Lakeland Financial Corporation — Q2 2021 Form 10-Q
Business context and period. Lakeland Financial Corporation is the parent of Lake City Bank and related subsidiaries. This unaudited filing covers the quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods unless otherwise noted. Balance-sheet comparisons are with December 31, 2020.
Financial results and position
| Metric | Q2 2021 | Six months 2021 |
|---|---|---|
| Net interest income | $43.7 million, up 10.5% | $87.3 million, up 11.4% |
| Provision for credit losses | $1.7 million recovery | $223,000 recovery |
| Noninterest income | $11.3 million, up 1.5% | $23.9 million, up 8.9% |
| Noninterest expense | $26.6 million, up 26.4% | $53.4 million, up 23.7% |
| Net income | $24.3 million, up 23.8% | $47.3 million, up 28.0% |
| Diluted EPS | $0.95, versus $0.77 | $1.85, versus $1.44 |
| Net interest margin | 3.01%, versus 3.10% | 3.10%, versus 3.22% |
| Efficiency ratio | 48.45%, versus 41.58% | 48.00%, versus 43.03% |
- At June 30, total assets were $6.23 billion, up 6.9% from year-end; deposits were $5.39 billion, up 7.1%. Cash and cash equivalents were $572.8 million, versus $249.9 million at year-end.
- Net loans were $4.28 billion, down $305.8 million from year-end. Gross loans were $4.36 billion; outstanding PPP loans were $194.2 million, compared with $412.0 million at year-end. Commercial real estate and multifamily loans were 45.5% of gross loans.
- The allowance for credit losses was $71.7 million, or 1.65% of loans (1.72% excluding PPP loans). Nonperforming assets were $11.8 million, or 0.19% of assets. Total stockholders’ equity was $677.5 million.
- Borrowings totaled $75.0 million, consisting of a fixed-rate FHLB advance due in 2030; the $10.5 million holding-company borrowing outstanding at year-end had been repaid. The company reported that capital levels remained “well-capitalized”; bank CET1 was 13.45%.
- For the first six months, operating cash flow was $59.1 million, investing cash flow was negative $64.3 million, and financing cash flow was positive $328.1 million. Cash and cash equivalents increased $322.9 million.
Changes and management commentary
- Year-over-year earnings growth largely reflected lower credit-loss provisioning: 2020 included $12.1 million of provision expense, while first-half 2021 had a $223,000 recovery. Q2’s $1.7 million recovery included a one-time $1.7 million recovery on a commercial relationship partially charged off in 2009.
- Despite higher net interest income, margin compressed amid low market rates and excess liquidity shifting into lower-yielding cash and securities. Management reported that PPP income and fees contributed $8.8 million in the first half; margin excluding PPP was 3.00% for the half and 2.95% in Q2.
- Expense growth—especially performance-based compensation, professional fees, technology and digital banking costs—outpaced revenue growth and raised the efficiency ratio. First-half pretax, pre-provision earnings were $57.8 million, up 1.2%; Q2 was $28.4 million, down 4.3%.
- Deposits grew partly from PPP proceeds, government stimulus and higher customer savings. The company deployed substantial excess liquidity into securities; available-for-sale securities rose to $1.12 billion. The first-half $5.5 million decline in accumulated other comprehensive income was driven mainly by lower securities fair values.
- Management reported COVID-related deferrals of $36.9 million for eight borrowers at June 30, all on accrual status, and stated it considered contractual cash flows collectible. Hotel and accommodation was the only industry then identified as materially affected, representing approximately 2.3% of loans.
- The company adopted CECL on January 1, 2021, increasing the allowance by $9.1 million and reducing opening retained earnings by $7.0 million, net of tax. The company elected not to use the available regulatory capital transition relief.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management expects results to remain exposed to the evolving COVID-19 impact, loan forgiveness timing under PPP, deposit and liquidity fluctuations, and interest-rate effects on asset yields and funding costs. It noted that increased infection rates, including the Delta variant, could weaken activity and affect fee income, credit costs and compensation expense.
- Key risks include borrower credit deterioration, commercial-loan and real-estate exposure, interest-rate and securities valuation risk, and uncertainty in CECL estimates. Management’s interest-rate simulation estimated a 1.71% decline in next-12-month net interest income for a 25-basis-point decline and a 6.64% increase for a 100-basis-point rise; actual results may differ from model assumptions.
- In the Interlogic Outsourcing bankruptcy matter, potential claims against the Bank had been disclosed. The company said a loss was neither probable nor estimable and that it would vigorously defend any claim. It reported no other material pending legal proceedings and no material change to previously disclosed risk factors.
- The company plans to discontinue new LIBOR-based loans no later than December 31, 2021 and expects to use available reference-rate transition relief. Management reported disclosure controls were effective and no materially significant control changes occurred during the quarter.
Important facts for investors to verify
- Whether loan growth excluding PPP stabilizes and how PPP forgiveness affects fee accretion, liquidity and net interest margin.
- Whether deposit balances remain elevated and how management deploys excess liquidity without further material margin compression.
- Whether credit quality and the CECL allowance remain adequate as pandemic-related deferrals expire; monitor the hotel exposure, watch-list credits and any new delinquencies.
- Whether elevated compensation, professional and technology spending moderates, and whether revenue growth can offset expense increases.
- Any developments in the Interlogic Outsourcing matter, LIBOR transition, and securities valuation as interest rates change.