Amalgamated Financial Corp. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions. The holding-company reorganization took effect March 1, 2021; pre-reorganization comparative periods refer to the Bank.
Business context and financial results
The company operates through Amalgamated Bank, providing commercial and consumer banking, trust, custody and investment-management services. At quarter-end, trust assets were $39.5 billion under custody and $16.1 billion under management.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $43.4m | $45.2m | $127.2m | $134.4m |
| Provision for (recovery of) loan losses | $(2.3)m | $3.4m | $(3.9)m | $20.2m |
| Non-interest income | $6.7m | $12.8m | $16.0m | $30.6m |
| Non-interest expense | $33.0m | $37.9m | $97.2m | $101.2m |
| Net income | $14.4m | $12.5m | $37.0m | $32.4m |
| Diluted EPS | $0.46 | $0.40 | $1.17 | $1.04 |
| Net interest margin | 2.70% | 2.88% | 2.77% | 3.13% |
Financial position, cash flow and liquidity
- Balance sheet at September 30: Total assets were $6.86bn, up from $5.98bn at December 31, 2020. Deposits rose to $6.22bn from $5.34bn; net loans declined to $3.09bn from $3.45bn. Stockholders’ equity was $556.4m, versus $535.8m.
- Cash flow, nine months: Operating activities provided $53.4m, investing activities used $275.8m, and financing activities provided $873.9m. Cash and cash equivalents ended at $690.2m, compared with $38.8m at year-end 2020. Deposit growth was the main financing inflow.
- Debt and liquidity: The company reported no borrowed funds at September 30. It had $1.4bn of remaining FHLB credit availability and approximately $85.9m of Federal Reserve discount-window capacity. On November 8, after quarter-end, it issued $85m of 3.250% fixed-to-floating subordinated notes due 2031, intended partly to fund the proposed acquisition.
- Capital: The Bank and consolidated company were classified as well capitalized. The Bank’s total risk-based capital ratio was 14.94%; consolidated total risk-based capital was 14.99%.
Material changes versus comparable periods
- Q3 net income increased 15% year over year; nine-month net income rose to $37.0m from $32.4m. The nine-month improvement mainly reflected a $3.9m loan-loss recovery versus a $20.2m provision in 2020, plus lower expenses, partly offset by weaker net interest income and non-interest income.
- Nine-month net interest income decreased 5.3%, and net interest margin fell 36 basis points to 2.77%. Lower loan balances and yields were partly offset by growth in securities and lower deposit costs.
- Nine-month non-interest income fell $14.6m, principally reflecting a swing in equity-method investment results, lower trust fees and a prior-year branch-sale gain. Equity-method investments recorded a $5.7m loss in 2021 versus $5.6m of income in 2020.
- Non-interest expense declined $4.0m for the nine months, mainly due to lower occupancy costs after branch closures; professional fees and data-processing costs increased.
- Loans declined by $359.8m net from year-end, while deposits increased by $885.8m. The allowance for loan losses fell to $35.9m from $41.6m; nonperforming assets decreased to $67.8m from $82.2m.
Outlook, risks and contingencies
- Proposed acquisition: The company agreed to acquire Amalgamated Investments Company, parent of Amalgamated Bank of Chicago, for approximately $98.1m in cash, including an earnout of up to $1.1m. Management expected closing late in Q4 2021, subject to regulatory and AIC shareholder approvals. The filing identifies integration, approval, execution, cost and benefit-realization risks.
- COVID-19 and credit: $16.7m of loans remained on payment deferral and accrued interest at quarter-end; $4.4m of accrued interest related to loans still on deferral. Management cited possible future credit deterioration, lower loan originations and margin pressure. Potential problem loans totaled $251.7m; this category is separate from reported nonperforming assets.
- Interest rates: Management’s hypothetical model estimated that an immediate 100-basis-point rate increase would raise first-year net interest income 13.9%, while a 100-basis-point decrease would reduce it 13.6%. The filing cautions that these simulations are not forecasts and actual results may differ.
- Other commitments and risks: The Bank had up to $399m of PACE-security purchases contracted through Q1 2022 and an additional obligation of up to $100m for other PACE-related purchases; $315.7m of the first commitment had been fulfilled. Credit commitments and standby letters of credit totaled $723.8m. Management reported no pending or threatened legal matter expected to have a material adverse effect.
- Accounting and securities: CECL adoption was anticipated for January 1, 2023; the impact was not yet determinable. Management considered securities unrealized losses temporary and did not intend to sell the affected holdings, but noted future impairment remains possible.
- No formal earnings or margin guidance is provided. Management stated branch closures were expected to benefit annual non-interest expense by approximately $4.0m once fully phased in.
Key facts for investors to verify
- Whether the AIC acquisition closed as expected, its final purchase price and funding, and realized integration costs, savings and benefits.
- Subsequent performance and credit quality of the $16.7m of deferred loans, potential problem loans, and the $251.7m of potential problem exposures.
- Whether deposit growth is sustainable and how the large increase in cash and securities affects asset yields, net interest margin and liquidity.
- Changes in solar/equity-method investment results, trust fees, and the company’s explanations of year-over-year non-interest income volatility.
- Actual capital and leverage effects of the $85m subordinated-note issuance and the pending acquisition; the note issuance occurred after the reporting date.