Good morning, ladies and gentlemen, and welcome to the Amalgamated Bank Third Quarter 2019 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened 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 Mr. Drew LaBenne, Chief Financial Officer. Please go ahead, sir..

Thank you, operator, and good morning, everyone. We appreciate your participation in our third quarter 2019 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 Web site for an extended period of time.

Additionally, a slide deck to complement today's discussion is also available on the Investors section of our Web site. 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 the actual results may differ from the expectations indicated or implied by any such forward-looking information or statements.

Investors should refer to Slide 2 of our earnings slide deck, as well as our 2018 10-K filed on March 28, 2019, and our other periodic reports 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 Web site. At this point, I'll turn the call over to Keith..

Thank you, Drew, and good morning, everyone. We are excited to be here today and look forward to discussing our results with you. This morning, I will discuss the high-level details of the third quarter and then provide an update on our strategy to grow the franchise value of the Bank.

Drew will then discuss our third quarter financial results in more detail. To start, there’s a few highlights I’d like to emphasize from what was a very solid quarter for the Bank. First, we surpassed $5 billion in assets which is an important milestone for Amalgamated and speak to the dedication and hard work of our employees.

Second, our deposit franchise continues to experience strong broad-based growth as we benefit not only from the run-up to the 2020 Presidential Election, but also robust growth across the many business sectors that we focus on, including unions and their funds, non-profits, social enterprises and philanthropies.

Importantly, we saw deposit growth in all three of our major markets of New York City, Washington DC and San Francisco. Third, loan growth was very strong in the quarter as our expansion into sustainable lending continued to gain traction and the headwind from our strategic decision to run off our indirect C&I portfolio abates.

Additionally, our residential mortgage business had an excellent quarter. Fourth, we made strong progress reducing our future expenses which positions the Bank for improved profitability and will help to mitigate the headwinds from a lower interest rate environment looking to next year.

And lastly, as we work every day to build on our reputation as America's socially responsible bank, we are proud to have announced a number of ESG-related commitments this quarter, including becoming the first U.S. bank to endorse the United Nations’ Principles for Responsible Banking and joining the collective commitment to climate action.

Turning to the third quarter, we delivered net income of $13.2 million or $0.41 per diluted share which compares to net income of $11.2 million or $0.35 per diluted share in the linked quarter and net income of $9.4 million or $0.29 per diluted share for the third quarter of 2018.

I continue to be quite pleased with the performance of our deposit franchise. As you can see from Slide 5, deposits grew by $185.9 million or 17.8% annualized from the second quarter. As we have noted previously, given the volatility in our period ending balances, we believe average deposits provide a better view into our deposit franchise.

For the third quarter, average deposits grew $117.4 million representing a rise of 11.3% annualized from the linked quarter. This growth was largely in DDA accounts which now represent 46% of our deposit base, up from 43% at the end of the second quarter.

As we look forward, our deposit pipeline remains robust and our bankers continue to expand our commercial relationships across verticals while our political business continues its upward trajectory.

As the 2020 election approaches, we continue to experience an increase in political deposits as seen in the growth experienced during the third quarter of $91.5 million to $510.9 million as compared to the second quarter deposit balance of $419.4 million as shown on Slide 6. Our deposit franchise remains a competitive advantage for the Bank.

In the quarter, we continued to experience healthy growth and continued to benefit from what is one of the lowest costs of funds in the industry. During the third quarter, our cost of deposits was 37 basis points which was modestly higher than the 34 basis points that we reported for the 2019 second quarter.

Although our cost of funds has ticked up over the course of the year, the overall deposit cost increase was mitigated by an increase in DDA balances.

Additionally, although we did see some end of the cycle pricing increases in MMA accounts, we have implemented programs designed to mitigate this pressure and expect a more stable cost of funds going forward.

For the full year of 2019, we have already reached the upper end of our previously guided range for deposit growth and are now expecting 14% to 18% growth adjusting for the $327 million of short-term deposits at year-end 2018.

Moving onto loans, we experienced very strong growth in the third quarter as loans increased $176.3 million or 21.4% annualized from the linked quarter.

