Lakeland Financial Corporation — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; comparisons are primarily with FY 2016. The filing also reports fourth-quarter results. Lakeland Financial is an Indiana bank holding company operating Lake City Bank, with 49 branches in 15 Indiana counties and a focus on commercial and relationship banking.
Financial performance and position
| Metric | FY 2017 / year-end 2017 | FY 2016 / year-end 2016 |
|---|---|---|
| Net interest income | $135.9 million | $118.5 million |
| Noninterest income | $36.0 million | $32.9 million |
| Total revenue (net interest and noninterest income) | $171.9 million | $151.3 million |
| Provision for loan losses | $3.0 million | $1.2 million |
| Noninterest expense | $79.3 million | $73.0 million |
| Net income | $57.3 million | $52.1 million |
| Diluted earnings per share | $2.23 | $2.05 |
| Net interest margin | 3.33% | 3.18% |
| Efficiency ratio | 46.11% | 48.22% |
| Total assets | $4.683 billion | $4.290 billion |
| Total loans | $3.818 billion | $3.471 billion |
| Total deposits | $4.009 billion | $3.578 billion |
| Total equity | $468.7 million | $427.1 million |
Net income rose 10.1%; assets increased 9.2%, loans 10.0%, and deposits 12.0%. Loan growth, particularly commercial lending, drove higher interest income. The net interest margin improved as asset yields rose more than funding costs. Fee income grew 9.6%, led by deposit service charges and wealth advisory fees; lower mortgage originations reduced mortgage banking income.
Cash flow: Operating activities provided $77.2 million; investing activities used $396.1 million, principally reflecting loan growth and securities purchases; financing activities provided $327.7 million, including deposit growth. Cash and cash equivalents increased $8.9 million to $176.2 million.
Credit and asset quality: The allowance for loan losses was $47.1 million, or 1.23% of loans, versus $43.7 million, or 1.26%, in 2016. Net charge-offs were negative $403,000 (net recoveries). Nonperforming loans increased to $9.4 million, or 0.25% of loans, from $6.7 million, or 0.19%; management attributed the increase mainly to two commercial relationships. The allowance equaled approximately 501% of nonperforming loans.
Debt, liquidity, and capital: Total borrowings were $181.6 million at year-end, including $80.0 million of FHLB advances, $70.7 million of repurchase agreements, and $30.9 million of subordinated debentures. Regulatory capital ratios were 13.26% total risk-based, 12.10% Tier 1 risk-based, 11.37% Common Equity Tier 1, and 10.76% Tier 1 leverage; the Company and Bank were categorized as well-capitalized. Management reported $1.711 billion in approved secondary funding sources, of which $345 million was utilized, subject to facility-specific collateral and borrowing limits.
Material changes and unusual items
- Net interest income increased $17.4 million, while noninterest income rose $3.1 million. Higher expenses ($6.3 million) and loan-loss provision ($1.9 million) partly offset the growth.
- Income tax expense increased to $32.3 million from $25.1 million. The Tax Cuts and Jobs Act prompted a $4.1 million noncash, non-operating, nonrecurring charge to revalue deferred tax assets as the federal corporate rate fell from 35% to 21%. Management expected lower income tax expense over the long term beginning in 2018. A $964,000 tax benefit from adopted share-based-payment accounting partly offset the charge.
- Nonperforming loans rose year over year, although net recoveries were recorded and impaired loans declined in total balance. Commercial real estate and commercial and industrial loans represented approximately 37.8% and 37.1% of loans, respectively; agriculture represented 10.0%.
- Public funds accounted for approximately 32% of deposits, creating exposure to withdrawals or changes in public-deposit insurance arrangements. Brokered deposits increased to $269.0 million from $98.2 million.
- Fourth-quarter 2017 net income was $11.6 million versus $13.5 million in fourth-quarter 2016; fourth-quarter 2017 tax expense was $11.8 million. The annual filing identifies the tax-reform deferred-tax revaluation as a significant nonrecurring item.
Outlook, risks, and contingencies
Management described its 2018 outlook as continued organic loan and deposit growth, disciplined credit, and ongoing investment in people, technology, and branches, including expansion in Indianapolis. No numerical earnings or growth guidance is provided. The Federal Reserve’s December 2017 projections anticipated three rate increases in 2018; this was not company guidance. Lakeland’s model projected 12-month net interest income down 9.94% under an immediate 100-basis-point rate decline and up 23.59% under a 300-basis-point increase; management cautioned that model outcomes depend on assumptions.
Principal risks include regional economic weakness, credit and collateral deterioration, commercial real estate and commercial lending concentrations, agricultural conditions, deposit competition and public-fund concentration, interest-rate and funding risk, cybersecurity and operational disruption, regulatory change, and the ability to manage growth. The allowance for loan losses and securities valuation rely on significant management estimates. The expected-credit-loss accounting standard was scheduled for adoption after 2019; management expected earlier recognition of credit losses but had not quantified the impact. Loan commitments and letters of credit totaled approximately $1.524 billion, and management did not expect significant losses from them. The filing reports no material pending legal proceedings apart from routine litigation.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The filing reports no material legal contingencies identified by management.
Important facts for investors to verify
- Whether growth in commercial, commercial real estate, and agricultural lending is accompanied by stable credit quality, particularly given the year-over-year increase in nonperforming loans and classified credits.
- The stability and pricing of public-fund and brokered deposits, deposit maturities, and the practical availability of contingent borrowing capacity.
- The final tax impact of the Tax Cuts and Jobs Act and whether reduced ongoing tax expense offsets the 2017 deferred-tax revaluation charge.
- How actual net interest income and funding costs compare with the filing’s rate-sensitivity scenarios as rates and deposit competition change.
- The eventual allowance and capital effects of the expected-credit-loss accounting standard, and any changes in commitments, liquidity, or regulatory capital.