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Profit of Amalgamated Financial Corporation (NASDAQ: AMAL) will continue to rise through the end of 2023. Strong loan growth will likely be the main driver of earnings over the next year and a half. Continued moderate margin expansion will support the bottom line. On the other hand, higher provisioning for expected loan losses will limit earnings growth. Overall, I expect Amalgamated Financial to report earnings of $2.35 per share for 2022, up 40% year-over-year. For 2023, I expect earnings to grow another 12% to $2.63 per share. The year-end target price is quite close to the current market price. Therefore, I am adopting a hold rating on Amalgamated Financial Corp.
Loan growth to slow from unsustainable level in second quarter
Amalgamated Financial’s loan portfolio grew by 10% outstanding in the first half of 2022, or 20% annualized, which is quite unusual given the historical trend. Going forward, loan growth is likely to remain at a decent level due to the team’s expansion plans. Amalgamated Financial plans to invest in talent, which should further drive loan growth. This hiring would be broad and “in critical roles”, as mentioned in the presentation of the results.
Amalgamated Financial has a well-diversified loan portfolio with different types of loans, ranging from residential real estate to commercial and industrial loans to consumer solar loans. Geographically as well, Amalgamated Financial is highly diversified with its digital banking platform offering banking services across the country. Physically, however, Amalgamated Financial only has a presence in New York, Washington DC and San Francisco. Given the profile of the company’s portfolio, the US coincident index is a good indicator of credit demand because it is broad and includes several economic indicators. As shown below, the index is well placed in historical context.
The Conference Board’s leading economic index is also an appropriate indicator of credit demand. However, this index presents a less rosy picture of the economic outlook, which is bad news for credit demand.
The conference board
Given the mixed economic outlook, I expect loan growth to slow to 8% annualized in the second half of 2022. For 2023, I expect a further deceleration to 4%.
Margin will increase moderately due to rising interest rates
Amalgamated Financial’s net interest margin increased 27 basis points in the second quarter of 2022, primarily due to loan growth. The rising rate environment also contributed to the margin increase, but to a limited extent.
As can be inferred from the information provided in the Q2 10-Q filing, only about 30% of the loan portfolio will be re-rated or mature within a year. Moreover, only about 32% of the securities portfolio bears variable rates, as mentioned in the presentation. Consequently, the average return on productive assets is not very sensitive to rate increases.
Fortunately, the deposit cost is also quite sticky. Non-interest bearing deposits represented 54% of total deposits at the end of June 2022. These deposits will limit the average cost of deposits as market interest rates rise.
The results of management’s interest rate sensitivity analysis presented in File 10-Q show that a 200 basis point increase in interest rates could increase net interest income by 6.9 % over twelve months. Given these factors, I expect the margin to increase by ten basis points in the second half of 2022, before stabilizing in 2023.
Above-average provisioning likely
Provisions accounted for 161.8% of outstanding loans at the end of June 2022. This coverage seems a little tight, but I’m not too worried as the majority of loans are backed by real estate. Additionally, most loans from Amalgamated Financial are based on fixed rates. Therefore, higher interest rates will not impair the ability to repay the debt of the majority of the Company’s borrowers.
However, high inflation could lead to financial stress for borrowers; therefore, it could adversely affect the credit quality of the portfolio. Also, like other banks, Amalgamated Financial may want to bolster its reserves due to recession threats.
Given these factors, I expect the provision charge to be slightly above average for the second half of 2022 and full year 2023. I expect the net provision charge to be approximately 0, 31% of total loans (annualized) in each quarter through the end of 2023. In comparison, the net provision charge has averaged 0.27% of total loans over the past three years.
Profits are expected to increase by 40%
Amalgamated Financial’s earnings will likely rise this year, driven primarily by strong loan growth. In addition, moderate margin expansion will support net income. On the other hand, higher provisioning will limit earnings growth. Overall, I expect Amalgamated Financial to report earnings of $2.35 per share for 2022, up 40% year over year. For 2023, I expect the company to report earnings of $2.63 per share, up 12% year-over-year. The following table shows my income statement estimates.
| FY19 | FY20 | FY21 | FY22E | FY23E | ||||||
| income statement | ||||||||||
| Net interest income | 167 | 180 | 174 | 225 | 248 | |||||
| Allowance for loan losses | 4 | 25 | (0) | 11 | 12 | |||||
| Non-interest income | 29 | 41 | 28 | 29 | 30 | |||||
| Non-interest charges | 128 | 134 | 132 | 145 | 156 | |||||
| Net income – Common Sh. | 47 | 46 | 53 | 73 | 82 | |||||
| BPA – Diluted ($) | 1.47 | 1.48 | 1.68 | 2.35 | 2.63 | |||||
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Source: SEC filings, earnings releases, author’s estimates (In millions of dollars, unless otherwise indicated) |
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Actual earnings may differ materially from estimates due to the risks and uncertainties associated with inflation and, therefore, the timing and magnitude of interest rate increases. Also, a deeper or longer than expected recession may increase the expected loan loss provisioning beyond my estimates.
