Lakeland Bancorp, Inc.

Good morning, and welcome to the Lakeland Bank Corp. 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. If you would like to register a question, please press star followed by one on your telephone keypad. Please note this event is being recorded. I would now like to turn the conference over to Mary Ruffin, Assistant Controller and Director of Financial Reporting. Please go ahead, ma'am.

Thank you, Megan. Good morning, ladies and gentlemen, and thank you for joining us for our fiscal year earnings call. Today's presenters are President and CEO Thomas Sharra and Executive Vice President and Chief Financial Officer Thomas Blaine. Before beginning the review of our financial results, we ask that you please take note of our standard caution as to any forward-looking statements that you may have 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, blakemanhub.com. Now it is my pleasure to introduce Thomas Sharra, who will offer his perspective on our

Thank you, Mary. Good morning, everyone, and welcome to our third quarter earnings call. I'll start the call off with a high-level summary for this quarter, followed by Tom Sling, our CFO, who will walk you through our earnings in detail. First off, I'd like to acknowledge our recently announced merger with Providence Financial Services and inform everyone that we will have more information to share with you shortly when we file our joint proxy prospectus with the Securities and Exchange Commission than our regulatory applications to connection with the merger. Our financial results for this quarter were solid, as we continued 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. For the third quarter, we posted net income of $28.7 million, a 44% share, which is in line with the prior quarter net income and represents an ROA of 1.10%, ROE of $1,033 and ROTCE of $13.87. Excluding merger-related expenses of $3.5 million this quarter, pre-tax on an income group Q3 would have been $31.3 million or $48.7 share, resulting in a ROE and ROTCE of $121, $11.36, and $15.7. as improvements in interest income related to higher rates in our organic loan growth during the quarter, which totaled $160 million, representing a 9% annualized growth rate, was offset by a similar increase in interest expense on 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 are strongest. We anticipate organic loan growth will meet higher guidance from a high single unit for the full year. Under the card in the sky, total deposits increased $176 million, 2% for the quarter, as we undertook an initiative to launch a longer-term certificate for the pod early in the third quarter in now make up 88% of total deposits. On the credit side, asset volume remains excellent. Non-performing loans at 930 were only $18 million versus $22 million at 630. For the quarter, we released a small net recovery. Non-performing assets for assets decreased this quarter to 17 basis points, while the allowance remained relatively stable at $69 million. reserve coverage for non-performing assets at the quarter end totals 375%. As it relates to the economy and our footprint, our commercial customers are generally weathering rapidly increasing inflation and thus far have maintained their margins and profitability. With rates rising as quickly as they have over the last few quarters, we are staying in close contact with our customers to ensure they are able to withstand higher operating costs along with higher interest rates. As you can see from our non-performing, it's only because you're trying to grow far where you're not seeing any credits. That concludes my prepared remarks. Now I'd like to turn it over now to the presentation to Tom. Once you've included all his comments, we're happy to answer your questions. Tom, take it away. Thank you, Tom, and good morning, everyone. So from the Q3, that income was $28.8 million, or $0.24 per share, compared to the second quarter of 22, of $29 million. $29 million or $0.24 per diluted share, and the third quarter of 2021 was $22 million and $0.43 per diluted share. The current quarter includes $3.5 million in pre-tax merger related expenses, which if excluded, would increase net income $31.3 million or $0.48 per diluted share. Q3 financial results were favorably impacted by organic loan growth of $160 million, deployment of investment portfolio cash flows to higher-yielding assets, and the increased interest rates, all combining to increase yields on our interest-earning assets by 29 basis points for the quarter. Offering these items, we increased deposit rates to the competitive environment, and we embarked on a deposit acquisition strategy in early Q3, to secure a longer-term certificate of deposit in anticipation of the ongoing increases in market interest rates during the remainder of 2022 and into 2023. These items increased our yield on interest-bearing liabilities to 54 basis points. As a result, reported net interest margin for Q3 increased 10 basis points to 3.28%, and an increase from prior year quarter of 2.98%. Comparing Q3 net interest margin per 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. Excluding these items, results in a flat net interest margin of 3.28% quarter over quarter, even factoring in the higher deposit pricing during the June 3. Compared to the prior quarter, the yield on loans increased 21 basis points to 4.43%, while the yield on investment securities increased 27 basis points to 2.12%. Deposit rates increased due to competitive pressures and the TD initiative, and and our index to the fixed funds rate. The cost of deposits increased to 62 basis points compared to 22 basis points for the prior quarter. Our secret provision for credit losses was an expense of $1.3 million. It was primarily related to credit losses and investments as a result of the decrease in the market value of corporate securities based upon interest rates and not based upon any credit downgrades for the securities. Regarding asset quality, as Tom mentioned, non-spending assets decrease four basis points, or a quarter to 17 basis points, and credit remains strong. Our Q3 debt charged off for a recovery of $32,000 and would represent the fifth consecutive quarter of net recoveries, excluding the accounting for the first Constitution acquisition for purchased credit security aid loans passing Q1 of this year. As of September 30th, the allowance for credit losses on loans took them to 91 basis points off total loans compared with 93 basis points in the trailing quarter. Q39 had been covered in a steady of $7.2 million as improvements in loan swap fees and the benefits of bank-owned life insurance were offset by continued softness in the gain on sale of residential mortgage loans and FBA loans. Q3 non-interest expenses of $47.8 million included $3.5 million in merger-related expenses, absent which these expenses would have decreased $750,000 from the link order. 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, as compared to the prior quarter, Colab has increased $141 million, or 1.4%, with the loan portfolio increasing $160.2 million, or 2.2%, while investment securities increased $77 million, as cash flows were used to fund the loan growth. Deposit balances increased $136 million, or 2.1% per quarter, primarily due to our longer-term certificate of deposit strategy discussed earlier, while borrowings decreased $74 million. Our September 30th loan-to-deposit ratio was 87%, consistent with the prior quarter, and gives us total liquidity to fund future loan growth. For capital management, our capital management Levels remain strong and tangible capital ratio decreased to 7.83% compared to 8.01% at June 30th. It has asset growth, cash dividends, and other comprehensive income changes offset varying retention per quarter. Due to the potential impact of initial trade changes causing additional market-to-market adjustments on our available-for-sale investment security portfolio, as well as a 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 net Our projected interest rate risk position is neutral and we've become more asset-sensitive in future periods. Deposit pricing increases and the certificate of deposit strategy we implemented in Q3 was designed to pre-fund our expected balance sheet growth with significantly lower cost of funding than is currently available via federal home loan bank borrowings and broker deposit markets. we do not anticipate the increasing deposit pricing in Q4, which will decrease the deposit data cycle to date. As a result, we anticipate Q4 net interest margin will expand into the mid-30s range. As Tom discussed earlier, we expect loan portfolios 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 million range. 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 answer any questions. With that, Megan, can you open up the question period for us, please?

