Lakeland Financial Corporation (NASDAQ: LKFN) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Lakeland Financial is a bank holding company; its principal banking subsidiary is Lake City Bank. Amounts below are in U.S. dollars unless noted.
Financial results and key metrics
- Q2 earnings: Net income was $14.6 million, down 43.1% year over year; diluted EPS was $0.57 versus $1.00. Six-month net income was $38.9 million, down 21.1%, and diluted EPS was $1.51 versus $1.92.
- Q2 revenue and margins: Net interest income was $48.5 million versus $48.7 million. Fully tax-equivalent net interest margin was 3.28%, up 2 basis points year over year. Noninterest income increased 9.6% to $11.5 million. The efficiency ratio rose to 71.19% from 47.17%.
- Six-month results: Net interest income was $100.0 million, up 6.9%; noninterest income was $21.8 million, up 3.0%. Provision for credit losses was $5.2 million versus $0.4 million, while noninterest expense rose 31.5% to $72.2 million.
- Unusual loss: The company recorded an $18.1 million wire-fraud loss, net of estimated $4.1 million insurance coverage. Management estimated the after-tax impact at $13.6 million, or $0.53 per diluted share. Excluding the loss and related reduction in incentive compensation, management reported Q2 core operational profitability of $26.8 million and core diluted EPS of $1.05; these are non-GAAP measures.
- Balance sheet and funding: Total assets were $6.51 billion at June 30, up 1.2% from year-end 2022. Net loans were $4.79 billion, up $152.4 million; deposits were $5.42 billion, down $37.6 million. Cash and cash equivalents were $173.1 million. Borrowings totaled $400 million, all in FHLB advances; the disclosed advance carried a 5.17% rate and matured July 13, 2023.
- Liquidity and deposits: The company reported $2.89 billion of unused liquidity sources. Noninterest-bearing deposits fell $298.7 million from year-end, while interest-bearing deposits rose $261.2 million. Uninsured deposits excluding Indiana PDIF coverage were 28% of deposits; deposits not covered by FDIC insurance, including public funds covered by PDIF, were 54%.
- Capital: Total equity was $592.0 million. The company said capital levels remained “well-capitalized”; the Bank’s preliminary CET1 and total risk-based capital ratios were 13.33% and 14.58%, respectively. Tangible common equity to tangible assets was 9.04%; the adjusted ratio excluding securities valuation effects was 11.37% (both non-GAAP).
- Cash flow: For the first six months, operating cash flow was $36.9 million versus $91.2 million a year earlier; investing cash outflow was $32.9 million versus $393.8 million; financing cash inflow was $38.9 million versus an outflow of $211.0 million.
Material changes versus comparable periods
- Q2 reported earnings were substantially lower, primarily due to the one-time wire-fraud charge. Management’s adjusted core measure showed profitability above Q2 2022 and the prior quarter.
- Higher loan yields supported net interest margin, but deposit and borrowing costs rose sharply. Six-month average deposit cost increased to 2.14% from 0.28%; average borrowing cost increased to 4.83% from 0.40%.
- Gross loans grew 3.2% from year-end, led by commercial real estate and multifamily lending; commercial and industrial and agricultural balances declined.
- Available-for-sale securities declined $123.5 million from year-end. Their net unrealized loss was $202.0 million at June 30, versus $215.3 million at December 31; accumulated other comprehensive loss was $177.6 million.
- Net charge-offs were $5.7 million for the first half, including a $5.5 million charge-off on one commercial borrower. The allowance was $72.1 million, or 1.48% of loans, versus 1.54% at year-end.
Outlook, risks, contingencies, and unusual items
- Management anticipated funding costs could continue rising during 2023 as deposit competition, migration from noninterest-bearing deposits, and FHLB borrowing increase. It expects securities to decline as a share of assets over time as proceeds support loan growth and liquidity.
- Management expects mortgage originations for secondary-market sale to remain subdued, citing elevated rates, limited inventory, and homeowners retaining historically low-rate mortgages. No specific earnings or revenue guidance was provided.
- Credit risks include higher borrowing costs and potential economic weakness, increased watch-list loans (3.83% of loans versus 3.42% at year-end), and concentration in commercial and commercial real estate lending. Commercial office exposure was $68.8 million, or 1.4% of loans.
- Interest-rate risk is material: management’s modeled next-12-month net interest income varied from 9.51% below base under a 300-basis-point rate decline to 5.89% above base under a 300-basis-point increase. Actual results may differ from model assumptions.
- The wire fraud involved a compromised employee email account outside the company’s network and a forged wire form. A forensic investigation reported no client accounts, information, or funds were accessed. The company notified insurers, law enforcement, FinCEN, and regulators; insurance recovery remains an estimate.
- A bankruptcy trustee’s litigation relating to a former treasury-management client remains ongoing. The court dismissed claims against the company and the Bank in May 2023, but allowed amendment; management said a material loss was neither probable nor estimable based on information then available. The filing also identifies other ordinary-course legal matters.
- Management concluded disclosure controls were effective as of June 30, 2023, and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the estimated $4.1 million insurance coverage for the $18.1 million wire loss is collected, and whether further losses or related expenses arise.
- Status and replacement funding for the $400 million FHLB advance that matured July 13, 2023; the filing does not state its post-maturity disposition.
- Subsequent deposit trends, funding costs, liquidity use, and the concentration of uninsured deposits.
- Credit performance after the single-borrower charge-off, including watch-list migration, commercial real estate exposures, and allowance adequacy.
- Changes in securities values, accumulated other comprehensive loss, and sensitivity of earnings and capital to interest-rate movements.
- Developments in the bankruptcy litigation and any resulting loss contingency or expense.