Drew will touch on this growth in more detail, but as I mentioned earlier, this was the first quarter in which we did not experience the headwind from the run-off of our indirect C&I portfolio that we saw in the first two quarters of the year. As we continue to grow our franchise, organic growth will remain a priority.

Another driver to growth is our strategic expansion into regions of the country where our culture and values will resonate with like-minded people and institutions. During the third quarter, we performed extensive due diligence on three potential M&A opportunities.

Unfortunately, the targets did not meet our strict economic and strategic criteria to move forward and we decided to pass on the opportunities.

We will continue to explore acquisition opportunities, but are also looking seriously at organic growth through the formation of commercial banking offices in our target markets to successfully start a de novo office we need to find the right banking team who understands our core customer base.

This will be an additional focus for growth as we look to 2020. I’d like to spend a few minutes highlighting a number of recent ESG initiatives in which the Bank continues to expand its commitment to promote and advance a more sustainable future.

First, Amalgamated was one of only three U.S.-based banks to sign the UN Principles for Responsible Banking.

As part of the company's ongoing leadership position in social responsibility and sustainability, I had the pleasure of representing Amalgamated at the United Nations announcement of the global launch for the UN Principles for Responsible Banking or UNPRB in New York last month.

In conjunction with the announcement of the UNPRB, the Bank is also united with partners to endorse the collective commitment to climate action in order to help facilitate the economic transition necessary to achieve climate neutrality.

As such, Amalgamated is committed to implementing and reporting a set of metrics and targets including setting science-based targets that will support and accelerate the shift towards low carbon, climate resilient technologies business models and societies.

Amalgamated also led the launch of the Partnership for Carbon Accounting Financials or PCAF and I'm proud to serve as the Chair of the International Steering Committee. PCAF enables financial institutions to assess and disclose greenhouse gas emissions of loans and investments.

The partnership currently consists of 50 plus financial institutions representing more than $3 trillion in assets, which is the first global initiative ever created that allows these institutions to measure their carbon emissions across all asset classes in order to reduce their climate impact.

In addition to efforts to reach climate neutrality, Amalgamated Bank also received the Small Cap Board Diversity Award by the National Association of Corporate Directors. This award recognized our efforts in support of greater diversity and inclusion at the Board level and throughout our organization.

The aforementioned commitments are yet another example of our commitment to advancing environmental sustainability through our operations, the clients we partner with and our balance sheet.

The banking industry has an important role to play in achieving a low carbon, more sustainable future and we hope that other industry partners will follow our lead and join us in meeting this goal.

As our brand continues to gain recognition through our sustainability leadership, we believe pursuing a de novo strategy to extend our geographic reach will enhance our organic growth over time. Another area for growth is the enhancement of our fee income with a focus on our trust business.

Currently, we have nearly $45 billion in assets under management and assets under custody.

For many of our commercial clients, this is seen as a significant competitive advantage as we can handle the custody aspects of their investment funds but also the disbursement of those funds to their clients, an ideal wholesome package to our commercial clients.

As we have detailed in past calls, this business is largely a breakeven business for us but this past quarter we launched two major initiatives designed to increase profitability in this area. We have initiated a study to determine if we can deliver our custody business in a more cost-effective manner by partnering with a major outsourcing partner.

Additionally, we are exploring ways to more effectively deliver the investment management bonds that are currently on our platform and to expand our offerings that are value-based clients’ desire in the ESG space. We have several months of hard work ahead of us and we will update you on those efforts on future calls.

We also continue to maximize shareholder value through steady return of capital through a consistent quarterly dividend, which remains a top priority for the Bank. We will also be opportunistic with our $25 million share repurchase plan.

We have repurchased $3.8 million of stock or 237,000 shares through the end of the third quarter at an average price of $15.84. To date, we have repurchased a total of $5.7 million of stock or 355,000 shares at an average price of $16.01.

To conclude, I am pleased with the growth that we have achieved during our third quarter and I'm excited with the long runway for growth that we see ahead of us.

Our brand continues to resonate with our customers both current and future as we continue to do our part to better the communities which Amalgamated serves, while building and delivering upon our reputation as America's socially responsible bank.

