Lakeland Financial Corporation — Q2 2017 Form 10-Q
Business context and reporting period. Lakeland Financial Corporation is a bank holding company whose principal subsidiary is Lake City Bank. This unaudited filing covers the quarter and six months ended June 30, 2017. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net income | $15.4 million | $12.8 million | $29.9 million | $25.1 million |
| Diluted EPS | $0.60 | $0.50 | $1.17 | $0.99 |
| Net interest income | $33.8 million | $29.3 million | $65.9 million | $57.9 million |
| Provision for loan losses | $0.5 million | None | $0.7 million | None |
| Noninterest income | $8.8 million | $8.1 million | $17.1 million | $15.1 million |
| Noninterest expense | $19.4 million | $18.4 million | $39.4 million | $35.8 million |
| Net interest margin, tax-equivalent | 3.34% | 3.19% | 3.31% | 3.22% |
| Efficiency ratio | 45.42% | 49.40% | 47.51% | 49.11% |
- Balance sheet at June 30: Total assets were $4.393 billion, up 2.4% from year-end 2016. Total loans were $3.578 billion, up $106.6 million; loans net of allowance and deferred fees were $3.532 billion. Available-for-sale securities were $530.3 million.
- Funding and liquidity: Deposits totaled $3.616 billion, up $38.0 million from December 31, 2016. Short-term borrowings were $275.2 million, up $45.1 million; total borrowings including long-term borrowings were $275.2 million, with $30.9 million of subordinated debentures separately reported. Cash and cash equivalents were $137.3 million, down $29.9 million over the half-year.
- Cash flows, six months: Operating activities provided $35.9 million; investing activities used $136.7 million, principally reflecting loan growth and securities purchases; financing activities provided $70.9 million. Cash declined by $29.9 million to $137.3 million.
- Equity and capital: Total equity was $450.5 million, up $23.4 million since year-end. Tangible common equity to tangible assets was 10.19% (a non-GAAP measure). The Company and Bank were described as well-capitalized; consolidated total capital to risk-weighted assets was 13.30% and CET1 was 11.39%.
Material changes versus comparable periods
- Q2 net income rose 20.0% year over year; first-half net income rose 19.1%. Management attributed higher net interest income mainly to growth in average earning assets, particularly commercial loans, and higher loan yields following Federal Reserve rate increases.
- Q2 net interest margin increased 15 basis points year over year; the first-half margin increased 9 basis points. The increase in asset yields more than offset higher funding costs.
- First-half noninterest income rose 12.8%, supported by deposit service charges, wealth advisory fees, bank-owned life insurance income, and other income. First-half noninterest expense increased 10.0%, primarily from compensation and corporate/business development costs, including donations and advertising.
- Nonperforming assets increased to $10.1 million from $6.9 million at year-end 2016, mainly after two commercial relationships entered nonaccrual status. Nonperforming loans were 0.28% of loans versus 0.19%. The allowance was $44.6 million, or 1.25% of loans, compared with $43.7 million and 1.26% at year-end.
- Commercial and commercial real estate loans made up most of the portfolio and drove growth. Agricultural loans declined $63.5 million, primarily reflecting seasonal decreases.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance was provided. Management said economic conditions in its markets had generally improved and stabilized, but characterized growth as not robust and remained cautious about near-term economic uncertainty.
- Management cited commercial and commercial real estate lending concentration, large individual credit exposures, borrower repayment capacity, and the subjective nature of allowance estimates as credit risks. It said continued loan growth was the primary reason for the first-half loan-loss provision and that it continued monitoring reserve adequacy.
- Troubled debt restructurings totaled $15.3 million, including $6.9 million on nonaccrual. Nonaccrual loans were $9.9 million; management reported no loans past due over 90 days and still accruing at June 30.
- Management identified interest-rate risk as its primary market risk. Its modeled 12-month net interest income was $138.6 million in the base case, down 9.8% under a 100-basis-point decline and up 7.2% under a 100-basis-point rise. Actual outcomes may differ because the model depends on assumptions about rates, prepayments, and deposit behavior.
- A $932,000 tax benefit from adoption of employee share-based payment accounting reduced the first-half effective tax rate to 30.2%, from 32.5%. The filing says future tax expense may be more volatile under this accounting treatment.
- Management did not expect a material financial-statement impact from adopting the new revenue-recognition and financial-instrument standards. It estimated that lease obligations of approximately $4.7 million would be recognized as assets and liabilities when the new lease standard takes effect.
- No material pending legal proceedings, material risk-factor changes, or material control changes were reported. Disclosure controls were assessed as effective at June 30, 2017.
Important facts for investors to verify
- Whether growth in commercial lending can continue without a further deterioration in nonperforming loans, criticized credits, or required loan-loss provisions.
- Developments in the two commercial relationships placed on nonaccrual and in the $15.3 million TDR portfolio.
- Funding costs and reliance on wholesale sources, including brokered deposits and Federal Home Loan Bank advances, as loans grow and interest rates change.
- The sensitivity of net interest income to actual rate movements and deposit repricing, compared with management’s modeled scenarios.
- The sustainability of earnings growth after the one-time $932,000 share-based-payment tax benefit and amid rising compensation and expansion-related expenses.