Lakeland Financial Corporation — 2020 Form 10-K
Business context and reporting period
This annual report covers the fiscal year ended December 31, 2020, with comparisons primarily to 2019. Lakeland Financial is an Indiana bank holding company operating Lake City Bank, a community-focused commercial bank serving northern and central Indiana through 50 offices. It reported one operating segment and $5.83 billion in year-end assets.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Net interest income | $163.0 million | $155.0 million |
| Provision for loan losses | $14.8 million | $3.2 million |
| Noninterest income | $46.8 million | $45.0 million |
| Noninterest expense | $91.2 million | $89.4 million |
| Net income | $84.3 million | $87.0 million |
| Diluted earnings per share | $3.30 | $3.38 |
| Net interest margin | 3.19% | 3.38% |
| Return on average assets | 1.55% | 1.76% |
| Return on average equity | 13.51% | 15.47% |
| Efficiency ratio | 43.46% | 44.70% |
- Assets rose 17.9% to $5.83 billion. Year-end deposits increased 21.9% to $5.04 billion, while gross loans increased 14.5% to $4.66 billion. Net loans were $4.59 billion.
- Cash and cash equivalents were $249.9 million, up from $99.4 million. Total borrowings fell to $85.5 million from $170.0 million. Stockholders’ equity was $657.2 million.
- Operating cash flow was $87.2 million, compared with $100.0 million in 2019. Investing activities used $712.0 million, primarily reflecting loan growth and securities purchases; financing activities provided $775.3 million, mainly from deposit growth. Cash and cash equivalents increased $150.5 million.
- Year-end capital ratios included total risk-based capital of 14.65%, Tier 1 risk-based capital of 13.39%, common equity Tier 1 of 13.39%, and Tier 1 leverage of 10.93%. The company and bank were categorized as well capitalized.
- The board declared $1.20 per share in dividends for 2020, versus $1.16 in 2019. The company repurchased 289,101 shares for approximately $10.0 million; the repurchase program was suspended in March 2020.
Material changes versus the prior comparable period
- Net income declined 3.1%, primarily because the loan-loss provision increased by $11.5 million amid pandemic-related uncertainty. This more than offset higher net interest income and noninterest income.
- Net interest income rose 5.1%, supported by growth in average earning assets, including average PPP loans of $376.8 million. Lower interest rates reduced asset yields and net interest margin; PPP interest and fee income contributed $12.8 million. Unamortized PPP fees were $6.3 million at year-end.
- Noninterest income grew 4.1%, with higher swap fees and mortgage banking income partly offset by a 35.7% decline in deposit service charges. Noninterest expense rose 2.0%, including increased data-processing, regulatory and professional fees.
- Deposits grew by $903.0 million, largely from core commercial and retail balances, pandemic stimulus and elevated customer savings. Brokered deposits decreased by $98.5 million. PPP originations totaled $570.5 million; $412.0 million remained outstanding at year-end.
- Nonperforming loans fell to $12.1 million, or 0.26% of loans, from $18.7 million, or 0.46%. Net charge-offs increased to $4.0 million from $1.0 million, including a $3.7 million charge-off tied to one manufacturing borrower.
Outlook, risks, contingencies and unusual items
- Management described 2021 priorities as continued organic loan and deposit growth, disciplined credit management, staff and branch investment, and further investment in customer technology and cybersecurity. No numerical earnings or margin guidance was provided.
- COVID-19, economic recovery, borrower performance, low interest rates, margin pressure and possible deterioration in commercial real estate and other credit exposures are significant uncertainties. At December 31, COVID-related deferrals totaled $100.7 million across 49 borrowers, about 2.2% of the loan portfolio; most remained accruing. The filing reported $102.2 million of deferrals as of February 17, 2021.
- Commercial real estate represented 40.7% of loans, commercial and industrial 38.5%, and agriculture 9.2%. The allowance for loan losses was $61.4 million, or 1.32% of loans; excluding SBA-guaranteed PPP loans, the reported coverage ratio was 1.45%. Classified loans increased to $286.1 million from $180.2 million, with most year-end classified balances in Special Mention.
- The company stated it would adopt CECL effective January 1, 2021 and estimated a $9.1 million initial increase in the credit-loss allowance, net of taxes charged to equity. This follows its election to defer adoption during 2020; the filing also describes a legislative extension allowing adoption as late as January 1, 2022.
- Management disclosed potential claims by debtors of former treasury-management client Interlogic Outsourcing following alleged fraudulent activity discovered in 2019. The company said a loss was neither probable nor estimable at the filing date and that it would defend any claim. Separately, it reported no material pending legal proceedings beyond ordinary routine litigation.
- Other risks include LIBOR transition, interest-rate sensitivity, concentration in public-fund deposits (23% of deposits), cybersecurity and vendor disruptions, and potential impairment of loans or other assets. The company reported substantial contingent liquidity sources and said securities were available for sale.
Important facts for investors to verify
- Track post-year-end credit performance, COVID-related deferrals, criticized/classified loans, charge-offs and whether the allowance remains adequate.
- Confirm the actual CECL adoption date and opening allowance/equity adjustment; the filing discusses both January 1, 2021 adoption and a permitted later deadline.
- Assess how PPP forgiveness and new PPP lending affect loan balances, fee recognition, liquidity and reported margins.
- Monitor deposit composition and concentration, especially public funds, and confirm available borrowing capacity under applicable collateral and facility limits.
- Follow developments in the Interlogic matter, including whether claims are filed and whether the loss assessment changes.
- Evaluate margin sensitivity to interest rates and progress in replacing LIBOR-linked contracts.