Lakeland Financial Corporation — 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019. Lakeland Financial is an Indiana bank holding company whose wholly owned Lake City Bank provides commercial and consumer banking, wealth management and related services in northern and central Indiana. It reported $4.95 billion in assets and operated 50 branches at year-end.
Financial performance and condition
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net income | $87.0 million | $80.4 million | +8.3% |
| Diluted earnings per share | $3.38 | $3.13 | +8.0% |
| Net interest income | $155.0 million | $151.3 million | +2.5% |
| Noninterest income | $45.0 million | $40.3 million | +11.6% |
| Noninterest expense | $89.4 million | $86.2 million | +3.7% |
| Total assets | $4.95 billion | $4.88 billion | +1.5% |
| Total loans, gross | $4.07 billion | $3.92 billion | +3.9% |
| Total deposits | $4.13 billion | $4.04 billion | +2.2% |
- Profitability and margins: Return on average assets was 1.76%, up from 1.69%; return on average equity was 15.47%, down from 16.51%. Net interest margin declined to 3.38% from 3.43%, as funding costs rose faster than yields late in the year. The efficiency ratio improved to 44.70% from 45.01%.
- Cash flow: Operating activities provided $100.0 million, investing activities used $168.7 million and financing activities used $48.9 million. Cash and cash equivalents fell $117.5 million to $99.4 million, principally reflecting loan growth and investing activity.
- Debt and liquidity: Borrowings were $170.0 million at year-end, down from $276.5 million. The company repaid $30.9 million of subordinated debentures and ended the year with $170.0 million of FHLB advances; repurchase-agreement balances were zero. Deposits funded most balance-sheet needs. Management reported $2.28 billion in approved secondary funding sources, of which $283.5 million was utilized, subject to facility and collateral limitations.
- Capital: Consolidated total risk-based capital was 14.36%, common equity Tier 1 was 13.21%, and Tier 1 leverage was 11.67%. The company and Bank were reported as well-capitalized. Total equity was $598.1 million, up from $521.7 million.
- Credit quality: The allowance for loan losses was $50.7 million, or 1.25% of loans, versus $48.5 million, or 1.24%. Net charge-offs were $1.0 million, or 0.03% of average loans, compared with $5.1 million, or 0.13%. Nonperforming loans increased to $18.7 million (0.46% of loans) from $7.3 million (0.19%), primarily following the addition of one manufacturing borrower. Allowance coverage of nonperforming loans declined to 271% from 667%.
Changes, outlook and notable items
- 2019 earnings growth reflected higher noninterest income and net interest income, along with lower loan-loss provision expense; higher operating costs and taxes partly offset those benefits. Growth in fee income included $1.7 million of commercial loan swap fees. Management said $4.5 million of deposit-service-charge revenue associated with one commercial treasury-management relationship would not recur after that relationship ended.
- Commercial real estate was 41.1% of loans, commercial and industrial loans 35.1%, and agriculture-related loans 9.3%. Management reported that the Bank remained below cited regulatory CRE concentration indicators.
- Management’s 2020 plans were for continued organic loan and deposit growth, disciplined credit practices, continued staffing and technology investment, geographic expansion and cybersecurity enhancements. The filing provides no quantified earnings or revenue guidance. It cited the Federal Reserve’s December 2019 projections of no rate changes in 2020, while noting those projections were not company guidance.
- The company expected to adopt CECL on January 1, 2020 and estimated an 8%–13% increase in its allowance for credit losses at adoption; the final effect depended on assumptions and adjustments. It also identified the LIBOR transition, interest-rate and margin sensitivity, regional economic conditions, tariffs, agricultural risks, cybersecurity and potential pandemic-related effects among risks.
- Other notable items: available-for-sale securities generated $18.3 million of after-tax other comprehensive income in 2019; there were no reported securities impairment charges. The company reauthorized a common-stock repurchase program of up to $30 million in January 2020. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective controls.
Important facts for investors to verify
- Whether the rise in nonperforming loans, particularly the manufacturing credit, resulted in further deterioration, charge-offs or reserve changes after year-end.
- Actual CECL adoption effects versus the disclosed 8%–13% allowance estimate, including the resulting impact on capital and earnings.
- Recurring fee-income levels after the termination of the commercial treasury-management relationship, and the durability of swap-related and other income growth.
- Net interest margin, deposit pricing and liquidity trends as rates change; confirm public-fund deposits, which were 27.2% of year-end deposits, remain stable.
- Whether planned organic growth and the $30 million repurchase authorization are executed without weakening capital, underwriting or funding flexibility.
- The cash-flow decline and the amount of genuinely available borrowing capacity, considering collateral requirements and the stated limits on facilities.