Amalgamated Financial Corp. — 2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020. The reported financial statements and operating results are those of Amalgamated Bank, the company’s predecessor operating entity; Amalgamated Financial Corp. became the Bank’s holding company in a one-for-one share exchange on March 1, 2021. The Bank provides commercial and consumer banking, trust, custody and investment management services, with a focus on mission-aligned customers. It reported $6.0 billion in assets, $5.3 billion in deposits, and $535.8 million in equity at year-end.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Net interest income | $180.0 million | $166.6 million |
| Provision for loan losses | $24.8 million | $3.8 million |
| Non-interest income | $40.6 million | $29.2 million |
| Non-interest expense | $133.9 million | $127.8 million |
| Income before taxes | $61.9 million | $64.2 million |
| Net income | $46.2 million | $47.2 million |
| Diluted earnings per share | $1.48 | $1.47 |
| Net interest margin | 3.11% | 3.55% |
| Efficiency ratio | 60.69% | 65.27% |
- Revenue and margins: Net interest income rose 8.0%, as lower funding costs and growth in average loans and securities more than offset lower asset yields. Net interest margin declined 44 basis points to 3.11%; average earning-asset yield fell 67 basis points to 3.29%. Average deposit cost declined to 0.19% from 0.35%.
- Profitability: Net income fell $1.0 million, despite higher net interest and non-interest income, mainly because provision expense increased $21.0 million and non-interest expense increased $6.1 million. Return on average assets was 0.76% (0.96% in 2019); return on average equity was 9.07% (10.03%).
- Cash flow: Operating activities provided $65.8 million, investing activities used $755.1 million, and financing activities provided $605.6 million. Cash and cash equivalents ended at $38.8 million, down from $122.5 million.
- Balance sheet and funding: Assets grew 12.3% to $6.0 billion. Net loans were $3.45 billion, broadly steady year over year; deposits rose 15.0% to $5.34 billion. Non-interest-bearing deposits were $2.60 billion, about 49% of deposits. The Bank had no borrowings at year-end, versus $75.0 million in 2019.
- Liquidity and capital: Available-for-sale securities were $1.54 billion. The Bank reported $1.6 billion of remaining FHLB credit availability and approximately $125.5 million of Federal Reserve discount-window borrowing capacity. Total stockholders’ equity was $535.8 million. Regulatory capital ratios included a 14.25% total risk-based ratio, 13.11% CET1 ratio and 7.97% leverage ratio; the Bank was categorized as well capitalized.
Material changes and notable items
- Nonperforming assets rose to $82.2 million, or 1.38% of assets, from $66.7 million, or 1.25%. Nonaccrual loans increased to $60.9 million from $31.0 million; the nonaccrual-loan ratio rose to 1.75% from 0.90%.
- The allowance for loan losses increased to $41.6 million, or 1.19% of loans, from $33.8 million, or 0.98%. Net charge-offs were $17.0 million, compared with $7.2 million in 2019. Management attributed the higher provision and credit deterioration chiefly to pandemic-related pressures and charge-offs involving hotel, construction and C&I loans.
- At year-end, $41 million of loans remained on COVID-related payment deferral, about 1.2% of the portfolio. The filing reports $428 million of loans that had exited deferral, with $163 million rated special mention and $86 million substandard.
- Non-interest income included $7.4 million from equity-method investments, primarily tax credits on solar investments; management expected approximately $5.6 million of equity-method investment losses in 2021, before any benefits from new investments. Trust fees fell 18.2% to $15.2 million, partly because of the wind-down of a real-estate fund whose fees were expected to end in 2021.
- Occupancy and depreciation costs increased, including branch-closure charges. The Bank recorded an $8.3 million charge related to branch closures and expected approximately $4.0 million in annual expense benefits once closures were fully phased in. The report also describes eight branch closures and Board approval to permanently close six branches; verify the scope and timing of those disclosures.
- The securities portfolio grew to $2.03 billion, including $421.0 million of PACE assessments held to maturity. The Bank had a commitment to purchase up to $325 million of PACE securities by September 2021 and had fulfilled $165.4 million by year-end. PACE securities generally rank senior to first mortgage liens and carry regulatory, compliance and valuation risks.
- The Bank invested in solar projects and reported $23.99 million of tax credits and other tax benefits recognized during 2020. It also made a $5.0 million equity investment in PACE Funding Group, LLC associated with a PACE securities purchase agreement.
- CEO Keith Mestrich resigned effective January 31, 2021; Board Chair Lynne P. Fox became interim CEO while a permanent successor search proceeded. The holding-company reorganization closed March 1, 2021.
Outlook, risks and contingencies
Management did not provide quantified earnings or growth guidance. It cited continued uncertainty from COVID-19, including borrower performance after deferrals, collateral values, loan demand, interest rates and credit-loss provisions. The Bank also highlighted exposure to New York rent-regulated multifamily properties, concentrated metropolitan markets, interest-rate and securities valuation risk, large commercial and real-estate exposures, and the performance and regulatory treatment of PACE financing. It expected CECL adoption on January 1, 2023, but said the effect could not yet be reasonably determined. Other identified risks include deposit volatility—particularly political-client deposits—cybersecurity and third-party service-provider dependence, trust-client concentration, and the CEO transition.
The Bank reported $455.5 million of commitments to extend credit and $17.9 million of standby letters of credit at year-end, with a $1.2 million reserve for off-balance-sheet credit exposures. Management stated that pending or threatened legal matters were not expected to have a material adverse effect. The Bank intended to continue a quarterly dividend of $0.08 per share, subject to Board decisions, regulatory approval and capital and liquidity conditions.
Most important facts for investors to verify
- Whether loan performance, nonaccrual balances, criticized classifications and the allowance adequately reflect pandemic-related risks, including loans that exited deferral.
- Whether the $421.0 million PACE portfolio and remaining purchase commitment meet the Bank’s credit, valuation, compliance and liquidity risk tolerances.
- Whether core deposit growth remains stable and whether political-client deposit balances or other concentrated funding sources create material volatility.
- How the lower-rate environment, securities portfolio composition and loan repricing affect net interest margin and earnings.
- Whether branch-closure charges and expected cost savings reconcile with the different closure counts described in the filing.
- The timing and financial effect of the planned trust-business transition, the real-estate fund fee runoff, solar investment results and the CEO succession process.
- The sustainability of dividends and capital levels, and the eventual effect of CECL adoption.