Likely erosion of equity book value
Due to a large balance of fixed-rate securities available for sale, the book value of Amalgamated Financial’s equity has plunged so far this year. As interest rates rose, the market value of available-for-sale securities declined, resulting in substantial unrealized losses. These losses skipped the income statement and were credited to the equity account through other comprehensive income, in accordance with applicable accounting standards. Amalgamated Financial’s tangible book value fell to $15.69 per share at the end of June 2022 from $17.56 per share at the end of December 2021.
Going forward, the tangible book value will decline further as I expect a 150 basis point hike in interest rates in the second half of 2022 (including the 75 basis point hike in July). However, as mentioned in the presentation, Amalgamated Financial moved $277.3 million of available-for-sale securities into the held-to-maturity portfolio during the second quarter to reduce potential market value volatility. . This transfer will reduce the impact on the book value of equity. In addition, retained earnings, as noted above, will support book value per share. The following table shows my balance sheet estimates.
| FY19 | FY20 | FY21 | FY22E | FY23E | |
| Financial situation | |||||
| Net loans | 3,439 | 3,447 | 3,276 | 3,755 | 3,907 |
| Net loan growth | N / A | 0.2% | (5.0)% | 14.6% | 4.1% |
| Other productive assets | 1,635 | 2,088 | 3,289 | 3,858 | 4,015 |
| Deposits | 4,641 | 5,339 | 6,356 | 7,438 | 7,740 |
| Loans and sub-debts | 137 | 53 | 132 | 131 | 136 |
| Common Equity | 491 | 536 | 564 | 531 | 601 |
| Book value per share ($) | 15.2 | 17.2 | 17.9 | 17.0 | 19.3 |
| Tangible BVPS ($) | 14.6 | 16.6 | 17.4 | 16.5 | 18.7 |
|
Source: SEC Filings, Author’s Estimates (In millions of dollars, unless otherwise indicated) |
The current market price is close to the year-end target price
Amalgamated Financial offers a dividend yield of 1.8% at the current quarterly dividend rate of $0.10 per share. Earnings and dividend estimates suggest a payout ratio of 15% for 2022, which is below the three-year average of 19%. Although there is room for a dividend hike, I decided not to assume any change in the dividend to be on the safe side. As it stands, the payment history is not long enough to determine which payment management is comfortable with.
I use historical price/accounting tangible (“P/TB”) and price/earnings (“P/E”) multiples to value Amalgamated Financial. The stock has traded at an average P/TB ratio of 1.09 in the past, as shown below.
Multiplying the average P/TB multiple by the expected tangible book value per share of $16.5 yields a target price of $17.9 for the end of 2022. This price target implies a decline of 21.4% compared to the closing price on August 25. The following table shows the sensitivity of the target price to the P/TB ratio.
| Multiple P/TB | 0.89x | 0.99x | 1.09x | 1.19x | 1.29x |
| TBVPS – Dec 2022 ($) | 16.5 | 16.5 | 16.5 | 16.5 | 16.5 |
| Target price ($) | 14.6 | 16.3 | 17.9 | 19.6 | 21.2 |
| Market price ($) | 22.8 | 22.8 | 22.8 | 22.8 | 22.8 |
| Up/(down) | (35.9)% | (28.6)% | (21.4)% | (14.2)% | (6.9)% |
| Source: Author’s estimates |
The stock has traded at an average P/E ratio of around 12.0x in the past, as shown below.
Multiplying the average P/E multiple with the expected earnings per share of $2.35 yields a price target of $28.1 for the end of 2022. This price target implies a 23.4% upside from at the closing price on August 25. The following table shows the sensitivity of the target price to the P/E ratio.
| Multiple P/E | 10.0x | 11.0x | 12.0x | 13.0x | 14.0x |
| EPS 2022 ($) | 2.35 | 2.35 | 2.35 | 2.35 | 2.35 |
| Target price ($) | 23.4 | 25.8 | 28.1 | 30.5 | 32.8 |
| Market price ($) | 22.8 | 22.8 | 22.8 | 22.8 | 22.8 |
| Up/(down) | 2.8% | 13.1% | 23.4% | 33.7% | 44.0% |
| Source: Author’s estimates |
Equal weighting of target prices from both valuation methods gives a combined result target price of $23.0, implying a 1.0% upside from the current market price. Adding the forward dividend yield gives an expected total return of 2.8%. Accordingly, I adopt a retainer rating on Amalgamated Financial Corporation.
