Labor of Love

How a 96-year-old labor bank is broadening its mission to support socially responsible companies and progressive causes

The article below was originally published in Bank Director magazine by Jack Milligan

Buried deep in the Federal Election Commission’s website is an FEC Form 1 — otherwise known as a statement of organization — that provides basic campaign information for every presidential candidate in the 2020 election. Among the required disclosures is the bank or depository institution where their campaign’s funds are being held. And for the long list of Democratic candidates, one name stands out: Amalgamated Bank.

Headquartered in New York with outposts in Washington, DC, Denver and San Francisco, Amalgamated is one of the most unusual banks in the country. Founded in 1923 by the Amalgamated Clothing Workers of America to provide essential banking services to its members, the bank is still 40% owned by the union’s modern day successor, Workers United. Amalgamated has a unique business model that focuses on a wide swath of socially responsible organizations, or SROs, ranging from unions and their pension funds to hospitals, universities, foundations and for-profit companies in the emerging business sector of social entrepreneurship.

But the one business where Amalgamated seems to have little competition is in the world of progressive politics. The campaigns of the top five Democratic presidential candidates in mid September — former Vice President Joe Biden, Senators Bernie Sanders, Elizabeth Warren and Kamala Harris, and South Bend, Indiana, Mayor Pete Buttigieg — all bank with Amalgamated. With the election still more than a year away, these five candidates had raised over $160 million in campaign funds.

“Those numbers, when you add them up, are nowhere near the total balances of political deposits that Amalgamated has,” says Alexander Twerdahl, an analyst who covers the bank for Sandler O’Neill + Partners. In fact, according to the bank’s second quarter 2019 earnings report, political deposits from all sources actually totaled $419 million. And the best thing of all, Twerdahl says, is that they are demand deposits that provide Amalgamated with a valuable source of low-cost funding.

“Whether you like it or not, campaign finance has changed tremendously in this country,” says Keith Mestrich, the bank’s president and chief executive officer. “There are a lot of dollars raised by campaigns and similarly situated organizations.” Amalgamated can navigate the complexities of campaign finance law, and it understands the special needs of political organizations, some of which can’t be fulfilled during normal banking hours.

“We have clients that have a lot of late-in-the-day wiring needs to buy commercial ad time,” Mestrich says. “We work with them to keep our wire room open longer hours.” Most political campaigns lack articles of incorporation, and yet Amalgamated will on occasion lend money to them. “That’s as much an art as a science,” he says.

Amalgamated’s left-of-center client base and support for progressive causes cuts against the grain of an industry that tends to be politically conservative. But it still operates just like any other bank, taking in deposits, making loans and trying to create value for its shareholders. And all those campaign deposits? Cheap funding is a magic elixir in banking, no matter its source.

Since becoming CEO in 2014, Mestrich has taken the company public, restructured the loan portfolio, closed underperforming branches in New York City and acquired another values-driven bank in San Francisco. Those changes were necessary, because Amalgamated’s identity as a union-owned bank has changed. Workers United no longer owns a majority of the bank's shares, although it remains the largest shareholder, and Amalgamated has had to think beyond its traditional mission of serving unions and the union worker to focusing on a larger community of progressive organizations and institutions that share many of the same values. With just $4.9 billion in assets, Mestrich also feels the need to expand the bank’s influence by growing its balance sheet — either through organic growth, more acquisitions or both. There have been other banks over the last century and a half that used “mission oriented models” to service a progressive agenda, he says, but “they were largely characterized by one thing — small scale. And small scale never allowed any of these institutions to really optimize what they [could] do.”

Amalgamated was New York’s first labor bank when it was started in 1923. Within days of opening its doors, 2,400 people had deposited $450,000 with the bank. Three years later, it financed New York’s first affordable housing project, the Amalgamated Housing Cooperative in the Bronx, as it would similar projects in later years. Its mission was simple: Serve the worker.

“There are two things to understand about 1923,” says Mestrich. “One is that garment manufacturing was the business of this city. It wasn’t law, it wasn’t banking, it wasn’t Broadway — it was manufacturing, with a heavy emphasis on garment manufacturing.” This was also 12 years before the passage of the National Labor Relations Act gave unions the legal right to represent workers. “Doesn’t mean that unions weren’t figuring out how to organize and represent workers at that time,” continues Mestrich. “The Amalgamated Clothing Workers was certainly doing that in 1923. And one of the ways they were organizing workers was figuring out … [what] workers in the industry needed.” The solutions the union came up with included affordable housing, health clinics, insurance companies and a bank that offered free checking accounts and small-dollar unsecured loans so a working family could buy an ice box or send a child to school.

