Lakeland Financial Corporation — Q3 2022 Form 10-Q
Business context and reporting period. Lakeland Financial is a bank holding company whose principal subsidiary is Lake City Bank. This unaudited filing covers the quarter and nine months ended September 30, 2022; balance-sheet comparisons are with December 31, 2021.
Financial performance and condition
| Metric | Q3 2022 | Prior comparable period | Nine months 2022 | Prior comparable period |
|---|---|---|---|---|
| Net income | $28.5 million | $24.1 million | $77.8 million | $71.5 million |
| Diluted EPS | $1.11 | $0.94 | $3.03 | $2.79 |
| Net interest income | $52.5 million | $45.7 million | $146.1 million | $133.1 million |
| Noninterest income | $10.2 million | $11.1 million | $31.3 million | $35.0 million |
| Noninterest expense | $27.9 million | $26.0 million | $82.8 million | $79.4 million |
| Net interest margin, fully tax-equivalent | 3.57% | 3.13% | 3.25% | 3.11% |
| Efficiency ratio | 44.5% | 45.7% | 46.7% | 47.2% |
Management attributed earnings growth mainly to higher net interest income, supported by rising rates and core loan growth, and lower credit-loss provision. Nine-month pretax pre-provision earnings were $94.6 million, up 6.6% year over year. The nine-month effective tax rate was 17.4%, versus 18.5%.
- Balance sheet: Total assets were $6.29 billion, down $268.9 million from year-end 2021. Gross loans were $4.49 billion, up $201.2 million; excluding PPP loans, loans increased $226.5 million, or 5.3%.
- Funding and liquidity: Deposits were $5.66 billion, down $71.3 million (1.2%). Cash and cash equivalents fell $478.4 million to $204.8 million, reflecting securities purchases, loan growth and repayment of an FHLB advance. No FHLB advances were outstanding at quarter-end. Nine-month operating cash flow was $134.9 million; investing cash flow was negative $434.3 million and financing cash flow negative $179.0 million.
- Credit: The allowance for credit losses was $67.2 million, 1.50% of loans, compared with $67.8 million and 1.58% at year-end. Nine-month net charge-offs were $951,000, versus net recoveries of $1.5 million a year earlier. Nonperforming assets were $10.1 million, or 0.16% of assets, down from $15.3 million and 0.23% at year-end. No credit-loss provision was recorded in Q3.
- Capital and securities: Total equity was $519.2 million, down $185.7 million, primarily due to a $237.8 million after-tax reduction in accumulated other comprehensive income from securities valuation losses; the company reported $77.8 million of nine-month net income and $30.6 million of dividends. The available-for-sale portfolio had $256.2 million of gross unrealized losses at September 30. The tangible capital ratio was 8.20%; the company’s adjusted tangible capital ratio, excluding the securities market-value impact, was 11.22%. The Bank remained “well-capitalized” under regulatory measures.
Changes, outlook and risks
- Interest-rate increases lifted the nine-month net interest margin, but deposit costs rose and management expected deposit betas to increase in Q4 as further Federal Reserve tightening was anticipated. The company’s modeled 12-month net interest income sensitivity ranged from a 17.4% decline under a 300-basis-point rate decrease to an 11.1% increase under a 300-basis-point increase; management cautioned that actual results may differ from model assumptions.
- Noninterest income declined year over year, reflecting lower variable life insurance values, reduced mortgage banking activity, and lower other and swap income; fee-based service lines including deposit charges and merchant card fees grew. Management expects mortgage originations for sale to decline from 2021 levels because of higher rates and said it expects the securities portfolio to trend toward about 14% of assets over time.
- Noninterest expense included accruals for ongoing legal matters. The filing describes an amended bankruptcy-trustee complaint alleging the company, the Bank and individuals were involved in transactions tied to a former client’s alleged check-kiting scheme. Management said a material loss was neither probable nor estimable based on current information and intends to defend the claims.
- Management identified interest-rate, inflation, market-value, borrower-credit, deposit-cost, liquidity, litigation, cybersecurity and economic risks. No formal earnings guidance is provided.
- The company transferred securities with a reported fair value of $127.0 million from available-for-sale to held-to-maturity in April 2022. It reported no securities credit-loss allowance. The unrealized losses principally reflect rising market rates, but market movements and any need to sell securities could affect reported equity or results.
Important facts for investors to verify
- Progression of deposit costs, deposit betas and deposit balances, especially commercial and retail runoff versus public-funds growth.
- Interest-rate sensitivity and the size, duration and liquidity implications of securities unrealized losses; distinguish reported equity from regulatory capital and adjusted tangible capital measures.
- Loan growth and credit quality, including watch-list/classified credits, charge-offs and adequacy of the allowance under changing economic conditions.
- Developments, potential exposure and any changes in estimates or accruals relating to the Interlogic bankruptcy litigation and other legal matters.
- Whether management’s stated expectations for mortgage activity and securities-portfolio mix are borne out; the filing gives no formal earnings forecast.