Lakeland Bancorp Inc (LBAI) 2022 Q2 法說會逐字稿

Good morning, and welcome to the Lakeland Bancorp, Inc. second-quarter earnings conference call. My name is [Tamia], and I'll be coordinating today's call. You will have the opportunity to ask a question at the end of the presentation. (Operator instructions) 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. Please go ahead, ma'am.

Thank you, Tamia. Good morning, ladies and gentlemen, and thank you for joining us for our second-quarter earnings call. Today's presenters are President and CEO, Thomas Shara; and Executive Vice President and Chief Financial Officer, Thomas Splaine.

Before beginning the review of our financial results, we ask that you please take note of our standard caution as to any forward-looking statement, which may be made during the course of today's call. Our full disclaimer is contained in this morning's earnings release, which has been posted to the Investor Relations page on our website: lakelandbank.com.

Now it is my pleasure to introduce Thomas Shara, who will offer his perspective on our second quarter.

Thank you, Mary. Good morning, everyone, and welcome to our second quarter earnings call. I will start off the call with a high-level summary of the quarter, followed by Tom Splaine, our CFO, who will walk you through our earnings in detail.

We're delighted by our financial results for the quarter, which represents a clean quarter absent merger-related items for the first Constitution acquisition earlier this year. For the quarter, our ROA, ROE, and ROTCE were $1.15, $10.71, and $14.45, respectively. We posted record net income of $29 million, driven by net interest income of $18 million, representing 14% increase from the prior quarter. The increase in net interest income is attributable to our meaningful margin expansion plus our organic loan generation during the quarter, which totaled $270 million, representing 16% annualized growth rate, while we're able to keep deposit betas low during the quarter.

The loan growth was across all categories in commercial and consumer portfolios, except for construction and PPP loans. Construction loans decreased $33 million as several loans converted to permanent loans during the quarter, and PPP was reduced by $26 million and now stands at only $10 million at the end of the quarter.

I'm happy to report that our commercial closings for the second quarter were a record and eclipsed the first-quarter totals, which were also a record. The pipeline going into the second half of the year is still very strong. Our healthcare lending team [or in] Hudson Valley lending teams had a tremendous quarter, and we expect them to have a strong balance of the year as well.

Recently, we're also starting to develop new relationships as a result of the recent large bank M&A on our markets. This will be beneficial in subsequent quarters. Overall, we expect continued loan growth to remain strong for the balance of the year, with organic growth for the year expected to be in the high single digits for all of 2022.

On the residential mortgage side, originations remain subdued as refinance activity has ended and customers become acclimated to the current rate environment. We continue to retain some high-quality, well-priced jumbos and ARMs on the balance sheet, while the market stabilizes. The average FICO score in this portfolio year to date has been 754.

On the deposit side, deposits decreased organically 3% for the quarter, with some planned reductions in municipal deposits and a continued decrease in time deposits. We have not experienced any runoff in the deposit base from first Constitution. Non-interest income bearing deposits increased $30 million during the quarter and now total 27% of total deposits, while core deposits now make up 91% of total deposits.

On the credit side, asset quality remained very solid. For the quarter, we had a small net recovery of $141,000. Nonperforming assets to assets at the end of the quarter were 21 basis points. The allowance remained relatively stable at $69 million or 93 basis points of loans versus $58 million and 97 basis points at year end.

Overall, the Central and Northern New Jersey economy remains strong despite implications with higher inflation. Our commercial customers continue to report strong results and a fairly positive outlook, although there are some concerns around inflation, supply chain challenges, and in some cases, a lack of staffing, which is slowing sales a bit. Overall, the local economy remains very strong and unemployment rate in the state is now 3.9%, and the state has fully recovered all the jobs lost during the pandemic. Our outlook for credit and the economy remains very, very strong.

That concludes my prepared remarks. I'm now going to turn over the balance of the presentation to Tom. Once he's concluded with his comments, we're happy to answer your questions. Tom, take it away.

Thank you, Tom, and good morning, everyone. As Tom mentioned, Lakeland's second-quarter net income was a record of $29.1 million or $0.44 per diluted share, compared to the first quarter of 2022 of $15.9 million or $0.25 per diluted share, and the second quarter of 2021, which was our previous record net income of $27.4 million or $0.53 per diluted share. To crystallize their record net income for this quarter, our previous high-record income of -- in Q2 of 2021 was aided by a negative provision for credit losses of $6 million, compared to the current quarter provision for credit losses of $3.6 million, which equates to $9.9 million unfavorable impact to pretax earnings.

