Lakeland Financial Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; balance-sheet comparisons are to December 31, 2012. Lakeland is the holding company for Lake City Bank, operating 45 offices in Northern and Central Indiana. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $23.0 | $22.2 | $66.1 | $66.8 |
| Provision for loan losses | $0 | $0 | $0 | $1.3 |
| Noninterest income | $7.8 | $6.2 | $22.9 | $17.9 |
| Noninterest expense | $16.3 | $14.3 | $46.3 | $43.2 |
| Net income | $9.8 | $9.3 | $28.3 | $26.8 |
| Diluted EPS | $0.59 | $0.57 | $1.70 | $1.63 |
| Net interest margin | 3.29% | 3.30% | 3.22% | 3.34% |
Q3 net income rose 4.5%; nine-month net income increased 5.5%. Nine-month net interest income fell 1.0%, while noninterest income rose 27.8%; higher noninterest expense partly offset the revenue gains. The nine-month effective tax rate was 33.9%, including a $0.465 million noncash charge from revaluing deferred state tax items after Indiana enacted lower future rates. Excluding that adjustment, management said nine-month net income would have been $28.7 million, up 7.1% year over year.
Financial position, liquidity and credit
- Assets and funding: Total assets were $3.041 billion, down 0.8% from year-end 2012. Deposits fell 5.3% to $2.445 billion. Cash and cash equivalents declined to $81.3 million from $232.2 million.
- Loans and securities: Total loans, excluding loans held for sale, grew $135.5 million to $2.393 billion. Commercial loans were 86.6% of the portfolio, including commercial real estate and multifamily loans at 38.4%. Available-for-sale securities were $463.1 million; accumulated other comprehensive income moved from $5.7 million to a $1.5 million loss, mainly reflecting securities valuation changes.
- Borrowings and capital: Short-term borrowings increased to $236.0 million from $121.9 million, including $75 million of other short-term borrowings and $57 million of federal funds purchased. Long-term borrowings were $0.04 million; subordinated debentures were $30.9 million. Bank regulatory capital ratios were 10.8% Tier 1 leverage, 13.1% Tier 1 risk-based and 14.4% total risk-based; all exceeded well-capitalized thresholds.
- Cash flow: For the first nine months, operating activities provided $50.2 million, investing activities used $157.1 million and financing activities used $44.0 million. Cash and cash equivalents decreased $150.9 million. The filing attributes the lower cash balance partly to loan growth, deposit outflows and a decision to maintain lower correspondent-bank compensating balances.
- Credit quality: Nonperforming assets declined to $23.3 million from $31.6 million; nonperforming loans were 0.97% of loans versus 1.37%. The allowance for loan losses was $49.8 million, or 2.08% of total loans, compared with 2.28% at year-end. Net charge-offs were $0.831 million in Q3. Classified credits totaled $167.3 million, including $89.8 million Special Mention and $77.5 million Substandard.
Changes, outlook and risks
- Management cited continued low-rate and competitive loan-pricing pressure on yields and expects ongoing pressure on net interest margin. Nine-month margin fell 12 basis points year over year, although Q3 margin was nearly unchanged.
- Fee growth included higher investment brokerage, deposit service and loan-related fees. Noninterest expense rose 7.0% for nine months; management attributed data-processing cost growth partly to a larger customer base and expanded core-processor services. Some Q3 advertising and consulting spending was described as program-specific and not expected to recur at the same level.
- Management expects moderate loan growth. It is considering good-quality, higher-yielding alternative investments but does not expect a significant change in investment strategy. No quantified earnings or margin guidance was provided.
- Risks include prolonged low interest rates, aggressive competitor pricing, deposit competition and variability in public-fund deposits, commercial real-estate exposure, and the possibility of worsening delinquencies or losses if economic conditions weaken. Three commercial relationships represented 67.6% of nonperforming loans; management cautioned that full repayment of the largest problem credits is not assured.
- Management reported that the company and Bank were expected to exceed Basel III well-capitalized minimums based on its preliminary analysis. The new rules were scheduled to begin January 1, 2015, with the capital conservation buffer phased in through 2019.
Important facts for investors to verify
- Reconcile troubled-debt-restructuring balances: the financial-statement note reports $41.6 million at September 30, while MD&A reports $42.4 million; clarify differing definitions or presentation.
- Track funding mix and liquidity after the $136.9 million deposit decline and $114.1 million increase in short-term borrowings, including the amount and terms of Federal Home Loan Bank advances.
- Monitor commercial real-estate concentrations, the largest nonperforming relationships, and whether lower nonperforming balances translate into sustained low charge-offs and allowance needs.
- Assess sensitivity of net interest margin and securities values to rates, and the effect of further market-value changes on accumulated other comprehensive income and capital.
- Confirm the trajectory of fee income and operating expenses, including whether Q3 discretionary spending and elevated data-processing costs persist.