Lakeland Financial Corporation (LKFN) — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Lakeland Financial is a bank holding company whose principal subsidiary is Lake City Bank. Financial amounts below are in U.S. dollars; “million” amounts are rounded.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $48.7m | $43.7m | $93.6m | $87.3m |
| Noninterest income | $10.5m | $11.3m | $21.2m | $23.9m |
| Noninterest expense | $27.9m | $26.6m | $54.9m | $53.4m |
| Net income | $25.7m | $24.3m | $49.3m | $47.3m |
| Diluted EPS | $1.00 | $0.95 | $1.92 | $1.85 |
| Net interest margin | 3.26% | 3.01% | 3.09% | 3.10% |
| Efficiency ratio | 47.2% | 48.5% | 47.8% | 48.0% |
Q2 net income rose 5.4%; first-half net income rose 4.2%. Higher net interest income drove growth, partly offset by lower noninterest income and higher expenses. First-half provision expense was $0.4m, versus a $0.2m reversal in 2021; Q2 recorded no provision, compared with a $1.7m reversal in Q2 2021. Pretax pre-provision earnings, a non-GAAP measure, were $31.3m for Q2 and $59.9m for the first half.
For the first half, operating cash flow was $91.2m, investing cash outflow was $393.8m, and financing cash outflow was $211.0m. Cash and cash equivalents declined $513.7m to $169.5m. The investing outflow included $313.9m of securities purchases and $137.5m of net loan growth; financing reflected deposit outflows and repayment of a $75.0m FHLB advance.
Financial position, liquidity and capital
- Total assets were $6.265bn at June 30, down $292.2m from year-end 2021. Net loans were $4.357bn, up $137.1m; total deposits were $5.622bn, down $113.8m.
- Loans excluding PPP loans increased $157.8m, or 3.7%, from year-end. Commercial and industrial loans grew $140.3m; agricultural loans declined $57.9m.
- No FHLB advances were outstanding at quarter-end, following repayment of the $75.0m advance. The company also reported no balance on its $30m revolving credit agreement.
- Stockholders’ equity was $562.1m, down $142.8m since year-end, primarily because of a $174.6m after-tax reduction in accumulated other comprehensive income. The tangible common equity ratio was 8.92%; the company’s adjusted ratio excluding the securities market-value impact was 11.08% (both non-GAAP).
- The company and bank remained “well-capitalized.” At June 30, the bank’s total capital ratio was 14.88%, CET1 ratio 13.63%, and Tier 1 leverage ratio 10.58%.
Material changes and notable items
- Rising rates substantially reduced securities values: the available-for-sale portfolio had net unrealized losses of about $175.6m at June 30, versus net unrealized gains of $21.6m at December 31, 2021. The loss was reflected in other comprehensive income, not current-period net income.
- On April 1, the company transferred securities with $151.4m net book value (fair value of $127.0m at transfer) from available-for-sale to held-to-maturity. It said it intended and was able to hold them to maturity. No credit-loss allowance was recorded for either securities portfolio.
- Nonperforming assets fell to $12.8m, or 0.20% of assets, from $15.3m, or 0.23%, at year-end. The allowance for credit losses was $67.5m, or 1.53% of loans, compared with $67.8m, or 1.58%.
- Noninterest income declined 11.4% in the first half, notably due to lower bank-owned life insurance income, mortgage banking income, and securities gains. Higher service charges, merchant-card fees, and loan fees partly offset declines.
- Noninterest expense increased 2.8% in the first half, mainly from $2.4m higher “other expense,” which management attributed to accruals for ongoing legal matters. Management also cited higher occupancy and business-development costs.
Outlook, commentary and risks
The filing provides no formal earnings or revenue guidance. Management paused additions to the securities portfolio late in Q2 as liquidity declined and said securities cash flows would help fund loan growth; it expects the portfolio to represent a lower share of assets over time. Management expected mortgage loan originations for sale to decline from 2021 levels as rates rose. The company planned to transition remaining LIBOR-based loans to alternative rates on or before June 30, 2023.
Interest-rate risk is the company’s primary market risk. Its model projected next-12-month net interest income rising 3.63% under a 100-basis-point rate increase and falling 6.39% under a 100-basis-point decrease; management cautioned that actual outcomes may differ from model assumptions. Other stated risks include economic and market conditions, deposit costs and levels, borrower credit quality, real estate values, securities-market volatility, inflation, labor and supply-chain conditions, cybersecurity, and regulatory changes.
A bankruptcy liquidating trustee’s lawsuit related to alleged transactions involving a former treasury-management client remains stayed through August 31, 2022. The company said a material loss was neither probable nor estimable at the time and that it intended to defend the claims. Separately, management said ordinary-course legal proceedings were not expected to materially affect the company’s financial position or results.
Important facts for investors to verify
- How changes in interest rates affect deposit pricing, loan yields, net interest margin, and the value or liquidity of the securities portfolio.
- Whether the company can sustain deposit funding and loan growth after the first-half decline in cash and deposits.
- Whether the securities unrealized losses, including the transferred held-to-maturity securities, have implications for capital, liquidity, or future flexibility.
- Developments in the bankruptcy-related lawsuit and the legal accruals included in other expense.
- Trends in criticized loans, charge-offs, nonperforming assets, and allowance adequacy as economic conditions evolve.