Lakeland Financial Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Lakeland Financial is a bank holding company whose principal subsidiary is Lake City Bank. Financial amounts below are in millions unless noted.
Financial results and key metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $34.6 | $29.7 | $100.5 | $87.6 |
| Provision for loan losses | $0.45 | $0 | $1.15 | $0 |
| Noninterest income | $9.5 | $9.0 | $26.5 | $24.1 |
| Noninterest expense | $20.3 | $18.8 | $59.7 | $54.6 |
| Net income | $15.8 | $13.5 | $45.7 | $38.6 |
| Diluted earnings per share | $0.62 | $0.53 | $1.78 | $1.52 |
| Net interest margin, tax-equivalent | 3.35% | 3.08% | 3.32% | 3.17% |
| Efficiency ratio | 45.94% | 48.43% | 46.97% | 48.87% |
- Q3 net income increased 17.4%; nine-month net income increased 18.5%. Nine-month return on average assets was 1.39% and return on average equity was 13.73%.
- Net interest income growth reflected higher average earning assets, particularly commercial loans, and improved loan and securities yields. The benefit from Federal Reserve rate increases exceeded higher funding costs during the periods discussed.
- Nine-month operating cash flow was $53.1 million, compared with $49.5 million in 2016. Investing cash outflow was $202.4 million and financing cash inflow was $111.9 million. Cash and cash equivalents ended at $129.8 million, down $37.4 million from year-end 2016.
Balance sheet, funding, and capital
- Total assets were $4.454 billion, up 3.8% from December 31, 2016. Gross loans were $3.636 billion, up $164.8 million; available-for-sale securities were $536.5 million, up $32.4 million.
- Deposits increased $296.1 million to $3.874 billion. Brokered deposits rose to $296.4 million from $98.2 million, including $150 million raised in Q3 at a 1.77% weighted-average rate and 1.7-year weighted-average term. Management said proceeds helped reduce short-term borrowings.
- Short-term borrowings were $63.9 million versus $230.0 million at year-end 2016. Subordinated debentures were $30.9 million. Total stockholders’ equity was $462.4 million, up 8.3%; the reported tangible capital ratio was 10.32%.
- At September 30, the Company and Bank were classified as well-capitalized. Consolidated total capital to risk-weighted assets was 13.58%, Tier 1 capital was 12.42%, and common equity Tier 1 was 11.65%.
Changes, risks, and management commentary
- Loan growth centered on commercial and commercial real estate lending; those categories represented 37.5% and 38.8% of loans, respectively. Agricultural loans declined $77.0 million, partly offsetting growth elsewhere.
- Nonperforming assets increased to $10.5 million from $6.9 million at year-end, primarily after two commercial relationships entered nonaccrual status. Nonperforming loans were 0.28% of total loans versus 0.19%. Impaired loans fell to $16.7 million from $20.7 million. The allowance was $45.5 million, or 1.25% of loans.
- Management cited stable credit metrics and economic conditions in its markets, but noted that commercial-loan concentration and large individual exposures can make asset quality sensitive to a limited number of borrowers. It warned that weaker economic conditions could increase delinquencies, nonperforming loans, charge-offs, and required reserves.
- Nine-month noninterest expense increased 9.3%, including higher compensation and corporate/business-development costs. The latter included $850,000 of community support and donations and $499,000 of additional advertising expense. Mortgage banking income declined 32.7% for the nine months as originations fell.
- A $964,000 income-tax benefit from adoption of share-based payment accounting reduced the nine-month effective tax rate to 31.0%. The filing says this accounting change may make tax expense more volatile.
- Interest-rate risk is the principal market risk. Management’s 12-month simulation estimated net interest income 10.85% lower under a 100-basis-point rate decline and 8.68% higher under a 100-basis-point increase versus its base scenario; actual results may differ because the model depends on assumptions.
- No earnings guidance was provided. Management said results for the interim periods are not necessarily indicative of full-year results. The filing reported no material pending litigation, no material changes to previously disclosed risk factors, and effective disclosure controls.
- Accounting matters to monitor include CECL, effective for the Company in 2020: management expects earlier recognition of credit losses but was still evaluating the impact. The Company also estimated approximately $4.7 million of lease obligations would be recognized as assets and liabilities when the new lease standard takes effect in 2019.
Important facts for investors to verify
- Whether rapid loan growth and increased nonperforming assets—especially the two commercial relationships entering nonaccrual—affect future credit costs and allowance adequacy.
- How the larger share of brokered deposits affects funding costs, deposit stability, and liquidity as those deposits mature.
- Whether net interest margin benefits persist as deposit and borrowing costs reprice alongside variable-rate loans.
- Whether higher operating expenses, including compensation, advertising, and community support, remain consistent with revenue growth and efficiency gains.
- Management’s eventual quantified assessment of CECL adoption and the timing and balance-sheet effects of the new lease standard.