Lakeland Bancorp stock: Strong loan growth to boost earnings (NASDAQ: LBAI)

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omersukrugoksu

Strong loan growth will support Lakeland Bancorp (NASDAQ: LBAI) revenues through the end of 2023. The loan portfolio is expected to grow due to management efforts and regional economic factors. On the other hand, above average provisioning will likely cause the bottom line. Meanwhile, the margin is likely to be little changed over the next year and a half. Overall, I expect Lakeland Bancorp to report earnings of $1.63 per share in 2022, down 12% year over year. For 2023, I expect earnings to grow 19% to $1.94 per share. The year-end target price suggests a significant upside from the current market price. Therefore, I adopt a buy rating on Lakeland Bancorp.

Internal and external factors to raise the loan portfolio

Lakeland Bancorp’s loan portfolio grew a remarkable 3.8% in the second quarter of 2022, or 15.2% annualized. Including the acquisition of 1st Constitution Bancorp in the first quarter, the loan portfolio grew by 24% in the first half of the year. Management expects loan growth to remain in the high single digit range for the remainder of this year, as mentioned on the last conference call. Management seemed particularly optimistic about the performance of its healthcare lending team and the Hudson Valley lending teams during the conference call. Additionally, management mentioned that recent M&A activity in the Lakeland Bancorp area is helping them develop new relationships. If the company is successful in winning new accounts, it could drive loan growth in the coming quarters.

Regional economic factors may also drive loan growth in the coming quarters. Lakeland Bancorp operates in New Jersey and New York’s Hudson Valley. New Jersey and New York (excluding New York) currently have very low unemployment rates, which bodes well for loan growth, especially consumer loans.

Unemployment rate in New York, New Jersey
New Jersey unemployment rate data from YCharts

Moreover, the coincident indices for the two States show that economic activity has recovered well and is currently at a satisfactory level.

Philly Fed New Jersey, New York Coincident Index
Philly Fed New Jersey Index Data Coincident by YCharts

Given these factors, I expect loan growth to remain in the high single digit range through the end of 2023, on an annualized basis. I expect the loan book to grow 8% annualized every quarter through the end of next year.

Margin will hardly be affected by soaring interest rates

Lakeland Bancorp’s deposit portfolio is quite rate sensitive due to the abundance of interest-bearing and unmatured deposits. These deposits are frequently repriced, so they will allow the rising rate environment to quickly increase the average cost of deposits. These deposits, namely remunerated cheques, money market and savings accounts, together accounted for 63.6% of total deposits.

Management’s interest rate sensitivity analysis also shows that repricing of liabilities is likely to outweigh asset repricing within twelve months of a rate hike. Based on the results of the analysis in File 10-Q, a 200 basis point increase in interest rates could DECREASE net interest income by 1% year-over-year.

Given the liability sensitivity and projected loan growth discussed above, I expect the margin to remain nearly flat through the end of 2023 relative to the second quarter level.

Higher provisioning to drag revenue this year

Lakeland Bancorp allowances amounted to 310.62% of outstanding loans at the end of June 2022, compared to 341.83% at the end of December 2021. The current allowance coverage does not appear to be environmentally significant enough high inflation and the resulting financial stress for borrowers. As a result, I expect provisioning to remain elevated over the coming quarters. The threat of recession will also prompt the management of Lakeland Bancorp to rebuild its reserves.

Overall, I expect provisioning to continue at the above average second quarter level through the end of 2023. I expect the net provisioning charge to be 0.17% (annualized) of total loans in each quarter through the end of 2023 In comparison, the net provision charge averaged 0.10% from 2017 to 2019.

Above-average provisioning is likely to be one of the biggest contributors to lower earnings this year. On the other hand, projected loan growth will likely support earnings through the end of 2023. During this time, the margin will likely remain stable and have little effect on the bottom line.

Overall, I expect Lakeland Bancorp to report earnings of $1.63 per share for 2022, down 12% year-over-year. My earnings estimate includes one-time merger-related expenses attributed to the acquisition of 1st Constitution Bancorp. For 2023, I expect earnings to grow 19% to $1.94 per share. The following table shows my income statement estimates.

