Lakeland Bancorp Q3 2023 Earnings Call Transcript

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October 26, 2023

There are 3 speakers on the call.

Operator

Good morning, and welcome to the Lakeland Bancorp Incorporated Third Quarter Earnings Conference Call. My name is Megan, and I'll be coordinating today's call. You will have the opportunity to ask a question at the end of the presentation. Please note this event is being recorded. I would now like to turn the conference over to Mary Russell, Assistant Controller and Director of Financial Reporting.

Operator

Please go ahead, ma'am. Thank you, Megan. Good morning, ladies and gentlemen, and thank you for joining us for our Q3 earnings call. Today's presenters are President and CEO, Thomas Scherer and Executive Vice President and Chief Financial Officer, Thomas Slain. Before beginning the review of our financial results, we ask that you please take note of our standard cautions as to any forward looking statements, that may be made during the course of today's call.

Operator

Our full disclaimer is contained in this morning's earnings release, which has been posted through the Investor Relations page on our website, wyklundbank.com. Now, it is my pleasure to introduce Amit Sharra, who will offer his perspective on our Q3.

Speaker 1

Thank you, Mary. Good morning, everyone, and welcome to our Q3 earnings call. I'll start the call off with a high level summary for the quarter followed by Tom Slain, our CFO, who will walk you through our earnings in detail. First off, I'd like to acknowledge our recently announced merger with Provident Financial Services and inform everyone that we will have more information to share with you shortly We filed our joint proxy prospectus with the Securities and Exchange Commission and our regulatory application to connection with the merger. Our financial results for the quarter were solid as we continue to successfully organically grow both loan and deposit portfolios, which were both up over 2% compared to the prior quarter as well as continuing to maintain pristine asset quality.

Speaker 1

For the Q3, we posted net income of $28,700,000 or $0.44 a share, which is in line with the prior quarter net Excluding merger related expenses of $3,500,000 this quarter, pre tax, our net income for Q3 would have been $31,300,000 or 0.48 dollars cents a share, resulting in an ROA, ROE and ROTCE of 1.21, 11.36% and 15.25%, respectively. 3rd quarter net interest income was consistent with prior quarter as improvements in interest income related to higher rates and our organic loan growth were in the quarter, The total of $160,000,000 representing a 9% annualized growth rate was offset by a similar increase Interest expense and deposit pricing to fund expected balance sheet growth at advantageous pricing. The loan growth for the quarter was across the majority of loan categories, including commercial and the consumer portfolios. Commercial closings for the quarter were strong, but below timing quarter, which was a record quarter. The pipeline going into the 4th quarter is very strong, and we expect solid loan growth in the 4th quarter, which has traditionally been our strongest.

Speaker 1

We anticipate organic loan growth will meet prior guidance of high single digits for the full year. On the deposit side, total deposits decreased $176,000,000 or 2% for the quarter as we undertook an initiative to lock in longer term The results early in the Q3 in anticipation of continued interest rate increases and market interest rates during the remainder of the year. Non interest bearing deposits decreased slightly during the quarter and totaled 26% from total deposits, while core deposits now make up 88% of total deposits. On the credit side, Patent Quad remained excellent. Non performing loans at 9:30 were only $18,000,000 versus $22,000,000 at 6:30.

Speaker 1

For the quarter, we released a small net recovery. Non performing assets to assets decreased this quarter to 17 basis points, While the allowance remained relatively stable at $69,000,000 or 91 basis points of loans versus 93 basis points at 6.30. Reserve coverage for nonperforming assets at the quarter end totaled 3 75%. As it relates to the economy and our footprint, our commercial customers are generally weathering rapidly increasing inflation Thus far, they have maintained their margins and profitability. With rates rising as quickly as they have over the last few quarters, we are seeing in close contact with our customers to ensure they are able to withstand higher operating costs along with higher interest rates.

Speaker 1

As you can see from our non performing So far, we are not seeing any cracks. That concludes my prepared remarks. Now I'd like to turn it over Now, I'll turn the presentation to Tom. Once he's concluded with his comments, we're happy to answer your questions. Tom, take it away.

