Lakeland Financial Corporation — Q3 2019 Form 10-Q
Business context and period. Unaudited consolidated results for the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Lakeland Financial is the parent of Lake City Bank and related subsidiaries.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $39.5 million | $37.9 million | $116.2 million | $111.7 million |
| Net income | $21.5 million | $20.6 million | $64.8 million | $59.0 million |
| Diluted EPS | $0.83 | $0.80 | $2.52 | $2.30 |
| Net interest margin, tax-equivalent | 3.38% | 3.42% | 3.40% | 3.40% |
| Noninterest income | $10.8 million | $10.6 million | $33.9 million | $30.2 million |
| Noninterest expense | $22.7 million | $22.2 million | $67.3 million | $63.7 million |
- Balance sheet at September 30: Assets were $4.95 billion, up 1.5% from year-end 2018. Net loans were $3.97 billion, up $106.3 million; available-for-sale securities were $613.2 million.
- Funding and liquidity: Deposits rose $239.3 million to $4.28 billion, including core deposit growth of $287.5 million; brokered deposits fell $48.2 million. Cash and cash equivalents declined $80.3 million to $136.6 million. Borrowings fell $245.6 million to $30.9 million, with no FHLB advances or repurchase-agreement balances outstanding at quarter-end.
- Cash flow, nine months: Operating activities provided $71.9 million, investing activities used $121.5 million, and financing activities used $30.8 million. Cash and cash equivalents decreased $80.3 million to $136.6 million.
- Credit and capital: Allowance for loan losses was $50.6 million, or 1.26% of loans, versus $48.5 million and 1.24% at year-end. Nonperforming assets increased to $19.3 million from $7.6 million; nonperforming loans were 0.47% of loans versus 0.19%. The company reported well-capitalized status; consolidated CET1 was 12.94% and the Bank’s was 13.17%.
- Returns: Nine-month annualized return on average assets was 1.76% versus 1.67%; return on average equity was 15.68% versus 16.42%. Q3 return on average assets was 1.72% in both years, while return on average equity declined to 14.78% from 16.55%.
Material changes versus comparable periods
- Nine-month net income rose 9.8%; management attributed the increase chiefly to higher net interest income and noninterest income and a lower loan-loss provision. Q3 net income increased 4.3%.
- Nine-month net interest income increased 4.0%, supported by growth in average earning assets and loans. Q3 margin narrowed to 3.38% from 3.42% as deposit costs rose faster than earning-asset yields.
- Nine-month noninterest income increased 12.1%, led by deposit service charges, loan fees, wealth advisory, mortgage banking and other income. Noninterest expense increased 5.6%, including higher professional fees, technology spending, and other expense.
- Loan growth was concentrated in commercial real estate and commercial and industrial lending; agriculture and agribusiness loans declined. Nonperforming assets rose primarily after four commercial relationships were placed on nonaccrual.
- Year-to-date provision expense fell to $3.0 million from $6.1 million, while net charge-offs declined to $810,000 from $4.9 million. Q3 net charge-offs were $936,000 versus $463,000.
Outlook, commentary, risks and unusual items
- The filing provides no explicit earnings or full-year financial guidance. Management described local economic conditions and broad credit-quality trends as stable, while noting increased nonperforming assets and watch-list exposure.
- Expected credit loss accounting (CECL), effective for the company in 2020, was estimated to increase the allowance by 5%–15% at adoption based on the September 2019 portfolio and current assumptions. Management expected larger increases for longer-lived retail portfolios and smaller increases for shorter-lived commercial loans; the final impact remains uncertain.
- Key exposures include interest-rate changes and deposit-cost pressure, commercial and commercial-real-estate concentrations, borrower credit quality, economic conditions, collateral values, agriculture, cybersecurity, regulatory and accounting changes, and the transition from LIBOR.
- The company received FDIC assessment credits that reduced Q3 regulatory-fee expense; it expected approximately $1.1 million of total credits to be fully used in Q1 2020. Higher legal and CECL implementation costs contributed to increased professional fees. A discontinued treasury-management relationship reduced service-charge income; Q3 included about $789,000 of fees collected in July relating to June.
- Adoption of lease accounting recorded a $5.5 million right-of-use asset and lease liability without material effect on operating results. Adoption of callable-debt premium accounting reduced opening retained earnings by approximately $1.3 million, net of tax.
- Management stated that disclosure controls were effective and reported no material change in internal control over financial reporting. No material pending legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether nonperforming loans and assets continue to rise, and the status of the four commercial relationships placed on nonaccrual.
- Actual CECL adoption impact versus the estimated 5%–15% increase in the allowance.
- Whether loan growth, deposit mix and rising deposit costs sustain or further pressure net interest margin.
- Whether the discontinued treasury-management relationship leads to continued fee-income declines and when FDIC credits are recognized and exhausted.
- How commercial real-estate and industrial loan concentrations, watch-list balances, and the allowance evolve relative to portfolio growth.