I'd now like to turn the call over to Drew for a more detailed review of our third quarter financial results..

Thank you, Keith. As Keith has already detailed the success that we have achieved in growing our deposit franchise, I will start with loan growth on Slide 7. For the third quarter, we delivered loan growth of 176.3 million or 21.4% annualized as compared to the second quarter of 2019 and ended the quarter with $3.5 billion of total loans.

Loan growth was primarily driven by an increase in residential first lien and PACE loans, multifamily and SBA/USDA loans in the C&I category. For the first six months of the year, our loan growth has been hindered by the strategic reduction of our indirect C&I portfolio which year-to-date has declined by $175 million.

The third quarter was the first quarter in which we did not experience substantial runoff in that portfolio and the loan growth that we have been experiencing is now visible. Looking forward, we expect the runoff to be at a more measured rate with only $61 million left in the portfolio.

Our loan growth guidance for the year was 6% to 10% and given our expectation to be at or above the high end of the range for the year, we have updated our loan growth guidance. We now expect 9% to 12% loan growth for the full year which includes the impact of the indirect C&I portfolio runoff.

Skipping ahead to Slide 9, our net interest margin was 3.5% for the quarter compared to 3.66% for the second quarter of 2019 and 3.65% in the year ago quarter. The yield on average earning assets was 3.92% for the third quarter, a decrease of 15 basis points as compared to the linked quarter.

The yield on loans decreased 20 basis points to 4.22% compared to 4.42% during the second quarter as the result of the runoff of the indirect C&I loans in the second quarter and the impact of lower market rates on our loan portfolio.

Our most recent full year NIM guidance was updated to 3.55% to 3.65%, but we are currently running at 3.60% for the first nine months of 2019. We expect to be near the low end of that range for the full year and have tightened our range anticipating our full year NIM to be in the range of 3.55% to 3.60%. Now onto non-interest income.

Non-interest income for the third quarter 2019 was $7.7 million, an increase from $6.3 million in the second quarter of 2019 and $100,000 increase compared with the third quarter of 2018.

The increase from the previous quarter was primarily due to growth in trust and asset management fees and fees on deposits and a lack of losses on security sales and OREO properties that occurred in the previous quarter.

Turning the Slide 10, non-interest expense for the third quarter of 2019 was $31.9 million which compares to $31.0 million in the second quarter and $34.1 million in the third quarter of 2018.

The slight increase in our non-interest expense was due to higher expense from projects, such as SOX implementation and an increase in the bonus pool for employees. As mentioned on our second quarter call, we closed our Chelsea branch in late August which will generate an approximate $800,000 run rate annual savings.

In terms of headcount related to this branch, positions were relocated or re-determined. There was no reduction in headcount attributed to the Chelsea branch closure. As previously disclosed, we have successfully finalized one of our vendor contract negotiations which will in turn generate an annual savings of $1.6 million annually.

Those savings will start to be realized in the fourth quarter of this year. We anticipate further cost savings opportunities in the future. We are quite pleased with the progress made thus far as we manage our cost structure. Our previous guidance for expenses was $31 million to $33 million per quarter and that is unchanged.

Skipping ahead to Slide 12, non-performing assets totaled $71.6 million or 1.42% of period end total assets at September 30, 2019, which was a decrease of $2.4 million from the linked quarter. The decrease was primarily caused by the expected removal of $13.9 million in loans over 90 days past due in accruing.

This was partially offset by the addition of a $9.3 million accruing TDR loan that was a result of restructuring the one indirect C&I loan that have moved to substandard in the previous quarter.

During the third quarter, we did have one $3.7 million substandard construction loan from the NRB acquisition moved to non-accrual which we hope will be a fast workout as the loan has a low LTV and no specific reserves were required for this loan.

The overall classified and criticized loans from the Bank decreased by $17 million to $71.6 million in the third quarter compared to the previous quarter. The improvements were mainly in C&I and CRE loans. During the quarter, our provision for loan losses totaled the release of $600,000 compared to a $2.1 million provision in the linked quarter.

