2023-03-31 06:30:40 ET
Summary
- The margin will continue to expand amid the rising rate environment thanks to a variable-rate-heavy loan portfolio.
- Indiana’s economic condition is currently satisfactory, which bodes well for loan growth.
- The December 2023 target price suggests a small upside from the current market price. Further, LKFN is offering a modest dividend yield.
- LKFN currently has a large balance of unrealized losses on its securities portfolio.
Earnings of Lakeland Financial Corporation ( LKFN ) will most probably continue on an uptrend this year thanks to the topline’s moderately high rate sensitivity. Additionally, regional economic factors will drive loan growth, which will, in turn, boost earnings. Consequently, I’m expecting Lakeland Financial to report earnings of $4.49 per share for 2023, up 11% year-over-year. The year-end target price suggests a small upside from the current market price; therefore, I’m adopting a hold rating on LKFN stock.
Favorable Loan Mix to Ensure Margin Expansion
Lakeland Financial Corporation’s net interest margin grew by 32 basis points in the fourth quarter, after growing by 31 basis points in the third quarter of 2022. Going forward, the margin is likely to continue to expand due to the ongoing up-rate cycle and the margin’s moderately-high rate sensitivity.
Lakeland Financial’s loan portfolio is heavy on variable-rate loans; therefore, the average loan yield is quite responsive to interest rate changes. Variable-rate loans made up 66% of total loans at the end of December 2022, according to details given in the 10-K filing . Moreover, fixed-rate loans that will mature within a year made up 13% of total loans.
Compared to the loan mix, the deposit mix is less concentrated on variable-rate products. Savings and transactions accounts, which re-price frequently, made up 57% of total deposits at the end of December 2022.
The results of the management’s rate-sensitivity analysis given in the 10-K filing show that a 200-basis points rate hike can boost the net interest income by 5.80% over twelve months.
Considering these factors, I’m expecting the margin to increase by 20 basis points in 2023. In comparison, the average margin for 2022 was 33 basis points higher than the average margin for 2021.
Regional Job Market, Agricultural Prices Bode Well for Loan Growth
Lakeland Financial’s loan portfolio ballooned by 4.9% in the last quarter of 2022, which took the full-year loan growth to 9.9%. The last quarter’s performance was quite impressive as it was broad-based across all markets, according to details given in the earnings release .
Lakeland is based in Indiana, so the state’s economy is pivotal for loan growth. As shown below, the state's unemployment rate is very low when compared to both the national average and the past.
Lakeland also has some exposure to agricultural loans, which make up about 9% of total loans. Therefore, the prices of agricultural products also determine loan growth. As shown below, corn and soybean prices are still high despite the downtrend late last year, which bodes well for loan growth.
On the other hand, high borrowing costs are bound to diminish credit demand. Considering these factors, I’m expecting the loan portfolio to grow by 4% in 2023. The following table shows my balance sheet estimates.
Financial Position | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
Net Loans | 3,866 | 4,015 | 4,588 | 4,220 | 4,638 | 4,826 |
Growth of Net Loans | 2.5% | 3.9% | 14.3% | (8.0)% | 9.9% | 4.1% |
Other Earning Assets | 626 | 657 | 922 | 2,037 | 1,363 | 1,405 |
Deposits | 4,044 | 4,134 | 5,037 | 5,735 | 5,461 | 5,682 |
Borrowings and Sub-Debt | 276 | 170 | 75 | 75 | 297 | 306 |
Common equity | 522 | 598 | 657 | 705 | 569 | 637 |
Book Value Per Share ($) | 20.3 | 23.2 | 25.7 | 27.5 | 22.1 | 24.8 |
Tangible BVPS ($) | 20.1 | 23.0 | 25.5 | 27.3 | 21.9 | 24.6 |
Source: SEC Filings, Author's Estimates(In USD million unless otherwise specified) |
Expecting Earnings to Increase by 11%
The anticipated margin expansion and loan growth will boost the top line, and consequently earnings this year. I’m expecting Lakeland Financial to report earnings of $4.49 per share for 2023, up 11% year-over-year. The following table shows my income statement estimates.
