the Amalgamated Bank's Fourth Quarter and Full Year 2020 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open 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 Drew LaBenne, Chief Financial Officer. Please go ahead.

Drew LaBenne, CFO

Thank you operator and good morning everyone. We appreciate your participation in our fourth quarter and full year 2020 earnings call. With me today is Keith Mestrich, 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. We caution investors that actual results may differ from the expectations indicated or implied by any such forward-looking information or statements. Investors should refer to slide two of our earnings slide deck as well as our 2019 10-K filed on March 13th, 2020 and our other periodic filings that we file from time-to-time with the FDIC 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 reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release as well as on our website. At this point, I'll turn the call over to Keith.

Keith Mestrich, CEO

Thank you, Drew and good morning everyone. We appreciate your time and attention today. This morning I will discuss our current operations, followed by the high-level results of the fourth quarter, before turning the call back over to Drew to discuss our financial results in more detail. Today is the last time I'll be speaking with you as the CEO of Amalgamated and I'd like to thank our employees, customers, shareholders, and research analysts for all of your support. This has been an amazing journey and I'm so proud of what we have accomplished. Today the bank is in a strong position highlighted by a talented management team; an exceptional group of employees who are committed to our customers and the bank; a conservative credit culture which has served us well through the crisis; and a well-earned reputation as America's socially responsible bank, which continues to differentiate Amalgamated in the market and positions the bank for success in the coming years. These attributes can be seen in our fourth quarter and full year 2020 results and there are five key highlights that I would like to focus on today. First, the pandemic created unprecedented challenges for all of us over the past year and our team executed flawlessly to ensure we could transition our employees to a work-from-home environment, while seamlessly maintaining our operations. We executed very well under extremely difficult circumstances, which is a true credit to our entire team who I would like to thank for their tireless efforts. Second, the steps that we have taken to improve the credit profile of our loan portfolio in the years leading up to the crisis position the bank to weather the challenging and uncertain economic environment that we currently face. Through the fourth quarter, our loan deferrals declined to 1% of our portfolio from 8% in the third quarter. As we will discuss, we took further actions in the quarter which positions our portfolio and the bank for continued improvement through the year ahead. Third, our deposit franchise continues to be a source of strength and a competitive advantage for the bank. In fact, we expanded our position in this election cycle as well as our share in our core markets with significant new account wins in Boston and D.C. I'm very pleased to see the new business momentum that our team has generated. Fourth, loan growth has been challenging given the paydowns that we have experienced in our residential and commercial real estate portfolios. That said, we are well-positioned in green lending given the investments that we have made which can be seen in the growth of our PACE portfolio over the last year. Our balance sheet is also well-positioned if the yield curve were to steepen in the year ahead. Lastly, we continue to execute on our growth initiatives as we work to grow the franchise value of Amalgamated. Our long-term positioning as a socially responsible company and a solid ESG investment is more relevant today than when I stepped into this position eight years ago. This reputation and our corporate values are driving our success in our newly opened Boston office and positions the bank for further geographic expansion as the pandemic is brought under control. We have also improved our ESG ratings from all the major rating agencies this year, and it has opened the door to new ESG product offerings in our trust business. As you can see, we are investing for the future and are excited with the many growth opportunities in front of us. Turning to the quarter: our success in managing this unprecedented environment can be seen in our results. As net income increased 10.5% to $13.8 million compared to $12.5 million in the third quarter. This equates to earnings of $0.44 per share in the fourth quarter compared to $0.40 per share in the linked quarter. Our deposit franchise continues to deliver, and it is very encouraging to see how far we have come through this most recent election cycle. At quarter's end, our political deposit balance was $603 million, which compares to the 2018 election cycle trough of $182 million. While we do expect to see some continued runoff in political deposits in the first quarter of 2021, you can see that our unique deposit franchise is resonating with our clients and further evidence of the competitive brand recognition Amalgamated holds in the significant market segment aided by the success of our bankers. Looking ahead to 2021, the team will be focused on building back up our deposits with a strong pipeline of opportunities ahead. The