PART I. FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited consolidated financial statements for Q2 and YTD 2023, including balance sheets, income, comprehensive income, equity, and cash flows Consolidated Balance Sheets Total assets increased to $6.51 billion by June 30, 2023, driven by loan growth and funded by increased borrowings, with a slight deposit decrease | Balance Sheet Items (in thousands) | June 30, 2023 | December 31, 2022 | Change ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Assets | $6,509,546 | $6,432,371 | $77,175 | 1.2% | | Loans, net | $4,790,202 | $4,637,790 | $152,412 | 3.3% | | Securities available-for-sale | $1,062,069 | $1,185,528 | ($123,459) | -10.4% | | Total Liabilities | $5,917,551 | $5,863,484 | $54,067 | 0.9% | | Total deposits | $5,423,059 | $5,460,620 | ($37,561) | -0.7% | | Total borrowings | $400,000 | $297,000 | $103,000 | 34.7% | | Total Equity | $591,995 | $568,887 | $23,108 | 4.1% | - A notable shift occurred in the deposit mix, with noninterest-bearing deposits decreasing by $298.7 million (17.2%) while interest-bearing deposits increased by $261.2 million (7.0%) since year-end 20227 Consolidated Statements of Income Q2 2023 net income sharply declined to $14.6 million due to an $18.1 million wire fraud loss, impacting YTD results | Income Statement (in thousands) | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $48,524 | $48,678 | $100,043 | $93,558 | | Provision for credit losses | $800 | $0 | $5,150 | $417 | | Total noninterest income | $11,501 | $10,492 | $21,815 | $21,179 | | Total noninterest expense | $42,734 | $27,913 | $72,168 | $54,882 | | Net Income | $14,611 | $25,673 | $38,889 | $49,315 | | Diluted EPS | $0.57 | $1.00 | $1.51 | $1.92 | - A significant wire fraud loss of $18.1 million was recorded in Q2 2023, which was the primary driver for the 53.1% YoY increase in quarterly noninterest expense and the sharp decline in net income8117 Notes to the Consolidated Financial Statements Provides detailed disclosures on accounting policies, financial instruments, credit quality, and a significant loss contingency - The company adopted ASU 2022-02, eliminating Troubled Debt Restructuring (TDR) accounting and enhancing disclosure for loan modifications to borrowers in financial difficulty, effective January 1, 2022, for TDR reporting and January 1, 2023, for vintage disclosures18 - The company is involved in a legal proceeding filed by a liquidating trustee for a former client who allegedly engaged in a check kiting scheme, with the company intending to vigorously defend itself and determining a material loss is neither probable nor estimable at this time110111 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Discusses a 21.1% YTD net income decrease to $38.9 million due to a wire fraud loss, alongside improved core profitability and balance sheet growth Overview YTD net income decreased 21.1% to $38.9 million due to an $18.1 million wire fraud loss, while core profitability improved and tangible capital rose - On June 30, 2023, the company discovered an international wire fraud resulting in an estimated loss of $18.1 million, net of $4.1 million in estimated insurance coverage, which reduced diluted EPS by $0.53 for both the three and six-month periods117 - Core operational profitability, a non-GAAP measure excluding the fraud loss, was $26.8 million for Q2 2023, an increase of 4% year-over-year and 10% from the linked quarter, demonstrating underlying business strength118 - The tangible common equity to tangible assets ratio was 9.04% at June 30, 2023, up from 8.79% at December 31, 2022, with the adjusted ratio at 11.37% excluding unrealized securities losses121123 Results of Operations YTD net interest income grew 6.9% to $100.0 million with margin expansion, but was offset by increased credit loss provision and noninterest expense from fraud | Performance Metrics | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | | Net Interest Income (in thousands) | $100,043 | $93,558 | | Net Interest Margin | 3.41% | 3.09% | | Provision for Credit Losses (in thousands) | $5,150 | $417 | | Noninterest Income (in thousands) | $21,815 | $21,179 | | Noninterest Expense (in thousands) | $72,168 | $54,882 | | Pretax Pre-Provision Earnings (Non-GAAP, in thousands) | $49,690 | $59,855 | - The tax-equivalent net interest margin expanded to 3.41% for the first half of 2023 from 3.09% in 2022, as the yield on earning assets increased by 217 basis points, outpacing the 185 basis point increase in funding costs144 - Excluding the wire fraud loss and related compensation adjustments, adjusted core noninterest expense (a non-GAAP measure) declined by $1.1 million, or 2.0%, compared to the first six months of 2022156 Financial Condition Total assets grew to $6.51 billion driven by loan growth, with shifts in funding, stable credit quality, and maintained 'well-capitalized' status - Total loans grew by $152.4 million (3.2%) in the first half of 2023, led by the commercial real estate and multi-family residential segment, which increased by $197.3 million167 - The investment portfolio's effective duration was 6.6 years at June 30, 2023, containing net unrealized losses of $202.0 million, an improvement from $215.3 million at year-end 2022162163 - Uninsured deposits (not covered by FDIC or Indiana PDIF) were 28% of total deposits as of June 30, 2023, down from 30% at year-end 2022184 - The company maintained a 'well-capitalized' status, with a Common Equity Tier 1 (CET1) ratio of 13.68% and a Total Capital ratio of 14.94% at the consolidated level as of June 30, 2023187189 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with net interest income moderately asset-sensitive to rate changes | Interest Rate Scenario (Parallel Shift) | Change in Net Interest Income ($ thousands) | Change in Net Interest Income (%) | | :--- | :--- | :--- | | +300 bps | $12,112 | 5.89% | | +200 bps | $8,009 | 3.89% | | +100 bps | $3,988 | 1.94% | | Base | $205,656 | N/A | | -100 bps | ($5,564) | -2.71% | | -200 bps | ($12,120) | -5.89% | | -300 bps | ($19,557) | -9.51% | Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal controls - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report (June 30, 2023)199 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings, with management not expecting a material impact on financial position - The company is subject to various pending and threatened legal proceedings in the normal course of business, with management not believing the outcome will be material to the company's consolidated financial position203 Item 1A. Risk Factors No material changes were reported to the risk factors previously disclosed in the company's Form 10-K for December 31, 2022 - No material changes were reported to the risk factors disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022204 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The board reauthorized a $30 million share repurchase program, with no shares repurchased under it in Q2 2023 - The company's board reauthorized a share repurchase program of up to $30 million, effective through April 30, 2025, with no shares repurchased under this program in Q2 2023205206
Lakeland Financial (LKFN) - 2023 Q2 - Quarterly Report