Income Statement | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
Net interest income | 151 | 155 | 163 | 178 | 203 | 242 |
Provision for loan losses | 6 | 3 | 15 | 1 | 9 | 8 |
Non-interest income | 40 | 45 | 47 | 45 | 42 | 43 |
Non-interest expense | 86 | 89 | 91 | 104 | 110 | 136 |
Net income - Common Sh. | 80 | 87 | 84 | 96 | 104 | 116 |
EPS - Diluted ($) | 3.13 | 3.38 | 3.30 | 3.74 | 4.04 | 4.49 |
Source: SEC Filings, Earnings Releases, Author's Estimates(In USD million unless otherwise specified) |
Large Balance of Unrealized Losses is Cause for Concern
Due to the increase in interest rates last year, large unrealized mark-to-market losses have built up on Lakeland’s available-for-sale securities portfolio. The unrealized losses amounted to $215.3 million at the end of December 2022, which is a whopping 38% of the equity balance. Further $215.3 million is twice as large as the net income reported for last year. If there is a deposit run, like SVB Financial’s case ( OTC:SIVBQ ), and Lakeland needs to sell its securities portfolio, then the unrealized losses will turn into realized losses. In such a case, the company’s market valuation will suffer. However, I believe the chances of this occurring are very low due to the following factors.
- There is very little threat of a spillover effect as Lakeland’s markets do not overlap with the Californian markets of the failed banks, SVB Financial, Signature Bank ( OTC:SBNY ), and Silvergate Capital ( SI ). As it is, the situation in the banking sector seems to have cooled and fears seem to have eased this week with no new failures or other worrying events.
- Lakeland Financial does not have material exposure to risky assets like cryptocurrencies and digital tokens.
- Lakeland does not mention exposure to venture capital assets and start-ups in its SEC Filings.
Low Total Expected Return Justifies a Hold Rating
Lakeland Financial is offering a dividend yield of 3.0% at the current quarterly dividend rate of $0.46 per share. The earnings and dividend estimates suggest a payout ratio of 41% for 2023, which is above the five-year average of 35%, but still easily sustainable. Therefore, the dividend appears secure.
I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Lakeland Financial. The stock has traded at an average P/TB ratio of 2.42x in the past, as shown below.
FY19 | FY20 | FY21 | FY22 | Average | |
T. Book Value per Share ($) | 23.0 | 25.5 | 27.3 | 21.9 | |
Average Market Price ($) | 45.7 | 45.1 | 67.3 | 75.6 | |
Historical P/TB | 1.99x | 1.77x | 2.46x | 3.45x | 2.42x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/TB multiple with the forecast tangible book value per share of $24.6 gives a target price of $59.4 for the end of 2023. This price target implies a 4.5% downside from the March 30 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 2.22x | 2.32x | 2.42x | 2.52x | 2.62x |
TBVPS - Dec 2023 ($) | 24.6 | 24.6 | 24.6 | 24.6 | 24.6 |
Target Price ($) | 54.5 | 56.9 | 59.4 | 61.8 | 64.3 |
Market Price ($) | 62.2 | 62.2 | 62.2 | 62.2 | 62.2 |
Upside/(Downside) | (12.4)% | (8.5)% | (4.5)% | (0.6)% | 3.4% |
Source: Author's Estimates |
The stock has traded at an average P/E ratio of around 16.0x in the past, as shown below.
FY19 | FY20 | FY21 | FY22 | Average | |
Earnings per Share ($) | 3.38 | 3.30 | 3.74 | 4.04 | |
Average Market Price ($) | 45.7 | 45.1 | 67.3 | 75.6 | |
Historical P/E | 13.5x | 13.7x | 18.0x | 18.7x | 16.0x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $4.49 gives a target price of $71.8 for the end of 2023. This price target implies a 15.4% upside from the March 30 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 14.0x | 15.0x | 16.0x | 17.0x | 18.0x |
EPS 2023 ($) | 4.49 | 4.49 | 4.49 | 4.49 | 4.49 |
Target Price ($) | 62.8 | 67.3 | 71.8 | 76.3 | 80.8 |
Market Price ($) | 62.2 | 62.2 | 62.2 | 62.2 | 62.2 |
Upside/(Downside) | 1.0% | 8.2% | 15.4% | 22.7% | 29.9% |
Source: Author's Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $65.6, which implies a 5.4% upside from the current market price. Adding the forward dividend yield gives a total expected return of 8.4%. Hence, I’m adopting a hold rating on Lakeland Financial Corporation.
For further details see:
Lakeland Financial: Top-Line Outlook Remains Bright, But Stock Appears Fairly Valued