Lakeland Financial Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are against December 31, 2015 unless stated otherwise. Lakeland Financial is a bank holding company whose principal subsidiary is Lake City Bank. Financial statements are unaudited.
Financial performance and condition
| Metric | Q1 2016 / March 31, 2016 | Comparison |
|---|---|---|
| Net income | $12.3 million; diluted EPS $0.73 | Up 10.3% from $11.1 million and $0.66 in Q1 2015 |
| Net interest income | $28.6 million | Up 11.2% from $25.7 million |
| Net interest margin | 3.26% on a fully tax-equivalent basis | 3.27% in Q1 2015 |
| Noninterest income / expense | $7.0 million / $17.4 million | Income down 9.6%; expense up 2.9% year over year |
| Efficiency ratio | 48.80% | 50.46% in Q1 2015 |
| Assets / loans | $3.809 billion / $3.113 billion in total loans | Assets up 1.1%; loans up $32.4 million from year-end |
| Deposits / borrowings | $3.251 billion / $125.5 million total borrowings | Deposits up $67.3 million; borrowings down $45.1 million |
| Cash and cash equivalents | $80.7 million | Essentially unchanged from year-end |
| Equity | $406.9 million in stockholders’ equity | Up 3.6% from year-end |
| Cash flow | $18.5 million operating inflow; $36.2 million investing outflow; $17.8 million financing inflow | Net cash increased $64,000 during the quarter |
Commercial lending drove growth: average loans increased $334.5 million year over year, with average commercial loans up 12.6%. Commercial loans represented 87.7% of the loan portfolio at quarter-end. Return on average equity was 12.35% and return on average assets was 1.30%; tangible capital ratio was 10.61%.
Credit quality, liquidity and capital
- The allowance for loan losses was $43.3 million, or 1.39% of loans, versus 1.42% at year-end. No provision for loan losses was recorded in either Q1 2016 or Q1 2015. Q1 2016 net charge-offs were $326,000, compared with $585,000 a year earlier.
- Nonperforming assets fell to $7.8 million from $13.3 million; nonperforming loans were 0.24% of total loans versus 0.42%. Management attributed the decline mainly to a $2.7 million commercial credit returning to accrual status and payoff of a $2.0 million nonaccrual credit.
- Total troubled debt restructurings were $14.1 million, including $5.5 million on nonaccrual status. Classified credits totaled $139.9 million across 81 credits.
- Deposits increased, including growth in public-fund certificates of deposit, while brokered deposits declined to $120.1 million from $148.0 million. Total public-funds deposits were $1.022 billion. Short-term borrowings declined, primarily due to lower Federal Home Loan Bank advances.
- The company and bank remained “well-capitalized.” At March 31, consolidated total risk-based capital was 13.74%, Tier 1 risk-based capital 12.48%, common equity Tier 1 11.60%, and Tier 1 leverage 11.15%.
Changes, management commentary and risks
- Profit growth reflected higher net interest income from larger earning assets, especially commercial loans. The margin edged down as funding costs rose modestly, partly offset by higher securities yields.
- Noninterest income declined largely because other income included a $313,000 swap credit-valuation adjustment loss and a $226,000 write-down on a former bank branch held for sale; Q1 2015 had included $460,000 of interest-rate-swap fees versus $10,000 in Q1 2016. Growth in deposit, loan, insurance, service and merchant-card fees partially offset the declines.
- Noninterest expense rose mainly from data-processing and professional fees. Management cited lower employee health-insurance costs as a partial offset. The filing reports no formal earnings or full-year financial guidance.
- Management described market conditions as stable or improving but said improvements were not broad or particularly strong, and remained cautiously optimistic. It noted commercial and commercial-real-estate concentration and the potential sensitivity of asset quality to a limited number of large credits.
- Management said the allowance reflected current credit conditions but warned that economic deterioration could increase delinquencies, nonperforming loans and charge-offs, potentially requiring a higher allowance. Allowance estimates depend on judgment and assumptions about borrowers, collateral and economic conditions.
- Interest-rate risk is the company’s primary market risk. Its model estimated twelve-month net interest income of $113.7 million in the base case, down 1.02% under a 100-basis-point decline and up 8.00% under a 100-basis-point increase. These are modeled scenarios, not forecasts.
- Available-for-sale securities had $14.1 million of gross unrealized gains and $429,000 of gross unrealized losses at quarter-end. Management considered losses primarily interest-rate driven and did not expect material losses unless securities were sold; it reported no intent or likely requirement to sell before recovery.
- No material subsequent events or material pending legal proceedings were reported. Management concluded disclosure controls were effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether commercial loan growth and the high commercial-loan concentration remain consistent with underwriting standards and acceptable credit quality.
- Trends in classified loans, nonaccruals, troubled debt restructurings, charge-offs and allowance adequacy, particularly if local economic conditions weaken.
- The sustainability and cost of deposit growth, including reliance on public funds, large certificates of deposit, brokered deposits and wholesale funding.
- Whether recurring fee growth can offset volatile or lower noninterest-income items, including swap valuation effects and property-related charges.
- Interest-rate exposure and the assumptions underlying the company’s modeled net-interest-income scenarios.