Amalgamated Bank Stock: A Differentiated Play On ESG-Compliant Lending

Credit and funding costs are known risks most banks right now, and Amalgamated Bank (NASDAQ:AMAL) is no exception. Likewise with risks to the loan outlook as the wider economy slows. Even so, the shares of this socially-conscious lending specialist look priced at an interesting level today. While the pre-provision profit growth outlook for the next two years isn’t necessarily superior to community and regional banks as a group, it’s not inferior and I see a large potential addressable market for this bank over the next decade.

I do have some concerns that a high single-digit long-term core earnings growth rate could prove too ambitious, but near-term valuation approaches like ROTCE-driven P/TBV and P/E also suggest that Amalgamated is undervalued. While sentiment could remain challenging for at least another quarter, I think this bank is worth some closer due diligence at this point.

Healthy Results Drive Better-Than-Expected Fourth Quarter Results

Amalgamated’s fourth quarter results were something of a mixed bag. While the results were a fair bit better than the Street expected, they weren’t all that impressive in absolute terms, with clear pressure on spread income and core earnings growth, as well as balance sheet growth.

Revenue rose almost 39% year over year and fell almost 2% quarter over quarter, but that was still good for a roughly $0.09/share beat versus sell-side expectations. Net interest income rose 43% yoy and fell slightly on a sequential basis (weak compared to many banks), and that was good for around $0.06/share of upside. Net interest margin improved 79bp yoy and 6bp qoq to 3.56%, while earning assets declined about 2% (a relatively weak result).

Adjusted fee-based income rose 9% yoy and fell 10% qoq, beating by around $0.03/share.

Operating expense rose 5% yoy and fell almost 4% qoq, adding about $0.04/share to the beat versus the Street, and the 100bp qoq improvement in operating efficiency to 47.4% compares well to many peer banks.

Pre-provision profits rose 96% yoy but rose less than 1% qoq, still good for a $0.13/share beat versus the Street, but sluggish compared to many other peer banks. Provisioning declined almost 20% sequentially, but still came in more than $0.03/share higher than expected, and Amalgamated ultimately reported a core beat of $0.13/share.

“Mixed” Is The Theme For Balance Sheet Trends

Amalgamated posted some interesting balance sheet trends for the quarter. Average loan balances declined about 2% sequentially, which was weaker than expected, but end-of-period balances increased about 6% and were better than expected. Loan yield improved a fairly lackluster 13bp to 4.24% (up 23bp yoy), but earning asset yields improved 49bp qoq and 128bp qoq to 4.15%, with Amalgamated enjoying stronger yields on its securities portfolio (average yield up 73bp to 4.08%).

Looking at period-end balances, mortgages grew 3% qoq, while multifamily lending grew more than 9%. C&I lending was up a strong 15%, while consumer lending declined 1%, with a 3% decline in residential solar lending (around 80% of consumer lending). Securities declined about 3% qoq, but PACE securities rose 6% sequentially.

Deposits fell 8% qoq on a period-end basis, with a 13% decline in non-interest-bearing deposits. NIBs are still about half of deposits (anything much above 30%-35% is still pretty good these days), and deposit costs are still well-controlled – total deposit costs rose just 25bp yoy and 20bp qoq to 0.34%, and Amalgamated’s cumulative deposit beta of 7% (and interest-bearing deposit beta of 15%) both compare very favorably to the broader banking sector, where cumulative betas are averaging out in the mid-20%’s so far.

Lending for consumer solar has certainly declined, but there still seems to be strong interest in PACE projects. A full description of PACE is beyond the scope of this article, but I’d suggest interested readers go here to read more. In short, it’s a financing mechanism overseen by the Department of Energy that helps finance the upfront costs of energy-efficient renovations (lighting, HVAC, water, et al) for commercial and residential property owners. There’s virtually no credit risk here to Amalgamated, and they treat their PACE commitments like securities on the balance sheet.

Looking ahead, I do see good ongoing growth for multifamily lending, given the U.S. housing shortage, but Amalgamated’s focus on rent-stabilized properties could create some headwinds. By the same token, Amalgamated prefers to look for lower-income/affordable housing investment opportunities, and there does seem to be more interest in those projects right now. I also see a lot of long-term opportunity for Amalgamated to expand its C&I lending, particularly with the bank looking past its historical focus in areas like unions and non-profits to more socially-responsible/green business lending.

In the near term, I see loan growth opportunities offset by net interest margin pressures as deposit costs continue to rise – while a full-cycle deposit beta of 20% (management’s guidance) would be great relative to most other banks, it still represents materially higher costs for Amalgamated, and I expect that we’ve seen the peak for NIM already (with margins likely to fall into the 3.3%’s next year). Credit is a modest concern, as management has guided to persistent charge-offs above 1% in the consumer solar business, and these loans could see 4%-plus charge-offs in a more bearish credit scenario.

The Outlook

Amalgamated’s focus on socially-responsible banking is simultaneous an asset, an opportunity, and a potential liability (at least for some readers/investors). There’s still a very large opportunity out there for Amalgamated to gather deposits from businesses and institutions that align with its mission – today the bank likely only has about 6% to 7% share in its core markets of New York, Washington, San Francisco, Chicago, Boston, and Los Angeles, and the bank isn’t really even active in all of these markets yet (to say nothing of including other markets over time like Seattle, Minneapolis, et al).

At the same time, Amalgamated’s focus is going to be an issue with some investors and politicians, and the bank’s close historical business ties with the Democratic Party will no doubt be disqualifying to some investors. Likewise, given the political world in which we now live, it could also make the bank a target for increased regulation/oversight depending upon who controls Congress at any given time.

Still, I think socially-responsible lending is not going to go away, and Amalgamated is, I believe, the largest pure-play in the business. With more and more incentives in the market for green/ESG-compliant projects, I can see a significant runway for lending growth for Amalgamated over the years, as well as growth in deposit-gathering.

I believe Amalgamated could have a harder time than it expects growing deposits over the next 12-24 months, and/or growing them at the desired cost, and that could restrain some of the growth in earning assets (as well as compressing net interest margin). With that, I think pre-provision profit growth around 10% is attainable over the next two years, which is better than I expect from larger regional banks like Fifth Third (FITB) and M&T Bank (MTB) (as a group), but not as good as I expect from some smaller, growth-oriented banks.

Longer term, I think Amalgamated can grow core earnings at a long-term rate of around 8%. Of course, “can” and “will” are not the same, and there is above-average execution risk here, tempered in part by Amalgamated’s rising status as a go-to bank for socially-responsible projects. Discounted core earnings give me a fair value of close to $29, while ROTCE-driven P/TBV and P/E (using a 10x multiple) give me a target closer to $32.

The Bottom Line

I do expect sentiment to be a headwind a while longer, and the nature of Amalgamated’s business will likely make it untouchable for some investors on principle. I also do see some elevated risk here if the Fed’s hawkish positioning lasts longer into 2023. Taking those risks into account, I still believe the risk-reward balance is favorable, and I think this is a name worth a closer look.