focus of the company will be to leverage our boots on the ground in Boston by adding new partnerships in markets where we historically have not had a presence. While the pandemic has been a headwind, our Boston team has had terrific success winning significant new relationships, which have been outside of the political sector. We've also seen strong non-political success out of our D.C. office which is very encouraging. Our teams are winning deposit relationships, which are in the tens of millions of dollars that further validate Amalgamated's strong reputation in the market. Our cost of funds held relatively steady at 13 basis points in the fourth quarter down one basis point from the third quarter of 2020 and down 23 basis points from the year-ago quarter. As I noted in my opening, loan growth continues to be challenging as total loans declined by $107.1 million, primarily due to residential and CRE prepayments. However, I'm very pleased with the growth in PACE assessments of $53.6 million due to purchases from PACE Funding Group, a 58.1% annualized increase from a balance of $367.4 million at the end of the third quarter of 2020. Additionally, since quarter's end, we have signed an agreement for an additional $150 million in PACE assessments, which positions us well as we look to the year ahead. Our non-interest expense for the quarter was $32.7 million, a decrease of $5.2 million from the linked quarter primarily as a result of a $6.5 million decrease in occupancy and depreciation expense related to our six New York City branch closures. This was offset by an increase of $1.8 million in professional fees related to the bank holding company, our management transition, and other projects. As I've said, I believe the bank is in good position to deliver on our growth initiatives, which will evidence themselves in the year ahead. The expansion of our geographic reach into Boston is an area where we have made significant progress. As a reminder, we announced our expansion into Boston pre-pandemic and began building our franchise in the midst of COVID. We expected the ramp-up to be slow. I cannot be more pleased with the progress that our team has made. Amalgamated continues to be the banking partner for individuals and companies who share our strong values and mission, and our brand has resonated in Boston as we have won significant new deposit relationships through the fourth quarter. Our Boston office now has over $30 million in deposits across political, non-profit, labor, and other mission-aligned organizations. Today, we believe there is a $90 billion commercial deposit opportunity in the U.S. with mission-aligned institutions, and we'll look to further expand our geographic reach when the pandemic is brought under control. Another growth initiative that we are excited about is our Trust business, where we have been working on a suite of ESG products that we expect to launch in the first quarter. We are optimistic that these products will resonate with our customers and the market as a whole given the focus on sustainability in the country today. These products not only carry higher fees than our current suite of investment products, but will provide us with products that we are confident will resonate with the foundation, endowment, and family office communities allowing us to expand our Trust business, similar to the way we expanded our commercial banking footprint beyond our historic base with unions and their associated Taft-Hartley funds. Additionally, our shareholders approved the creation of Amalgamated Financial Corporation earlier this month, which is a holding company that will allow us to fully take advantage of our status as a B corporation, gain access to additional means of raising capital, and provide us with an opportunity to expand our offerings to our customers into non-bank financial services. Turning to capital allocation. We continue to invest in the bank to drive growth where we have many high-return investment opportunities several of which I've just touched on. Beyond growth, we are also focused on providing a steady stream of capital to our shareholders through our dividend, which our Board evaluates on a quarterly basis. To conclude, I could not be more proud of what we have accomplished. The bank is in a strong financial position having weathered an unprecedented environment and is positioned for success in the years ahead. We have made strong strides growing our franchise, built upon our reputation as America's socially responsible bank, at a time when this has become more important than ever, and have created many exciting avenues for growth. The Board is making strong progress in our search for a new CEO. And they are very pleased with the quality of candidates they have met. Importantly, the search is now in its final stages. And I'm very proud of the institution that the new CEO will be inheriting. I will remain a special adviser to the Board, to ensure a smooth transition. And I look forward to working with the team, that I'm so very proud of in this new role. I want to thank the Board again for the opportunity to lead this great institution, and to the teams that I've worked with on a daily basis. Today I feel an enormous sense of accomplishment, as should all of you. Thank you all for your hard work and your companionship. And on a personal note, I'd like to thank my friend Drew for both his partnership and his friendship. The success that we have achieved would not have been possible without you Drew. Thank you very much my friend.

Drew LaBenne, CFO

Well, thank you, Keith. And thank you for the opportunity to be a part of this incredible journey. On behalf of the entire bank, you are going to be missed greatly. Thank you. All right, turning to our financial results on slide 6, as Keith mentioned in the fourth quarter, deposits decreased $682.3 million as expected, primarily due to the election cycle to $5.3 billion from the third quarter of 2020, while average deposits for the quarter were $5.6 billion. Average non-interest-bearing deposits decreased $244.8 million from the prior quarter, primarily due to seasonality related to the election cycle. And now represent 53% of average deposits at year-end. Our deposit cost of funds remain relatively stable at 13 basis points for the quarter, a decrease of one basis point from the third quarter of 2020. Deposits from politically active customers such as campaigns, PACs, and State and National Party Committees decreased $609 million from $1.2 billion at September 30th, 2020, ending the year at $603 million, as outlined on slide 7. This election cycle greatly exceeded our expectations, as we had strong success expanding our market share during this past year. Amalgamated continues to be a value partner, as we supported the business needs of the majority of Democratic candidates this cycle, which bodes well as we look to 2022. As seen on slide 10, our year-end 2020 total loans held relatively steady at $3.4 billion, as compared to December 31st, 2019. As Keith mentioned, loan growth in the fourth quarter was impacted by early payoffs of residential and CRE loans, as well as our diligent efforts to manage the credit profile of our portfolio. A bright spot in the fourth quarter was the growth of PACE assessments to $421 million. In addition, we signed another $150 million PACE purchase agreement with PACE Funding Group, which will allow us to continue this growth in 2021. The yield on average earning assets was 3.18% for the fourth quarter, a decrease of 63 basis points as compared to the same period in 2019, driven by lower market rates on loans and securities. The yield on our total loans was 4.04%, compared to 3.97% in the third quarter of 2020. After adjusting for prepayment penalty fees, our loan yield was down three basis points in the fourth quarter, as compared to the previous quarter. Turning to slide 13, our net interest margin was 3.06% for the quarter, an increase of 18 basis points from the third quarter and a year-over-year decrease of 37 basis points. As expected, cash on the balance sheet decreased and helped to increase margin from the previous quarter. Prepayment penalties also positively impacted margin, as they added 13 basis points to our net interest margin in the fourth quarter of 2020, compared to seven and two basis points in the third quarter of 2020 and the fourth quarter of 2019, 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 third and fourth quarters of 2020, compared to five basis points in the fourth quarter of 2019. Net interest income for the fourth quarter of 2020 was $45.7 million, which compares to $45.2 million in the linked quarter and an approximately $3.4 million increase as compared to $42.3 million in the same quarter of 2019. For the year, net interest income was $180 million, which compares to $166.6 million in the prior year. Now on to non-interest income. Non-interest income for the fourth quarter of 2020 was $10.0 million, decreasing from $12.8 million in the third quarter of 2020 and a $2.3 million increase compared with the fourth quarter of 2019. The sequential quarter decrease was primarily due to a decrease of $2.5 million in tax credits on equity investments in solar projects. The quarterly increase as compared to the year-ago period was primarily due to $1.8 million in tax credits on equity investments and solar projects in the fourth quarter of 2020. Non-interest income for the full year was $40.6 million, an increase of $11.4 million compared to 2019. In 2021, we will see the reversal of those tax equity gains taken in 2020 and $5.6 million is expected to reverse. This does not include any benefit from future deals that we may book. In addition, the real estate fund that has been winding down in the Trust business stopped charging fees at the end of 2020 and the $400,000 per quarter in fees will no longer be occurring in 2021. For the fourth quarter, non-interest expense was $32.7 million, a decrease of $5.2 million from the third quarter of 2020 and an $800,000 decrease from the year-ago period. The decrease of $5.2 million from the previous quarter was primarily due to a $6.5 million decrease in occupancy and depreciation expense related to the closing of six branches in New York City partially offset by an increase of $1.8 million in professional fees related to the formation of a bank holding