The release in the quarter was primarily driven by the recovery of $1.7 million related to one indirect C&I loan that had previously been charged off in 2016, offset by $800,000 in net charge-offs in C&I due to a couple small loans from the NRB portfolio.

Turning to Slide 13, the allowance for loan loss was approximately flat at $31.7 million compared to the previous quarter end.

At September 30, 2019, the Bank had $71.0 million of impaired loans which includes performing TDRs for which a specific allowance of $6.2 million was made compared to $59.3 million of impaired loans in the linked quarter for which a specific allowance of $3.9 million was made.

The ratio of allowance to total loans was 96 basis points at September 30, 2019 and 101 basis points at June 30, 2019. Turning to Slide 14, our return on average equity and core return on tangible common equity were 10.9% and 11.4%, respectively.

The core return compares to 10.5% for the second quarter of 2019 and 12.2% for the comparable period in 2018. Lastly, we remain well capitalized to support future growth. Before I turn the call over to the operator, I would like to summarize our expectations for our full year results which are included on Slide 15.

We continue to expect pre-tax, pre-provision earnings of $66 million to $72 million and expenses of $31 million to $33 million per quarter. As mentioned, we have updated our expectation for deposit growth to 14% to 18% adjusted for the $327 million of year-end deposit flows in 2018.

Loan growth expectations of between 9% to 12% and net interest margin for the full year of 3.55% to 3.60%. To conclude and before we open up for questions, we are pleased with our third quarter results and remain conservative regarding our outlook for the remainder of the year as we take into account the current rate environment.

Thank you again for your time today. We look forward to updating everyone on our fourth quarter results in January. With that, I’d like to ask the operator to open up the line for any questions.

Operator?.

Thank you. [Operator Instructions]. Our first question is from Steven Alexopoulos with JPMorgan. Please proceed..

Hi. Good morning, everybody..

Good morning..

Hi, Steve..

I wanted to start on the deposit side. So you saw pretty notable increase in interest-bearing deposit cost again this quarter.

Give some color on what drove the increase in 3Q and why wouldn’t we expect deposit cost to continue rising, particularly given you’re still so far below peers?.

Yes. So a good question. We did see a little bit of what I would call end of cycle adjustments that we made for a handful of customers that were still looking for some interest rate increases at the end of what was their perception of a rising rate environment.

I think what you’ll see in the future and obviously this is somewhat predictive, but we have done some additional adjustments in terms of our across the board commercial pricing that should ameliorate any kind of additional increases and have looked at a number of the one-offs and anything that we were seeing has definitely slowed and I would not anticipate any continued increase in the interest-bearing deposits of our current customer base..

Okay, that’s helpful. And then to switch gears, I want to follow up on this potential for de novo offices in 2020.

Maybe to start, what are you thinking in terms of target markets and as a thought at this point, a larger presence in one market or maybe some more presence in several markets? How are you thinking about that?.

Yes. I think more the latter. We continue to look at the kind of markets that we’ve talked about that have a significant concentration of our core customers in the political, non-profit and union sectors. We’ve been pretty clear that we think the best markets for that are LA, Boston and Chicago.

As we have not been successful in finding satisfactory M&A opportunities in those markets, we are looking at in 2020 putting de novo staff in those markets. I do think it is not going to be the kind of classic loan production office that you would think because we would not want to lead in loans in these markets.

This would really be deposit gathering, operations and really the folks working on expanding cost opportunities for us to drive that non-interest income. So I look for us to do a couple of markets. Those are plans that were sort of hatching as we speak and really beginning to build into our 2020 budget projections..

Okay.

So these would be actual branches, Keith, at this point?.

Well, they would commercial offices. I don’t think we’ll staff them with a full branch, Steve, in terms of actually taking cash in the operations. It would be cashless commercial offices focused on commercial deposit acquisition..

Got you, okay. And then a final one for Drew. I was hoping CECL would get delayed, but it’s not looking likely.

Assuming that it takes place here shortly, what are your thoughts on the day one impact?.

