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Amalgamated Bank (NASDAQ:AMAL)
Q3 2019 Earnings Call
Oct 28, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, ladies and gentlemen, and welcome to the Amalgamated Bank's third-quarter 2019 earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded. I'd now like to turn the call over to Mr. Drew LaBenne, chief financial officer.

Please go ahead, sir.

Drew LaBenne -- Chief Financial Officer

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 website for an extended period of time.

Additionally, a slide deck to complement today's discussion is also available on the Investors section of our website. 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 earning 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 website.

At this point, I'll turn the call over to Keith.

Keith Mestrich -- President and Chief Executive Officer

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 is 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, nonprofits, social enterprises and philanthropies. Importantly, we saw deposit growth in all three of our major markets of New York City, Washington, D.C., and San Francisco.

Third, loan growth was very strong in the quarter as our expansion into sustainable lending continues 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've 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 continued 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 cost 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've implemented programs designed to mitigate this pressure and expect a more stable cost of funds going forward. For the full year of 2019, we've 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 on to 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 runoff 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 the strategy 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 these 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 has 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 or reporting a set of metrics and targets, including setting science-based targets that will support and accelerate the shift toward 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 measuring 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 funds that are currently on our platform and to expand our offerings that our 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 will also continue to maximize shareholder value through a 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'm 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.

Drew LaBenne -- Chief Financial Officer

Thank you, Keith. As Keith has already detailed the success that we've achieved in growing our deposit franchise, I'll 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, multi-family 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 to runoff -- 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%, 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 on to noninterest income.

Noninterest income for the third quarter of 2019 was $7.7 million, an increase from $6.3 million in the second quarter of 2019 and a $100,000 increase compared to the -- with the third quarter of 2018. The increase from the previous quarter was primarily due to growth in trust and asset management fees, fees on deposits and the lack of losses on security sales and OREO properties that occurred in the previous quarter. Turning to Slide 10. Noninterest 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 noninterest 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 redetermined, 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. Nonperforming 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 that were 90 days past due and 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 had 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 move to nonaccrual, 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 a 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 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 full -- 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?

Questions & Answers:


Operator

[Operator instructions] Our first question is from Steven Alexopoulos with JP Morgan. Please proceed.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Hey, good morning, everybody.

Keith Mestrich -- President and Chief Executive Officer

Good morning.

Drew LaBenne -- Chief Financial Officer

Hi, Steve.

Steven Alexopoulos -- J.P. Morgan -- Analyst

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?

Keith Mestrich -- President and Chief Executive Officer

Yes. So good question. We did see a little bit of, what we call, end-of-cycle adjustments that we made for a handful of customers that we're still looking for some interest rate increases at the end of what's their perception of a rising-rate environment. I think what you will 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.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. That's helpful. And then to switch gears, I want to follow-up on this potential for de novo offices in 2020. Maybe I'll start, what are you thinking in terms of target markets.

And is the thought at this point larger presence in one market or maybe smaller presence in several markets, how are you thinking about that?

Keith Mestrich -- President and Chief Executive Officer

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, nonprofit union sectors. We've been pretty clear that we think the best markets for that are L.A., 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 trust opportunities for us to drive that noninterest 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.

Steven Alexopoulos -- J.P. Morgan -- Analyst

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

Keith Mestrich -- President and Chief Executive Officer

Well, it'd be commercial offices. I don't think we'll staff in 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.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Got it. OK. And then a final one for Drew. I was hoping CECL will get delayed, but it's not looking likely.

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

Drew LaBenne -- Chief Financial Officer

Well, so for CECL, Steve, we're actually now eligible to be a 2023 adopter, which we've come to that conclusion after the FASB released their -- took their vote on the revised guidance. So we're still talking about when we will actually implement. We're currently -- 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 evaluate that option.

And certainly, it's an advantage. I don't think there is 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 it's being implemented. 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.

Steven Alexopoulos -- J.P. Morgan -- Analyst

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

Drew LaBenne -- Chief Financial Officer

No. I won't say that yet, Steve. I mean, I think we're literally last week, kind of, our legal counsel came to the conclusion. It's not a straightforward, as you might think like most things with CECL.

But -- so we did -- 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 point, though, you become the one bank of our size that hasn't adopted, and we need to figure out if that's a place we'd really want to be or not in the future.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. Terrific. Thanks for taking my questions.

Keith Mestrich -- President and Chief Executive Officer

Thanks.

Drew LaBenne -- Chief Financial Officer

Thanks, Steve.

Operator

Our next question is from Alex Twerdahl with Sandler O'Neill. Please proceed.

Alex Twerdahl -- Sandler O'Neill + Partners, L.P. -- Analyst

Hey, good morning, guys.

Keith Mestrich -- President and Chief Executive Officer

Good morning, Alex.

Drew LaBenne -- Chief Financial Officer

Hi, Alex.

Alex Twerdahl -- Sandler O'Neill + Partners, L.P. -- Analyst

Just one first quick housekeeping item. Do you have, Drew, the amount of the FDIC credit that you got in the third quarter?

Drew LaBenne -- Chief Financial Officer

Yes, that was just over $400,000.

