Lakeland Financial Corporation — Q2 2020 Form 10-Q
Business context and reporting period. Lakeland Financial Corporation, parent of Lake City Bank, reported unaudited results for the quarter and six months ended June 30, 2020. The filing was signed August 5, 2020. Results were materially affected by the COVID-19 pandemic and the Paycheck Protection Program (PPP).
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $39.5 million | $38.4 million | $78.4 million | $76.6 million |
| Provision for loan losses | $5.5 million | $0.8 million | $12.1 million | $2.0 million |
| Noninterest income | $11.2 million | $11.6 million | $21.9 million | $23.1 million |
| Noninterest expense | $21.1 million | $22.1 million | $43.2 million | $44.6 million |
| Net income | $19.7 million | $21.7 million | $37.0 million | $43.4 million |
| Diluted EPS | $0.77 | $0.85 | $1.44 | $1.69 |
| Net interest margin | 3.10% | 3.37% | 3.22% | 3.42% |
- Q2 net income and diluted EPS each declined 9.4%; six-month net income and diluted EPS each declined 14.8%. Management attributed the declines principally to the higher loan-loss provision reflecting estimated pandemic-related credit risk.
- Pre-tax, pre-provision earnings, a non-GAAP measure, increased 6.1% to $29.6 million in Q2 and 3.6% to $57.2 million for the six-month period. The efficiency ratio improved to 41.58% in Q2 and 43.03% for the half year.
- Q2 net interest margin was 3.17% excluding the estimated PPP impact, versus 3.10% reported. For the first half, the comparable figures were 3.25% and 3.22%.
Balance sheet, cash flow, debt and capital
- Total assets were $5.44 billion at June 30, up 10.0% from year-end 2019. Net loans were $4.43 billion, up $416.3 million; gross loans increased $438.0 million, largely reflecting PPP lending. PPP loans outstanding were $554.6 million.
- Deposits rose $509.6 million (12.3%) to $4.64 billion. Core deposits increased $595.1 million, while brokered deposits declined $85.5 million. Management cautioned that PPP-related deposit balances may fall as borrowers use the funds.
- Cash and cash equivalents were $126.3 million, versus $99.4 million at year-end. First-half operating cash flow was $40.7 million, investing cash flow was negative $436.3 million, and financing cash flow was positive $422.5 million; cash increased $27.0 million overall.
- Total borrowings were $110.5 million, down from $170.0 million at year-end. This included $75.0 million of FHLB advances, $25.0 million of federal funds purchased and $10.5 million drawn on a revolving credit line. The $30 million credit line was renewed through July 30, 2021.
- Stockholders’ equity was $620.8 million, up 3.8% from year-end. The company reported a 11.35% tangible capital ratio; the Bank and Company were described as well-capitalized. The Bank’s total risk-based capital ratio was 14.83%.
- Quarterly dividends declared were $0.30 per share. The company repurchased $10.0 million of shares in Q1 and suspended plan repurchases in March; none were made under the plan in Q2.
Credit quality, COVID-19 and outlook
- The allowance for loan losses increased to $59.0 million, or 1.31% of total loans (1.50% excluding PPP loans), from $50.7 million at year-end. Six-month net charge-offs were $3.7 million, primarily from restructuring one commercial manufacturing relationship; the related charge-off was $3.7 million.
- Nonperforming assets were $15.1 million, or 0.28% of assets, compared with $19.0 million, or 0.38%, at year-end. Troubled debt restructurings increased to $13.4 million from $9.1 million, including $7.6 million on nonaccrual.
- At June 30, COVID-related payment deferrals totaled $652.5 million across 384 borrowers, about 15% of the loan portfolio. By July 22, the amount had declined to $425.1 million across 212 borrowers, or 9% of the portfolio; some borrowers received a second deferral.
- Management’s industries under heightened review represented 6.6% of the loan portfolio ($261.2 million) at June 30, excluding PPP loans. It cited hotel and accommodations, dairy and hogs, restaurants, education, and entertainment and recreation among the exposures being monitored.
- Management expects future results to remain exposed to pandemic-related credit deterioration and potentially elevated provision expense. It also expects pressure on net interest income and margin from low rates, the 1.0% PPP loan rate, and timing of PPP forgiveness and repayments. Lower customer activity may also affect fee income. No specific earnings or margin guidance was provided.
- Management said the overall pandemic impact cannot yet be determined and could materially adversely affect business, results, financial condition, liquidity and cash flows. It also identified potential impairment risk for goodwill, lease assets, other real estate owned and mortgage servicing rights.
- The company elected to delay CECL adoption under the CARES Act, with adoption due by the earlier of the end of the national emergency or December 31, 2020, retroactive to January 1, 2020. The initial impact was not finalized; management expected a one-time cumulative adjustment to the allowance and retained earnings. Management did not expect a significant credit allowance for available-for-sale securities.
- Interest-rate modeling estimated that a 100-basis-point rise would increase 12-month net interest income by 4.89% versus the base case, while a 25-basis-point decline would reduce it by 1.45%. Actual results may differ from model assumptions.
Most important facts for investors to verify
- Whether loan-loss provisions, charge-offs, criticized credits and nonperforming loans rise as pandemic effects develop, and whether allowance coverage remains adequate.
- How many COVID-related deferrals resume contractual payments, require further extensions or become troubled credits; compare the June 30 and July 22 deferral figures.
- PPP forgiveness and repayment timing, related fee recognition, and the effect of PPP-related loan and deposit balances unwinding on margin, liquidity and growth.
- The final CECL transition adjustment and subsequent effects on reserves and earnings.
- Changes in deposit composition, borrowing needs, liquidity, and sensitivity to interest rates and market conditions.