So for CECL, Steve, we are actually not eligible to be a 2023 adopter, which we’ve come to that conclusion after the FASB released their or took their vote on the revised guidance. So we’re still talking about when we will actually implement. Our current project plan, as you know, has us implementing in 2021, a year later.

We now have an option to go longer and we’re going to valuate that option and certainly it’s an advantage – I don’t think there’s a first mover advantage in CECL. So us being waiting at least a year to adopt I think will allow us to look at what’s happening with banks and in the industry as its being implemented..

Got you..

And so just as a reminder, Steve, we already had the year delay opportunity as an emerging growth company and now we may have a longer – we believe we have a longer delay if we choose to take it..

Okay.

But it sounds like you would take it from what Drew was saying?.

No, I wouldn’t say that yet, Steve. I think literally last week our legal counsel came to the conclusion. It’s not as straightforward as you might think, like most things with CECL. But they did come to the conclusion and advised us we’re a 2023 adopter.

I think the trade-offs here are – obviously, it’s an advantage to wait a year and watch what happens. At some though you become the one bank our size that hasn’t adopted and we need to figure out if that’s a place we really want to be or not in the future..

Okay, terrific. Thanks for taking my questions..

Thanks..

Thanks, Steve..

Our next question is from Alex Twerdahl with Sandler O’Neil. Please proceed..

Hi. Good morning, guys..

Good morning, Alex..

Hi, Alex..

Just one first quick housekeeping item.

Do you have, Drew, the amount of the FDIC credit that you got in the third quarter?.

Yes. That was just over 400,000..

Okay. And then as we think about expenses and some of the things that you did during the third quarter to lower your costs and in some of your prepared remarks, you talked about the further cost saving opportunities into 2020.

As we weigh that against some of the de novo branch opportunities and considerations that you just talked about a minute ago, how do you think about expenses going into next year? Do you think that those two will be able to offset each other and expenses should remain flat, or are these de novo opportunities going to push expenses higher even with these cost savings initiatives?.

Yes, I think we’re not ready to give 2020 guidance, which I think is what you’re asking. And I don’t know if it will be a direct offset between the two, but I certainly think that there’s some progress that can be made on the expense side that will go a long way to offsetting some of those increases from the de novo offices..

Okay. And then just to switch gears to the margin here for a second, the margin guidance kind of being revised lower, is that more a function of just the timing of anticipated rate cuts? I assume that you have an October cut baked into the margin guidance for the full year.

And then just a second part to that question, now that the indirect C&I portfolio is kind of mostly in the rearview mirror, how do you think about rate cuts impacting the margin on an ongoing basis?.

Yes. So there’s the immediate impact of the rate cut on the short term in the curve which is really going to be felt more in the investment portfolio than on the loan side, because the indirect C&I runoff that happened, those were almost entirely floaters except maybe one loan.

So taking that out has added a lot more duration to the loan side of the balance sheet. So the immediate effect is going to be on the investment portfolio. The shape of the curve, as you well know, obviously impacts where NIM is going to go over the longer term. And I think the middle to the long end of the curve has already baked in a number of cuts.

It will be interesting to see how it reacts when we finally get the next Fed decision. I’m giving you all the variables here, Alex, sorry. And then the last one I think is actually just the risk premium on the loans that we’re originating.

And so while, for example, our interest rate risk modeling assumes parallel shifts impacting income, it also assumes parallel shifts in the risk spread on different asset classes. And so we haven’t seen those risk premiums come in as much as the curve might otherwise indicate. So that’s been helpful as well. So a lot of variables there.

If you think of the disclosures we’ve given previously, we’ve said 2.5 million for every 25 basis cut assuming a parallel shift in the curve and in the risk premium.

So that number’s probably gone up a little bit to closer to 3 million because of all the DDA that we’ve added on and where we’re at with the convexity portion of the curve, especially on residential mortgage. But the guidance is largely the same as it was before..

Okay. And then just a final question from me just to clarify. So you increased the guidance for deposits until the end of the year, increased loan growth guidance, margin low end of the range but range unchanged, expenses basically flat yet the pre-tax, pre-provision income.

I would have thought maybe given all these things put together would actually tick a little bit higher.

