Q3 2021 Lakeland Bancorp Inc Earnings Call
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Hello, and welcome to todays call can I take your first and last name. Please.
David Brown.
Thank you and your company affiliation please.
Yeah.
IRA I E R. A.
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Thank you and finally, we have been requested to take telephone numbers is the one you've talked in an ending 753, okay to be passed on today.
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For $27 million or $40 53.
<unk> per share for the trailing quarter Q3 earnings were impacted by a benefit of $2 $7 million of negative provisions for credit losses, and unfavourably impacted by nonrecurring merger related expenses and debt extinguishment costs during the quarter totaling $1 $9 million.
Q2s results reflected the benefit of negative provisions for credit losses totaling $6 million.
Pre provision net revenue was $27.6 million or a 1.37% annualized rate of return on average assets.
Our net interest margin compressed 17 basis points versus the trailing quarter as excess liquidity.
Increased despite an increase in our average investments as average loans decreased for the quarter and average deposits grew.
Loan repayments remain elevated and included increased Pvp forgiveness.
As a result, our average cash balance for Q3 increased $327 million and comprises 6.5% of average total assets compared with 2.5% as of Q2.
We expect to deploy much of this excess liquidity into loans and securities in the near term to improve earning asset yields and increase interest income.
Total deposits increased $216 million in Q3, or three 2% compared to the trailing quarter.
Including noninterest bearing deposits, our total cost of deposits fell to 23 basis points. This quarter from 25 basis points in the trailing quarter and continue to remain among the best in our peer group.
Average noninterest bearing deposits increased $42 million or an annualized 10% rate to $1.72 billion or 25% of our average deposits for the quarter.
Our average borrowing levels increased slightly during the quarter.
By approximately $45 million as a result of the negative carry on our new $150 million subordinated debt offering and the redemption of our existing $75 million subordinated debt offering at the end of Q3.
We anticipate the net interest margin to remain under pressure into Q4.
And decreased two to three basis points as we continued to deploy the excess liquidity into loans and securities, while managing funding costs and emphasizing noninterest bearing deposit growth.
Our provision for credit losses was a benefit of $2.7 million for the current quarter compared with $6 million benefit in the trailing quarter.
The current quarter benefit was attributable to improved asset quality.
Continued favorable macroeconomic forecast.
Net interest recoveries on previously charged off loans and a decrease in loans outstanding.
Asset quality metrics.
Nonperforming loan levels early stage delinquencies and criticized and classified loans ratios all improved versus the trailing quarter.
Nonperforming assets decreased 48% to 15 basis points of total assets from 29 basis points at June 30th.
Excluding PPP loans.
The allowance represents.
100 basis points of total loans compared with 104 basis points in the trailing quarter.
Noninterest income has remained relatively stable versus the trailing quarter at $5 $4 million.
Operating expenses were negatively impacted by two nonrecurring items this quarter, including merger related expenses of $1 $1 million in debt extinguishment costs of $831000.
Excluding these nonrecurring items operating expenses increased $1.2 million from the linked quarter.
Due to higher compensation and bonus accrual cost and continued investments into our digital strategy initiative.
Our efficiency ratio of 54% for the third quarter of 2021 compares to 52% from the trailing quarter and 54% in the third quarter of 2020.
Our effective tax rate increased due to nontaxable merger related costs.
And was 26, 4% for Q3 versus 25, 7% for the trailing quarter.
And we are currently projecting an effective tax rate of approximately 26% for the year of 2021.
That concludes our prepared remarks Daisy if you can open up the question period. Please.
Of course, if anyone would like to register a question. Please press star followed by one on your telephone keypad.
If you would like to withdraw your question. Please press star followed by T M.
When preparing to ask your question. Please ensure you are muted lately.
So our first question is from Frank Schiraldi from Piper Sandler Frank. Please go ahead. Your line is open.
Good morning.
Frank.
I Wonder if you.
You guys can give a little color in terms of you talked about loan growth expectations and it seems like you are.
