Lakeland Financial Corporation — Q1 2022 Form 10-Q
Business context and period: Lakeland Financial Corporation is a bank holding company whose principal subsidiary is Lake City Bank. This unaudited report covers the three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Dollar amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $44.9 | $43.7 in Q1 2021 |
| Net interest margin, fully tax-equivalent | 2.93% | 3.19% in Q1 2021 |
| Noninterest income | $10.7 | $12.6 in Q1 2021 |
| Noninterest expense | $27.0 | $26.7 in Q1 2021 |
| Provision for credit losses | $0.4 | $1.5 in Q1 2021 |
| Net income / diluted EPS | $23.6 / $0.92 | $23.0 / $0.90 in Q1 2021 |
| Cash from operations | $47.7 | $23.8 in Q1 2021 |
| Total assets | $6,572.3 | $6,557.3 at December 31, 2021 |
| Net loans | $4,286.2 | $4,220.1 at December 31, 2021 |
| Deposits | $5,820.6 | $5,735.4 at December 31, 2021 |
| Cash and cash equivalents | $475.0 | $683.2 at December 31, 2021 |
| FHLB advances | $75.0 | $75.0 at December 31, 2021 |
| Total equity | $609.1 | $704.9 at December 31, 2021 |
Net income rose 2.9% year over year, supported by higher net interest income and lower provision expense, partly offset by lower noninterest income. Pretax pre-provision earnings, a non-GAAP measure, declined 3.0% to $28.6 million. The efficiency ratio increased to 48.5% from 47.6%; return on average assets was 1.44% versus 1.58%.
Net interest margin compression reflected lower asset yields and excess liquidity, partly offset by lower funding costs. Net interest margin excluding PPP loans was 2.90%, versus 3.06% in Q1 2021. The allowance for credit losses was $67.5 million, or 1.55% of loans; net charge-offs were $0.7 million, compared with $0.1 million in Q1 2021. Nonperforming assets were $14.1 million, or 0.22% of assets, down from $15.3 million and 0.23% at year-end.
Operating cash flow was $47.7 million; investing cash flow was negative $329.2 million, including $292.1 million of securities purchases and a $66.5 million net increase in loans. Financing cash flow was positive $73.3 million, including $85.2 million of deposit growth and $10.2 million of dividends paid. Cash and cash equivalents fell $208.2 million, primarily as the Bank deployed excess liquidity into securities.
Material changes versus comparable periods
- Net interest income increased $1.2 million year over year, while noninterest income declined $1.9 million. Lower mortgage banking income, no securities gains, and weaker variable life insurance returns were key drags; deposit service charges and merchant-card fees increased.
- Average earning assets grew $753.9 million year over year, primarily from securities and interest-bearing deposits. Average loans declined due to PPP runoff, but average core loans excluding PPP increased $118.9 million.
- Quarter-end deposits grew $85.2 million from year-end, chiefly in public funds and commercial deposits. Loans excluding PPP grew $79.5 million from year-end.
- Equity declined $95.8 million, mainly because of a $109.8 million after-tax reduction in accumulated other comprehensive income tied to lower available-for-sale securities values. Tangible common equity to tangible assets fell to 9.22% from 10.70% at year-end.
Outlook, risks, contingencies and unusual items
- Management expected further Federal Reserve tightening in 2022 to support margin through repricing of variable-rate loans; 68% of loans were variable-rate at March 31. Excess liquidity and lower-yielding securities and deposits were expected to temper that benefit. Management anticipated liquidity would moderate as deposits declined and loan demand increased, with securities cash flows available to fund lending and liquidity needs.
- Management expected mortgage originations for sale to decline from 2021 levels as rates rose. The Company had $12.5 million of PPP loans outstanding at quarter-end.
- The available-for-sale portfolio experienced substantial market-value declines amid a steepening yield curve. The filing reports an approximately $117.4 million net unrealized loss in one discussion, but another MD&A passage states $177.4 million; the securities note shows $122.7 million of gross unrealized losses and $5.3 million of gross gains. No allowance for credit losses on these securities was recorded.
- A bankruptcy liquidating trustee’s lawsuit concerning transactions with a former treasury-management client names the Bank and Company. Management said a material loss was neither probable nor estimable based on information then available and intended to defend the claims. Other legal proceedings in the ordinary course were not expected to materially affect financial position or results. Legal-matter accruals contributed to higher other expense.
- Interest-rate risk is the Company’s primary market risk. Management’s model estimated 12-month net interest income would rise 10.14% under a 200-basis-point increase and fall 4.08% under a 50-basis-point decrease; actual results may differ as assumptions and customer behavior change.
- The Bank and Company were characterized as well-capitalized. The Company identified economic conditions, borrower credit quality, interest-rate movements, securities values and liquidity, cyber risks, and the LIBOR transition among forward-looking risk factors. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the filing’s inconsistent $117.4 million versus $177.4 million description of the securities portfolio’s unrealized loss; compare with the detailed securities table and the after-tax AOCI movement.
- Track the effect of further rate changes on net interest margin, variable-rate loan repricing, securities values, and deposit costs, including management’s excess-liquidity assumptions.
- Monitor core loan growth, deposit mix and retention, PPP runoff, and the resulting deployment of cash and securities into loans.
- Review credit quality trends, classified exposures, charge-offs, allowance adequacy, and the outcome of the bankruptcy-related litigation.
- Confirm subsequent capital ratios and liquidity trends; the March 31 regulatory capital ratios were preliminary pending regulatory filings.