Absolutely. If you would like to ask a question, please press star plus I1 on your telephone keypad. If for any reason you would like to remove that question, please press star plus I2. Again, to ask a question, press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from Chris O'Connor with KDW. Our line is now open.

Morning. I just need to talk a little bit about a little bit more about the deposit strategy, maybe where the CDs are coming on at, and how much of that is going to flow into the quarter here, just on an average balance basis, and you know, where you see, you know, the deposit costs going in terms of, you know, I know you said they'll be flat in terms of, you know, more new raises, but how much is, you know, the raises in the top quarter will kind of flow into it. Right. Yeah, Chris, on the strategy, we forecasted interest rates continue to rise based on the Federal Reserve's bank's intention and just wanted to get out in front of it. um, secured, um, approximately $300 million in one to two year TV, uh, average rate in the two 40 to two 50 range, um, comparable borrowings right now from the home loan buyer in the neighborhood of 5%. So we think that we secured some life funding in advance, which has some downward pressure on, uh, on them in Q3, but should open up as we go forward. Now, uh, Yeah, absolutely. That helps. And then as far as, you know, the true funding goes, I mean, cash balances didn't move that much. So I guess, you know, when thinking about the future loan growth and, you know, these deposits going forward, So, is it going to be kind of new deposit growth or, you know, future barterings or kind of going off of the securities portfolio? Or can you fall into loans and go toward this? Yeah, that's right, Chris. When you look at the overall balance sheet, you know, we... You have about $35 million in cash flow coming out of the investment securities portfolio, as well as all the cash flow of 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 – you know, loan growth above our projection. 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. And so we're not sitting on excess liquidity right now. We have plenty of capacity to borrow and move if we need to. Got it. So over the next, you know, couple of quarters or so, as you guys take on loan growth, is it fair to say that, you know, the securities portfolio metrics benefit? Yeah, that's the intention. Historically, we operated with the securities portfolio assets approximately, you know, around that 15, 12 to 15% range. and we'd like to deploy those cash flows into higher-yielding loans and increase profitability on a go-forward basis. Got it. And then on the loan portfolio growth, you're getting up this quarter, so I'm getting the pipeline going in about the end of the year, so that's pretty strong. Maybe just a little bit of color over the end. you know, where you're seeing demand and kind of where you're being cautious at this point in the cycle. And, yeah, that'd be great. Chris, we're seeing growth, heavy growth in the healthcare space, which in the last quarter, they're continuing to make some pretty good traction there. The Hudson Valley market continues to grow nicely. The Tom's River, Ocean County market, Healthcare is clearly leading the way. We continue to avoid suburban office. That's the years that we've been doing that. Multifamily still remains strong. Retail still remains strong. And industrial warehouses continue to be on fire. So those are the areas we're focusing our activities. We're being very cautious on hospitality and suburban office. John, and where is the price on compared to last quarter? It is up about 10% from last quarter. Okay, great. And then last one for me, on the buyback, you know, being paused here, is it safe to say that that will continue to stay paused with the deal coming? Yeah, Chris, Basically, based upon the balance sheet, what we're doing right now is I think we're going to keep the pause as well as because of the merger acquisition with the profit financial. So, Ron, we're going to be on the sidelines for Q4. Great. Thanks for all your questions. Thanks, Chris.

Thanks, Ron. Thank you, Mr. O'Connell. We have currently no questions registered. So, as a reminder, it is 4-1 on your telephone keypad. There are no additional questions waiting at this time, so I will pass the conference back over to Tom Scherer for any additional remarks.

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.