The bank's union owner would eventually merge the ILGWU to form the Union of Needle Trades, Industrial, and Textile Employees, or UNITE. In 2009, the union renamed itself Workers United while retaining its ownership of Amalgamated Bank.

Unfortunately, this was a challenging time for both the union and the bank. The labor movement was facing a more pernicious environment nationally by the early 2000s. And declining membership had weakened Workers United finances just when the financial crisis was impacting Amalgamated Bank’s profitability.

Mestrich says the bank had ventured into risky loan categories that later resulted in losses, including subprime mortgages it purchased from Countrywide Financial. “They hurt us just like they did other holders of that paper,” he says. The bank’s expense base was also too high, in part because of several underperforming branches in expensive New York neighborhoods. And it was relying on high-cost funding at a time when interest rates had essentially gone to zero.

Most seriously, the bank was under pressure from regulators to raise capital, which it needed to clean up the loan portfolio. But Amalgamated was still 100% owned by Workers United. It relied on the union for its capital, and there was little to be had. So in 2012, the bank brought in two private equity investors — Wilbur Ross at WL Ross & Co. and Ron Burkle at The Yucaipa Cos. — who put in $50 million each. Despite the seeming irony of Ross being a staunch Republican who currently serves as the U.S. Secretary of Commerce, Mestrich says both Ross and Burkle have a history of investing in unionized businesses. Both firms got a seat on Amalgamated's board, and Workers United ownership share was reduced to approximately 60%.

If Amalgamated is an unusual bank, then Mestrich is a very unusual banker. “I went to work for the labor movement right out of college,” he says. “I had moved to Washington, D.C., with every intention of going to work in government or public policy.” Mestrich wanted a job in politics or government, where he would have an opportunity to “change the world.” An employment ad in The Washington Post led to a job as a corporate researcher for the AFLCIO, and he would spend the next 25 years working in the labor movement, including the Service Employees International Union — the umbrella organization for Workers United — as chief financial officer and deputy chief of staff, as well as chief of staff for SEIU’s Workers United conference. His commitment to the labor movement runs deep. “This is a passion and vocation for me as much as a job or a position,” he says. “I am passionate about helping Amalgamated be part of the infrastructure to support the labor and progressive community.”

Mestrich joined Amalgamated Bank in 2012 to head up its Washington office before taking over as CEO two years later. Over the last five years, he has focused on fixing problems that compromised the bank’s financial performance. He has reengineered its balance sheet by shedding hundreds of millions of dollars in indirect commercial and industrial (C&I) loans that were purchased from other originators, improving the bank’s asset quality in the process. And the high-cost borrowings have largely been replaced by low-cost core deposits, thanks to a renewed emphasis on sourcing those funds. The payoff has been a significant improvement in the bank’s net interest margin, from 2.55% in 2014 to 3.66% in the second quarter of this year. Noninterest bearing deposits were 46% of total deposits for the quarter.

Amalgamated has a consumer banking operation, although its historical cost probably exceeded the value of the funding that it produced, prompting Mestrich to close 12 branches in the New York metropolitan market since 2014. The bank now has 11 New York branches, with one additional branch each in Washington and San Francisco, as well as a loan production office in Denver. The benefit has been a steady improvement in its efficiency ratio, from an outsized 96% in 2014 to 64.4% through the first six months of this year.

And in a move that had important historical significance for both Amalgamated and Workers United, Mestrich took the bank public last year. (The IPO raised no new capital but was structured as an exchange of shares.) This fulfilled a commitment to its private equity investors that Amalgamated would provide them with an off-ramp for their investment. “We’re not a great sales candidate,” Mestrich explains. “Our model needs to have the ability to run the way it is. It’s not a model that nests into another bank particularly well. There weren’t great people who were going to buy us, but if we didn’t have the means for private equity to exit, they were going to find one for us.” Also, rather than being a seller Mestrich wants to be a buyer, and the IPO gave him a public currency to use in an acquisition.

With a 40% stake, Workers United is still a significant shareholder, and Chair of the Board Lynne Fox says the union has no plans to reduce its ownership position any further. Fox, who is the board’s first female chair and also serves as the union’s international president, says that she and Mestrich communicate regularly and have a good relationship. “We connect a lot,” she says. “He and I have known each other for a long time. We work well together and somehow always find a way to solve whatever needs to be solved.”

Amalgamated’s board has evolved over the past several years. At one time, all of the directors came from Workers United. But even prior to the IPO, the union began recruiting independent directors with audit, banking and governance experience. Because these individuals did not come from the world of organized labor, they also brought a measure of political diversity to the board. “We joke with each other about it, and we have healthy debate about it, but for sure we are not all of the same political bent,” she says. And yet despite this diversity, Fox says the board is fully united behind the bank’s success. “The thing that has unified us, and still unifies us, even with the new directors we brought on around the time of the IPO, was the respect and love for this bank and the desire to have it succeed,” she says. “Everyone feels very invested. We have learned from each other.”