So is it kind of just suggesting that maybe there’s a little bit of increased confidence just to hit the upper end of that $66 million to $72 million range or would that be too bold of a statement?.

Maybe a little bit bold. Let’s see what the Fed does and where things come in, in Q4. But the range we didn’t adjust. We have NIM obviously has gone lower, balance sheet has gone up. So I think that’s maybe a little positive for NII, while NIM is impacted by the rate environment, cost staying the same.

We’re kind of in the same range we were before we added all up..

Okay. Thanks for taking my questions..

Our next question is from Brian Morton with Barclays. Please proceed..

Hi. Good morning. Thanks for taking my questions. I think we’ll start maybe on the loan side.

Can you talk about where you’re seeing like your origination yield across the different products?.

Yes. So, for example, residential, we have moved away from 30-year originations though I will say the recent refi boom that has been happening impacting Q3 and will certainly carryover into part of Q4, I think we picked up a little more 30-year there than we anticipated and we’ve taken some steps to move away from that.

But the shorter end on residential is probably 325 to 350, certainly lower than where our loan yields are right now but higher than where anything is coming on the securities portfolio. So that’s still a positive trade versus the securities portfolio.

The multifamily market’s pricing anywhere from 325 to 375 depending on the duration of the deals and where you’re at on DTI and LTV. And then the other deals we’re doing; PACE originations, commercial loans, those are coming in anywhere from 4% and higher yields.

So that’s a place where we’re getting more attractive yields and more differentiated yields from the rest of the market.

And then, Brian, I would just add kind of putting your analysis question together a little bit that that focus for us is really in that higher yielding part of the portfolio there as we make some moves to try and shift our loan to deposit ratio very, very focused on what in our conservative portfolio still remains our relatively higher margin yields in that energy efficiency space and the lending space in particular..

Okay, great.

And then maybe what’s the mix between fixed and floating on these loans?.

Most of what we’re putting on is fixed now. For example, in residential I’m going to say a 5/1 ARM is a fixed, not a floating. I think you’re talking about peer floaters. But for the most part what’s coming on is fixed rate and that’s where we’ve certainly been targeting our loan originations..

Okay, great.

And then maybe you could talk a minute about the SBA/USDA loans that are coming on, is there is a new program that you guys started?.

We’ve been doing it over the past several quarters. So we put out and about 50 million this quarter and those are coming on or at least this quarter they came on a 350. I think the spreads have come in a fair amount over the past couple of quarters, but very attractive. They’re obviously pretty much riskless from a credit standpoint.

And with the exception of some we put on in the beginning had very good prepayment protection as well, so an attractive asset class. And again when we compare it to alternatives in the securities portfolio, it looks like a good addition to the loan portfolio..

Okay, great. Maybe moving on, a quick one on expenses. I saw there’s a tick-up in the kind of legal and professional fees that’s driven by some SOX-related expenses.

How long do you expect this to continue? Is this like a one-time type of item?.

I don’t know if I’d call it one-time – certainly the SOX work is I think mostly one time. There’s a pretty big implementation cost there that needs to happen and SOX will be finished at the end of this year. So that will go away. I think there will be some decrease in those costs.

I think where there will still be some professional services spend is Keith alluded to some of the projects that were going on in the trust and asset management department and I think there will be some project spend there over the next six months probably..

Six to nine months, yes..

Six to nine months if I keep that number a little bit elevated, but we think the benefits of those projects will more than justify the cost increase that will happen in the near term..

Okay, great. That’s it for me. Thanks..

Thanks, Brian..

Our next question is from Chris O’Connell with KBW. Please proceed..

Good morning, everyone..

Hi, Chris..

Hi, Chris..

Just wanted to see if you guys can give the breakdown on what the loan purchase is for this quarter and maybe what the yield was on those purchases? And then also what the yield is on the remaining I think you said 61 million of indirect C&I?.

Sure. So we did 12 million in purchases on residential, solar, which is sort of finishing up the flow agreement that we had in place with one of the companies there and that was about a 6% yield on those loans.

