Lakeland Financial Corporation (NASDAQ: LKFN) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Lakeland Financial is a bank holding company whose principal subsidiary is Lake City Bank. Dollar amounts below are in millions except per-share data.
Financial results and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $48.4 | $52.5 | $148.4 | $146.1 |
| Noninterest income | $10.8 | $10.2 | $32.7 | $31.3 |
| Noninterest expense | $29.1 | $27.9 | $101.3 | $82.8 |
| Provision for credit losses | $0.4 | $0 | $5.6 | $0.4 |
| Net income | $25.3 | $28.5 | $64.1 | $77.8 |
| Diluted EPS | $0.98 | $1.11 | $2.49 | $3.03 |
| Net interest margin, fully tax-equivalent | 3.21% | 3.57% | 3.33% | 3.25% |
| Efficiency ratio | 49.13% | 44.52% | 55.92% | 46.66% |
- Balance sheet at September 30: Assets were $6.427 billion; net loans $4.799 billion; deposits $5.657 billion; borrowings $90 million; and total equity $557.2 million.
- Cash flow, nine months: Operating cash flow was $87.5 million, investing cash flow was negative $22.4 million, and financing cash flow was negative $49.1 million. Cash and equivalents rose $16.0 million to $146.3 million.
- Credit: Gross loans increased 3.5% from year-end 2022 to $4.874 billion. Allowance for credit losses was $72.1 million, or 1.48% of loans. Nonperforming assets were $16.7 million (0.26% of assets); net charge-offs were $6.1 million year to date.
- Capital and liquidity: Management reported the Company and Bank as well-capitalized. Bank CET1 was 13.52%. The Company reported $3.27 billion in unused aggregate liquidity sources at quarter-end.
Material changes versus comparable periods
- Q3 net income fell 11.5%; lower net interest income and higher noninterest expense were the main drivers. Margin contracted 36 basis points year over year as deposit and wholesale funding costs rose faster than asset yields.
- Nine-month net income fell 17.6%, principally reflecting higher expenses and credit-loss provision. Noninterest expense included an $18.1 million wire-fraud loss in Q2; management estimated its after-tax impact at $13.6 million, or $0.53 per diluted share. Excluding the event under the Company’s non-GAAP calculation, core operational profitability was $76.4 million versus $77.8 million.
- Deposits grew 3.6% from December 2022, but shifted toward interest-bearing products: noninterest-bearing deposits declined $359.1 million while interest-bearing deposits rose $555.6 million. Brokered deposits increased to $177.4 million from $10.0 million.
- Available-for-sale securities declined $210.0 million from year-end. Their unrealized losses were $266.4 million at September 30, versus $215.3 million at December 31, 2022; these market-value changes reduced equity through accumulated other comprehensive loss.
- Year-to-date net charge-offs included a $5.5 million charge-off on one commercial relationship. Classified relationships rose to 66 totaling $186.4 million from 58 totaling $161.0 million at year-end, primarily reflecting downgrades to Special Mention; watch-list loans were 3.83% of total loans.
Outlook, risks and contingencies
- Management expected funding costs could continue rising through the remainder of 2023 due to deposit competition, migration to interest-bearing accounts and elevated wholesale funding costs. It expected the securities portfolio’s share of assets to decline over time as proceeds support loan growth and liquidity. Management also expected secondary-market mortgage originations to remain subdued amid elevated rates and limited inventory.
- Interest-rate sensitivity modeling showed projected 12-month net interest income down 11.21% under a 300-basis-point rate decline and up 6.83% under a 300-basis-point increase; actual results may differ from model assumptions.
- Key risks include interest-rate and deposit behavior, loan and collateral quality, securities-market volatility, economic conditions in Indiana, cyberattacks, fraud, regulatory and FDIC-insurance costs, and litigation.
- A bankruptcy trustee’s third amended complaint alleges claims related to a former treasury-management client’s alleged check-kiting scheme. The court previously dismissed claims against the Company and the Bank’s independent director; a motion to dismiss the latest complaint remained pending. Management said a material loss was neither probable nor estimable at the filing date and intends to defend the Bank and named individuals.
- The Bank had a $90 million FHLB advance at quarter-end, due October 6, 2023. After quarter-end, the Company terminated a $12.5 million revolving facility and entered a new $30 million facility. No specific earnings guidance was provided.
Important facts for investors to verify
- Whether deposit pricing and funding costs continue to pressure net interest margin, and how deposit mix and brokered funding evolve.
- Progression of classified, watch-list and nonperforming loans, particularly commercial real estate exposure and concentration in individual commercial credits.
- Any further developments or financial effects from the wire-fraud event and related litigation.
- Changes in unrealized securities losses, liquidity availability and regulatory capital; reported September capital ratios were preliminary pending regulatory filings.
- Management’s non-GAAP adjusted profitability measures and exclusions; these are not substitutes for GAAP results.