Alex Twerdahl -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. 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-saving initiatives?

Drew LaBenne -- Chief Financial Officer

Yes. I think we are 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 is 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.

Alex Twerdahl -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. And then just to switch gears to the margin here for a second. As 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 your 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?

Drew LaBenne -- Chief Financial Officer

Yes. So there is the immediate impact of the rate cut on the short-term of the curve, which is really going to be felt more in the investment portfolio than on the loan side because with 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 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 look -- think of the disclosures we've given previously, we have said $2.5 million for every 25-basis cut, assuming a parallel shift in the curve and in the risk premium. So that number has probably gone up a little bit, closer to $3 million because of all the DDA that we've added on and where we are at with the convexity portion of the curve, especially on residential mortgage, but the guidance is largely the same as it was before.

Alex Twerdahl -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. And then just a final question for me, just to clarify. So you increased the guidance for deposits until the end of the year, increased loan growth guidance; margin, lower end of the range but range unchanged; expenses basically flat, yet the pre-tax pre-provision income, I would've thought maybe given all these things put together, would actually tick a little bit higher. So is this 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?

Drew LaBenne -- Chief Financial Officer

Maybe a little bit bold. Let's see what the fed does and where things come in, in Q4. But that -- 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, costs staying the same. And we're kind of in the same range we were when you add it all up.

Alex Twerdahl -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. Thanks for taking my questions.

Operator

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

Brian Morton -- Barclays -- Analyst

Hi. Good morning. Thanks for taking my questions. I think we'll start may be on the loan side.

Can you talk about where are you seeing like your origination yields across the different products? I mean, what's the next...

Drew LaBenne -- Chief Financial Officer

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 carry over 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 3.25% to 3.50%, certainly lower than where our loan yields are right now, but higher than where anything is coming on in the securities portfolio. So that's still a positive trade versus the securities portfolio.

The multi-family market is pricing anywhere from 3.25% to 3.75% depending on the duration of the deals and where you are at on DTI and LTV. And then the other deals we are doing, PACE originations, commercial loans, those are coming in, 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.

Keith Mestrich -- President and Chief Executive Officer

And then Brain, I would just add kind of putting your and Alex's question together a little bit. That focus for us is really in that higher-yielding part of the portfolio there. As we shift -- 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 the energy efficiency space and the PACE lending space, in particular.

Brian Morton -- Barclays -- Analyst

OK. Great. And then maybe what's the mix between like fixed and floating on these loans?

Drew LaBenne -- Chief Financial Officer

Most of what we're putting on is fixed now. For example, in residential, I'm going to say a five one ARM is a fixed, not a floating. I think you're looking to talking about pure 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.

Brian Morton -- Barclays -- Analyst

OK. Ggreat. And then maybe if you could talk a minute about the SBA, USDA loans that are coming on. Is this a new program that you guys started?

Drew LaBenne -- Chief Financial Officer

We've been doing it over the past several quarters. So we put on about $50 million this quarter, and those are coming on -- or at least this quarter, they came on at 3.50%. 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 at the beginning, we've 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.

Brian Morton -- Barclays -- Analyst

OK. Great. Maybe moving on, a quick one on expenses. I thought there is a tick up in the, kind of, legal and professional fees, looks like driven by some SOX-related expenses.

How long do you expect this to continue? Is this going to -- or is this like a onetime type of item?

Drew LaBenne -- Chief Financial Officer

I don't know if I'd call it onetime -- certainly, the SOX work is, I think, mostly onetime. There is a pretty big implementation cost there that needs to happen in SOX, will be finished at the end of this year. So that will go away. I think where -- and 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 we are going on in the trust and asset management department, and I think there will be some project spend there over the next, Keith, what, six months probably?

Keith Mestrich -- President and Chief Executive Officer

Six to nine months, yes.

Drew LaBenne -- Chief Financial Officer

Six to nine months that might 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.

Brian Morton -- Barclays -- Analyst

OK. Great. That's all for me. Thanks.

Keith Mestrich -- President and Chief Executive Officer

Thanks, Brian.

Operator

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

Chris O'Connell -- KBW -- Analyst

Good morning, everyone.

Keith Mestrich -- President and Chief Executive Officer

Hi, Chris.

Drew LaBenne -- Chief Financial Officer

Hi, Chris.

Chris O'Connell -- KBW -- Analyst

Just wanted to see if you guys can give the breakdown on what the loan purchases were 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?

Drew LaBenne -- Chief Financial Officer

Sure. Yes. So we did $12 million in purchases on residential solar, which is sort of finishing up a 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'll add is 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 plus 3.80%, is where those are right now.

Keith Mestrich -- President and Chief Executive Officer

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 are all servicing retained options for us. So very, very efficient way for us to originate and service loans.

Chris O'Connell -- KBW -- Analyst

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 New Resource buildup that you kind of wanted to see coming into the year?

Keith Mestrich -- President and Chief Executive Officer

Yes. I don't know that we look at it really in terms of geographically where they are 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 that -- the acquisition of that team.

