Lakeland Financial Corporation — Q1 2013 Form 10-Q
Business context and period. Lakeland Financial is the holding company for Lake City Bank, operating 45 offices in 13 counties in Northern and Central Indiana. This unaudited report covers the quarter ended March 31, 2013; income and cash-flow comparisons are against Q1 2012, while balance-sheet comparisons are against December 31, 2012. Dollar figures below are in millions unless noted.
Financial performance and position
| Metric | Q1 2013 / March 31, 2013 | Comparison |
|---|---|---|
| Net income | $9.25 | $8.63 in Q1 2012; up 7.2% |
| EPS | $0.56 basic and diluted | Basic: $0.53; diluted: $0.52 in Q1 2012 |
| Interest income / expense | $26.29 / $5.04 | $29.78 / $7.28 in Q1 2012 |
| Net interest income | $21.26 | $22.50 in Q1 2012; down 5.5% |
| Net interest margin | 3.17% | 3.41% in Q1 2012 |
| Noninterest income / expense | $7.48 / $14.89 | $5.85 / $14.68 in Q1 2012 |
| Provision for loan losses | $0 | $0.80 in Q1 2012 |
| Operating cash flow | $23.11 | $13.97 in Q1 2012 |
| Investing / financing cash flow | $(25.43) / $(154.25) | Q1 2012: $(3.22) / $51.69 |
| Total assets | $2,927.7 | $3,064.1 at year-end 2012 |
| Loans, net of allowance | $2,211.6 | $2,206.1 at year-end 2012 |
| Deposits | $2,451.2 | $2,581.8 at year-end 2012 |
| Cash and cash equivalents | $75.7 | $232.2 at year-end 2012 |
| Borrowings | $113.5 short-term; $0.04 long-term; $30.9 subordinated debentures | Short-term: $121.9; long-term: $15.0; subordinated debentures: $30.9 at year-end 2012 |
| Total equity | $306.7 | $297.8 at year-end 2012 |
Material changes and management commentary
- Net income growth reflected higher noninterest income and no loan-loss provision, partly offset by lower net interest income and modestly higher expenses. Noninterest income rose 27.9%, including $0.59 million of client interest-rate-swap fees; Q1 2012 included a $0.51 million securities impairment charge.
- Net interest income fell as margin compressed 24 basis points. Management cited the prolonged low-rate environment, competitive commercial-loan pricing, lower securities reinvestment yields, and deposit mix. It expects continued pressure on net interest margin and commercial-loan yields.
- Average earning assets increased 2.4% year over year to $2.768 billion, but their tax-equivalent yield declined to 3.91% from 4.49%. Management was reevaluating investment strategy, including possible high-quality, higher-yield alternatives, but did not expect a significant change.
- Period-end deposits declined $130.6 million, or 5.1%, from year-end; cash and cash equivalents fell $156.6 million. Management attributed the cash decline both to reduced deposits and borrowings and to a decision to hold lower correspondent-bank compensating balances. The company maintains a contingency funding plan with multiple potential sources.
- Total loans increased modestly from year-end. Management expects loan growth to be moderate as the recovery progresses. Commercial, commercial real estate, and agricultural lending made up most of the portfolio.
- Credit measures improved from year-end: nonperforming assets fell to $22.4 million from $31.6 million; nonperforming loans were 0.96% of loans versus 1.37%; impaired loans declined to $47.7 million from $58.9 million. Net charge-offs were $0.63 million versus $1.4 million in Q1 2012. The allowance was $50.8 million, or 2.25% of loans, versus 2.28% at year-end.
- Credit remains concentrated: three commercial relationships represented 73.4% of nonperforming loans. Management cautioned that full repayment is not assured and that real estate development and certain manufacturing industries remain challenged. Troubled debt restructurings totaled $43.2 million, including $19.6 million nonaccrual; $1.8 million of loans were modified as TDRs during the quarter.
- Regulatory capital remained above “well capitalized” thresholds. Bank Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios were 10.9%, 13.3%, and 14.5%; corresponding holding-company ratios were 11.1%, 13.5%, and 14.8%.
Outlook, risks, and unusual items
- No formal earnings or financial guidance is provided. Management’s stated outlook includes continued net interest margin pressure and moderate loan growth.
- Interest-rate risk is the primary market risk. Management reported modeled exposure within its policy limit and not significantly different from year-end; it cited a prolonged low-rate environment as a risk to earnings.
- Five remaining non-agency mortgage-backed securities, totaling $5.9 million, were no longer rated AAA/Aaa by at least one rating agency; one was below investment grade by at least one agency. Management reported no impairment or unrealized loss on these securities at quarter-end and stated it did not intend to sell securities before recovery or maturity.
- The company introduced customer interest-rate swaps, generally offsetting customer contracts with swaps to highly rated counterparties. These derivatives are not designated as accounting hedges; fair-value changes run through noninterest income.
- Management identified credit-loss estimates, mortgage-servicing-rights valuation, and securities valuation/impairment as critical accounting judgments. It reported no material subsequent events, no material pending litigation beyond routine matters, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the deposit outflow and sharp decrease in cash were temporary or continued in subsequent periods, and how the bank’s liquidity sources performed.
- Whether margin compression continued, including the effects of low rates, loan pricing competition, securities prepayments, and deposit costs.
- Developments in the three large nonperforming commercial relationships, TDR performance, and the adequacy of the allowance for loan losses.
- Any further downgrades, valuation changes, or impairment in the non-agency mortgage-backed securities portfolio.
- Future contribution of swap fees and other noninterest income, and the related counterparty, credit, and fair-value risks.