Lakeland Financial Corporation — Q1 2024 Form 10-Q
Business context and reporting period. Lakeland Financial Corporation, the parent of Lake City Bank, reported unaudited consolidated results for the three months ended March 31, 2024; comparisons are with Q1 2023 unless otherwise noted. Amounts are in U.S. dollars.
Key financial metrics
- Earnings: Net income was $23.4 million, down 3.6%; diluted EPS was $0.91 versus $0.94. Pretax pre-provision earnings, a non-GAAP measure, were $29.3 million, down 9.5%. Return on average assets was 1.44%, and return on average equity was 14.59%.
- Net interest and margins: Net interest income was $47.4 million, down 8.0%. Fully tax-equivalent net interest margin contracted 39 basis points to 3.15%. Interest income rose, led by loan growth and higher loan yields, but funding costs rose faster: deposit interest expense increased 65.2% year over year.
- Other income and costs: Noninterest income rose 22.3% to $12.6 million, including a $1.0 million insurance recovery related to a 2023 wire fraud loss. Noninterest expense increased 4.3% to $30.7 million; the efficiency ratio worsened to 51.15% from 47.60%.
- Credit: Provision for credit losses was $1.5 million versus $4.4 million; net charge-offs were $0.3 million versus $5.7 million, with the prior-year period including a $5.5 million charge-off tied to one commercial borrower. The allowance was $73.2 million, or 1.46% of loans. Nonperforming assets were $15.2 million, 0.23% of assets.
- Cash flow: Operating cash flow was $24.8 million; investing cash flow was negative $61.9 million and financing cash flow was positive $32.9 million. Cash and cash equivalents ended the quarter at $147.7 million, down $4.1 million from year-end.
- Balance sheet and liquidity: Total assets were $6.567 billion. Net loans were $4.924 billion, up $79.8 million from December 31, 2023. Deposits declined $102.4 million to $5.618 billion; borrowings increased $150.0 million to $200.0 million, consisting of an FHLB advance at quarter-end. Management reported $3.13 billion of unused aggregate liquidity sources.
- Capital and securities: Total equity was $647.0 million, down $2.8 million from year-end. The reported regulatory capital ratios remained in the “well-capitalized” range; the Bank’s total risk-based capital ratio was 15.36%. The available-for-sale securities portfolio had $189.9 million of net unrealized losses, contributing to a $11.7 million quarterly decline in AOCI. The portfolio’s effective duration was 6.6 years.
Material changes and management commentary
- Net income declined as lower net interest income and higher operating expenses more than offset lower credit-loss provision and higher noninterest income. Excluding the Q1 insurance recovery and related effects, management’s non-GAAP core operational profitability was $22.7 million, down 6.7%; core diluted EPS was $0.88.
- Average loans grew year over year, while average securities and noninterest-bearing demand deposits declined. Deposit competition and migration into interest-bearing accounts raised average deposit costs; management said funding costs may remain elevated. It expects higher-rate loan renewals to support margin, but provided no quantified earnings or margin guidance.
- Quarter-end core deposits declined $152.8 million; brokered deposits increased $50.4 million to $185.8 million, or 3.3% of deposits. The company funded balance-sheet growth in part with additional borrowings.
- Management expects the securities portfolio’s share of assets to decrease over time as paydowns, sales and maturities fund loan growth and other liquidity needs. Mortgage originations for secondary-market sale are expected to remain reduced amid elevated mortgage rates, limited inventory and homeowner lock-in.
Risks, contingencies and unusual items
- Interest-rate risk is the company’s primary market risk. Its simulation estimated next-12-month net interest income would be down 5.62% under a 300-basis-point rate decline and up 1.35% under a 300-basis-point increase; actual results may differ due to model assumptions and customer behavior.
- Commercial and commercial real estate lending are significant portfolio exposures. Commercial office loans totaled $73.6 million, or 1.5% of loans; commercial real estate loans secured by multifamily and non-farm non-residential properties were approximately 205% of Bank risk-based capital. Management cautioned that deteriorating economic conditions could increase delinquencies, nonperforming loans and losses.
- Available-for-sale securities fair values remain sensitive to rates; unrealized losses increased from year-end. Management reported no credit-loss allowance for available-for-sale or held-to-maturity securities.
- Litigation remains pending over alleged check-kiting and related transactions involving a former treasury-management client. Claims against the Company and the Bank’s independent director were dismissed, while some claims against the Bank and four individual representatives remain. The company said a material loss was neither probable nor estimable at quarter-end and intends to defend the remaining claims.
- The $1.0 million insurance recovery increased reported Q1 earnings; the filing also reports a $532,000 after-tax opening-retained-earnings adjustment from adopting ASU 2023-02, which management said had no material financial-statement impact.
Important facts for investors to verify
- Whether deposit trends, deposit pricing and reliance on wholesale funding improve or worsen, and the status and cost of the $200.0 million quarter-end FHLB advance, which matured April 10, 2024.
- Whether margin pressure persists and whether higher loan yields offset rising deposit and borrowing costs.
- Developments in commercial real estate and other criticized credits, charge-offs, nonperforming assets and allowance adequacy.
- Changes in unrealized securities losses, AOCI and interest-rate sensitivity as market rates move.
- Developments in the pending litigation and any further insurance recoveries or other unusual income items.