Mestrich and Fox both agree that Amalgamated’s raison d’etre has changed. The power of organized labor in industry and politics has waned over the past several decades, and that has broad implications for a 96-year-old labor bank. As the labor sector continued to shrink, Amalgamated has had to broaden its strategic focus. Unions and the union worker are still important, but the mission field is now much larger. “We realized that you can’t service workers [and] the underserved unions unless you also service all the related institutions and organizations that make up a bigger part of the social business,” says Fox.

A bank that espouses support for progressive causes has to walk the walk, and Amalgamated does. It became the first bank in the country to raise its minimum wage to $15 an hour in 2015, and in July became the first bank to pay a $20 an hour minimum wage. It has also become a Certified B Corp., which is a private certification issued to companies by B Lab, an organization that measures a company’s social and environmental performance, public transparency and legal accountability through an online assessment process. And it is a member of the Global Alliance for Banking on Values, a global network of institutions whose shared mission is to support sustainable economic, social and environmental development.

Mestrich understands full well, however, that a commitment to progressive ideals won’t take the bank very far if it doesn’t perform for its customers. “The history and the mission [of the bank] always is something that gets us in the door, but if we don’t offer a comparable service, both in terms of price and the delivery of the service itself, we’re not going to keep the business for very long,” he says. “People still have a set of expectations about what they do.”

Improved asset quality and a lower cost of funds has led to a gradual increase in Amalgamated’s profitability. The bank’s cost of deposits in the second quarter of this year was just 34 basis points, which is a tremendous competitive advantage. “That gives you a lot of leeway in terms of picking and choosing the right assets and getting the correct yields,” says Chris O’Connell, an analyst who covers the bank for Keefe Bruyette & Woods.

Amalgamated’s profitability has steadily improved under Mestrich’s leadership. The bank reported $21.9 million in net income through the first six months of this year, compared to $19.2 million for the same period in 2018. However, the bank’s profitability is not yet where Mestrich would like to see it. In a year-over-year comparison, the bank’s profitability metrics through the first half of 2019 were a return on average assets (ROAA) of 0.93% versus 0.95%, and return on average equity (ROAE) of 10.32% compared to 11.3% — both of which are lower than its peers. Mestrich’s goals are an ROAA and ROAE of 1.1% and the “mid-teens,” respectively.

“Can we prove the thesis that a differentiated business model based on running a socially responsible, mission-oriented company actually drives value?” he says. The key to raising the bank’s long-term profitability will be to find good sources of organically originated loans to pair with its low-cost deposits. Twerdahl at Sandler O’Neill loves the deposit franchise, since many SROs and political campaigns tend to generate excess funds, but “turning that into profitability is a challenge because they don’t come with loans … and you’ve got to manage the balance sheet around it.” In the past, the bank had a tendency to rely on purchased loans — like those subprime mortgages from Countrywide — because they offered a higher yield than the loans it could originate for itself. “Amalgamated doesn’t have a fantastic core customer base to lend to the way a typical commercial or community bank might,” Twerdahl adds.

Mestrich speaks openly of eventually scaling the bank to $50 billion in assets, although he does not specify a time frame in which that would occur. Some of that growth will come organically as the bank looks for new lending opportunities within its expanding SRO franchise. One example is the government-funded PACE program (for Property Assessed Clean Energy), which helps homeowners finance energy-saving projects like insulation or solar conversions, and repay the money through an annual assessment on their property taxes. San Francisco-based New Resource Bank, which Amalgamated acquired in 2017, was already active in this lending space.

Growth could also come from additional acquisitions of other value-focused banks like New Resources. “There is a way to think about a strategy to roll up other mission-aligned banks and build a nationwide socially responsible franchise,” Mestrich says. “I hope we can do that.” Assuming that Amalgamated’s stock gains in value over time, it has the necessary currency to fund a roll-up strategy. O’Connell at Keefe Bruyette & Woods says there are a number of value-focused banks in attractive markets like Chicago, Boston, New York and elsewhere in California that are viable take-out candidates. “I’m sure they are courting potential targets,” he says.

Mestrich says that scale is important, because a larger balance sheet would enable Amalgamated to do more for its socially responsible client base, which has never had a nationwide bank focused solely on their interests. And he believes they need one. “That’s the thesis we’re going to test,” he says. “That’s the thesis of what this second century is really all about.”