Lakeland Financial Corporation — Q3 2018 Form 10-Q
Business and period: Lakeland Financial is a bank holding company whose principal subsidiary is Lake City Bank. This unaudited report covers the quarter and nine months ended September 30, 2018. Income comparisons are year over year; balance-sheet comparisons are generally against December 31, 2017. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2018 | Q3 2017 | First 9 months 2018 | First 9 months 2017 |
|---|---|---|---|---|
| Net income | $20.6 | $15.8 | $59.0 | $45.7 |
| Diluted EPS | $0.80 | $0.62 | $2.30 | $1.78 |
| Net interest income | $37.9 | $34.6 | $111.7 | $100.5 |
| Provision for loan losses | $1.1 | $0.45 | $6.1 | $1.15 |
| Noninterest income | $10.4 | $9.5 | $30.0 | $26.5 |
| Noninterest expense | $22.0 | $20.3 | $63.5 | $59.7 |
| Net interest margin, tax-equivalent | 3.42% | 3.35% | 3.40% | 3.32% |
For the first nine months, net income rose 29.2%; management attributed the improvement mainly to higher net interest income and noninterest income, along with lower income taxes. The effective tax rate was 18.1% for the nine months and 18.5% for Q3, versus 31.0% and 32.4%, respectively, in 2017. The lower federal tax rate and approximately $0.4 million of tax savings finalized in Q3 contributed to the decrease.
Net interest income growth reflected higher average earning assets, particularly commercial loans, and wider net interest margin. Higher deposit costs partly offset loan-yield improvement. Noninterest income increased 13.0% year to date, with growth in deposit service charges, loan and service fees, and wealth fees. Noninterest expense increased 6.4%, including higher compensation and technology-related data-processing costs; the year-to-date efficiency ratio improved to 44.81% from 46.97%.
Financial position, cash flow, and capital
- Assets and loans: Total assets were $4.758 billion, up $74.6 million (1.6%) from year-end 2017. Net loans were $3.795 billion, up $23.4 million; gross loans were $3.845 billion. Commercial real estate and multifamily loans rose $71.5 million, while agricultural loans declined $88.8 million.
- Funding and liquidity: Deposits totaled $4.016 billion, up $7.3 million. Core deposits increased $95.3 million, while brokered deposits fell $88.1 million to $176.9 million. Cash and cash equivalents were $182.3 million. Borrowings totaled $208.3 million, up $26.7 million, including $20.0 million of federal funds purchased and $6.7 million more in repurchase agreements.
- Cash flows, first nine months: Operating activities provided $75.2 million; investing activities used $81.4 million; financing activities provided $12.4 million. Cash and cash equivalents increased $6.1 million to $182.3 million.
- Equity and capital: Total equity was $498.5 million, up $29.9 million from year-end, with net income partly offset by dividends of $18.7 million and a $12.6 million decline in accumulated other comprehensive income. The tangible common equity-to-tangible assets ratio was 10.41%. The Bank remained “well-capitalized”; its total risk-based capital ratio was 13.71% and its Tier 1 leverage ratio was 10.93%.
Material changes and credit quality
- Year-to-date provision expense increased to $6.1 million from $1.15 million, reflecting loan growth and net charge-offs, particularly in Q1. The allowance for loan losses was $48.3 million, or 1.26% of loans, compared with $47.1 million, or 1.23%, at year-end.
- Nonperforming assets rose to $12.8 million from $9.5 million; nonperforming loans were $12.3 million, or 0.32% of loans, versus 0.25%. Management attributed the increase mainly to two commercial relationships placed on nonaccrual. Impaired loans increased to $20.9 million from $13.9 million.
- Q3 net charge-offs were $0.46 million, compared with net recoveries of $0.48 million in Q3 2017. Management reported generally stable credit metrics and economic conditions but noted concentration risk from commercial lending and uncertainty in near-term conditions.
- Available-for-sale securities had a fair value of $570.6 million versus amortized cost of $585.3 million. Management considered unrealized losses primarily interest-rate-driven, reported no other-than-temporary impairment, and said it did not intend, nor expect to be required, to sell the securities before recovery.
Outlook, risks, and unusual items
The filing provides no specific earnings or revenue guidance. Management said the balance sheet remained asset-sensitive and judged interest-rate exposure to be within acceptable limits. Its modeled 12-month net interest income changed by -7.33% under a 100-basis-point decline and +5.18% under a 100-basis-point increase; actual results may differ because of model assumptions and customer behavior.
Principal disclosed risks include interest-rate changes, borrower credit quality, economic and real-estate conditions, funding costs and availability, market volatility affecting securities, competition, cybersecurity, regulatory or tax changes, and agricultural conditions. Management cautioned that deterioration in economic conditions could increase delinquencies, nonperforming loans, charge-offs, and required reserves.
- Adoption of ASC 606 in 2018 changed presentation of certain fee income and related expenses but had no net-income impact for the periods presented.
- The company expected lease accounting adoption in 2019 to recognize approximately $5.6 million of lease obligations as both assets and liabilities.
- Management estimated that a debt-security premium-amortization standard scheduled for 2019 would reduce retained earnings by approximately $0.94 million, net of tax, based on September 30 balances.
- The company expects earlier recognition of credit losses under the forthcoming CECL standard and was still evaluating its effect.
- No material pending legal proceedings were reported outside routine litigation; management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the increase in nonaccrual and impaired commercial credits leads to further provisions, charge-offs, or deterioration in classified loans.
- Whether loan growth and higher asset yields continue to outpace rising deposit and wholesale funding costs.
- The sensitivity of securities values and accumulated other comprehensive income to interest-rate changes, and the company’s ability to hold securities through any recovery.
- The eventual CECL impact, including the timing and size of any initial allowance increase, and the estimated effects of other pending accounting standards.
- Whether core deposit growth, declining brokered deposits, and current capital ratios are maintained as balance-sheet funding needs evolve.