Lakeland Financial Corporation — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; comparisons are primarily with FY 2017. The filing also reports unaudited fourth-quarter results. Lakeland Financial is an Indiana bank holding company operating Lake City Bank, with 49 offices at year-end across northern and central Indiana; its 50th office opened in Indianapolis in January 2019.
Financial performance and condition
| Metric | FY 2018 / Dec. 31, 2018 | FY 2017 / Dec. 31, 2017 |
|---|---|---|
| Net interest income | $151.3 million | $135.9 million |
| Noninterest income | $40.1 million | $36.0 million |
| Net income | $80.4 million | $57.3 million |
| Diluted EPS | $3.13 | $2.23 |
| Net interest margin | 3.43% | 3.33% |
| Efficiency ratio | 44.96% | 46.11% |
| Total assets | $4.875 billion | $4.683 billion |
| Total loans | $3.916 billion | $3.820 billion |
| Total deposits | $4.044 billion | $4.009 billion |
| Total borrowings | $276.5 million | $181.6 million |
| Allowance for loan losses | $48.5 million; 1.24% of loans | $47.1 million; 1.23% of loans |
- Total revenue, measured as net interest income plus noninterest income, was $191.4 million. Pretax income was $98.9 million; income tax expense was $18.5 million, for an effective tax rate of 18.7%.
- Operating cash flow was $105.0 million; investing cash flow was negative $166.4 million and financing cash flow was positive $102.2 million. Cash and cash equivalents ended the year at $216.9 million.
- Capital remained above regulatory well-capitalized thresholds: consolidated total risk-based capital was 14.20%, Tier 1 capital 13.06%, common equity Tier 1 12.35%, and Tier 1 leverage 11.44%. Tangible capital ratio was 10.63%.
- Fourth-quarter net income was $21.4 million and diluted EPS was $0.83, compared with $11.6 million and $0.45 in Q4 2017.
Material changes and notable items
- FY net income increased 40.3%. Net interest income rose 11.3%, reflecting loan growth and higher asset yields; net interest margin increased 10 basis points. Average earning assets grew 6.7%.
- Noninterest income rose 11.4%, led by deposit service charges, wealth fees, and loan and service fees. Noninterest expense rose 8.5%, including higher staff, technology, occupancy, and equipment costs.
- Provision for loan losses increased to $6.4 million from $3.0 million. Net charge-offs were $5.1 million, including a $5.1 million charge-off tied to one commercial relationship. Nonperforming loans decreased to $7.3 million from $9.4 million, while impaired loans increased to $26.7 million from $13.9 million.
- The 2018 effective tax rate fell to 18.7% from 36.0%, principally reflecting the Tax Cuts and Jobs Act’s reduction of the federal corporate rate to 21%. FY 2017 included a one-time, noncash $4.1 million deferred-tax revaluation expense; 2018 included a $408,000 tax benefit related to the tax reform revaluation.
- Deposits increased $35.4 million, as core deposits grew $135.5 million and brokered deposits declined $100.1 million. Borrowings increased $94.9 million, primarily from FHLB advances. Public funds were 30.0% of deposits.
- Available-for-sale securities had $8.9 million of gross unrealized losses at year-end, versus $4.1 million in 2017; management attributed the losses primarily to interest rates and reported no other-than-temporary impairment.
Outlook, risks, and contingencies
- Management described 2019 plans for continued organic loan and deposit growth, disciplined credit, further Indianapolis expansion, and investment in staff and technology. The filing provides no numerical earnings or growth guidance.
- Key exposures include the Indiana-centered footprint; commercial real estate, commercial and industrial, and agricultural lending; borrower and collateral deterioration; and dependence on interest-sensitive funding. Commercial real estate was 40.1% of loans, C&I 35.9%, and agriculture 9.5%.
- Management identified interest-rate, liquidity, competition, regulatory, cybersecurity, technology, tax, and LIBOR-transition risks. Its modeled 12-month net interest income was 7.11% below base under an immediate 100-basis-point rate decline and 5.61% above base under a 100-basis-point rise; actual results may differ because of model assumptions.
- Liquidity resources included $1.863 billion of approved secondary funding sources, of which $334.9 million was utilized. The filing also describes undrawn correspondent-bank lines and Federal Reserve borrowing capacity; FHLB availability was constrained by collateral.
- Off-balance-sheet commitments totaled $1.741 billion, principally unused loan commitments. Management did not expect significant losses from these commitments. The filing reports no material pending litigation.
- Expected near-term items include adoption of a callable-securities premium amortization standard in 2019, which reduced retained earnings by approximately $1.3 million net of tax, and implementation work for the expected-credit-loss standard. Management expects earlier loss recognition under that standard; the filing does not provide a clear quantified impact.
- After year-end, the board authorized up to $30 million of share repurchases through December 31, 2019. A Treasury warrant was exercised cashlessly in February 2019, resulting in issuance of 224,066 shares.
Most important facts for investors to verify
- Whether loan quality stabilizes after the large C&I charge-off and the rise in impaired loans and specific reserves.
- How commercial real estate, C&I, agricultural, and public-fund deposit concentrations perform if local economic conditions weaken.
- Whether deposit pricing and wholesale funding costs outpace loan repricing and pressure net interest margin.
- The actual impact of the new expected-credit-loss accounting standard and the LIBOR transition on reserves, earnings, and contracts.
- Whether planned growth, branch and technology spending, dividends, and the authorized repurchase remain consistent with capital and liquidity objectives.
Audit and controls: The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective as of year-end.