On the income statement, Q2 financial results were favorably impacted by the organic loan growth of $270 million, deployment of excess cash into higher yielding assets, and the increase in interest rates, all combining to increase yields on our interest earning assets by 36 basis points for the quarter. As a result, net interest margin for Q2 increased 36 basis points to 3.38%, compared to the linked quarter of 3.02% and the prior year quarter of 3.27%.

In comparison to the prior quarter, our pre-provision net revenue, excluding merger-related charges in Q1, increased $10.5 million or 33% to $43.2 million in Q2. The yield on our loans increased 30 basis points from the linked quarter to 4.22%, while loan prepayment speeds remain elevated, and combined with interest recoveries on nonaccrual loans and PPP fees had a positive net impact of 8 basis points to net interest margin compared to the prior quarter.

Deposit rates remained fairly steady, with interest rate increasing only on products related to the Fed funds rate. The strength of our banking franchises and the composition of our core deposit portfolio, as evidenced by the total cost of deposits increasing 3 basis points to 22 basis points compared to the linked quarter.

Our Q2 provision for loan losses was an expense of $3.6 million and was comprised of $1.6 million in provision for credit losses on loans, $1.5 million provision for credit losses on investments, and $500,000 provision for credit losses on unfunded loan commitments. Our current quarter provision for credit losses on loans [where is this] for the loan growth in the portfolio for the quarter, while the provision for credit losses on investments was a result of the decrease in the market value of corporate securities based on interest rates, and not related to any credit downgrades on the securities.

Regarding asset quality, as Tom mentioned, nonperforming assets increased 2 basis points to 21 basis points of total assets for the quarter, and the credit remains stellar. Q2 net charge-off for recovery: $141,000 and would represent the fourth consecutive quarter of net recoveries, excluding the accounting for the acquired first Constitution purchase credit deteriorated loans in Q1. At June 30, the allowance for loan losses on loans represent 93 basis points of total loans compared to 94 basis points in the trailing quarter. Q2 noninterest income increased slightly in Q2 to $7.1 million, as improvements in swap fees and wealth management fees were partially offset by continued softness in the gain on sale of residential mortgages and SBA loans.

Q2 noninterest expense of $45.1 million decreased $4.9 million in the linked quarter, which reflected the merger-related expenses from the first Constitution acquisition in Q1. For the second quarter, lower expenses for compensation and benefits and occupancy expenses were partially offset by higher data processing and other operating expenses. Our efficiency ratio dropped to 51% compared to 58% in the linked quarter. Our Q2 effective tax rate was 24.7% compared to 23.9% in Q1.

(technical difficulty) balance sheet, in comparison to the prior (technical difficulty) [couple] assets increased $98.9 million or 1%, (technical difficulty) $[270.4] million or [2.8]%, while our cash balances decreased $176.2 million (technical difficulty) levels. (technical difficulty) up from 82% at March 31.

Capital Management, our capital levels remain strong, and we're relatively static compared with the prior quarter, with tangible capital ratio decreased less than 1% to 8.01% at June 30, compared to 8.07% at March 31, as asset growth, cash dividends, and other comprehensive income changes offset earnings retention for the quarter. Based on the high degree of uncertainty regarding economic conditions during the quarter and a potential impact of interest rate changes causing additional mark-to-market adjustments in our available-for-sale investment securities portfolio as well as significant growth in the loan portfolio, we did not repurchase any common stock in Q2 under our existing authorized share repurchase program. We believed it was prudent to maintain our tangible capital ratio at 8% in light of the economic uncertainty as well as the anticipated strong loan growth. And we will continue to evaluate our capital ratios moving forward.

Regarding our outlook for the remainder of 2022, we believe that we are well positioned for rising interest rates. Our projected interest rate risk position is neutral, and we become more asset-sensitive in future periods. The significant increase in net interest margin experienced in Q2 is unlikely to be repeated, as excess liquidity is removed from the financial system and deposit pricing reacts to the Federal Reserve's recent increases in the Fed funds rate. Deposit betas are likely to transition higher in Q3 as deposit competition increases.

