In this episode of Industry Focus: Financials, host Jason Moser sits down with Amalgamated Bank (NASDAQ: AMAL) CEO Keith Mestrich to talk about the opportunities and challenges of operating a smaller and socially responsible bank in the modern financial landscape. Plus, Fool.com contributor Matt Frankel, CFP, discusses what Wells Fargo (NYSE: WFC) CEO Tim Sloan's abrupt departure could mean for the bank and its investors. And you'll hear which two stocks we're watching this week.
A full transcript follows the video.
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This video was recorded on April 1, 2019.
Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, April 1st, and we're talking Financials. I'm your host, Jason Moser, and on today's show we'll talk about the latest news from the executive suite at Wells Fargo. We'll of course have One to Watch for everyone out there. But we begin today with a new installment of Between Two Fools.
Keith Mestrich is president and CEO of Amalgamated Bank, with over three decades of experience in the finance industry. In 2017, Keith guided Amalgamated's acquisition of San Francisco-based New Resource Bank, creating the nation's largest socially responsible bank. Last year, he helped Amalgamated take the next step by bringing the company to the public markets. I recently spoke with Keith about everything from how Amalgamated is setting the standard as a socially responsible bank to lessons he learned during the financial crisis and a whole lot more.
Moser: Keith, first question here, and we've gotten this question from a few people here on the analyst team, your message in building America's socially responsible bank, we love the message. We love what you're trying to do there. I want to get a little from your perspective -- what goes into actually building America's socially responsible bank? What do you want our listeners to know about why that matters?
Keith Mestrich: That's a great question! I think there's really two very important things that go into it. Our mission is really about helping a lot of other organizations that do good be more successful in their mission because we take some of the friction out from their financial transactions and help them execute better on those financial transactions. If it's a human needs delivery nonprofit that's providing care to elderly senior citizens in their community, we help make their financial transactions go a little bit smoother. If it's a union representing workers, we help them think through how to get the most advantage out of their banking relationship. That's a really important role that we play. It's really about advancing the socially responsible agendas of so many of our good clients. That is a really important piece of that.
We do it because we have just enough bespoke products and services that meet the needs of our nonprofit clients. We do it because we have bankers who really understand our clients because they come out of their businesses, not out of the banking business in particular. The other piece that's really important about it is that we have to have a very genuine brand. If we are not [unclear 2:49] to all the socially responsible kinds of things that our clients care about, they will sniff that out and we will not have a genuine brand, and people will not want to do business with us. So that means we have to treat our employees really, really well. We can't continue to foster income inequality. We were really proud to be the first bank to raise its minimum wage to $15 an hour, and have continued to grow our wages since then. We have to be good environmental stewards. We're very proud to be the bank that's leading an effort of other American banks to think about how you account for the impact of climate on our own balance sheets and the loans that we make. We have to adhere to the principles of diversity. I'm really proud that we've built a senior executive team here where 7 of the 16 people in our senior executive ranks are women or people of color. Five people of the 12 people on our board are women or people of color. Adhering to those kinds of principles across the board is really how you create a genuine brand that people want to bank with and create a brand that helps them achieve their own missions.
Moser: That seems like it could lead me to my next question, really. I wanted to speak a little bit about culture. Culture is something that we here at The Motley Fool care greatly about. We're constantly working to try to shape our culture and make it something that everybody enjoys and is proud of. Talk to us a little bit about what makes Amalgamated Bank so unique. Why is your culture there special?
Mestrich: I think one of the things that we're doing is, we're really trying to explore how we deepen the cultural impact of the mission that we have. I don't actually go out shopping all that often. But last year at the holidays, I did venture out and spend a lot of time with my wife and family at the mall and other things. And I was struck by how many companies tried to put some socially responsible orientation into the marketing that they were doing. And a lot of it was, people were talking about, "If we're a retailer of women's clothing, we're going to give a portion of all of our sales to a women's organization," or people doing something to protect the national parks or something like that. A lot of it was a give-back thing. But I was struck by how universal it seemed to be in the marketing. I was also struck by how much of it, the veneer of it felt to be pretty thin.
I came back, and we really began talking here about, how do we differentiate ourselves in an increasingly growing pool of companies that are trying to have a moniker of social responsibility associated with it? We need to have that genuine brand. It's caused us to do some real soul searching. How do we make sure that everything that we do, whether it's in the transaction activities that we do on behalf of our customers, and how we do that; if it's around our employment policies; if it's around just the transparency that the C-suite has into the business plans of the operation with our other employees; how do we really create a culture that takes the principles of corporate social responsibility and doesn't make it just a marketing gimmick but really makes it something that we think about in all of the work that we do every day?
