Lakeland Financial Corporation — FY 2022 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2022; fourth-quarter figures are noted where relevant. Lakeland Financial is an Indiana bank holding company operating Lake City Bank, a community bank serving northern and central Indiana through 52 branches. The Company reported $6.43 billion in year-end assets and operates as one reportable segment.
Financial performance and condition
| Metric | FY/end 2022 | FY/end 2021 |
|---|---|---|
| Net income | $103.8 million | $95.7 million |
| Diluted EPS | $4.04 | $3.74 |
| Net interest income | $202.9 million | $178.1 million |
| Net interest margin | 3.40% | 3.07% |
| Provision for credit losses | $9.4 million | $1.1 million |
| Noninterest income | $41.9 million | $44.7 million |
| Noninterest expense | $110.2 million | $104.3 million |
| Total assets | $6.43 billion | $6.56 billion |
| Total loans | $4.71 billion | $4.29 billion |
| Total deposits | $5.46 billion | $5.74 billion |
| Total borrowings | $297.0 million | $75.0 million |
- Earnings and margins: Net income rose 8.4%, principally on higher net interest income as interest rates increased and loans grew. Return on average assets was 1.62%; return on average equity was 17.40%. The efficiency ratio improved to 45.03% from 46.81%.
- Cash flow: Operating activities provided $169.3 million; investing activities used $626.5 million; financing activities used $95.8 million. Cash and cash equivalents declined $553.0 million to $130.3 million.
- Credit quality: The allowance for credit losses was $72.6 million, or 1.54% of loans. Nonperforming loans were $17.1 million, 0.36% of loans, compared with $15.1 million, or 0.35%, in 2021. Net charge-offs were $4.5 million, or 0.10% of average loans.
- Capital and liquidity: The Company reported a 15.07% total risk-based capital ratio, 13.82% CET1 ratio, and 11.50% Tier 1 leverage ratio; it and the Bank were classified as well capitalized. The adjusted tangible capital ratio, excluding the securities fair-value impact, was 11.30%, versus 10.47% a year earlier. The Company reported $3.292 billion of approved secondary funding sources, of which $307.0 million was utilized at year-end.
Material changes versus the prior comparable period
- Net interest income increased $24.8 million, or 13.9%, and net interest margin rose 33 basis points, reflecting loan growth and faster repricing of assets than deposits. Reported 2022 net interest income included $0.8 million of PPP interest and fee income, versus $14.9 million in 2021.
- Loans grew $422.6 million, or 9.9%; deposits fell $274.8 million, including a $203.5 million decline in the fourth quarter. The Company used cash, securities cash flows, and $297.0 million of year-end borrowings to support lending and liquidity needs.
- Noninterest income fell 6.4%, partly due to lower bank-owned life insurance income, mortgage banking, securities gains, and swap fees. Noninterest expense increased 5.7%, including a $3.5 million accrual for ongoing legal matters.
- Provision expense increased by $8.3 million. A $10.7 million commercial relationship was downgraded in the fourth quarter; $3.7 million was charged off and the remaining $7.0 million placed on nonaccrual. The relationship drove $7.0 million of provision expense.
- Rising rates reduced the fair value of available-for-sale securities. The portfolio moved from a $21.6 million net unrealized gain at year-end 2021 to a $215.3 million net unrealized loss at year-end 2022. Other comprehensive loss, net of tax, was $205.0 million; total equity declined 19.3% to $568.9 million. Regulatory capital excludes the available-for-sale unrealized gain or loss.
Outlook, risks, contingencies, and unusual items
- Management said it plans continued loan growth, disciplined credit practices, investment in employees and digital banking, and targeted Indianapolis-area branch expansion, including two offices planned over the next 18 months. The filing provides no specific earnings or revenue guidance.
- Management identified interest-rate and inflation uncertainty, deposit competition and outflows, credit deterioration, commercial real estate exposure, labor costs, cybersecurity, and geographic concentration in Indiana as key risks. Public funds represented about 26% of deposits; loss of these balances could raise funding costs.
- The investment portfolio’s effective duration was approximately 6.5 years. Management’s modeled 12-month net interest income ranged from a 13.25% decline under an immediate 300-basis-point rate decrease to an 8.76% increase under a 300-basis-point increase; results depend on assumptions and are not forecasts.
- The Company transferred securities with $127.0 million fair value from available-for-sale to held-to-maturity in 2022. At year-end, the held-to-maturity securities had $17.2 million of unrealized losses; management stated it intended and was able to hold them to maturity.
- A bankruptcy liquidating trustee’s lawsuit related to alleged check-kiting activity by a former treasury-management client names the Company, the Bank, and individuals. The Company said a material loss was neither probable nor estimable at the time of filing and intends to defend the claims. Separately, the Company accrued $3.5 million for ongoing legal matters in 2022; potential exposure beyond recorded liabilities was not estimable.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The allowance for credit losses’ qualitative adjustments were identified as a critical audit matter, reflecting significant estimation judgment.
Important facts for investors to verify
- Subsequent developments in the downgraded commercial relationship, recoveries, and credit-loss provisioning.
- Deposit trends, especially commercial and public-fund balances, deposit pricing, and use and availability of contingent funding.
- Realized or further unrealized securities losses, the effects on tangible equity, and the held-to-maturity portfolio’s liquidity implications.
- Developments and any financial exposure from the former-client litigation and other legal accruals.
- Actual net interest income and margin performance as rates, loan repricing, and deposit costs evolve; management’s modeled rate sensitivity is assumption-dependent.