Speaker 1

Thank you, Tom, and good morning, everyone. Lakeland's Q3 net income was $28,800,000 or $0.44 per diluted share compared to the Q2 of 29,000,000 Point $29,000,000 or $0.44 per diluted share and the Q3 of 2021 of 22,000,000 and $0.43 per diluted share. The current quarter includes $3,500,000 in pre tax merger related expenses, which if excluded, would increase net income of $31,300,000 or $0.48 per diluted share. Q3 financial results were favorably impacted by organic loan growth of $160,000,000 Deployment of investment portfolio cash flows to higher yielding assets and the increased interest rates, all combining to increase yield on our interest earning assets by 29 basis points for the quarter. Offsetting these items, We increased deposit rates due to the competitive environment and we embarked on our deposit acquisition strategy in early Q3 We'll secure longer term certificates of deposit in anticipation of the ongoing increases in market interest rates during the remainder of 2022 and into 2023.

Speaker 1

These items increased our yield on interest bearing liabilities 54 basis points. As a result, reported net interest margin for Q3 decreased 10 basis points to 3.28 percent compared to the linked quarter of 3.38 percent and an increase from prior year quarter of 2.98%.

Operator

Comparing Q3 net interest margin versus the

Speaker 1

prior quarter, in Q2, we experienced Interest recoveries on non accrual loans and higher loan prepayments fees, which had a combined positive impact of 10 basis points on Q3 Net interest margin on Q2's net interest margin. Excluding these items, results in a flat net interest margin of Compared to the prior quarter, the yield on loans increased 21 basis points to 4.43 percent, While the yield on investment securities increased 27 basis points to 2.12%. Deposit rates increased due to The competitive pressures and the CD initiative and the products that are indexed for the Fed funds rate. The cost of deposits increased to 62 basis points compared to 22 basis points for the prior quarter. Our consideration for credit losses was an expense of $1,300,000 was primarily related to credit losses Understood.

Speaker 1

As a result of the decrease in the market value of corporate securities based upon interest rates and not based upon any credit downgrades of the securities. Regarding asset quality, as Tom mentioned, non performing assets Decreased 4 basis points during the quarter to 17 basis points and credit remains strong. Our Q3 net charge offs were a recovery of $32,000 and would represent the 5th consecutive quarter of net recoveries, Excluding the accounting for the 1st Constitution acquisition, we purchased credit deteriorated loans back in Q1 of this year. As of September 30, the allowance for credit losses on loans represented 91 basis points off total loans compared with 93 basis points in the trailing quarter. Q3 non GAAP income remained steady at $7,200,000 As improvements in loan swap fees and the benefit of bank owned life insurance were offset by continued softness and the gain on sale of residential mortgage loans and SBA loans.

Speaker 1

Q3 non interest expenses of $47,800,000 included $3,500,000 in merger related expenses, absent which These expenses would have decreased $150,000 from the linked quarter. Our efficiency ratio decreased to 49.8% compared to the prior quarter of 50.7%. Our Q3 effective tax rate increased slightly to 25% as compared to the trailing quarter. On the balance sheet, in comparison to the prior quarter, total assets $141,000,000 or 1.4 percent with the loan portfolio increasing $160,200,000 or 2.2 percent, All investment securities increased $77,000,000 as cash flows were used to fund the loan growth. Deposit balances increased $136,000,000 or 2.1 percent for the quarter, primarily due to our longer term Our September 30 loan to deposit ratio was 87%, consistent with the prior quarter that gives us ample liquidity to fund future loan growth.

Speaker 1

For capital management, our capital levels remain strong Intangible capital ratio decreased to 7.83% compared to 8.01% at June 30 Asset growth, cash dividends and other comprehensive income changes offset earnings retention for the quarter. Due to the potential impact of interest rate changes causing additional mark to market adjustments on our available for sale investment Securities portfolio as well as the continued strong loan growth in our loan portfolio, we did not repurchase any common stock in Q3 under our existing authorized share repurchase program. All of our capital ratio percentages are consistent with the prior quarter, and we remain well capitalized. Regarding our outlook for the remainder of 2022, We believe that we are well positioned for rising interest rates. Our projected interest Great risk position is neutral and we've become more asset sensitive in future periods.

Speaker 1

Deposit pricing increases and the certificate of The deposit strategy we implemented in Q3 was designed to prefund our expected balance sheet growth with significantly lower cost of funding that is currently available via Federal Home Loan Bank borrowings and broker deposit markets. We do not anticipate increasing deposit pricing in Q4, which will decrease the deposit beta cycle to date. As a result, we anticipate Q4 net interest margin will expand into the mid-330s range. As Tom discussed earlier, we expect loan portfolio to organically grow in the high single digits in 2022 and that asset quality will remain high. Non interest expenses for 2022, excluding merger related costs, are forecasted in the low $180,000,000 range.

