Lakeland Financial Corporation — Q3 2021 Form 10-Q
Business context and reporting period. Lakeland Financial is a bank holding company whose principal subsidiary is Lake City Bank. This unaudited filing covers the quarter and nine months ended September 30, 2021; comparisons are against the corresponding 2020 periods unless noted.
Financial performance and condition
| Metric | Q3 2021 | Nine months 2021 |
|---|---|---|
| Net interest income | $45.7 million, up 14.6% | $133.1 million, up 12.5% |
| Provision for credit losses | $1.3 million, down from $1.8 million | $1.1 million, down from $13.9 million |
| Noninterest income | $11.1 million, down 15.3% | $35.0 million, essentially unchanged |
| Noninterest expense | $26.0 million, up 12.3% | $79.4 million, up 19.7% |
| Net income | $24.1 million, up 5.9% | $71.5 million, up 19.6% |
| Diluted earnings per share | $0.94, versus $0.89 | $2.79, versus $2.33 |
| Net interest margin, fully tax-equivalent | 3.13%, versus 3.05% | 3.11%, versus 3.16% |
| Efficiency ratio | 45.67%, versus 43.61% | 47.21%, versus 43.23% |
Excluding PPP-related net interest income, the reported margin was 2.95% for Q3 and 2.98% for the first nine months, compared with 3.17% and 3.22%, respectively, in 2020. Management attributed pressure to lower asset yields and excess liquidity, partly offset by lower funding costs. Nine-month pretax, pre-provision earnings, a non-GAAP measure, increased 1.9% to $88.7 million.
At September 30, 2021, total assets were $6.223 billion, up 6.7% from year-end 2020. Deposits rose 7.5% to $5.415 billion; total borrowings were $75.0 million, down $10.5 million. Cash and cash equivalents were $557.2 million, and available-for-sale securities were $1.240 billion. Net loans were $4.166 billion, down $421.3 million; gross loans excluding PPP declined $89.6 million. Stockholders’ equity was $683.1 million. The bank was reported as well-capitalized; its preliminary total capital ratio was 15.10%, and Tier 1 leverage ratio was 10.65%.
For the first nine months, operating cash flow was $86.0 million; investing cash flow was negative $117.7 million and financing cash flow was positive $339.0 million. Cash and cash equivalents increased $307.3 million to $557.2 million. The allowance for credit losses was $73.0 million, or 1.72% of loans (1.76% excluding PPP loans). The company paid dividends of $1.02 per share during the nine-month period.
Material changes versus comparable periods
- Higher net interest income and substantially lower credit-loss provision drove year-to-date earnings growth. The prior-year provision reflected pandemic-related uncertainty under the incurred-loss method; Lakeland adopted CECL effective January 1, 2021, recording a $9.1 million allowance increase and a $7.0 million after-tax reduction to opening retained earnings.
- Q3 net income growth was tempered by lower noninterest income and higher expenses. Swap fee income fell sharply; mortgage banking income also declined, including the effect of faster mortgage-servicing-rights amortization.
- Deposit growth and PPP forgiveness increased liquidity, prompting significant securities purchases. Securities available-for-sale rose $504.9 million from year-end, while loans declined. Net unrealized securities losses reduced accumulated other comprehensive income by $16.8 million year to date.
- Nonperforming assets increased to $31.3 million, or 0.50% of assets, from $12.4 million and 0.21% at year-end. Two commercial relationships totaling $21.2 million were downgraded to nonaccrual in Q3.
Outlook, commentary, risks and contingencies
The filing provides no numerical earnings or revenue guidance. Management said future results remain exposed to the uncertain economic effects of COVID-19, borrower performance, labor-market and supply-chain disruption, loan demand, and interest-rate conditions. Deposit balances may fluctuate as PPP proceeds and stimulus-related funds move through customer accounts. Management expects PPP balances to continue declining as loans are forgiven or repaid; forgiveness timing affects fee accretion and margins.
COVID-related deferrals were $22.3 million across three borrowers, or 0.5% of loans, versus a peak of $737 million in June 2020. Management said the deferred loans remained on accrual and contractual cash flows were considered collectible. Hotel and accommodation exposure was approximately $94 million, or 2.3% of the loan portfolio. Management cautioned that deterioration in the economy could increase delinquencies, nonperforming loans, charge-offs and required reserves.
Interest-rate risk is the company’s primary market risk. Its model estimated 12-month net interest income of $171.2 million in the base case; a 100-basis-point rise indicated a 6.29% increase, while a 25-basis-point decline indicated a 1.71% decrease. The filing cautions that modeled results depend on assumptions and actual outcomes may differ. Lakeland was preparing to stop originating new LIBOR-based loans no later than December 31, 2021.
A bankruptcy liquidating trustee filed a complaint against the Bank in August 2021 concerning transactions with a former treasury-management client and related entities. The action was stayed through December 31, 2021. Management stated that a loss was neither probable nor estimable and that the Bank intended to defend itself. Separately, management said routine legal proceedings were not expected to materially affect results or financial position. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the rise in nonperforming assets and the two newly downgraded commercial credits result in further losses or reserve increases.
- How loan demand, PPP forgiveness, deposit flows and excess liquidity affect future net interest margin and balance-sheet growth.
- Whether elevated compensation and technology-related costs persist, and whether revenue growth can offset them.
- The outcome and potential financial exposure of the bankruptcy trustee’s complaint; management said the loss was not then estimable.
- The effects of interest-rate changes on securities values, funding costs and earnings, and the execution of the LIBOR transition.