Since hiring Derrick D. Cephas as president and chief executive officer in January 2006, Amalgamated Bank in New York has been undergoing a transformation.
The $4.6 billion-asset bank, which for most of its 85 years was content to serve labor unions, has added its first new branches in five years as part of a plan to begin pursuing retail customers aggressively.
Historically, much of Amalgamated's assets have been in securities, and it has bought virtually all of its loans, but under Mr. Cephas it has started doing its own commercial real estate and middle-market commercial lending. It has also added a sales force to build its investment management business.
"In the first three months I was here, I literally had a blank sheet of paper, and I said, What should this look like?" said Mr. Cephas, who had been a New York superintendent of banking during the early 1990s. "It looked nothing like it does now, both in terms of structure and in terms of personnel."
He concedes the bank has long underperformed, but he says its union owner, Unite Here CLC, wants to change that — a process that he expects will take some time.
"For many, many years, this was the bank for labor unions, not the members," Mr. Cephas said. "So most of the bank's business — excluding the investment management business — was wholesale. They had a lot of borrowings, very, very little internal lending capabilities, and virtually all of the loans on the balance sheet were loans that the bank bought, either whole loans or participations. With $4.6 billion of assets, you just don't reverse that overnight. It's a slow process."
The going has been bumpy so far. Amalgamated lost $10 million in the first quarter, mainly because of a $24.5 million provision for loan losses, up from $400,000 a year earlier.
Mr. Cephas said Amalgamated took such a large provision in the first quarter because of credit-quality concerns with home equity loans that it bought from Countrywide Financial Corp. He said that the provision is large enough to cover any issues that might arise, and that he does not expect lingering trouble. "We're going to make money for the second quarter."
Amalgamated's ratio of nonperforming assets to assets, 0.86%, is up from a year ago, but Karen Dorway, the president and director of research at BauerFinancial Inc. in Coral Gables, Fla., said "it is a very manageable number."
Amalgamated stopped buying loans last summer and is investing less in securities, putting that money toward lending instead.
Its middle-market commercial loans range from $5 million to $15 million, and Mr. Cephas said the bank has started to originate "a significant number" of those loans, which has helped it to establish more relationships. "We get a lot of deposits," he said. "We get to do banking for the owners of a lot of these businesses."
For the commercial real estate loans it makes, the bank only keeps up to $25 million; it offers participations for any loans over that amount.
Though credit quality is a concern in that sector, Amalgamated is being "very cautious," Mr. Cephas said. "I think we are positioned where we can grow our portfolio in a prudent way without taking a lot of risk."
Greg Fierce joined Amalgamated last spring from Bank of New York to head the commercial real estate team, which had only one lender at the time and now has five. Amalgamated also added Lou DeLuca and George Jarvis last summer to lead the middle-market commercial lending effort. Both came from North Fork Bank, which was acquired by Capital One Financial Corp. last year.
Mr. Cephas also has hired a chief operating officer, chief financial officer, and chief investment officer. "That's cost us some money, but it's money well spent," he said.
Another new goal at Amalgamated is to expand its investment management business, which serves union and government pension funds. It has added a sales force to bring in new customers, and this year it launched half a dozen new funds, both debt and equity. Its assets under management were up 10% at midyear, to $12.8 billion.
Mr. Cephas said Amalgamated's best-performing fund, the LongView Ultra Construction Loan Fund, invests in construction loans only for projects where the developer agrees to use all union labor. The fund has been around for a decade, but has become more popular lately, he said.
Amalgamated gets some unique benefits from that product. The bank originates those construction loans — about $1.2 billion worth are outstanding, Mr. Cephas said — but they go into the fund instead of on the balance sheet.
"It has helped us grow, because a lot of the lending has led to relationships," he said. "And people see our name up on a big building somewhere, and think, 'Oh, what's that about?' and we get business that way."
Though many lenders are "getting skittish" about construction, Mr. Cephas said, Amalgamated has sought to do more construction lending while maintaining credit quality. "And those are not contradictory goals," he said. "We beat the pavement. We see a lot of deals we turn down."
Besides making loans for the fund, Amalgamated also has added more construction lending to its balance sheet. Through the first quarter it had $62 million, or 3% of its loans, in construction and land development, compared with zero a year earlier.
Mr. Cephas said when union members see that the Amalgamated fund is investing in projects that keep them employed, that also helps the bank attract customers. "In New Jersey a lot of the trades have become very interested in working with us."
But Mr. Cephas said the bank prefers to play up its capabilities rather than rely on its union ties. He said the goal is for its products, service, and pricing to match or beat the competition's.
"We don't say, You ought to place your money with us because we're a union bank," he said. "What we work very hard to be able to say on the retail side and on the asset management side is that for what we do, we do it as well as everyone else. So you don't have to do us a favor by doing business with us."
Lowering Amalgamated's cost of funds is a key to enhancing profitability, so Mr. Cephas sees building branches as a worthwhile investment. "For us the incremental value of getting another source of deposits and getting another outlet for all of our products is very important financially," he said.
"Also, the folks out there in these communities need us more than ever," he added, noting that the bank's mission is to help the working class.
Amalgamated has 18 branches, up from a dozen when Mr. Cephas started.
Part of its strategy is expanding into low-income New York neighborhoods. Three of its six new branches are part of a state program that rewards banks with government deposits for going into such areas, which are designated as "banking development districts." The deposits — $10 million each from the city and state at below-market rates — help to make the branches more affordable.
Amalgamated also plans to expand in other cities where there is a concentration of union workers. It began operating in Las Vegas in January when it took over three supermarket branches there, and it aims to have a branch in Atlantic City and Los Angeles next year, its first in those cities.
"Atlantic City is a heavily unionized town," Mr. Cephas said. "It also has a very large number of union members that belong to the union that owns us, so it was a natural."
Mr. Cephas declined to say what other cities it might target.
Ken Thomas, a branching consultant who operates Branchlocation.com, said he advises against the "shotgun" approach of opening branches in scattered cities. "Profitability is very closely related to market share," he said. "It's better to have a strong market share in one market than to have a small market share in many markets."
He also questioned the decision to go into Las Vegas, with its struggling housing market.
Though Amalgamated is well capitalized, Mr. Thomas said, its 5.8% tangible capital ratio for the first quarter is below the average for banks of its size, according to the Federal Deposit Insurance Corp.
Given its weak earnings performance and deteriorating asset quality, Amalgamated should put off the growth plans, he said. "This is not necessarily a bad time to expand. The smartest banks look for opportunities in difficult periods," he said. "I just don't think an expansion strategy in this environment is the right one for this bank."
Mr. Cephas defended the decision to enter Las Vegas, where Unite Here has 60,000 members. "We didn't pick Las Vegas because it's growing. We picked it because we have relationships there."
He said that Amalgamated added $20 million of capital in April, expects to add another $20 million this month, and plans still another infusion in the fall, with the money coming from Unite Here and its affiliates.
"We have plenty of capital," he said. "We're doing an expansion, but it's fairly measured growth, really. This is a well-conceived strategy."