Speaker 1

And income tax expense for 2022 is forecasted to be approximately 25% for the year. That concludes our prepared remarks, and we'd be happy to address any questions. With that, Megan, can you open up the question period for us, please?

Operator

For asking your question. We will pause here briefly as questions are registered. Our first question comes from Chris O'Connor with KBW. Your line is now open.

Speaker 1

I was

Speaker 2

hoping you could talk a little bit about A little bit more about the deposit strategy, maybe kind of where the CDs are coming on at and How much of that is going to flow into the Q4 here just on an average balance basis and Where do you see the deposit costs going in terms of I know you said that they'll be flat in terms of No new lasers, but how much of the lasers in the Q3 will kind of flow into?

Speaker 1

Right. Yes, Chris, on the strategy, we forecasted interest rates continue to rise based upon the Federal Reserve's Thanks and attention. And just wanted to get out in front of it. We secured approximately $300,000,000 in 1 2 year CDs, it's at an average rate in the 2.40 to 2.50 range. Comparable borrowings right now for We're in the neighborhood of 5%.

Speaker 1

So we think that we secured some nice funding in advance, Which had some downward pressure on NIM in Q3, but should it benefit us as we go forward now. So I think that answers your question, but let me know if I didn't do it fully.

Speaker 2

Yes, absolutely. That helps. And then as far as the pre funding goes, I mean cash balances didn't move that much. So I guess When thinking about the future loan growth and these deposits going forward, So is it going to be kind of new deposit growth or future borrowings or kind of going off of the Surety's portfolio that's going to be falling into loans on a go forward basis.

Speaker 1

Yes, that's right, Chris. When you look at the overall balance sheet, We have about $75,000,000 of cash flow coming out of the investment securities portfolio As well as all the cash flow, the lower yielding loans coming off the loan portfolio and that's being turned back into more loans going forward. So That's what we see right now. And then we have ample we can do some more deposit taking If we want on a go forward basis depending on where we're at with additional loan growth above our But I think we're in a good place from a liquidity standpoint that we can take care of what we need to do. We fully leveraged the cash position, as you mentioned, in the beginning of the year.

Speaker 1

And so we're not sitting on excess liquidity Right now, we have plenty of capacity to borrow and move if we need to.

Speaker 2

Got it. So over the next couple of quarters or so, as you guys take on loan growth, Is it fair to say that the securities portfolio might drift down a bit?

Speaker 1

Yes. That's the intention. Historically, we operated With securities for total assets approximately around that 15 12% to 15% range. Right now, they're still up around 20% of total assets, and we'd like to deploy those cash flows into higher yielding loans and increase profitability on a go forward basis. Got it.

Speaker 2

And then On the loan portfolio growth, you guys are getting decent growth this quarter. It sounds like the pipeline going into the back end of the year is pretty strong. Maybe just a little bit of color around where you're seeing demand and kind of where you're being cautious at this point in the cycle. And yes, that's great.

Speaker 1

Chris, we're seeing growth, heavy growth in the healthcare Space, which we said last quarter, they're continuing to make some pretty good traction there. The Hudson Valley market Continues to grow nicely. The Toms River, Ocean County market is growing nicely. So it's coming pretty much across the board, but Healthcare is clearly leading the way. We continue to avoid suburban office.

Speaker 1

That's been years that we've been doing that. Multifamily still remains strong, retail still remains strong, and industrial warehouse space is just continuing to be on fire. So, Those are the areas we're focusing our activities, but being very cautious on hospitality and suburban office.

Speaker 2

Got it. And where is the pipeline compared to last quarter?

Speaker 1

It is About 10% from last quarter.

Speaker 2

Okay, great. And then last one for me. On the buyback being paused here, is it Safe to say that that will continue to stay paused with the upcoming?

Speaker 1

Yes, Chris. Based upon the balance sheet, what we're doing right now, I think we're going to keep it paused as well as because of the merger acquisition With Provident Financial. So, we're going to be on the sidelines for Q4. Great. Thanks

Speaker 2

for taking my questions.

Speaker 1

Thanks, Chris. Thanks, Chris.

Operator

Thank you, Mr. O'Connell. There are currently no questions registered. Time. So I will pass the conference back over to Tom Sciara for any additional remarks.

Speaker 1

Thank you, Megan. Thanks, everybody for joining us today. If you do have any questions for Tom and I, we are available pretty much all day today. So please give us a call. Thanks very much and have a great day everybody.

Speaker 1

Thank you.

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Earnings Conference Call
Lakeland Bancorp Q3 2023
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