I think we've pushed that culture because we're open to talking about it and exploring it. I don't purport that we do everything right, at all. I think an important thing is, how do we get the people who work here engaged in trying to make us better all the time?
Moser: Yeah, it does feel like everywhere you go now, everybody's saying how socially responsible they are and how important that is. But it feels like lip service in a lot of cases. I think it behooves us to dig a little bit deeper and understand exactly why what they're saying actually jives with what they're doing.
Now, Amalgamated Bank is a recent IPO, still relatively new to the public markets. What were some of the biggest challenges you faced in taking the bank public last year?
Mestrich: We went public in August. It's a lot of work. I think there were really three big challenges that we had to face. One was, it really required us to get incredibly sharp on what the strategy of the business was and to be able to articulate that for potential investors in the company. That was a lot of work, to really put a fine point on that. Our investment bankers helped us a lot through that process. It really got our management team working much more closely with each other to really be able to articulate that. But that work of really refining that business strategy was a key piece of work that we had to do.
Second big challenge was, we're a company that had been owned by a union for 95 years. And privately held. Being able to really work with our private ownership to think about what it meant to be a public company. That was a lot of soul searching with board members and shareholders. Really getting a collective understanding on why access to the capital markets so that we could really begin the process of growing this company again was an important component. That was a lot of important work that we had to do.
Finally, as a company with a mission, we had to spend a lot of time with the investment community, really convincing them and explaining to them something that I very deeply believe, which is, there is no trade-off between achieving our mission and achieving profitability. I, in fact, think the only way we can achieve our mission of being a socially responsible organization is to be vibrantly profitable. We had to start off every one of our meetings with investors really putting to bed the notion that we must be sacrificing some level of profit if we're going to achieve our mission. I really believe it's just the opposite. I think vibrant profitability allows us to plow resources back into the organization and build the kind of organization that allows us to meet our clients' needs. But that was a lot of work, to convince people that that was, in fact, the case. And it's still work. We're going to have to fight that fight every day to convince people that we're not leaving something on the table.
Moser: Yeah, I can imagine that is a real challenge, especially in your position. You're a smaller bank in a very tough and competitive market, with some very big and well-endowed competitors. In that line, what do you view as not only some of the opportunities but some of the challenges that are there for you as a smaller but clearly growing bank in today's environment?
Mestrich: Let's talk about the opportunities first. I say this all the time, and I really mean it: there's 5,000 community banks in the United States, we're different because we have a really defensible niche. We know our customer base incredibly well. It is a base of corporate customers that are between our traditional base in unions, nonprofits, political organizations, that is really underserved by today's financial system. Lots of banks will bank those kinds of organizations; we're the only one I know of that really specializes on it. That defensible niche is really a great opportunity for us.
I think in today's banking market, you either have to be big so that you can take on the technological changes of gathering consumer deposits and putting all the kinds of cybersecurity protections in place that a bank needs today, and figuring out how to have the marketing and branch network support to be able to build a national consumer business, largely; or, you have to be able to do what Warren Buffett says, build a moat around your company. I think we have a good moat. I don't think we have a lot of competitors who are competing for the same market that we are. That's a great opportunity for us.
The challenges, like every other industry in the country right now, banking is being disrupted, and being disrupted a lot by technology, artificial intelligence, and other things. As a small bank in that space, we don't really have the power of the dollars to be able to make huge investments in technology that may or may not work. We've got to be very attuned to watching what happens in the fintech space and in the big bank space so that we are aligning ourselves to be fast followers so that we can adopt the technologies and the services that consumers want and seem to be something that has become universally accepted in the banking industry.
Moser: You mentioned earlier there, in this business, one of the traits you have to possess, you have to be big if you want to do X. I want to shift the conversation a little bit over toward a recent headline here we saw, where Tim Sloan, Wells Fargo's CEO, will be stepping down. They're going to be looking to replace him with a permanent CEO here in the coming weeks or months. One of the things we've been kicking around here on the investing team for a while now, when Tim first assumed that position based on all of the headlines, it seemed a bit of an odd choice at the time, primarily because you're bringing in someone internally, who arguably was very much a part of all of the problems that ultimately came to light. I mean, it's hard to imagine he didn't know or understand what was going on. So it always struck us as a little bit of an odd choice. Fast-forward to today, and maybe they're looking at, "Let's try to take control of the narrative here and bring in someone from the outside to really help right this ship here."