EX18 FY19 FY20 FY21 FY22E FY23E
income statement
Net interest income 174 196 208 235 317 350
Allowance for loan losses 4 2 27 (11) 17 14
Non-interest income 22 27 27 22 28 30
Non-interest charges 111 127 133 141 186 196
Net income – Common Sh. 63 71 57 94 106 126
BPA – Diluted ($) 1.32 1.38 1.13 1.85 1.63 1.94

Source: SEC filings, earnings releases, author’s estimates

(In millions of dollars, unless otherwise indicated)

Actual earnings may differ materially from estimates due to the risks and uncertainties associated with inflation and, therefore, the timing and magnitude of interest rate increases. Also, a deeper or longer than expected recession may increase the expected loan loss provisioning beyond my estimates.

The rising rate environment has eroded the book value of equity

Lakeland Bancorp’s tangible book value per share decreased from $13.21 at the end of December 2021 to $12.47 at the end of June 2022. Part of the decline is attributable to the acquisition of 1st Constitution Bancorp. -the sale securities portfolio is also responsible for the decline in the book value of tangible equity. As interest rates rose in the market, the market value of available-for-sale securities declined. These market value losses skipped the income statement and were paid directly into the equity account.

Further pressure on the book value of equity is likely in the second half of 2022 due to the 75 basis point hike in Fed Funds rates in July. I also expect another 75 basis point rate hike for the rest of the year. The following table shows my balance sheet estimates.

EX18 FY19 FY20 FY21 FY22E FY23E
Financial situation
Net loans 4,419 5,098 5,950 5,918 7,636 8,266
Net loan growth 7.3% 15.4% 16.7% (0.5)% 29.0% 8.2%
Other productive assets 825 905 982 1,653 2,219 2,309
Deposits 4,621 5,294 6,456 6,966 8,845 9,574
Loans and sub-debts 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 millions of dollars, unless otherwise indicated)

A high expected total return warrants a buy rating

Since 2015, Lakeland Bancorp has increased its dividend in the second quarter of each year. Given the earnings outlook, I believe the company will maintain this trend next year and increase its quarterly dividend to $0.155 in the second quarter of 2023. My earnings and dividend estimates suggest a 31% payout range for 2023 , which is close to the five-year average of 36%.

Despite the pressure on equity book value, Lakeland Bancorp’s capital is still mostly at a comfortable level. Lakeland reported a total capital to risk-weighted asset ratio of 13.74% at the end of June 2022, as opposed to the minimum regulatory requirement of 10.50%. Therefore, I believe there is no threat to the payment of dividends due to capital adequacy requirements. My dividend estimate implies a forward dividend yield of 3.7%.

I use historical price/tangible accounting (“P/TB”) and price/earnings (“P/E”) multiples to value Lakeland Bancorp. The stock has traded at an average P/TB ratio of 1.40 in the past, as shown below.

EX18 FY19 FY20 FY21 Medium
T. Book value per share ($) 10.1 11.2 11.9 13.1
Average market price ($) 18.9 15.9 12.0 17.2
Historical P/TB 1.87x 1.43x 1.00x 1.31x 1.40x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple by the expected tangible book value per share of $13.1 yields a target price of $18.4 for the end of 2022. This price target implies an upside of 12.3% compared to the closing price on September 1. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 1.20x 1.30x 1.40x 1.50x 1.60x
TBVPS – Dec 2022 ($) 13.1 13.1 13.1 13.1 13.1
Target price ($) 15.7 17.1 18.4 19.7 21.0
Market price ($) 16.4 16.4 16.4 16.4 16.4
Up/(down) (3.7)% 4.3% 12.3% 20.3% 28.3%
Source: Author’s estimates

The stock has traded at an average P/E ratio of around 11.5x in the past, as shown below.

EX18 FY19 FY20 FY21 Medium
Earnings per share ($) 1.32 1.38 1.13 1.85
Average market price ($) 18.9 15.9 12.0 17.2
Historical PER 14.3x 11.6x 10.6x 9.3x 11.5x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple with the expected earnings per share of $1.63 yields a price target of $18.7 for the end of 2022. This price target implies a 14.1% upside from at the September 1 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 9.5x 10.5x 11.5x 12.5x 13.5x
EPS 2022 ($) 1.63 1.63 1.63 1.63 1.63
Target price ($) 15.4 17.0 18.7 20.3 21.9
Market price ($) 16.4 16.4 16.4 16.4 16.4
Up/(down) (5.8)% 4.1% 14.1% 24.1% 34.0%
Source: Author’s estimates

Equal weighting of target prices from both valuation methods gives a combined result target price of $18.5, implying a 13.2% upside from the current market price. Adding the forward dividend yield gives an expected total return of 16.9%. Therefore, I adopt a buy rating on Lakeland Bancorp.

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