Lakeland Financial Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited consolidated results for Lakeland Financial Corporation and its subsidiaries. Comparisons are with Q1 2017 for income and cash flows, and with December 31, 2017 for balance-sheet amounts. Dollar amounts are in millions unless otherwise noted.
Key financial results
| Metric | Q1 2018 | Comparable period |
|---|---|---|
| Net interest income | $36.2 | $32.1 in Q1 2017 |
| Net interest margin, tax-equivalent | 3.36% | 3.27% in Q1 2017 |
| Provision for loan losses | $3.3 | $0.2 in Q1 2017 |
| Noninterest income | $9.9 | $8.3 in Q1 2017 |
| Noninterest expense | $21.2 | $20.0 in Q1 2017 |
| Net income | $18.3 | $14.5 in Q1 2017 |
| Diluted earnings per share | $0.71 | $0.57 in Q1 2017 |
| Efficiency ratio | 46.0% | 49.7% in Q1 2017 |
Net income increased 26.3%. Management attributed the improvement principally to higher net interest income and noninterest income, partly offset by higher credit-loss provision and operating expenses. The effective tax rate fell to 15.1% from 27.7%, primarily reflecting the federal corporate tax-rate reduction under the Tax Cuts and Jobs Act. Annualized return on average assets was 1.58%, versus 1.37%; return on average equity was 15.82%, versus 13.63%.
Balance sheet, liquidity and capital
- Total assets were $4.727 billion, up $44.0 million, or 0.9%, from year-end 2017. Net loans were $3.800 billion, up $28.7 million; available-for-sale securities were $560.7 million, up $22.2 million.
- Total deposits were $4.099 billion, up $90.8 million. Core deposits increased $132.5 million, while brokered deposits decreased $41.7 million to $227.3 million. Public-fund deposits totaled $1.290 billion.
- Cash and cash equivalents were $167.6 million, down $8.6 million. Total borrowings fell $56.0 million to $125.6 million: FHLB advances were zero, repurchase agreements were $94.7 million, and subordinated debentures were $30.9 million.
- Operating cash flow was $25.9 million, compared with $20.8 million in Q1 2017; investing cash flow was negative $61.2 million, compared with negative $86.0 million; financing cash flow was $26.7 million, compared with $9.6 million. Cash and cash equivalents decreased $8.6 million during the quarter.
- Total equity was $473.3 million. The tangible common equity-to-tangible assets ratio was 9.94%, compared with 10.06% a year earlier. The company and bank remained classified as “well-capitalized”; consolidated total capital to risk-weighted assets was 13.41%, and common equity Tier 1 was 11.57%.
Material changes and credit quality
- Average earning assets grew 8.9% year over year, mainly from commercial loan growth. The tax-equivalent yield on earning assets rose to 4.26% from 3.88%, while funding cost as a share of average earning assets increased to 0.90% from 0.61%. Management linked margin expansion to Federal Reserve rate increases and the company’s asset-sensitive balance sheet.
- Net charge-offs rose to $4.8 million from $0.1 million in Q1 2017. A $4.6 million charge-off related to one commercial borrower was the principal driver; the borrower’s $6.8 million exposure was judged not fully collectible. The remaining $2.2 million exposure was on nonaccrual status and secured by business assets, real estate and personal guarantees.
- Nonperforming loans increased to $11.0 million from $9.4 million at year-end; total nonperforming assets rose to $11.2 million from $9.5 million. Nonperforming loans were 0.29% of total loans, versus 0.25%. Troubled debt restructurings totaled $12.0 million, versus $10.6 million.
- The allowance for loan losses declined to $45.6 million from $47.1 million, or 1.19% of loans versus 1.23%. The quarter’s $3.3 million provision was more than offset in the allowance roll-forward by net charge-offs. Management considered the allowance appropriate but noted that deterioration in economic conditions could increase delinquencies, nonperforming loans and required reserves.
- Unrealized losses on available-for-sale securities increased during the quarter; the portfolio’s fair value was $560.7 million against amortized cost of $568.6 million. Other comprehensive income was negative $7.1 million, principally from securities valuation changes. Management said losses were primarily interest-rate-related, did not expect material losses unless securities were sold, and did not intend or expect to be required to sell affected securities before recovery.
Outlook, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management described local economic conditions as improved and stabilized and expressed cautious optimism, while noting continuing challenges. It emphasized commercial lending growth, portfolio diversification and active credit oversight. Commercial and commercial real estate loans represented a substantial share of the loan portfolio, exposing results to borrower and sector concentration risk.
Interest-rate sensitivity modeling estimated 12-month net interest income 9.51% below the base case under a 100-basis-point rate decline, and 7.55% above base under a 100-basis-point increase. Management cautioned that model assumptions and actual deposit, prepayment and balance-sheet behavior may differ from projections. Other disclosed risks include economic and market conditions, borrower credit performance, funding costs, real-estate values, competition, cybersecurity, regulation and accounting estimates.
- Adoption of the revenue-recognition standard increased reported loan and service fees and data-processing expense by $194,000 each, with no net-income impact; opening retained earnings increased $24,000. The federal tax-rate change materially reduced the effective tax rate.
- The company early adopted guidance reclassifying certain tax effects from accumulated other comprehensive income to retained earnings, a $173,000 reclassification. It expected approximately $5.2 million of lease obligations to be recognized as both assets and liabilities upon adoption of the lease standard in 2019.
- The company expected to recognize credit losses earlier under the then-upcoming expected-credit-loss standard and was evaluating its effects; adoption was scheduled for 2020. No material pending legal proceedings were reported, and management reported effective disclosure controls with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Subsequent disclosures on the large commercial borrower, collateral recovery and whether further charge-offs or provisions were necessary.
- Trends in nonperforming loans, criticized credits, troubled restructurings and allowance coverage as commercial lending expands.
- Deposit pricing, brokered and public-fund funding levels, and whether rising funding costs pressure net interest margin.
- Available-for-sale securities valuation changes and their effects on accumulated other comprehensive income and capital.
- Management’s implementation assessment and eventual quantified impact of the expected-credit-loss accounting standard.