We did 16 million in PACE, which I will add as a space where we’re doing some work to increase our originations – I’m sorry, increase our purchases and partnerships in that space. So I think we’ll maybe have more to talk about that in the future.

I’m not going to give the pricing there, because we’re in some negotiations but it’s well within the range of our existing portfolio in terms of yields. And then the government guarantees the 50 million I previously mentioned. Those were at 3.5%.

And then the 60 million we have in the indirect portfolio, those are going to be LIBOR+ 380 is where those are right now..

And then, Chris, I would just add just as a reminder why we like the purchase space here is the all-in cost of acquisition of these assets is significantly lower than the origination of anything we directly source ourselves, and these were all servicing retained options for us, so very, very efficient way for us to originate in service loans..

Got it.

And what was the breakdown I guess in the originated loans for the West Coast franchise and the East Coast and if you guys have been seeing the ramp up in kind of the West Coast like I see in your resource build up that you kind of wanted to see coming into the year?.

Yes. I don’t know that we look at it really in terms of geographically where they’re located.

I would say that the team that we brought in from new resource very, very pleased with what’s happened on the loan production side on that, exactly what we wanted to do particularly in the energy efficiency and in the renewable energy space seeing loan originations really across the country in that space generated by that – sometimes sourced by our commercial bankers and then handled by that team and using our bigger balance sheet to really put on significantly larger size facilities in those spaces.

Whether it’s a purchase package or individual loans, we’re very, very happy with what’s happening from that transaction. That’s where the vast majority of our C&I activity is coming from. It may not be in California, but it really comes as a result of the acquisition of that team..

Yes. And the one thing I didn’t mention or I didn’t make entirely clear, but of the 78 million that we purchased in Q3, all of that was energy efficiency related. So as residential, solar, PACE obviously we talked about before, but then the government guaranteed were all USDA solar farm loan as well.

So while they are purchase loans, they’re going a long way towards our mission on the renewable energy standpoint..

Got it.

And just thinking about the credit outlook going forward, I don’t know if you guys can speak to whether any of this indirect C&Is has fallen off or been paid down in the fourth quarter already or if you have thoughts as to kind of the normalization of the recoveries or net charge-offs and any thoughts if we can see kind of a more normalized provisioning in charge-off in kind of a reserved quarter in the fourth quarter this year?.

So I would say generally we’re not seeing any trends that concern us from a credit standpoint. Obviously, we had to pay down 17 million reduction in criticized and classified loans; actually had another 6 million reduction here in Q4, so feeling pretty good on where the criticized and classifieds are going as well.

The only loans out there that I think cause any concern are really those three indirect C&I loans that are part of that $61 million out there. And we continue to watch them every quarter and we’ll see what happens to those three. But I think that that portfolio is – it had a pretty fast rundown.

I think it’s probably just going to dribble from here on out, but we might be surprised and get a payoff here or there..

Got it. And just last one here, you announced some pretty good progress on the share of purchases already in the fourth quarter.

Can you remind us if there’s any TC ratio or capital ratios that you want to keep at a certain level maybe with some margin safety or buffer there in terms of capital to keep in the wheelhouse for M&A or a comfortable level that you’d like to operate at?.

The range that we have talked about in the past is operating in the 7.5% to 8.5% Tier 1 capital ratio which we’re at 9.03 this quarter. So we’re at the higher end and we feel like we have some room to deploy capital and the share buybacks one way where we meet with our Board this week to discuss the dividend.

So we’ll see where that comes out later this week. And by that I don’t mean – there may be an opportunity to raise it. We’ll see what the Board decides to do there.

But I think every quarter we have a conversation with our Board on capital and what we want to do on the buyback and on the dividend and we’re continuing to do that thoughtfully and think about how best to use capital. But our metrics remain the same.

As far as M&A, I think we’ve run through the main potential targets we had and really then come up with the yield. As Keith said, they met our economic criteria. So I think right now there’s really nothing in the pipeline that we’re staring at to do a deal on. But if we were, it would still be that three-year or less payback that we’d be looking for.

And then we think a share buyback as sort of an opportunity to acquire more of ourselves. So that metric certainly wouldn’t be higher than three years in terms of where we do a buyback as well..