We're still pretty optimistic given what's in the pipeline I wondered if you could talk a little bit about.
Once the first Constitution deal closes you guys had talked about in the past the warehousing business being quite an opportunity.
Can you just give some more color there given that you think about rates moving higher we probably seen peak.
Peak in mortgage activity.
But you know you guys talk about it as being a pretty.
Pretty good tailwind here, so I wondered if you could just give some more color there.
Yes sure Frank Good question, you know we are spending a lot of time with the first constitution warehouse team.
Yeah.
First Constitution 1 billion eight loan most of their warehouse lines are around $10 million 10 to 15 million and obviously in a combined $10 billion bank the ability to upsize those relationships is pretty significant and we've already gone out to talk to some of their clients about increasing warehouse lines of factory bar.
<unk> committed to one already where we doubled the line of credit and as a result of doing that the warehouse companies moving their operating bonds to us as well. So those are the kinds of opportunities that we see in the warehouse largest upsides existing relationships they've had for a long time and the other thing that's happening in the mortgage market frankly.
See it here in our own production is that the market is moving more to a purchase market from a refinance market and we expect that the purchase market will continue to be good.
At least through the first half of 'twenty two.
Okay, great. Thanks, and then I wondered if you could just in terms of the expense base in terms of growth from here.
Paul maybe if you could just give us a.
Your thoughts on.
On run rate, both before and after the deal closes.
Yeah.
We were impacted Frank by the two nonrecurring items and if you back those out.
About 1 million nine.
We think that that that projecting back into to be right around where we think that the expense run rate will be in Q4.
Barring any significant events.
And then as we look into 2022.
Right now indications are is that we will be able to close the deal.
Early in early in the first quarter of 2022, if things keep progressing well.
And at that point, we'll still have to get through a consolidation and of the back office systems and do some conversions.
Which are scheduled for February so cost saves will not be realized 100% in the first quarter and we can give you more guidance on where we think expenses are in 2022 next quarter as it gets closer but there's still a lot of a lot of things up in the air right now as we continue to move.
Forward and get through the rest of this year.
Okay, Alright, great. Thank you.
That's right Brian.
Our next question comes from Chris O'connell from K B W. Chris Your line is open. Please go ahead.
Good morning.
Chris apologize if I missed this.
<unk> opening comments came on a bit late but.
I was hoping you could just flush out a little bit.
The loan growth pipeline in house, the originations fared this quarter compared to last quarter.
And in.
And maybe also just where the line utilization was at this quarter compared to last quarter, and then maybe pre COVID-19 as well.
Yeah sure Chris.
So originations were good for.
For the quarter Good challenge continues to be prepayments speeds.
You know, we generally get last look at these deals and some of our.
The competitors are doing deals most of the insurance companies.
For the most part and.
And the GSE is a 10 year interest only is what we're seeing a lot.
And in some cases, we're seeing rates in the twos for.
For five and seven years, which we just don't want to chase at this point, but originations are about 90% of last year's originations. So far this year. So verifying the pipeline is about on top of where it was this time last year and last year. Just a reminder, arena with the same volumes, we grew 11% organically.
So it's just really the prepayment speeds that are coming at us historically, the fourth quarter has always been a strong one for for US based on where the pipeline is today I would expect that to continue we do think with rates moving up a bit prepayments will slow and end to your question on line utilization.
Utilization for the quarter was around 32%.
That's down from 36% last quarter, and historically line utilizations to run around 50%.
So that just shows the the amount of liquidity that's in the system right now that eventually will work its way back out and will create some organic loan growth, but right now the.
The utilization rates around 32%.
Got it that's helpful. Thanks.
And then one quick one if you had the PPP.
Interest income I think it holds $3 1 million this quarter.
If you have what it was last quarter that'd be great.
And then also.
We're looking at you know the amount of cash you know put on this quarter.
It sounds like slight pressure to the core margin for next quarter as.
As we look out.
Two to three quarters of Pvp out of the run rate here.
