Lakeland Financial Corporation (LKFN) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Lakeland Financial is a bank holding company whose principal subsidiary is Lake City Bank. Unless otherwise noted, figures are in U.S. dollars; financial statement amounts are in millions.
Financial performance and position
| Metric | Q1 2023 / Mar. 31, 2023 | Comparable period / Dec. 31, 2022 |
|---|---|---|
| Net income | $24.3 million | $23.6 million, Q1 2022 |
| Diluted EPS | $0.94 | $0.92, Q1 2022 |
| Net interest income | $51.5 million | $44.9 million, Q1 2022 |
| Net interest margin | 3.54% (tax-equivalent) | 2.93%, Q1 2022 |
| Provision for credit losses | $4.4 million | $0.4 million, Q1 2022 |
| Noninterest income / expense | $10.3 million / $29.4 million | $10.7 million / $27.0 million, Q1 2022 |
| Total assets | $6.412 billion | $6.432 billion, Dec. 31, 2022 |
| Total deposits / borrowings | $5.518 billion / $200 million | $5.461 billion / $297 million, Dec. 31, 2022 |
| Net loans / allowance for credit losses | $4.684 billion / $71.2 million | $4.638 billion / $72.6 million, Dec. 31, 2022 |
| Cash and cash equivalents | $153.5 million | $130.3 million, Dec. 31, 2022 |
| Operating cash flow | $27.4 million | $47.7 million, Q1 2022 |
| Stockholders’ equity | $602.0 million | $568.9 million, Dec. 31, 2022 |
Pretax, pre-provision earnings, a non-GAAP measure, increased 13.3% to $32.4 million. The efficiency ratio improved to 47.6% from 48.5% in Q1 2022. Return on average assets was 1.54%; return on average equity was 16.81%. The reported tangible capital ratio was 9.34%, and the adjusted tangible capital ratio, excluding securities market-value effects, was 11.56% (both non-GAAP measures).
Material changes and drivers
- Net income rose 2.7%, as $6.6 million of net interest income growth was partly offset by higher credit-loss provision, higher expenses, and lower noninterest income. Interest income benefited from loan growth and higher yields; deposit and borrowing costs rose sharply.
- Average loans increased $424.5 million year over year, while average deposits declined $361.0 million. The tax-equivalent net interest margin expanded 61 basis points. Management noted that deposit funding costs could continue rising during 2023.
- Quarter-end gross loans increased $44.8 million from year-end, led by commercial real estate and multifamily lending; commercial and industrial and agricultural loans declined. Total deposits rose $57.1 million, but core deposits fell $93.5 million and brokered deposits increased $150.6 million to $160.7 million.
- Net charge-offs were $5.7 million, compared with net recoveries of $0.7 million in Q1 2022. A $5.5 million charge-off related to one commercial borrower drove most of the quarterly charge-offs. Nonperforming assets rose to $17.9 million from $17.2 million at year-end; nonperforming loans were 0.37% of total loans.
- Available-for-sale securities had $188.5 million of net unrealized losses at quarter-end, improving from $215.3 million at year-end. The fair-value movement contributed to a $21.6 million increase in accumulated other comprehensive income during the quarter. The company reported no securities credit-loss allowance.
- Net cash increased $23.2 million. Investing activities provided $50.4 million, including $87.5 million in securities sale proceeds; financing activities used $54.6 million, including dividends and reduced borrowings.
Outlook, risks, and unusual items
- No specific earnings or financial guidance was provided. Management expects the securities portfolio to decline over time as maturities, paydowns, and sales help fund loan growth and liquidity needs. Mortgage originations for sale were expected to remain subdued amid higher mortgage rates.
- Management cited sensitivity to interest rates, deposit competition and funding costs, economic weakness, borrower credit deterioration, and securities-market volatility. Its modeled 12-month net interest income was 13.12% below base under a 300-basis-point rate decline and 8.47% above base under a 300-basis-point rise; actual outcomes may differ.
- Uninsured deposits were 29% of total deposits. The company reported $3.03 billion of unused liquidity capacity from various sources and said it and the Bank remained “well-capitalized” under regulatory measures.
- The Bank and the company are defendants in litigation alleging involvement in transactions related to a former client’s check-kiting scheme. Motions to dismiss were pending after an April 17, 2023 hearing. Management said a material loss was neither probable nor estimable based on information then available and intends to defend the claims.
- The company had a $200 million fixed-rate FHLB advance at March 31, 2023, bearing 4.86% and maturing April 4, 2023. The filing reports that the Board reauthorized a share repurchase program on April 11, 2023, permitting up to $30 million in repurchases through April 30, 2025; the company was not obligated to repurchase shares.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Subsequent filings and results for deposit stability, brokered-deposit use, uninsured-deposit trends, and deposit pricing.
- Credit quality developments, especially the commercial borrower charge-off, classified/watch-list loans, and the adequacy of the $71.2 million allowance.
- Interest-rate and liquidity exposure, including the refinancing or repayment of the April 4 FHLB advance and the availability and terms of stated backup funding sources.
- Changes in unrealized securities losses, tangible capital, and the company’s capacity to withstand further rate or market moves.
- Developments in the Interlogic litigation and any change in management’s assessment of potential loss.