Unfortunately, Wells Fargo seems like it's almost too big to fail. But by the same token, it clearly seems like a culture and a business in a real state of crisis right now. I wonder how in the world that happens. It seems like the relationship with a bank is one based on trust. Right now, I don't know that I would trust this bank as far as I can throw it.
Mestrich: Yeah. Look, I'm going to contradict myself a little bit about my last statement. I do believe you have to be big to be able to compete in this market. But I completely agree with your notion that at some point, it is too big. How you possibly manage and put in the control environment of institutions that are trillion-dollar institutions with massive, massive branch networks, hundreds and hundreds of thousands of employees, compensation systems that are designed pretty far down the ladder, not in the C-suite, how do you keep control of all that and make sure that you run a good business? It's hard for me to get my head around. I run a $5 billion institution, and some days it feels like it's tough to keep it all in my head. I can't imagine what it's like to run a trillion-dollar institution and do that.
And then, Jason, on your issue of trust, you couldn't be more right. Whether you're an institution or you're an individual consumer, your relationship with your money is one of the most important ones in your life. Some people fetishize about it, some people don't pay enough attention to it, but it's important to everybody. You entrust your banker to keep your resources safe. You want them to be looking out for your best interests. And I think when things happen that undermine that trust, the reputation of the organization is put immediately at risk, and I think companies that suffer that violation of that trust have to take pretty drastic actions to be in a position to regain the trust to their customers.
One thing that's happening, it's actually very hard for people to change their banking relationship.
Moser: It is. It's a sticky relationship.
Mestrich: Very sticky relationship, really around technology. You get your system set up so that your check goes in automatically, and you pay your bills. Undoing that is a fair amount of work. I shudder to think if it had been easier for consumers to change, what might have happened to Wells Fargo's business. They got lucky in that sense. They need to be paying a lot of attention to making sure that they get the right leadership in place that is going to regain the trust.
And it's not just for Wells Fargo. Whether it was the financial crisis or the Wells Fargo scandal or some of the others that have happened, it's a black mark on the entire industry. I think bankers are right up there with politicians in terms of popularity in this country.
Still, today, even 10 years after the financial crisis. It impacts all of us. We spend a lot of time trying to earn the trust of our customers. It's an important piece. And I believe our customers do trust us, but it's because we're there with them and helping them navigate a system that they don't always understand all that well. It really makes those customer relationships for us sticky, as well.
Moser: I think you're right in that there probably is a stigma there. I don't want to paint everyone in the banking industry with the same brush necessarily, but there probably is a stigma there, given everything that we've been through here. So let's talk about that financial crisis for just a minute. You have decades of experience in the finance industry. I always look back to the financial crisis as an investor, and that was probably the greatest learning experience I'll ever have for my entire life as an investor. You learn a lot about what matters, how to deal with a market that is obviously in tumult. So, from the professional perspective, what were some of the lessons? What are the things you remember about the financial crisis that have stuck with you today?
Mestrich: Let's go back to 2008. We were on the verge of the greatest financial catastrophe since the Great Depression. I think people who intervened here, and we don't have to agree with everything that they did, but I do think the leaders of the day -- and I really mean the political leaders of the day -- moved into the space, and they took quick action to save the economy. And it saved much more than the economy. It saved the global system, really. I think it was that dire.
The other thing that I remember very starkly from that was the absolute hatred that most of the American public had for executives in the financial services industry. To build on the point we were talking about, those executives were just demonized. And it's been hard to shake that ever since.
But like you, I agree, it was a great learning moment. We came through it. I think the system is in much, much better shape now. I think banks are better capitalized. I think the stress testing regime that the Dodd-Frank law put in is one of the smartest pieces of public policy. You won't hear many bank executives say that, but I 100% believe it. I think, especially for the large financial institutions, if they are going to have the privilege of being bailed out by the government when they get in deep trouble, they owe the American public an awful lot to make sure that only in absolute extremes will we ever have to do that again. I think the system has changed for that.
I worry that risk has been shifted away from the regulated financial parts of the industry to the nonbank financial system. If there's anything to worry about, I think some of those toxic assets that existed inside the regulated financial environment in 2008 are still in the system, and they're in the nonregulated environment. I hope I'm wrong about that. I think, one lesson, not sure we can do it in the current administration, but I think one lesson is, we should be bringing more of the financial industry into the regulated environment, and not on the outside. Pretty smart people know what we need to do to protect ourselves, and we should listen to them.