Where do you think the core margin could kind of shake out.
Post P D P M.
After that you know they can.
This excess cash kind of gets.
Deploy.
Sure Chris.
Right now Pvp income like you said for this quarter was $3 1 million last quarter it was $3.7 million.
And where we stand right now is our PPP balances outstanding balances are down to $109 million outstanding and $3.4 million of AWN recognize fees yet to be yet to be incurred so we anticipate additional forgiveness as we get through Q4.
For but it's unlikely that we will get.
All PPP loans through the pipeline by the end of the year due to customer.
Customer applications.
Looking forward of where NIM, we think is going to shake out in 2022, that's a wonderful question.
There's a lot of moving parts as we head into 2022, we do.
Planned to utilize the excess liquidity and put that to work as.
As we get through here, but the other complicating factor that makes the answering the question very difficult right now Chris is the acquisition of first constitution.
And the fair value marks and things like that that will all be hitting us in the first quarter as well as the date too.
Provision on for earnings so it's not just net interest margin its earnings for Q1.
And we'll be giving better insight into into that as we get through Q4 and looking into 2022 right now so I know that's not the best answer but.
So when we have for right now.
Got it that's helpful. Thank you.
And that's all I had for now thanks.
Thanks, Chris.
Our next question comes from William Wallace from Raymond James William Your line is open. Please go ahead.
Hi, Thanks.
I wanted to circle back on the on the loan growth commentary if you, let's just kind of think.
Bigger picture if U S layer.
Later in the first constitution.
Larger and your comments around building the kind of existing balances with existing customers in the warehouse business what type of.
Growth.
What type of portfolio grower is is Lakeland pro forma.
With just trying to kind of offset how the potential pressures in the mortgage business might might work against you. So just kind of thinking.
Holistically, what kind of growth do you think he can do overall.
Next year.
Well I think while you know historically, we've done a really good job growing existing relationships when we acquired bank.
You know as we sit here today, probably five of our top 10 clients have come from small bank acquisitions.
So we have an ability to upsize relationships that are constrained within a smaller bank and.
And we've been out talking to a lot of the first constitution customers about.
Not having to do participations in getting deals that they've done in other places to stay about rone first constitution. So you know I think for 2020 to mid single digit growth seems very very realistic.
As an initial goal, including first constitution grow.
Okay.
And then <unk>.
With the I believe you weren't it is the digital transformation I can or how your wording in the release, but.
And an understanding that theres going be a lot of moving parts with cost saves et cetera around first constitution, what what kind of inflationary pressures might you anticipate on whatever that core expense base settles in that due to investments in technology wage inflation et cetera.
Yes.
Hum.
Natural inflation into next year.
You know we we are.
We've stated that we were going to get 44% cost saves through the first constitution deal in 2022.
And then as everyone knows is getting more and more difficult to hire people right now and prices are going up so I would anticipate natural inflation into next year in 2022 to be somewhere in the neighborhood of mid single digits.
Maybe the 5% to 6% range.
Just off the top so that's just kind of my indication of where we're where we're heading right now.
And you know like you said, there's a lot of moving parts when it comes to an acquisition and getting cost saves out in a timely manner. Once we get through this.
The system conversion costs and things like that.
And then and then wood.
What investments related to your kind of the digital side of the business would that be on top of 5% to 6% or would that be included in that 5% 6% potential.
Kind of base inflation.
Yes, I think that would that would not be in addition to the five or 6% I think you put that in there.
The investments that we're making in there.
Our saving us from from going out and hiring additional manpower and things like that and the efficiencies that you get from the automation of the digital strategy and deal with your customer.
Kind of helps control the expense run rate on a go forward basis.
Okay. That's helpful. Thank you.
And then just quick housekeeping question do you have the average PPP balances in the third quarter.
Okay.
And we were at 207 last quarter Outstandings at the end of the quarter and at the end of this quarter at 109, So simple averages throws you about 150 ish.
155.
Okay.
