Amalgamated Financial: Earnings to continue at full steam

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kangestudio

Substantial loan growth will boost earnings for Amalgamated Financial Corp. (NASDAQ:AMAL) through the end of 2023. Recent equipment hiring and strong labor markets are likely to support loan growth. Additionally, next year’s earnings will benefit from the rising rate environment. In general, I am waiting Amalgamated Financial to report earnings of $2.62 per share for 2022 and $3.23 per share for 2023. Compared to my latest report About the company, I raised my earnings estimate primarily because I revised up my loan growth estimates. Next year’s target price suggests a moderately high rise from the current market price. Therefore, I am upgrading Amalgamated Financial Corp.’s rating to a buy rating.

Team expansion, labor market to support loan growth

Amalgamated Financial Corp’s loan growth continued to accelerate in the third quarter of 2022. The portfolio grew 6.1% during the quarter, bringing nine-month growth to 16.9%, or 22% annualized . Management credited the exceptional growth to the newly hired bankers, as mentioned on the conference call. Management also mentioned on the conference call that it expects loan growth to moderate in the fourth quarter to around 2%-3% sequentially. This target does not surprise me because Amalgamated Financial could not have sustained the third quarter performance for long in this high rate environment.

On the other hand, growth in headcount will likely support loan growth for the foreseeable future. Furthermore, healthy labor markets will support economic activity and thus loan growth. Amalgamated Financial is physically present only in New York City, Washington DC and San Francisco. However, it serves customers from all over the country. Therefore, the national unemployment rate is a good indicator of credit demand.

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Data by YGraphics

However the US leading economic index continued a downward trend in September. The six-month growth rate for the index is now in dangerous territory, as seen below.

Leading Economic Index Change

The conference board

Taking into account the positive and negative factors mentioned above, I expect the loan portfolio to grow 2% in the last quarter of 2022, which would bring full-year loan growth to 19%. By 2023, I expect the loan portfolio to grow 8%. In my last report on Amalgamated Financial, I estimated loan growth of 14.6% for 2022 and 4.1% for 2023. Considering the performance of the third quarter, I think I underestimated the capabilities of the team earlier. Therefore, I have revised my lending goals upwards for the foreseeable future.

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The following table shows the estimates of my balance

fiscal year 2019 fiscal year 20 fiscal year 21 FY22E FY23E
Financial situation
net loans 3,439 3,447 3,276 3,906 4,228
Net Portfolio Growth N/A 0.2% (5.0)% 19.2% 8.2%
Other earning assets 1,635 2,088 3,289 3,548 3,692
Deposits 4,641 5,339 6,356 7,232 7,676
Loans and sub-debt 137 53 132 197 205
common equity 491 536 564 499 577
Book value per share ($) 15.2 17.2 17.9 16.1 18.6
Tangible BVPS ($) 14.6 16.6 17.4 15.6 18.1
Source: SEC Filings, Earnings Releases, Author’s Estimates ($ millions, unless otherwise noted)

Impressive margin growth likely to stall in Q4

Theoretically, Amalgamated Financial’s net interest income is only slightly rate sensitive. Management’s rate sensitivity model shows that a 200 basis point increase in interest rates could increase net interest income by only 1.5% over twelve months, as mentioned in the 10-Q report.

Net interest margin Interest rate sensitivity

3T 2022 Presentation 10-Q

However, in practice, the margin has been much more sensitive to the rate. The margin increased 47 basis points in the third quarter after increasing 27 basis points in the second quarter of this year. This variance between theory and practice is a sign of management capabilities. Amalgamated Financial’s management has managed to increase its margin by stifling the growth in funding costs despite the rate hike cycle. Their task was made easier by non-interest bearing deposits, which make up a whopping 54% of total deposits. However, adjustable rate deposits represent 44% of total deposits. The fact that management has been able to keep the costs of these adjustable rate deposits low is admirable.

In my opinion, Amalgamated Financial will have to allow adjustable rate deposit costs to rise or risk losing deposits to competitors. Therefore, I do not expect the amazing performance of the third quarter to be repeated in the fourth quarter or beyond.