As Tom discussed earlier, we expect the loan portfolio to grow organically in the high single digits for 2022 and asset quality to remain very high. Noninterest expenses for '22, excluding the merger-related costs in Q1, are expected to be in the low $180 million range, inclusive of the higher run rate in Q1. Salary and benefits expenses are likely to trend slightly higher due to current hiring conditions for development of our (technical difficulty) digital [initiatives]. (technical difficulty)

That concludes our prepared remarks, and we'll be happy to take any questions (technical difficulty).

A couple of questions, first on -- you noted liquidity kind of back to historic levels, and I know deposit balances can be a bit volatile given some of the buckets. But a sense of where you expect or where you target the loan-to-deposit ratio in coming quarters?

Yeah, I think, Frank, we're meandering back to our more normalized levels. For us, historically, we tend to have our loan-to-deposit ratio in the low- to mid-90s, so between 92% and 95%, still slightly lower than some of our peers. But as we move forward now over the next couple of quarters, I think that we can start seeing that move from where we're at currently and continue to move slightly higher. But I don't think we're going to see it as bigger than increases that we saw this quarter.

Right. Okay. And in terms of pressures on the deposit base, in terms of pricing, I know it's early in the quarter, but are you starting to see those pressures build? Or is that, at this point, still just an assumption as liquidity leaves the system?

For right now, it's -- we're starting to see competitors starting to move rates right now as early as yesterday based upon the Fed moves. And we are contemplating that, we head forward, we've kept our deposit betas through the prior interest rate changes at a very low level. And I think now we're going to start seeing them start to migrate closer back to model betas as we move forward. But -- so there are -- we won't have as much NIM expansion based on deposit betas going forward.

Got you. And then just lastly, I wonder just on loan growth, given a sense that the outsized growth we're seeing, not only from you, guys, but in the industry here, is just sort of a pull forward from later in the year, just given Fed action, just trying to lock in pricing, maybe. Not sure if you can comment on that or just kind of what you're hearing on that front from your customers?

Yeah, Frank, the feedback we're getting from our customers is very positive. But, maybe in the North Jersey marketplace, it's a little different than other parts of the country, but people are very optimistic. We're seeing sales grow. We are actually starting to get some requests for larger lines of credit, which we haven't seen in years, so it seems like the Central North Jersey economy is faring pretty well.

And we've surveyed customers in virtually every asset class. And they're all saying the same things, that things are quite good. They're optimistic about the back half of the year. And like I said in my opening comments, so our pipeline is continuing to stay full, even though we're accelerating closing.

So it feels pretty good, Frank. I think the loan growth should continue.

Okay, great. Thank you for all the color.

Yeah, no problem.

Thank you. Christopher O'Connell, KBW.

Morning.

Morning, Chris.

Was hoping to start off on the expense comments. I think previously, you're thinking a little bit closer to the high-170s range for the year, now low-180s. Just curious as to what's driving that? And is there -- is it a result of an improved loan growth outlook?

Or is there higher revenues tied to that? Or is it -- yeah, that'd be great.

Yeah, I mean, if you were to back out the merger-related expenses that we had for first Constitution Q1, it's -- what we're looking at now is the $45 million of operating expenses in Q2 is a pretty good run rate for us as we head forward for the rest of the year. We are getting the cost saves as targeted from first Constitution, so we're still on track for that. It's just that some of our other expenses are creeping upward, mainly on salaries and benefits due to the hiring constraints that are out there right now, that are putting a little upward pressure on our expenses. But overall, that's kind of the way expenses are forecasted as we get through the rest of this year.

Got it. So there's still some cost saves yet to be achieved but just being offset by the higher salaries?

Yeah, that's the way it's shaking out right now.

Okay. Great. And on the comments around mortgage banking, and the gain on sale going into the back half of the year, just any other color there? Or how we should frame kind of that line going forward?

Yeah, Chris, I think it's going to remain under pressure. I mean, the refinance activities is gone, and inventory in this part of the country is pretty restricted. So I think we'll continue to be opportunistic, put some things in portfolio. Like I said earlier, we're putting some jumbos on, some ARMs on, and those rates are in the high-4s, low-5s right now.

So it seems like a better place to put loans than to sell. But we're hoping things pick up in the back half of the year, but they're not going to be anywhere near where we projected at the beginning of the year. And we're also offsetting some of that loss with swaps. We're starting to see much more swap activity in the second half of the year.

