By Scott Van Voorhis
It would seem like a propitious time for the nation’s only union-owned bank to make a comeback, with the Occupy Wall Street protests having revived age-old concerns about the costs of unfettered capitalism.
But despite some favorable political headwinds and a badly needed injection of capital, New York Amalgamated Bank faces some serious challenges ahead.
The bank appears sufficiently recapitalized after investors – a group that includes a fund launched by former Lakers great Magic Johnson – pumped in $100 million. But the bank is also faced with having to overhaul several key aspects of its internal operations under a wide ranging consent order issued by the Federal Deposit Insurance Corp. And even after those requirements are met, Amalgamated must find a way to make money in a sluggish lending market that has even the best-run banks struggling to places to invest their deposits, noted Ron Shevlin, senior analyst at Aite Group, a Boston-based financial industry consultant.
“If you are in trouble right now with the FDIC from a financial structure perspective, your prospects of getting out of it aren’t really rosy or optimistic,” he said.
It’s not all bad news for Amalgamated, which has received a series of timely boosts over the past couple months. Founded in 1923 and owned substantially by the garment workers union, the bank lost more than $100 million over the past several years on real estate loans gone bad, some made in once-booming Sun Belt markets like Las Vegas. A profit of $9 million in 2009 turned to a $1.2 million loss in 2010.
Faced with orders by state and federal regulators to boost its capital levels, Amalgamated responded with a triple, if not a home run.
In late September the bank announced a deal with Wilbur Ross’ WL Ross & Co. and Ron Burkle’s Yucaipa Cos., each of which agreed to invest $50 million into Amalgamated. Burkle’s team of investors, in turn, includes Magic Johnson Enterprises.
“The investments … will enable the bank to comfortably exceed the increased required capital levels,” said Edward Grebow, Amalgamated’s chief executive, in a press statement.
Workers United, the garment workers’ union, kept control of the bank through the deal, though it ceded 40 percent to Amalgamated’s new investors. Along with providing retail banking services, the $4.5 billion bank is the leading manager of union pension funds.
Burkle is known as a union-friendly investor, while Johnson’s firm touts its socially responsible investments.
“Amalgamated’s long history of union ownership places it in a unique position to serve the financial needs of America’s labor organizations, the pension fund community, and working people throughout our nation,” Burkle said at the time.
Not exactly a household name, Amalgamated also picked up some free advertising with the emergency of the Occupy Wall Street movement. Looking for an acceptable place to stash their donations, OWS opened an account at Amalgamated.
But behind the scenes, the bank is faced with a significant internal overhaul after a sweeping “consent order” issued by the FDIC on Aug. 31. One of the more serious problems identified by regulators were assets still on the bank’s books after they had been categorized as a loss. The FDIC, in its edict released on the last day of August, was unequivocal in what it wants from Amalgamated:
“The bank will, if it has not done already, eliminate from its books, by charge-off or collection, all assets or portions of assets classified as ‘loss’ in the report of examination dated June 14, 2010 (as of Dec. 31, 2009),” the FDIC stated.
The bank is also under regulatory pressure to revamp other areas of its operations, from management and IT to delinquent loans and audits.
The FDIC’s consent order, issued in conjunction with state banking regulators, requires Amalgamated to:
Retain a third party consultant to assess the bank’s board and the bank’s management needs. The consultant, in turn, is to both assess the capabilities of the bank’s board members and executives, evaluated compensation and recommend any new positions or committees that might be needed.
Ramp up oversight by the board so that it assumes “full responsibility for the approval of sound policies and objectives.” The board is required to hold at least monthly meetings and to an array of specific items, including reports of income and expense, delinquent loan activity, liquidity levels, audit reports and information technology, among several highlighted areas.
Reduce exposure to delinquent loans, with an “action plan to review, analyze and document the current financial condition of each delinquent or adversely classified borrower … and any possible actions to improve the bank’s collateral position.”
Launch a loan review program that will “provide for a periodic review of the bank’s loan portfolio and the identification and categorization of problem credits.”
Develop a “comprehensive policy and methodology for determining the bank’s allowance for loan and lease losses.”
Formulate a written annual profit and budget plan, and craft a long-range strategic plan for the next three years.
Put into place an IT security plan that assesses potential threats to different business units and departments.
Maintain an internal audit program that meets federal regulations, including a restructuring of the bank’s audit committee.
Halt all dividend payments unless authorized by the FDIC’s regional director.
Establish a compliance committee to ensure the bank meets the requirements laid out by the FDIC in its consent order.
Amalgamated must also figure out a way to start making money again in a changing financial landscape, industry observers say.
After getting into trouble with real estate lending gone bad in markets like Las Vegas and Southern California, Grebow told Crain’s New York Business that Amalgamated will be returning “to its roots as a primarily New York-area lender.”
And this, in turn, may be a blessing in disguise, with both commercial and residential real estate holding up much better in the New York metro market than in many other parts of the country.
“New York is probably one of the more stable markets in the world,” Ed Mermelstein, a real estate attorney and co-founder of international real estate law firm Rheem Bell & Mermelstein in New York. “It has fared the best during the downturn and the risk and reward scenarios are different.”
As Amalgamated begins to sniff out opportunities in its own backyard, it is likely to face fierce competition from larger banks. While Amalgamated has gotten a boost of sorts for becoming the bank of the Occupy Wall Street movement, it is unlikely to make serious market headway unless it couples this publicity boon with action. That means taking a hard look at its fees, which are similar in some areas to those charged by the big banks that the Occupy Wall Street activists are declaiming, said Aite Group’s Shevlin. And even if Amalgamated can bring more customers and deposits in, it still faces the challenge, like every other bank, of finding profitable areas to loan the money out in, he noted.
“Commercial bankers, the smart ones, know that this is a mixed blessing,” Shevlin said. “Depositors are walking through the door, but they don’t have productive uses for those deposits.”