Another factor that will slow margin growth amid a rising rate environment is the large balance of equities, which account for nearly half of all earning assets. Around 63% of the securities have fixed interest rates, as can be deduced from the detail provided in the earnings presentation.

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In addition, management expects an outflow of $400 million to $500 million of political deposits in the fourth quarter, which will begin accumulating again in the first quarter of 2023. Due to the temporary outflow, Amalgamated Financial may have to rely on costly borrowing. to finance your assets.

Taking these factors into account, I expect the spread to remain unchanged in the fourth quarter of 2022 before increasing by eight basis points in 2023.

Expecting earnings to rise 23% next year

The anticipated credit growth discussed above will be the main driver of earnings next year. Also, the bottom line will get some support from margin expansion next year. Meanwhile, ECL provisions are likely to remain at a normal level through the end of 2023. I expect net provision expense to represent 0.28% of total loans next year, which is the same as the average from 2019 to 2021.

Overall, I expect Amalgamated Financial to report earnings of $2.62 per share for 2022, up 56% year over year. By 2023, I expect earnings to grow 23% to $3.23 per share. The table below shows the estimates from my income statement.

fiscal year 2019 fiscal year 20 fiscal year 21 FY22E FY23E
Statement of income
Net Interest Income 167 180 174 240 285
Provision for loan losses 4 25 (0) 14 12
Non-financial income 29 41 28 25 22
interest-free spending 128 134 132 142 161
Net Income – Sh. 47 46 53 81 100
EPS – Diluted ($) 1.47 1.48 1.68 2.62 3.23
Source: SEC Filings, Earnings Releases, Author’s Estimates ($ millions, unless otherwise noted)

In my last report on Amalgamated Financial, I estimated earnings of $2.35 per share for 2022 and $2.63 per share for 2023. I increased my earnings estimates for both years by increasing my loan growth estimates.

My estimates are based on certain macroeconomic assumptions that may not hold. Therefore, actual earnings may differ materially from my estimates.

Upgrade to a purchase rating

Amalgamated Financial offers a dividend yield of 1.7% at the current quarterly dividend rate of $0.10 per share. Earnings and dividend estimates suggest a 12% payout rate for 2023, which is below the 2019-2021 average of 19%. Therefore, there is room for a dividend increase. However, I have not incorporated a dividend increase into this investment thesis to be safe.

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I am using historical price-to-book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Amalgamated Financial. The stock has traded at an average P/TB ratio of 1.06 in the past, as shown below.

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Data by YGraphics

Multiplying the average P/TB multiple with the projected tangible book value per share of $18.1 yields a target price of $19.2 by the end of 2023. This target price implies a 20.3% drop from at the closing price on November 11. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 0.86x 0.96x 1.06x 1.16x 1.26x
TBVPS – Dec 2023 ($) 18.1 18.1 18.1 18.1 18.1
Target price ($) 15.6 17.4 19.2 21.0 22.8
Market Price ($) 24.1 24.1 24.1 24.1 24.1
up/(down) (35.3)% (27.8)% (20.3)% (12.8)% (5.3)%
Source: Author’s estimates

The stock has traded at an average P/E of around 10.4x in the past, as shown below.

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Data by YGraphics

Multiplying the average P/E multiple with the forecast earnings per share of $3.23 gives a target price of $33.5 for the end of 2023. This target price implies a 39.2% advantage over the closing price. of November 11. The following table shows the sensitivity of the target price to the P/E ratio.

P/E Multiple 8.4x 9.4x 10.4x 11.4x 12.4x
EPS 2023 ($) 3.23 3.23 3.23 3.23 3.23
Target price ($) 27.1 30.3 33.5 36.8 40.0
Market Price ($) 24.1 24.1 24.1 24.1 24.1
up/(down) 12.4% 25.8% 39.2% 52.6% 66.0%
Source: Author’s estimates

By equally weighting the target prices of the two valuation methods, a $26.4 price target, which implies a rise of 9.4% compared to the current market price. If the term dividend yield is added, a total expected return of 11.1% is obtained. In my last report, I gave a price target of $23.0 for December 2022 and adopted a hold rating. I have now extended my target price to the end of next year and raised my earnings estimates. Based on my updated expected total return, I am upgrading Amalgamated Financial Corp. to a buy rating.

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