Lakeland Financial Corporation — Q1 2020 Form 10-Q
Business context and period. Lakeland Financial Corporation is the holding company for Lake City Bank and related subsidiaries. This unaudited filing covers the three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019, and income-statement comparisons with Q1 2019. Amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q1 2020 | Comparable period / change |
|---|---|---|
| Net interest income | $38.9 | $38.2 in Q1 2019; up 1.7% |
| Noninterest income | $10.8 | $11.5 in Q1 2019; down 6.5% |
| Net income | $17.3 | $21.7 in Q1 2019; down 20.2% |
| Diluted earnings per share | $0.67 | $0.84 in Q1 2019 |
| Provision for loan losses | $6.6 | $1.2 in Q1 2019 |
| Net interest margin, fully tax-equivalent | 3.35% | 3.45% in Q1 2019 |
| Return on average assets / equity | 1.40% / 11.51% | 1.80% / 16.59% in Q1 2019 |
| Efficiency ratio | 44.51% | 45.19% in Q1 2019 |
| Net cash from operating activities | $19.5 | $23.7 in Q1 2019 |
| Cash and cash equivalents | $132.6 | $99.4 at December 31, 2019 |
| Total assets / deposits | $5,030 / $4,282 | $4,947 / $4,134 at December 31, 2019 |
| Total borrowings | $85.5 | $170.0 at December 31, 2019 |
| Stockholders’ equity | $606.5 | $598.0 at December 31, 2019 |
Gross loans were $4,087 million, up $19.7 million from year-end; net loans were $4,032 million. Commercial real estate and multifamily loans were 43.1% of gross loans, and commercial and industrial loans were 35.0%. The allowance for loan losses was $53.6 million, or 1.31% of loans, versus $50.7 million, or 1.25%, at year-end. The company reported a 11.99% tangible common equity-to-tangible assets ratio and stated that the company and bank remained “well-capitalized.”
Material changes and drivers
- Net income fell primarily because the loan-loss provision rose by $5.4 million, reflecting COVID-19-related economic uncertainty and a $3.7 million charge-off tied to one commercial manufacturing relationship. Net charge-offs were $3.6 million versus $0.1 million in Q1 2019.
- Net interest income increased as average earning assets and loans grew, while the fully tax-equivalent margin declined to 3.35% from 3.45%. Lower asset yields were partly offset by lower funding costs; management said the March Federal Reserve rate cuts would have a fuller effect in Q2.
- Noninterest income declined, including lower deposit service charges and bank-owned life insurance income. Q1 2019 deposit service charges included $1.6 million from a commercial treasury-management client whose relationship ended in June 2019. Mortgage banking, wealth advisory, and swap-related income increased.
- Noninterest expense declined 1.7% to $22.1 million; lower salaries and benefits partly offset higher data-processing and professional costs.
- Deposits increased $147.9 million, primarily from core deposit growth. Borrowings fell $84.5 million: the company repaid $170 million of short-term FHLB advances, obtained a $75 million ten-year FHLB advance, and drew $10.5 million on an unsecured credit line.
- Accumulated other comprehensive income rose $10.5 million, mainly from unrealized gains on available-for-sale securities. The company repurchased 289,101 shares for $10.0 million during the quarter, then suspended repurchases on March 24, with approximately $20 million of authorization remaining.
Outlook, risks and unusual items
- COVID-19 and credit risk: Management said the pandemic’s effects were uncertain and expected to worsen, and that future provision expense could remain elevated. Deferrals were $99.8 million for 77 borrowers at March 31 (2% of loans), rising to $467.1 million for 404 borrowers by April 22 (11%). Most were three-month principal-only deferrals. These figures are not equivalent to losses, but borrowers’ ability to resume payments is a key uncertainty.
- Portfolio exposures: Management identified about 19% of loans in industries potentially affected by the pandemic, including recreational vehicles, nursing homes and assisted living, hotels, restaurants, and related sectors. It reported no direct oil-and-gas exposure and limited retail-shopping-center exposure. Nonperforming assets declined to $14.3 million from $19.0 million at year-end, largely because of the charge-off; this reduction does not by itself establish improved borrower performance.
- PPP: Lake City Bank reported approval of 1,677 Paycheck Protection Program loans totaling $530 million by April 16 and completion of funding by April 24, after quarter-end. Management noted that PPP loan pricing, forgiveness, and repayment timing could affect net interest margin and fee income.
- Rates and earnings: Management expects lower rates to pressure net interest income and margin, while PPP fees may partly offset that effect. Lower economic activity may also reduce fee-based income. No specific earnings or margin guidance was provided.
- Liquidity and capital: Management reported monitoring credit-line use and increasing available FHLB and Federal Reserve borrowing capacity. It cautioned that PPP funding, stimulus deposits, customer withdrawals, and draws on unfunded commitments could cause deposit and borrowing needs to fluctuate.
- CECL: The company elected under the CARES Act to defer CECL implementation. It expected adoption by the earlier of the end of the national emergency or December 31, 2020, retroactive to January 1, 2020; the initial retained-earnings and allowance impact was not finalized.
- Other risks: The filing cites possible impairment of goodwill, lease assets, other real estate owned, or mortgage servicing rights; third-party vendor and employee continuity risks; interest-rate exposure; and the LIBOR transition. Management stated that disclosure controls were effective and reported no material pending legal proceedings.
Important facts for investors to verify
- How COVID-19 deferrals perform as they expire, and whether delinquencies, nonperforming loans, charge-offs, or the allowance rise.
- The final CECL adoption date and its quantified effect on the allowance, retained earnings, and subsequent provision expense.
- Q2 and later net interest margin, including the effects of rate cuts and PPP loan forgiveness, repayment, and fee recognition.
- PPP loan balances, funding and repayment timing, associated liquidity needs, and any resulting credit or revenue effects.
- Whether deposit growth and borrowing capacity remain sufficient as customer liquidity needs and unfunded credit-line draws evolve.
- Capital levels and the status of share repurchases, which were suspended after $10.0 million of Q1 purchases.