Seeking Alpha • Sep 02
Lakeland Bancorp: Strong Loan Growth To Drive Earnings
Summary
Loan growth will depend on New Jersey and New York’s economic factors. Further, M&A disruption will provide a good opportunity for loan growth.
Provisioning will likely be elevated in the next few quarters due to the high-inflation environment. Moreover, the existing allowance level is not high enough.
The December 2022 target price suggests a high upside from the current market price. Further, Lakeland Bancorp is offering a decent dividend yield.
Strong loan growth will support Lakeland Bancorp's (LBAI) earnings through the end of 2023. The loan portfolio is set to surge on the back of management's efforts and regional economic factors. On the other hand, above-average provisioning will likely drag the bottom line. Meanwhile, the margin will likely be little changed over the next year and a half. Overall, I am expecting Lakeland Bancorp to report earnings of $1.63 per share in 2022, down 12% year-over-year. For 2023, I'm expecting earnings to grow by 19% to $1.94 per share. The year-end target price suggests a sizable upside from the current market price. Therefore, I'm adopting a buy rating on Lakeland Bancorp.
Internal And External Factors To Lift The Loan Portfolio
Lakeland Bancorp's loan book grew by a remarkable 3.8% in the second quarter of 2022, or 15.2% annualized. Including the first quarter's acquisition of 1st Constitution Bancorp, the loan portfolio has grown by a sizable 24% in the first half of the year. The management is expecting loan growth to remain in the high-single-digit range in the remainder of this year, as mentioned in the latest conference call. The management seemed particularly optimistic about the performance of its healthcare lending team and the Hudson Valley lending teams during the conference call. Further, the management mentioned that recent M&A activity in Lakeland Bancorp’s region is helping them develop new relationships. If the company is successful in gaining new accounts then it could boost loan growth in the coming quarters.
Regional economic factors can also drive loan growth in the coming quarters. Lakeland Bancorp operates in New Jersey and the Hudson Valley of New York. Both New Jersey and New York (excluding New York City) currently have very low unemployment rates, which bodes well for loan growth, especially consumer loans.
New Jersey Unemployment Rate data by YCharts
Further, the coincident indices for both states show that economic activity has recovered well and is currently at a satisfactory level.
Philly Fed New Jersey Coincident Index data by YCharts
Considering these factors, I'm expecting loan growth to remain in the high-single-digit range through the end of 2023, on an annualized basis. I'm expecting the loan portfolio to grow by 8% annualized every quarter till the end of next year.
Margin To Be Barely Affected By The Surge In Interest Rates
Lakeland Bancorp's deposit book is quite rate-sensitive because of the abundance of interest-bearing, non-maturing deposits. These deposits re-price frequently, hence they will enable the rising-rate environment to quickly raise the average deposit cost. These deposits, namely interest-bearing checking, money market, and savings accounts, altogether made up 63.6% of total deposits.
The management's interest-rate sensitivity analysis also shows that liability re-pricing is likely to outweigh asset re-pricing in the twelve months following a rate hike. According to the results of the analysis given in the 10-Q filing, a 200-basis points hike in interest rate could DECREASE the net interest income by 1% over twelve months.
Considering the liability sensitivity and the anticipated loan growth discussed above, I'm expecting the margin to remain almost stable through the end of 2023 from the second quarter’s level.
Higher Provisioning To Drag Earnings This Year
Lakeland Bancorp’s allowances were 310.62% of nonaccrual loans at the end of June 2022, down from 341.83% at the end of December 2021. The current allowance coverage does not appear large enough for the high-inflation environment and the resultant financial stress for borrowers. As a result, I'm expecting provisioning to remain elevated in the next few quarters. The threats of a recession will also encourage Lakeland Bancorp’s management to build up its reserves.
Overall, I'm expecting provisioning to continue at the second quarter’s above-average level through the end of 2023. I'm expecting the net provision expense to make up 0.17% (annualized) of total loans in every quarter till the end of 2023. In comparison, the net provision expense averaged 0.10% from 2017 to 2019.
The above-average provisioning will likely be one of the biggest contributors to an earnings decline this year. On the other hand, anticipated loan growth will likely support earnings till the end of 2023. Meanwhile, the margin will likely remain stable and have little effect on the bottom line.
Overall, I'm expecting Lakeland Bancorp to report earnings of $1.63 per share for 2022, down 12% year-over-year. My earnings estimate includes the one-time merger-related expenses attributed to the acquisition of 1st Constitution Bancorp. For 2023, I'm expecting earnings to jump by 19% to $1.94 per share. The following table shows my income statement estimates.
FY18 FY19 FY20 FY21 FY22E FY23E
Income Statement
Net interest income 174 196 208 235 317 350
Provision for loan losses 4 2 27 (11) 17 14
Non-interest income 22 27 27 22 28 30
Non-interest expense 111 127 133 141 186 196
Net income - Common Sh. 63 71 57 94 106 126
EPS - Diluted ($) 1.32 1.38 1.13 1.85 1.63 1.94
Source: SEC Filings, Earnings Releases, Author's Estimates
(In USD million unless otherwise specified)
Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, a stronger or longer-than-anticipated recession can increase the provisioning for expected loan losses beyond my estimates.
Rising Rate Environment Has Eroded Equity Book Value
Lakeland Bancorp's tangible book value per share dropped from $13.21 at the end of December 2021 to $12.47 at the end of June 2022. Part of the decline was attributable to the acquisition of 1st Constitution Bancorp. A buildup of unrealized losses on the large available-for-sale securities portfolio was also responsible for the dip in tangible equity book value. As interest rates increased in the market, the market value of the available-for-sale securities declined. These mark-to-market losses skipped the income statement and flowed directly into the equity account.
Further pressure on the equity book value is likely in the second half of 2022 because of the 75 basis points Fed Funds rate hike in July. I'm also expecting a further 75 basis point rate hike in the remainder of the year. The following table shows my balance sheet estimates.
FY18 FY19 FY20 FY21 FY22E FY23E
Financial Position
Net Loans 4,419 5,098 5,950 5,918 7,636 8,266
Growth of Net Loans 7.3% 15.4% 16.7% (0.5)% 29.0% 8.2%
Other Earning Assets 825 905 982 1,653 2,219 2,309
Deposits 4,621 5,294 6,456 6,966 8,845 9,574
Borrowings and Sub-Debt 520 613 331 327 686 699
Common equity 624 725 764 827 1,133 1,219
Book Value Per Share ($) 13.0 14.3 15.1 16.3 17.4 18.8
Tangible BVPS ($) 10.1 11.2 11.9 13.1 13.1 14.4
Source: SEC Filings, Author's Estimates
(In USD million unless otherwise specified)
High Total Expected Return Justifies A Buy Rating
Since 2015, Lakeland Bancorp has increased its dividend in the second quarter of every year. Given the earnings outlook, I believe the company will maintain this trend next year and raise its quarterly dividend to $0.155 in the second quarter of 2023. My earnings and dividend estimates suggest a payout reach of 31% for 2023, which is close to the five-year average of 36%.