LAKELAND FINANCIAL CORP 10-K

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk The Company’s primary market risk exposure is interest rate risk. The Company does not have a material exposure to foreign currency exchange rate risk and does not maintain a trading portfolio. The following table provides information regarding the Company’s financial instruments that are sensitive to changes in interest rates. For loans, securities and liabilities with contractual maturities, the table presents principal cash flows and related weighted-average interest rates by contractual maturities, as well as the Company’s assumptions relative to the impact of interest-rate fluctuations on the prepayment of certain commercial, residential and home equity loans and mortgage-backed securities. Core deposits such as noninterest bearing deposits, interest bearing checking, savings and money market deposits that have no contractual maturity, are shown based on management’s judgment and historical experience that indicates some portion of the balances are retained over time. Weighted-average variable rates are based upon rates existing at the reporting date. 52 Table of Contents 2021 Principal/Notional Amount Maturing in: (dollars in thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter Total Fair Value 12/31/2021 Rate sensitive assets: Fixed interest rate loans $ 592,512 $ 330,646 $ 211,989 $ 111,048 $ 80,375 $ 55,605 $ 1,382,175 $ 1,345,499 Average interest rate 4.03 % 4.16 % 4.03 % 4.04 % 3.46 % 4.20 % Variable interest rate loans $ 1,416,485 $ 522,053 $ 248,960 $ 164,309 $ 179,165 $ 374,694 $ 2,905,666 $ 2,896,218 Average interest rate 3.33 % 3.36 % 3.31 % 3.22 % 2.90 % 3.19 % Total loans $ 2,008,997 $ 852,699 $ 460,949 $ 275,357 $ 259,540 $ 430,299 $ 4,287,841 $ 4,241,717 Average interest rate 3.54 % 3.67 % 3.64 % 3.55 % 3.08 % 3.32 % Fixed interest rate securities $ 170,849 $ 107,061 $ 88,326 $ 87,234 $ 98,408 $ 824,969 $ 1,376,847 $ 1,398,458 Average interest rate 2.16 % 1.86 % 1.75 % 2.02 % 2.26 % 2.10 % Variable interest rate securities $ 28 $ 20 $ 15 $ 11 $ 8 $ 18 $ 100 $ 100 Average interest rate 4.27 % 4.27 % 4.27 % 4.27 % 4.27 % 4.27 % Other interest-bearing assets $ 631,410 $ 0 $ 0 $ 0 $ 0 $ 0 $ 631,410 $ 631,410 Average interest rate 0.16 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % Total earning assets $ 2,811,284 $ 959,780 $ 549,290 $ 362,602 $ 357,956 $ 1,255,286 $ 6,296,198 $ 6,271,685 Average interest rate 2.69 % 3.47 % 3.33 % 3.18 % 2.85 % 2.52 % Rate sensitive liabilities: Noninterest bearing checking $ 370,382 $ 171,055 $ 151,923 $ 134,874 $ 119,720 $ 947,527 $ 1,895,481 $ 1,895,481 Average interest rate 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % Savings & interest bearing checking $ 609,882 $ 228,064 $ 201,375 $ 178,402 $ 158,659 $ 1,634,026 $ 3,010,408 $ 3,010,408 Average interest rate 0.26 % 0.24 % 0.24 % 0.24 % 0.24 % 0.26 % Time deposits $ 591,740 $ 174,035 $ 37,600 $ 13,704 $ 12,091 $ 348 $ 829,518 $ 833,617 Average interest rate 0.46 % 68.00 % 2.21 % 0.96 % 0.63 % 0.49 % Total deposits $ 1,572,004 $ 573,154 $ 390,898 $ 326,980 $ 290,470 $ 2,581,901 $ 5,735,407 $ 5,739,506 Average interest rate 0.27 % 0.30 % 0.34 % 0.17 % 0.16 % 0.16 % Fixed interest rate borrowings $ 0 $ 0 $ 0 $ 0 $ 0 $ 75,000 $ 75,000 $ 66,118 Average interest rate 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.39 % Variable interest rate borrowings $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Average interest rate 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % Total funds $ 1,572,004 $ 573,154 $ 390,898 $ 326,980 $ 290,470 $ 2,656,901 $ 5,810,407 $ 5,805,624 Average interest rate 0.27 % 0.30 % 0.34 % 0.17 % 0.16 % 0.16 % Interest rate sensitivity gap by period $ 1,239,280 $ 386,626 $ 158,392 $ 35,622 $ 67,486 $ (1,401,615) Cumulative rate sensitivity gap $ 1,239,280 $ 1,625,906 $ 1,784,298 $ 1,819,920 $ 1,887,406 $ 485,791 Cumulative rate sensitivity ratio at December 31, 2021 178.8 % 167.5 % 140.5 % 110.9 % 123.2 % 47.2 % at December 31, 2020 155.5 % 220.8 % 163.6 % 95.4 % 84.5 % 33.9 % The Company utilizes computer modeling software to stress test the balance sheet under a wide variety of interest rate scenarios. The model quantifies the income impact of changes