Lakeland Financial Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Lakeland Financial is a bank holding company; its principal subsidiary is Lake City Bank. Income-statement and cash-flow comparisons are against Q1 2018; balance-sheet comparisons are against December 31, 2018. Dollar amounts below are in millions unless otherwise stated.
Financial results and condition
- Profitability: Net income was $21.7 million, up 18.2%; diluted EPS was $0.84 versus $0.71. Annualized return on average assets was 1.80%, return on average equity 16.59%, and the efficiency ratio 45.19%.
- Revenue and margins: Net interest income increased 5.5% to $38.2 million. Net interest margin was 3.45% on a fully tax-equivalent basis, versus 3.36%. Noninterest income rose 16.7% to $11.5 million; noninterest expense rose 6.0% to $22.5 million.
- Credit costs: Provision for loan losses fell to $1.2 million from $3.3 million. Net charge-offs were $91,000, compared with $4.8 million in Q1 2018. The allowance was $49.6 million, or 1.26% of total loans.
- Assets and lending: Total assets were $4.892 billion, up 0.3% from year-end. Net loans were $3.889 billion, up $23.2 million; total loans before the allowance and deferred fees grew $24.3 million. Commercial real estate and multifamily loans increased $60.0 million, while agricultural loans declined $68.2 million.
- Funding and liquidity: Deposits increased $103.4 million to $4.147 billion, including core deposits up $128.2 million and brokered deposits down $24.8 million. Cash and cash equivalents declined $28.2 million to $188.8 million. Total borrowings fell $123.6 million to $152.9 million: $122.0 million of federal funds purchased and $30.9 million of subordinated debentures remained outstanding; FHLB advances and repurchase-agreement balances were zero at quarter-end.
- Cash flow: Operating activities provided $23.7 million, investing activities used $22.8 million, and financing activities used $29.0 million. Cash and cash equivalents decreased $28.2 million during the quarter.
- Capital: Total equity was $543.3 million. The Bank remained “well-capitalized”; its CET1 ratio was 12.77% and total capital ratio was 13.94%. The company reported a tangible common equity-to-tangible assets ratio of 11.04% (a non-GAAP measure).
Material changes and management commentary
- Net income growth reflected higher net interest income, lower loan-loss provision, and increased fee income, partly offset by higher expenses and income taxes. Management attributed fee growth particularly to treasury-management activity and continued client relationship growth.
- Higher loan yields lifted earning-asset yield, but funding costs also increased: the cost of interest-bearing liabilities rose to 1.81% from 1.19%. Management said the higher net interest margin reflected improved loan yields partly offset by increased funding costs.
- Nonperforming assets declined to $7.0 million from $7.6 million; nonperforming loans were 0.17% of total loans. Classified credits rose to $204.9 million from $186.6 million, primarily due to two commercial borrowers. Management described local economic conditions as stable and said it was cautiously optimistic.
- Accumulated other comprehensive income improved by $8.7 million, primarily from higher fair values of available-for-sale securities. The securities portfolio had $3.1 million of gross unrealized losses; management attributed losses primarily to interest rates and said it did not intend, and was unlikely to be required, to sell affected securities before recovery.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or full-year financial guidance. Management cautioned that Q1 results are not necessarily indicative of full-year results.
- Interest-rate risk is the company’s primary market risk. Its 12-month simulation projected net interest income 7.95% below base under a 100-basis-point rate decline and 6.68% above base under a 100-basis-point increase; management noted that actual results may differ because of model assumptions and customer behavior.
- Management expects the upcoming CECL credit-loss standard to result in earlier loss recognition and a one-time cumulative adjustment to the allowance; the impact had not yet been quantified. Adoption was expected for fiscal years beginning after December 15, 2019.
- Adoption of the new lease standard resulted in recognition of a $5.5 million right-of-use asset and lease liability, with no material effect on results. Adoption of callable-debt premium guidance reduced opening retained earnings by approximately $1.3 million, net of tax.
- A 2009 warrant was exercised cashlessly in February 2019, resulting in issuance of 224,066 common shares and retirement of the warrant. The company declared dividends of $0.26 per share for the quarter.
- Risks identified include economic and credit conditions, interest rates, deposit and funding costs, real-estate values, concentration in commercial lending, regulation, cybersecurity, competition, and accounting estimates. No material changes to previously disclosed risk factors were reported; no material pending legal proceedings were reported beyond routine litigation.
Important facts for investors to verify
- Whether commercial loan growth and fee-income gains continue, and how deposit pricing and wholesale funding affect net interest margin.
- Trends in classified credits, commercial real-estate exposures, agricultural lending, charge-offs, and allowance adequacy.
- The eventual CECL adoption impact and any change to management’s assessment of credit quality or reserves.
- Actual sensitivity to interest-rate changes relative to the company’s modeled scenarios.
- Cash-flow and liquidity developments, including the use of federal funds purchased and changes in core, brokered, and public-fund deposits.