Moser: Yeah, I couldn't agree more. I think that when you're talking about people's money, a lot of times, they don't really think a whole heck of a lot about it. They just put their faith in whatever financial institution's holding it. We have to make sure that we're all held accountable for being good stewards.
OK, last question here, I like to wrap these interviews up with a fun one. We have an audience that loves to read, we here at The Fool love to read. I'm always looking for a good book recommendation. Keith, wondering if you have any good book recommendations for our listeners.
Mestrich: I'm going to plug a very special book here. That's a book that a gentleman named Mark Pinsky, who used to be the head of the Opportunity Finance Network, and myself have co-authored called Organized Money.
Moser: Very nice!
Mestrich: It is a book about how the progressive movement has enormous amounts of resources that are largely invested in a small-fee conservative financial system that is not always working in the best interest of the progressive movement. I think by the agglomeration of those resources in a new financial system, the progressive movement could really create a system that was in service to its own objectives and do that. We chronicle hundreds of really great experiments that have been done throughout the last century, they're all very small.
Anyway, it's a great read! [laughs] You can preorder the book on Amazon. It comes out this October.
Moser: Well, I'd better get to preordering that book, because it sounds like something that's definitely up my alley. Keith, we'll leave it at that. I know you've got a busy schedule. Thank you so much for taking the time out of your day to speak with us! I appreciate it! I know our listeners appreciate it. Really like the message you're communicating there at Amalgamated Bank. I'm going to enjoy following you guys along.
Mestrich: Thanks, Jason!
Moser: Joining me in the studio via Skype is certified financial planner Matt Frankel. Matt, Happy April Fool's Day!
Matt Frankel: Same to you! Greetings from pollen-covered South Carolina.
Moser: I think we're right behind you there. It's still a little bit cooler up here than it is down there, but I think that's all starting to hit.
Frankel: I have a yellow car right now, and I don't drive a yellow car.
Moser: I can imagine. Matt, we wanted to talk this week about something that you and I have talked about on a few episodes now. Just recently, we were asking ourselves the rhetorical question of Wells Fargo and Tim Sloan and their whole executive suite mess, the horse poop that they continue to step in just week after week, it seems like.
Lo and behold, last week, we get the news that CEO Tim Sloan is stepping down. They have a search committee out there to try to find a new CEO for the company. It sounds like that's going to be an external search. I think we both fall on the same conclusion here. Do you think this is ultimately a good thing?
Frankel: Yeah. I think it needed to happen. I'm not saying that a new candidate is going to hop in, and Wells Fargo is going to be a completely different bank tomorrow or next month or even in the next year or so. But this needed to happen for the bank to truly move on.
If you've been following any of the political dealings with Wells Fargo, Tim Sloan testifying in front of the Financial Services Committee. That was pretty much everyone's biggest complaint, is that he's still there. Not that Wells Fargo's not trying to right the ship, not that they weren't making cultural changes. The problem was that the people who had caused the problem in the first place were, for the most part, still there, Sloan included. He was president and COO during all the scandals in question. So the fact that he's gone could open up a whole lot of doors for the bank to legally get past this mess. Elizabeth Warren, who's been Wells Fargo's biggest enemy in the news, has openly written a letter to the Federal Reserve asking them to keep their penalty intact indefinitely as long as Sloan was still there. I've talked about their penalty a few times. If you're not really familiar, it's that Wells can't grow past its size at the end of 2017 without the Federal Reserve lifting this penalty. The bank's not allowed to grow in what's a great growth environment for banks. If that were to be lifted, this would be a big deal for the bank.
It's not that Wells is going to be a different bank. It's that this could open the door for the government to say, "OK, now you're really trying to move on. Now we'll give you a chance."
Moser: When I look at this from our perspective, I feel like we asked this question an awful lot. If it's so obvious to us, I just don't understand quite why it wasn't so obvious to the powers that be at Wells Fargo. Why would you think, when they were looking to fill the CEO position a little while back, given everything that had happened to that point, and given what we knew, and clearly they must have known it as well, why do you think they went with an internal hire? I said before, it seems like you're going around your rear end to get to your elbow. It just doesn't make sense. It's not a smart decision. You're delaying the inevitable. Why do you feel like they would go with an internal hire as opposed to immediately going external and really trying to nip this thing in the bud?