And then obviously like every bank, we’ll just watch and see solely to figure what we may have to reserve from a perspective there..

Got it. Great. That’s all I had. Thank you..

Thanks, Chris..

Thanks..

Our next question is from William Wallace with Raymond James. Please proceed..

Thanks. Good morning, guys..

Hi, Wally..

Hi. We talked a lot about a lot of the moving parts of all the line items when it comes to net interest margin and what happens with the cut. I’m just wondering maybe if you can help us just put a bow on this as we think about our models.

So if the Fed cuts this week and then pauses, once we get passed the impact of the Fed cut with your loan mix potentially shifting but your deposit mix also shifting as you continue to build up the political deposits, would you anticipate that margin would be stable or do you think there would be pressure moving on or do you think the deposits that you’re bringing on could actually drive expansion?.

I think it’s going to be tough to get NIM expansion unless the curve makes a pretty dramatic move from where it’s at, more so the long end of the curve because over time it’s going to be tough to not have those lower rates at kind of the 3 to 10-year point bleed into your margin.

And then we have the levers we’ve talked about in the past which is the loan to deposit ratio, deposit growth and I think those can definitely help offset. But most things going on the books now are coming on lower than where our loan yield is right now with the exception of the commercial loans.

And we have a pretty good pipeline there in the near term, so I think we can help offset a lot of that pressure. But I think we’re not going to be immune to gravity over the longer term if the curve still stays low like this..

Okay. Thank you. That’s helpful. Keith, in your prepared remarks you talked about diligence on three potential transactions that ultimately didn’t meet your criteria.

Can you tell us was the criteria that you missed on, was it all around pricing or did you find when you sat down and started to dig in that culturally, these transactions didn’t work out?.

Yes. I would say strategically really, we could probably have made some of the deals work from an economic perspective.

But when you stared at what we were actually getting for the transaction from a deposit quality and composition standpoint and then really from an asset quality and composition standpoint, for relatively small transactions we were looking at things and we just said, for the strategic value that we’re actually getting from these transactions, the degree of difficulty of doing this especially when we’re staring at the possibility of using that same capital to buy back our own company, it just didn’t make sense for us at the end of the day.

And the failure possibility, right, from an operational and integration standpoint just felt not right for us. I call it strategic rather than cultural, but maybe that’s the same thing in your head..

That’s fair.

And then should we take your initiation of commentary around looking to enter some new markets on a de novo type basis, should we take that to mean that you feel like M&A opportunities are perhaps less attractive than maybe you thought 6 or 12 months ago?.

I’d say we’re still looking for M&A opportunities. They come in our markets. We’ve always said we’re going to be choosy. But I would also take it to say we’re not going to wait. We’re not going to wait for an M&A opportunity to get into those markets.

We think we have significant runway in other markets and we think – we’ve been able to achieve growth in a market, i.e. Washington without having to do it through an acquisition. We think we should do it in other markets.

And while there’s certain advantages to being able to have an acquisition to give yourself a head start, we think next year is a year we can just go into those markets and begin working our tails off to actually build our business..

And for what it’s worth, what about looking to invest more in markets like DC and San Francisco where you have a very small presence relative to the real size of the market?.

Not really an either/or decision in our minds, but really of both and how do we actually grow the franchise both in organic markets and add some inorganic opportunities as well..

Okay, fair enough. And then just one last housekeeping. You said there is $400,000 FDIC credit in fourth quarter.

Do you anticipate or are you going to accruing that credit in the fourth quarter as well or did you take it all in the third quarter?.

So what we took as a credit just directly offset what our assessment was in Q3. So I believe if the FDIC funds stays where it’s at, that credit should be available continuing into Q4 as well and probably into Q1..

Okay. Thank you. That’s all I have. I appreciate it..

Thanks, Wally..

Thanks..

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks..

Thanks. I just want to again thank everybody for taking a little time this morning joining us. Again, we are very, very happy with the quarter. I think a lot of great clarifying questions came from the folks who had questions this morning. We appreciate it and look forward to talking to you all in the future. Thank you..

Thank you. This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation..