Greetings, and welcome to Amalgamated Bank Third Quarter 2020 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Drew LaBenne, Chief Financial Officer. Please proceed.

Thank you, Operator, and good morning, everyone. We appreciate your participation in the third quarter 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 Investor section of our website for an extended period of time. Additionally, a slide deck to complement today's discussion is also available on the Investor 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 a number of factors, some of which are beyond our control could cause actual results to differ from the expectations indicated or implied by any such forward-looking information or statements. Investors should refer to Slide 2 of our earnings deck as well as our 2019 10-K filed on March 13, 2020, and our other periodic reports that we file from time to time with the FDIC, typically under cautionary note regarding forward-looking statements and risk factors, for further description or explanation of those items that could cause actual results to differ materially from those indicated or implied by any forward-looking statements that we may make. Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance 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.

Thank you, Drew, and good morning, everyone. We appreciate your time and attention today. On today's call, I will start by providing an overview of our current operations, and an update to our business given the ongoing COVID-19 pandemic, before turning the call over to Drew to discuss our third quarter results in more detail. First, as most of you are aware, after eight rewarding and fulfilling years serving this great institution, I announced my plan to step down as President, CEO of the Bank at the end of January 2021. A difficult decision in which I came to the conclusion after much reflection about what I wanted to achieve next. Six years ago, when I assumed my current position, Amalgamated was in a very different place than it is today. It was this time that the Board and I worked closely to establish a number of key objectives to be accomplished. These included resolving the consent order from the regulators, setting a strategic direction for the bank aimed at growth, recruiting a new management team, returning the Company to profitability and reestablishing the payment of the dividends and lastly providing an excellent opportunity for our private equity investors. Together as an organization, we have achieved these goals. As I look at the bank today, I'm so proud of the fact that Amalgamated is financially and operationally much stronger than it was when I assumed this role back in 2014, as demonstrated by our third quarter results. During the past six years, we have cultivated an exceptional leadership team that first led us out of the precarious position the Bank found itself in following the financial crisis, and then put us on a solid path for growth, highlighted by our acquisition of New Resource Bank and our successful initial public…

Thank you, Keith. I will begin by reviewing our third quarter results before turning the line back to the operator to open for questions. Turning to Slide 6, in the third quarter ending deposits increased $151 million, or 10% annualized to $5.9 billion from the second quarter of 2020 while average deposits grew $459 million in the quarter to $5.9 billion. Average non-interest bearing deposits increased $445 million from the prior quarter primarily due to seasonality related to the election cycle. Total non-interest bearing deposits now represent 54% of average deposits at quarter end. Our cost of deposits decreased to 14 basis points, down 6 basis points compared to 20 basis points at the end of the second quarter. Deposits from politically active customers such as campaigns, PACs, advocacy-based organizations and State and National Party Committees increased $633 million from $578 million at December 31, 2019, ending the third quarter at $1.2 billion as outlined on Slide 7. As of Monday, our political deposits were $805 million. Although we had expected a nadir of $300 million in political deposits, the momentum in the party continues to be exceptional and we now expect these deposits to be above $500 million at the end of the election. We look forward to continuing our support of the Democrats during the presidential race and partnering with the majority of Democratic candidates in office. Turning to loans, total loans were $3.6 billion, compared to $3.7 billion at the end of the second quarter. For the nine months ended September 30, 2020, total loans increased $115.9 million driven by an increase of $187 million in C&I loans, including $95 million of Government Guaranteed and Paycheck Protection Program loans, and $16 million increase in consumer loans, primarily consumer residential solar loans. Our balance of PACE assessments, which…

Thank you. [Operator Instructions] Our first question comes from the line of Steve Alexopoulos with J.P. Morgan. Please proceed with your question.

Good morning. This is Janet Lee on for Steve Alexopoulos. First of all, best of luck Keith on your next chapter. Maybe for Keith, as you're doing the CEO search, are you looking for someone who's in your market or someone with a specialized background working with the niche sector you're in, such as political organizations and nonprofits?

So the Board is leading the search, and I have had a chance to review some of the materials. I know that the search is underway, and I think the Board is looking for someone who's really got that set of skills that both have deep experience in banking or financial services along with the ability to connect in our niche market. And there are, in my understanding a number of very, very good candidates who have surfaced?

That's helpful. And my follow-up is on solar credit. So the modest income you project out beyond 1Q 2021 on Slide 14, is this assuming that the deals are being flat at current levels without new potential deals, you also say on the same slide that you expect to book more deals over the next several quarters that are not included in the projections. So just want to double check to make sure that the run rate should be higher than the $1.8 million forecast for 2022, for example?

Correct. Yes. Hi, Janet, it's Drew. Yes, that's correct. The $1.8 million is the total and applied is the total income for the project stream over the life we're showing there. So what we're really doing is just giving you a longitudinal view of one set of projects. So as we add-on more projects, which we intend to do, we'll add to those numbers. So that is not a forecast of non-interest income for all projects going forward. Just to be clear.

Is there sort of a magnitude of an income benefit that you get from like an additional deal or the size, or the number or the size of the deals, do you expect to book over the next few quarters?

Yes. So this type of investment is constrained by our taxable income. So when we're looking at how many deals we can do in the future, we need to consider how much federal taxable income we're going to have available to us these tax credits. So I would say this is – this one deal I'm referring to is actually four related deals with one project sponsor. So I suspect we could probably do about two of these a year on a normalized basis, as long as taxable income, looks positive in the future. And then what's really not on the slide, but related to this is, along with the tax equity investment we're making, we're also doing the term loan on the projects as well. So there's other benefits that are related to making these tax equity investments besides just the economics shown on this page.

Alright. That's helpful. Thanks for taking my questions.

Thanks, Janet.

Our next question comes from the line of Brian Morton with Barclays. Please proceed with your question.

Good morning, guys. How are you doing?

Thanks. Good morning, Brian.

I just want to know, you've highlighted that high levels of cash impacted the NIM by about 31 basis points. We've kind of seen pre-penalty payments are headed back 7 basis points. And kind of given the expected decline in political deposits for next quarter, how much of that 31 basis points you think you can get back? And would that imply, you can get a 3% NIM would be achievable even with possibly lower prepayment penalties?

It would imply that. I mean, there is still going to be some pressure on – more from the longer end of the curve being lower now on new originations coming in refinances. So we do also have to offset that pressure; that's going to continue as long as low rates exist. But I think we – besides just the cash coming off the balance sheet, I mean, we do have, obviously a large securities portfolio and a lot of lower yielding assets that can be deployed into higher yielding assets in the form of more loans or PACE assessments. So that's what we'll be working on to help counteract some of that longer term pressure on NIM?

Okay, great. And then the other question just on capital. We're seeing capital level continue to creep up, and next quarter you'll get a lift in the leverage ratio and the political deposits running off. Could you just go through your capital priorities again? And if acquisitions and buybacks are on hold, at what point does it become more appropriate to take a closer look at the dividend?

Yes, great. So the dividend is a conversation every quarter with the Board, and we'll continue to have that conversation. The first priority for capital is always going to be organic growth, and we see a lot of that in our future. I think our growth rate has been very strong over the past several years. And we see it continuing to be strong going forward. Obviously in Q4, we're going to have a little bit of drop from the political deposits. But I think less so than we've been forecasting as the outlook there looks higher. And then we'll continue to grow our core franchise as well, and I think we're going to need some capital to continue doing that. And as we plan for next year, or finalize our plans for next year, we'll look at the capital levels and determine what the best course of action is, buybacks, dividends, acquisitions, et cetera. And I think the other thing to note here too, is there's still a lot of dry powder in terms of, Keith mentioned the Kroll rating that's just been established and the bank holding companies coming here. We actually have no sub debt issued, we have no preferred stock, not that we're planning on issuing either of those right now. But those are levels to think about non-organic – those are levers available to use as we're thinking about non-organic growth as well.

Okay, great. Well, thanks a lot. Those were all my questions.

Thanks, Brian.

Our next question comes from the line of Chris O'Connell with KBW. Please proceed with your question.

Good morning, gentlemen.

Hello, Chris.