in customer preference for products, basis risk between the assets and the liabilities that support them and the risk inherent in different yield curves as well as other factors. The ALCO committee reviews these possible outcomes and makes loan, investment and deposit decisions that maintain reasonable balance sheet structure in light of potential interest rate movements. It is the objective of the Company to monitor and manage risk exposure to net interest income caused by changes in interest rates. It is the goal of the Company’s asset/liability function to provide optimum and stable net interest income. To accomplish this, management uses two asset liability tools: GAP/Interest Rate Sensitivity Reports and Net Interest Income Simulation Modeling, which are constructed, presented and monitored quarterly. Management believes that the Company’s liquidity and interest sensitivity position at December 31, 2021, remained adequate to meet the Company’s primary goal of achieving optimum interest margins while avoiding undue interest rate risk. The Company 53 Table of Contents places a greater level of credence in net interest income simulation modeling. The GAP/Interest Rate Sensitivity Report is believed by the Company’s management to have two major shortfalls. The GAP/Interest Rate Sensitivity Report fails to precisely gauge how often an interest rate sensitive product reprices, nor is it able to measure the magnitude of potential future rate movements. Although management does not consider GAP ratios in planning, the information can be used in a general fashion to look at asset and liability mismatches. The Company’s cumulative repricing GAP ratio as of December 31, 2021 for the next 12 months using a scenario in which interest rates remained unchanged was a negative 1.36% of earning assets. Net interest income simulation modeling, or earnings-at-risk, measures the sensitivity of net interest income to various interest rate movements. The Company’s asset liability process monitors simulated net interest income under three separate interest rate scenarios; base, rising and falling. Estimated net interest income for each scenario is calculated over a twelve-month horizon. The immediate and parallel changes to the base case scenario used in the model are presented below. The interest rate scenarios are used for analytical purposes and do not necessarily represent management’s view of future market movements. Rather, these are intended to provide a measure of the degree of volatility interest rate movements may introduce into the earnings of the Company. The base scenario is highly dependent on numerous assumptions embedded in the model. While the base sensitivity analysis incorporates management’s best estimate of interest rate and balance sheet dynamics under various market rate movements, the actual behavior and resulting earnings impact will likely differ from that projected. For certain assets, the base simulation model captures the expected prepayment behavior under changing interest rate environments. Assumptions and methodologies regarding the interest rate or balance behavior of indeterminate maturity core deposit products, such as savings, money market, NOW and demand deposits reflect management’s best estimate of expected future behavior. Results for the base, falling 25 basis points, rising 25 basis points, rising 50 basis points, rising 100 basis points, rising 200 basis points, and rising 300 basis points interest rate scenarios are listed below based upon the Company’s rate sensitive assets and liabilities at December 31, 2021. The net interest income shown represents cumulative net interest income over a twelve-month time horizon. (dollars in thousands) Base Falling (25 Basis Points) Rising (25 Basis Points) Rising (50 Basis Points) Rising (100 Basis Points) Rising (200 Basis Points) Rising (300 Basis Points) Net interest income $ 176,889 $ 174,020 $ 179,790 $ 182,865 $ 189,032 $ 202,781 $ 216,499 Variance from Base $ (2,869) $ 2,901 $ 5,976 $ 12,143 $ 25,892 $ 39,610 Percent of change from Base (1.62) % 1.64 % 3.38 % 6.86 % 14.64 % 22.39 % For more information on the Company’s interest rate sensitivity see the Interest Rate Risk discussion in Item 7A. above. 54 Table of Contents