Frankel: My feeling is, since the first thing that really needed to happen were the cultural changes -- meaning that their sales goals needed to be done away with, some departmental restructuring needed to be done -- maybe they wanted somebody in there who really had a great working knowledge. Sloan had been there since the 80s. Maybe somebody with a really good working knowledge of how the banks' different parts worked together would have made that process a little more efficient?
And, to be fair, the cultural changes and some restructuring, that happened pretty fast. I'm thinking that's why they kept Sloan in there as long as they did. For that phase of the getting past all this, they really needed somebody who knew the bank really well.
Moser: How long do you think it takes before they get a new CEO in there? This has to be something that happens fairly quickly, right? When we were looking at Square, for example, they were trying to bring a new CFO in, we thought it probably wouldn't take all that long, and it really didn't. I would have to imagine there's a short list of candidates already.
Frankel: I would be shocked if it didn't happen by the end of the second quarter. Like I said, Wells Fargo's No. 1 priority should be to get these penalties lifted and be able to move on. That's not going to happen until they put a new CEO in there. So I think they're going to really try to expedite this process.
Moser: OK. We shall see. Let's go ahead and wrap things up here. Before we do, we want to give our listeners One to Watch. Matt, I'll let you kick it off this week. What's your One to Watch?
Frankel: I'm actually going to go with Wells, just because I don't think that the market truly appreciates what a big deal it would be if that Fed penalty was lifted and if someone else was in there to get the lawmakers off the bank's back. Wells Fargo popped a little bit after the news was announced, but not by much. It's still a major underperformer, even over the past week or so, in the sector. I want to go with that. I think there's a lot of upside there if they successfully find a new CEO and get the penalty lifted.
Moser: Yeah, that's probably a pretty good catalyst there. We always look for, in investment ideas, either big market opportunities or some kind of catalyst that'll help unlock value. I think that probably makes for a pretty good catalyst. It has to happen eventually, you figure. That's a good call. I like that!
Matt, did you catch any of the Apple event last week?
Frankel: I did. I wrote a piece about the card and the details of it for our sister site, The Ascent.
Moser: Were you as underwhelmed by the performance as I was?
Frankel: I was. My take on it is, it's not a game-changing product by any means, but Apple faithfuls will still sign up. That's about it.
Moser: Yeah. That's what I'm going with this week for my One to Watch, is Apple. We've said it before, Apple pivoting to being more of a services business, or at least trying to grow that services side of the business, makes a lot of sense. I like the fact that they're doing it, and I think they're doing it the right way. They're going to be getting a lot of little contributions from a lot of different efforts. On the one hand, the Apple Card seems kind of interesting from the perspective of the security idea. They do offer some rewards for cardholders. Cards, to me, generally speaking, it really boils down to incentives. As far as incentives, what is your card going to give you? And I don't think anything really stood out in regard to the Apple Card. I look at my Amazon Prime Visa, and given I use Amazon a whole heck of a lot more than I use Apple, that card gives me way more than an Apple card ever would. But yeah, there are going to be some Apple faithful that get it and like it. They're always going to swear by it.
The thing that struck me, and I don't know that we talk about this as much here domestically, but overseas, certainly, it seems like contactless payments are far more popular than they are here. I'm talking about a card that you just scan. Instead of swiping it or using your phone, you just have a card that you just swipe over the top of a sensor, and it just gets the data from that. Personally, I like contactless payments more than having to pull my phone out to do a payment with my phone anyway, which makes me wonder about the Apple card. I don't know that mobile payments are as strong globally as maybe they might be domestically here. But I don't know. Apple Card, I'm a little bit on the fence. I think I'm going to have to dig a little bit more into it. It could be a contributor. But, honestly, I like the fact that they're using MasterCard. I own those shares. If MasterCard's making some money from it, then I'm happy. We'll dig into more of that and learn more about how that contributes to the business here in the coming quarters as well.
There you have it, folks! Matt, I'm going to go ahead and take off here. Thanks, as always, for joining us this week!
Frankel: Of course! I'll see you guys next week!
Moser: Yes, sir! As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Today's show was produced by Austin Morgan. For Matt Frankel and Keith Mestrich, I'm Jason Moser. Thanks for listening! And we'll see you next week!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jason Moser owns shares of Amazon, Apple, Mastercard, Square, and Visa. Matthew Frankel, CFP owns shares of Apple and Square. The Motley Fool owns shares of and recommends Amazon, Apple, Mastercard, Square, and Visa. The Motley Fool has the following options: short January 2020 $155 calls on Apple and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.