company, the transition of our CEO, and other strategic initiatives. For the full year of 2020, our non-interest expense was $133.9 million, an increase of $6.1 million, or 4.7% from $127.8 million for the year ended December 31, 2019. The increase was primarily due to a $5.3 million increase in occupancy and depreciation expense related to branch closures and a $1.5 million increase in other expenses due to FDIC insurance rebates in 2019 that ceased in 2020. Our progress on loan deferrals has been quite positive over the last quarter. We ended 2020 with $41 million, or 1.2% of loans on principal and interest deferrals. For loans that have exited payment deferrals or have gone past six months of deferrals, only $21 million of those loans have failed to resume payments, primarily in residential and we have included those loans in our non-accrual assets. The remaining $408 million have been moved into the appropriate credit risk rating based on their situation, with $179 million being pass rated, $163 million being special mention, and $65 million being substandard and accruing. While we have seen an increase in criticized and classified loans, we view this as a strong showing of credit performance that $21 million have not resumed payments, most of which are not required to pay at this time due to New York state laws passed during the pandemic. As it can be seen on slide 17, our non-performing assets totaled $82.2 million, or 1.38% of period-end total assets at December 31, 2020, an increase of $15.5 million compared with $66.7 million, or 1.25% at December 31, 2019. The increase in non-performing assets was primarily driven by the addition of $14 million of non-accruing residential first-lien mortgages primarily due to COVID-19 pandemic. We have seen very few new requests for deferrals and are pleased with the trends in credit thus far. Obviously, this crisis is not over, and we remain vigilant in managing credit and working with our borrowers to resolve any issues as they may arise. We recorded a $4.6 million provision for loan losses in the fourth quarter of 2020, which compares to an expense of $83,000 in the fourth quarter of 2019. The provision expense in the fourth quarter of 2020 was primarily driven by an $11 million charge-off related to an indirect C&I loan of which $8.3 million was reserved for in previous quarters, and for specific reserves on multi-family loans of $2 million. Looking back at 2020 from a credit perspective, the year was clearly challenging. That said, steps we took to address the credit profile of our portfolio and the years leading up to the pandemic combined with the disciplined credit culture that we have instilled position the bank to weather what could have been an even more difficult environment. I'm pleased with our ability to manage credit and I am optimistic that the actions we have taken through the fourth quarter position us well as we look to the year ahead. Skipping to Slide 18, our GAAP and core return on tangible average common equity were 10.3% and 10.7% respectively for the fourth quarter of 2020. The core return compares to 13.4% for the third quarter of 2020 and 10.7% for the comparable period in 2019. The modest decrease in core return on tangible common equity in the linked quarter was primarily due to the previously discussed factors. Lastly, we remain well capitalized to support future growth. To conclude I'd like to reiterate, Keith's sentiments towards the fourth quarter and full year results. We are very pleased and proud of all the work the team has accomplished both pre-pandemic setting the company up to navigate unforeseen events and the successes accomplished throughout the pandemic. I thought it would be interesting to look back at our performance compared to our original 2020 guidance which is on slide 20. Even though we pulled the guidance in the midst of the pandemic, despite all the obstacles the bank had to overcome we still hit on all the key points of guidance during the year which is a real testament to the hard work of our colleagues at the bank. Turning to slide 21, we have outlined our expectations for 2021. This guidance assumes the year-end 2020 yield curve with no change in the Fed funds target for 2021. Core pretax pre-provision earnings of $72 million to $88 million, which excludes the impact of solar tax equity reversals. Targeting 10% balance sheet growth overall for the year. And core expenses are expected to run higher in the first and second quarters due to strategic initiatives and then lower in the second half of 2021. Thank you again for your time today. We look forward to updating everyone on our first quarter results in April. With that I'd like to ask the operator to open up the line for any questions.

Operator, Operator

Our first question is from Steven Alexopoulos with JPMorgan. Please proceed.