Thank you.
Thanks, Ron.
Our next question comes from Erik Zwick from Boenning and Scattergood. Your line is open. Please go ahead.
Thank you good morning, guys.
Eric Good morning, Eric.
Just curious you've talked in several of the.
Answers and as well as in your prepared remarks about deploying the excess capital into loans and investment securities and talked about the opportunity in the pipeline just curious how long do you expect that the process would take and I think you mentioned, if we look backwards at nine or 12 months ago, and our cash balances were more in kind of the 2% ish level is that the target to get back.
And how long does that take.
Yeah, there's a lot of factors that go into that one Eric.
Like Tom indicated in his comments our production this year is very good.
Loan generation has been good.
We'll run at 90% of last year's level, and we grew 11%. So it's really the prepayment speeds. That's the wildcard right now and that has been affecting us.
So we're working really hard to kind of stay in the same place.
So deploying the excess capital if prepayment speeds slowed down a little bit and maybe with.
The long term rates starting to tick up higher than that begins.
That would be a very good contributing factor to us deploying some more excess capital out there the loan pipelines are strong and we are booking loans.
So we're very encouraged by that.
And like this quarter, we put another $140 million into the securities portfolio, which which helps but it doesn't give you the yield that you would get in your loan portfolio. So.
There will be some more PPP run off in Q4 with the forgiveness and we're looking to already deploy that debt capital that that cash balance coming at us and getting that out in Q4 as well. So we're going to continue to manage and deploy the excess excess.
Cash as fast as we can.
But we're trying to be prudent and not and not try to take too much risk of investing it out too long at this point. So we haven't we haven't done anything silly when it comes to.
Offering.
Really long term loans are getting too far over our in front of ourselves when it comes to looking at putting stuff in the investment portfolio.
Got it and then thinking about the non.
Nonperforming loans that you sold in the quarter curious were those sold to another bank or a nonbank entity and curious if there are opportunities to sell anything additional in that NPL portfolio at this point.
Well, we're running out of stuff to sell Eric.
Which is a good thing but.
It's all institutional investors I would tell you the demand is ferocious.
Probably getting 20 plus investors each time, we do one of these things, but they're not bank investors, but there are folks that are hungry for yield.
We've been kind of surprised at the.
The realization rate, we've been be able to get on these things last sale was in the nineties.
Frankly, but really we're down to $12 million, we have one loan over a $1 million of nonperforming. So there's really not anything left to sell.
And we don't see any new formations more importantly, so we have one credit upsize that that is under contract.
So there really is no no product left to sell.
Got it so continue continue to manage what you've got left and theyre not seeing any outs.
Outsize risk there. So that's good okay, and then kind of sticking on that credit front you.
You mentioned the reserves ex PPP now about 1% of total loans.
Is that a good level today, and I guess I'm thinking more if if loan growth kind of ramps up as you're expecting it how should we think about provisioning going forward.
Okay.
We don't give a lot of guidance on the allowance for loan loss provisions.
Just because of the nature of the the account.
What I can tell you is as you and Tom just discussed.
Our problem loans are at a very low level.
Early stage delinquencies non accrual nonperforming are all down.
It's a very low levels.
As we look forward macroeconomic conditions continue to improve so being a seasonal.
Modeler with the allowance for loan loss.
It's indicating that reserve levels.
Should be lower than they were in 2021, so that's kind of a general indication.
What we're looking at right now from a very very high level.
But we're not going to give any general guidance on provision expense going forward.
Understood. Thanks for taking my questions today.
Thanks, Eric next era.
Okay.
As a reminder, if anyone would like to register a question. Please press star followed by one on your telephone keypad.
Okay.
We have no further questions. So I'll hand back over to the team for closing.
Thank you David and thanks for all of you for participating in today's call. If you do have any further questions feel free to reach out to Tom Ray anytime, but thank you for being with us.
Please stay safe and take care everybody.
Thank you all for joining you may now disconnect your lines and have a lovely day.
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