Lakeland Financial Corporation — Q2 2019 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 three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods unless otherwise noted. Dollar amounts below are in millions unless stated.
Financial performance and condition
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net interest income | $38.4 | $37.5 | $76.6 | $73.8 |
| Provision for loan losses | $0.8 | $1.7 | $2.0 | $5.0 |
| Noninterest income | $11.6 | $9.7 | $23.1 | $19.6 |
| Noninterest expense | $22.1 | $20.3 | $44.6 | $41.5 |
| Net income | $21.7 | $20.1 | $43.4 | $38.5 |
| Diluted EPS | $0.85 | $0.78 | $1.69 | $1.50 |
| Net interest margin, tax-equivalent | 3.37% | 3.42% | 3.42% | 3.39% |
| Efficiency ratio | 44.19% | 42.93% | 44.68% | 44.44% |
- Q2 net income rose 7.8%; first-half net income rose 12.8%. First-half return on average assets was 1.78% versus 1.64%; return on average equity was 16.17% versus 16.35%.
- At June 30, total assets were $4.976 billion, up 2.1% from year-end 2018. Net loans were $3.948 billion, up $81.8 million; available-for-sale securities were $609.8 million, up $24.3 million.
- Deposits totaled $4.221 billion, up $177.2 million from year-end. Core deposits increased $124.1 million and brokered deposits increased $53.1 million. Total borrowings fell $130.6 million to $145.9 million, including the elimination of $75.6 million in repurchase-agreement funding.
- Cash and cash equivalents were $196.4 million, down $20.6 million from year-end. First-half cash from operating activities was $44.7 million; investing activities used $95.3 million and financing activities provided $30.1 million.
- Stockholders’ equity was $565.3 million, up $43.7 million from year-end. The allowance for loan losses was $50.6 million, or 1.26% of loans, versus $48.5 million, or 1.24%, at year-end. Regulatory capital ratios remained above applicable well-capitalized thresholds.
Material changes and management commentary
- First-half earnings growth reflected higher noninterest income, lower loan-loss provision and higher net interest income, partly offset by higher operating expenses and taxes. Noninterest income increased 17.9%, while expenses rose 7.4%.
- Loan growth was concentrated in commercial real estate and commercial and industrial lending; agricultural lending declined, partly due to seasonal repayments and customers choosing long-term fixed-rate financing elsewhere.
- Q2 margin narrowed year over year as deposit costs rose faster than earning-asset yields. Management reported a first-half margin increase, supported by higher loan yields, partly offset by higher funding costs.
- Nonperforming assets increased to $15.3 million from $7.6 million at year-end, primarily because one manufacturing borrower was placed on nonaccrual amid cash-flow and inventory challenges. Nonperforming loans were 0.38% of loans, versus 0.19% at year-end. Management described overall market conditions and key credit metrics as stable, while noting the increase in classified/watch-list exposures.
- A single commercial treasury-management client generated $3.7 million in first-half fees, including $2.1 million in Q2. The bank terminated the relationship after discovering potentially fraudulent activity involving multiple banks; it reported no loss, said an investigation was ongoing, and stated the revenue will not recur. The bank is reviewing related enterprise-risk policies and procedures.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management said first-half results are not necessarily indicative of full-year results.
- The company is preparing for CECL, effective for it in 2020, and expects earlier loss recognition and a one-time cumulative adjustment to the allowance and opening retained earnings; the impact was not yet quantifiable.
- Interest-rate risk is the principal market risk. The filing’s simulation estimated a 7.49% decrease in projected 12-month net interest income under a 100-basis-point rate decline and an 18.38% increase under a 300-basis-point increase; management cautioned that actual results may differ from model estimates.
- Available-for-sale securities had $780,000 of gross unrealized losses at June 30, down from $8.9 million at year-end. Management attributed losses primarily to interest rates and said it did not intend, and was not likely to be required, to sell affected securities before recovery.
- Effective January 1, 2019, adoption of the callable-debt premium accounting update reduced retained earnings by approximately $1.3 million after tax. Lease accounting added a $5.5 million right-of-use asset and lease liability, with no material operating-results impact.
- After quarter-end, the company entered a one-year unsecured revolving credit agreement for up to $30 million, usable for general corporate purposes or share repurchases. Its board-authorized buyback program allows up to $30 million of repurchases through December 31, 2019; the program does not require purchases. No material pending litigation or material risk-factor changes were reported.
Most important facts for investors to verify
- Whether the terminated treasury-management relationship’s nonrecurring $3.7 million fee contribution is replaced by recurring revenue, and whether the ongoing review or investigation results in costs, losses or control changes.
- Trends in the manufacturing exposure, nonperforming assets, classified loans and allowance adequacy as commercial loan balances grow.
- Deposit pricing, funding mix and net interest margin sensitivity if interest rates change.
- The eventual CECL adoption estimate and its effect on the allowance, opening equity and capital ratios.
- Whether the $30 million credit facility is drawn and whether share repurchases proceed, alongside liquidity and capital needs.