Okay, got it. So like all in on a core basis, is the same $7 million to $8 million a good range or with the swaps kind of offsetting some of the lower mortgage banking?

Yeah, that's a good assumption there, Chris.

Okay. And then the comments around the buyback and keeping capital ratios kind of at 8% plus on TCE, I know you, guys, have previously indicated wanting to start utilizing the buyback. If there's not a ton of AOCI hits coming in future quarters, is it even with maybe a little bit more questionable economic environment, do you think you can start to repurchase again?

Yeah, I think you're looking at it the same way we're looking at it there, Chris. We were -- with the economic uncertainty, we were a little hesitant. We did really want to start up on the share repurchase plan, and basically, we just weren't -- we weren't there, and we saw a lot of loan growth coming at us that we knew was going to put downward pressure on our capital levels. So we'll take the loan growth.

Share repurchases are good for us when we don't have something better to do with our capital. And as long as we have a really healthy loan pipeline and we're growing the bank, that's the most important thing right now. So yeah, as we look into the second half of this year, if the economic uncertainty settles down as well as loan growth gets a little bit softer as we head forward -- right now, it's looking very good, yes, we'll definitely look at share repurchases as a tool to manage our capital levels.

Okay, great. And that is all I have for now. Thank you.

Thanks, Chris.

Thank you. Manuel Navas, D.A. Davidson.

Good morning.

Hey, Manuel.

Hey, so I might have missed this. What are you booking new loans at? And has that shifted a little bit into here in July?

Yeah, with -- we'll put on rates are probably in the mid- to high-4s right now, Manuel, and moving up. And that was prior to the Fed move yesterday. So we're seeing much, much better pricing, and we're seeing that across the board.

Okay, that's helpful. Is there a thought process of -- I understand that deposit betas are creeping up. But thinking big picture, how high could the NIM get by the year end or early next year?

That's a great question. If we had a look behind the curtain at the Fed, we -- maybe we'd have a better indication. But I think that right now, we're -- the NIM expansion that we had this quarter was based upon the adjustable rate of our portfolio, plus we did have the tailwind for us of some nonaccrual interest recapture. So that benefited the quarter.

So as we look forward, these increases, it's all going to come down to deposit pressure with competition. And so for us, as we head forward, I think that for us being in the 330 range going forward, it's going to be -- is where we're kind of targeting right now based upon where we're at and where we see things going as we move forward.

Do you think that there comes a point with betas catching up that you could see NIM kind of bounce around rather than keep expanding?

I guess that's always a possibility, but I think that there's still a lot of liquidity out in the system. So I think deposit pressure is probably, at this point of the cycle, not as intense as it was when we were at the last time we were in the up-rate environment.

Okay. That's really helpful. Thank you.

Thank you.

Thanks.

Thank you. There are no further questions in the queue. (Operator instructions)

Christopher O'Connell, KBW.

Hey, I just wanted to circle back on those last comments there on the margin. I thought, if I heard correctly, the impact of PPP and nonaccrual prepays is -- was 8 basis points this quarter, right?

Yeah, we compared to Q1, the increase over Q1.

So backing that out, we're kind of -- we're already really in the 330 range at the NIM. So just trying to get a sense of the NIM expansion comments versus the 330 range, already kind of being there?

Right. So if you were to back off some of that positive impact that we had this quarter because PPP is virtually going away and with the nonaccruals, the one-time nonaccrual recapture, NIM comes back -- more of a core NIM basis, comes down somewhat. And then we get some expansion based upon the recent increases in rates, offset by deposit betas.

So for us, I think we're looking at keeping the NIM in the range of a low- to mid-330s, and we'll be conservative on our projections. And we'll take it from here as we move forward. So we do still see some NIM expansion.

Got it. So some NIM expansion but just not as off a core basis once backing out those items?

Right. Yeah, there was some positive impacts in Q2 that will not repeat themselves.

Okay. That's all I had. Thank you.

Thank you.

Thanks.

There are no further questions in the queue, so I will now pass it back to Tom Shara.

Okay. Thanks, everybody. Thanks for joining us this morning. If you have any additional questions, feel free to give Tom or I a call. Enjoy the rest of the summer, and thanks again for participating this morning. Take care.

This concludes the Lakeland Bancorp, Inc. Q2 2022 earnings conference call. Thank you for your participation. You may now disconnect your lines.