So I'd like to circle back, I guess counter to the margin rate, to capital or to liquidity deployment. And just see how your PACE pipeline or the opportunities that you're seeing for future PACE growth are, and just where you're seeing as well, loan opportunities given some of the declines this quarter?

Yes, great. So I'll take that one, and Keith can jump in. On the PACE assessments, we continue to have – we continue to believe we will originate and put more of those on the balance sheet. So that will be a source of growth. Our partnership with PACE Funding Group has continued to strengthen in other ways as well, and I think we see a lot of opportunities for growth in continuing to work with them. We do have some other partners, which are of a similar variety that we're working with to continue to look for loan growth opportunities. And we have a pretty strong C&I pipeline for new loan growth as well, more so in the renewable energy space. So I think there's a lot of opportunities for loan growth there. The two big headwinds for us are going to be the ones that we saw this quarter. The first is multi-family, which for us is primarily in the New York City market. I think what we're seeing in terms of credit deferrals is great. I think we're very happy with where our outcome will be in Q4, with essentially all of those loans, beginning repayment. But at the same time that refinancing activity and purchase activity has really slowed down. So I think originations will be challenged there, but we continue to look for opportunities. And then in residential, our pipeline originations are the strongest they've ever been. But at the same time, we've made a strategic decision that, at a 2.5% rate or thereabout we're not looking to put 30-year mortgage on the books at this point, except for relationships. Something we could change that in the future. But in the meantime, that's going to mean a continued stream of higher non-interest income, but some pressure on the loan side of the balance sheet.

Got it? That's helpful. Thank you. And then I appreciate, you gave the updated political deposit balance dropping $800 million or so as of October. But do you guys have any view as to where that will bottom out towards the end of the fourth quarter at this point?

Well, I think one of the things that we're seeing, Chris, is that we are seeing spending later in a cycle than we normally have. We are seeing some of our clients in the space, recognizing that there could be post-election; let's call it, activity, if there's uncertainty around the outcome, either in the Presidential level, which gets a lot of attention, but you could have that that at the state and local level as well. So I think there's some likelihood that we might see some continued spend of that. Makes it a little hard to project exactly where we will be at the end of the fourth quarter. It will be a little bit lower than it is today, but I think, the projection that Drew had given in terms of where this is a range. I think it's a probably a pretty good range on what's likely to happen at the end of Q4.

Got it. Thank you. Then given just kind of putting all the moving parts together with the political deposits dropping, and the cash balances dropping kind of along with that in the fourth quarter. But then, adding to that, other liquidity deployment opportunities or mix shift opportunities, given the liquidity levels. Do you guys have an idea of where the margin will shake out going forward?

I don't think we're ready to give guidance on that. I think we've – I don't want to pat ourselves on the back too much, but I think we've done a pretty good job of holding net interest income pretty steady over the past few quarters while absorbing, obviously a massive decline in the yield curve. We're pretty happy about that. I think our sources for increasing net interest income in the future are really going to be continued balance sheet growth, excluding the political deposits impact, and then continuing to work on growing the loan portfolio. So there's a lot of factors that go into it. So I don't want to give you a Q4 NIM right now. But we're very focused on holding and then increasing net interest income into the future.

Got it. Understood. Then one last quick one, for the bully fees this quarter, were there some elevated? I guess, if they were, where do you think they might drop down to kind of on a normalized level?

Yes. I think if you look at where we were and it's actually pretty steady, except for when unfortunate events happen, and it increases up. But if you look back to where we were in Q3, it's in the earnings release in Q3 of 2019, a little over $400,000 per quarter. That's probably a good approximation of where we'll run in the near-term, excluding any one-time event.

Great. Thank you. That's helpful. That's all I had.

There are no further questions in the queue. I'd like to hand the call back to Keith Mestrich for closing remarks.

Thanks, operator. I just want to thank everybody for joining us today. We're really pleased with the strong results that we put forward this quarter. It's a testament to the strategy that we've developed, the terrific franchise that we've been able to create and really the strength of so many people on our management team and all of our staff that works so hard every day. So I just want to thank all of you, stay safe, and we'll talk to you at the end of the year. Thanks.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.