Lakeland Financial Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Lakeland Financial is an Indiana bank holding company operating Lake City Bank, with 51 branches at year-end across northern and central Indiana. The audited statements received an unqualified opinion, and the auditor reported effective internal control over financial reporting.
Financial performance and condition
| Metric | 2021 | 2020 |
|---|---|---|
| Net interest income | $178.1 million | $163.0 million |
| Noninterest income | $44.7 million | $46.8 million |
| Total revenue (net interest income plus noninterest income) | $222.8 million | $209.9 million |
| Provision for credit losses | $1.1 million | $14.8 million |
| Noninterest expense | $104.3 million | $91.2 million |
| Net income | $95.7 million | $84.3 million |
| Diluted earnings per share | $3.74 | $3.30 |
| Net interest margin | 3.07% | 3.19% |
| Return on average assets / equity | 1.56% / 14.19% | 1.55% / 13.51% |
- Balance sheet and liquidity: Total assets grew 12.5% to $6.56 billion. Deposits rose 13.9% to $5.74 billion, while cash and cash equivalents increased to $683.2 million from $249.9 million. Available-for-sale securities increased to $1.40 billion from $734.8 million, reflecting deployment of excess deposit liquidity.
- Loans and credit: Gross loans fell to $4.29 billion from $4.66 billion, largely as PPP loans declined to $26.2 million from $412.0 million after forgiveness and repayment. Excluding PPP loans, loans grew 0.6%. Commercial real estate represented 45.6% of loans and commercial and industrial loans 32.4%.
- Credit quality: The allowance for credit losses was $67.8 million, or 1.58% of loans; nonperforming loans were $15.1 million, or 0.35% of loans, versus $12.1 million and 0.26% a year earlier. Net charge-offs were $3.8 million, or 0.09% of average loans.
- Cash flow: Operating activities provided $113.8 million; investing activities used $331.5 million; financing activities provided $651.1 million. Cash and cash equivalents increased by $433.3 million.
- Debt and capital: Year-end borrowings totaled $75.0 million, consisting of an FHLB advance; the $10.5 million holding-company borrowing outstanding in 2020 was repaid. Consolidated total risk-based capital was 15.35%, CET1 was 14.10%, and Tier 1 leverage was 10.73%; the Company and Bank were reported well-capitalized.
Material changes versus 2020
- Net income increased 13.5%, helped by $15.1 million higher net interest income and a $13.7 million lower credit-loss provision.
- Net interest margin declined 12 basis points to 3.07%. Average earning assets grew, but yields fell amid low rates and excess liquidity.
- Noninterest expense rose 14.3%, driven principally by an $8.5 million increase in salaries and benefits, alongside higher professional, regulatory, and technology-related costs. The efficiency ratio worsened to 46.81% from 43.46%.
- Noninterest income declined 4.5%, mainly because interest-rate swap fees and mortgage banking income fell; wealth, loan-service, and merchant/interchange fees increased.
- Other comprehensive income turned to a loss of $11.7 million, largely from lower fair values of available-for-sale securities, compared with income of $15.7 million in 2020.
Outlook, risks, contingencies, and unusual items
- Management described plans for continued organic loan growth, broader lending reach, disciplined underwriting, branch expansion, staffing, and investment in customer-facing technology and cybersecurity. The filing does not provide specific earnings or revenue guidance.
- Management cited excess customer liquidity and subdued loan demand as constraints on loan growth. It expected excess liquidity to diminish over time as customers use deposits, and expected securities repayments to support future lending as demand improves.
- Key risks include COVID-19 and new variants, inflation and interest-rate changes, labor and supply-chain constraints, credit deterioration, real-estate and industry concentrations, deposit competition, cybersecurity and third-party systems, and the transition from LIBOR by June 30, 2023. About 22% of deposits were public funds from municipalities and government agencies.
- The Company adopted CECL on January 1, 2021, increasing the allowance by $9.1 million and reducing opening retained earnings by $7.0 million after tax. The change makes allowance estimates more dependent on forecasts and management judgments.
- A bankruptcy liquidating trustee filed a lawsuit against the Company and Bank concerning transactions with a former treasury-management client. The Company said a material loss was neither probable nor estimable at the time of filing and stated it would vigorously defend the claims.
- Quarterly net income was $24.3 million in Q4 2021, compared with $24.6 million in Q4 2020. The Q4 2021 credit-loss provision was zero.
Important facts for investors to verify
- Track commercial real estate and commercial-and-industrial credit quality, including nonperforming loans and allowance adequacy under CECL.
- Assess whether loan growth and deposit use can support earnings as PPP balances run off and excess liquidity is deployed.
- Monitor net interest margin sensitivity to rising rates, deposit repricing, and the investment portfolio’s duration and unrealized losses.
- Follow public-fund deposit concentration, available contingent funding, and the effect of deposit competition on funding costs.
- Review developments in the former client bankruptcy litigation; the filing states the potential loss was not then estimable.