Drew LaBenne -- Chief Financial Officer

Yes. And the one thing I'll -- I didn't mention or didn't make entirely clear, but of the $78 million that we purchased in Q3, all of that was energy efficiency related. So it's residential solar, PACE obviously we've talked about before, but then the government guaranteed were all USDA solar farm loans as well. So while they are purchase loans, they're going a long way toward our mission on the renewable energy standpoint.

Chris O'Connell -- KBW -- Analyst

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&I has fallen off or been paid down in the fourth quarter already? Or if you have any thoughts as to kind of the normalization of the recoveries or net charge-offs and any thoughts on if we could see kind of a more normalized provisioning charge-off and kind of reserve quarter in the fourth quarter this year?

Drew LaBenne -- Chief Financial Officer

So I would say, generally, we're not seeing any trends that concern us from a credit standpoint. The -- obviously, we had to pay down $17 million reduction in criticized and classified loans. We 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 will see what happens to those three, but I think that that portfolio is -- it had a pretty fast run down. 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.

Chris O'Connell -- KBW -- Analyst

Got it. And then just last one here. I mean, you announced some pretty good progress on the share repurchases already in the fourth quarter. Is there -- can you remind us if there is any TCE ratio or capital ratios that you want to keep at a certain level, maybe with some margin of safety or buffer there in terms of capital to keep in the wheelhouse for M&A or a comfortable level that you would like to operate at?

Drew LaBenne -- Chief Financial Officer

Well, the range that we have talked about in the past is operating in the 7.5% to 8.5% tier one 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 share buyback is one way. We meet with our board this week to discuss the dividend. So we'll see where that comes later this week.

The -- and by that, I mean -- I don't mean it -- 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'll continue 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 didn't come up with a deal, as Keith said, that met our economic criteria. So I think, right now, there is 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 share buybacks as sort of an opportunity to acquire more of ourselves. So that metric certainly wouldn't be higher than three and a half year -- three years in terms of where we do a buyback as well.

Keith Mestrich -- President and Chief Executive Officer

And then, obviously, like every bank, we're just watching CECL to figure out what we may have to reserve from a perspective there.

Chris O'Connell -- KBW -- Analyst

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

Keith Mestrich -- President and Chief Executive Officer

Thanks, Chris.

Drew LaBenne -- Chief Financial Officer

Thanks.

Operator

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

William Wallace -- Raymond James -- Analyst

Thanks. Good morning, guys.

Keith Mestrich -- President and Chief Executive Officer

Hi, Wally.

William Wallace -- Raymond James -- Analyst

Hi. We've 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 a cut. I'm just wondering maybe if you can help us put a bow on this as we think about our models. So if the Fed cuts this week and then pauses, once we get past 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 you think the deposits that you're bringing on could actually drive expansion?

Drew LaBenne -- Chief Financial Officer

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 three to 10-year point bleed into your margin. Right? And then we have the levers we 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've 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 are not going to be immune to gravity over the longer term if the curve still stays low like this.

William Wallace -- Raymond James -- Analyst

OK. 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?

Keith Mestrich -- President and Chief Executive Officer

Yes. I would say strategically really, I mean, we could probably have made some of the deals work from an economic perspective, but -- and when you stared at what we were actually getting for the transaction from a sort of 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 are actually getting from these transactions, the degree of difficulty of doing this, especially when we are 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 that -- and the failure possibility right from an operational integration standpoint just felt not right for us. So I call it strategic rather than cultural, but maybe that's the same thing in your head.

William Wallace -- Raymond James -- Analyst

That's fair. And then should we take your kind of 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 six or 12 months ago?

Keith Mestrich -- President and Chief Executive Officer

I'd say we are still looking for M&A opportunities as 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 in 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 could do it in other markets. And while there are certain advantages to being able to have an acquisition and give ourselves a head start, we think next year is the year we can just go into those markets and begin working our tails off to actually build our business.

William Wallace -- Raymond James -- Analyst

And for what it's worth, I mean, what about looking to invest more in markets like D.C. and San Francisco where you have a very small presence relative to the size, the overall size of the market?

Keith Mestrich -- President and Chief Executive Officer

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

William Wallace -- Raymond James -- Analyst

OK. Fair enough. And then one, just one last housekeeping. You said it was $400,000 FDIC credit in the fourth quarter.

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

Drew LaBenne -- Chief Financial Officer

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

William Wallace -- Raymond James -- Analyst

OK. Thank you. That's all I have. Appreciate it.

Keith Mestrich -- President and Chief Executive Officer

Thanks, Wally.

Drew LaBenne -- Chief Financial Officer

Thanks.

Operator

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.

Keith Mestrich -- President and Chief Executive Officer

Thanks. I just want to again thank everybody for taking a little time this morning and joining this. 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.

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Drew LaBenne -- Chief Financial Officer

Keith Mestrich -- President and Chief Executive Officer

Steven Alexopoulos -- J.P. Morgan -- Analyst

Alex Twerdahl -- Sandler O'Neill + Partners, L.P. -- Analyst

Brian Morton -- Barclays -- Analyst

Chris O'Connell -- KBW -- Analyst

Chris OConnell -- KBW -- Analyst

William Wallace -- Raymond James -- Analyst

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