Lakeland Financial Corporation — Q3 2020 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 three and nine months ended September 30, 2020; balance-sheet comparisons are with December 31, 2019. Amounts below are in U.S. dollars and rounded to millions unless stated otherwise.
Financial performance and condition
- Third-quarter results: Net interest income was $39.9 million, noninterest income $13.1 million, and total revenue (net interest income plus noninterest income) $53.0 million, up about 5.4% from $50.3 million a year earlier. Net income was $22.8 million, up 6.2%; diluted EPS was $0.89 versus $0.83. Provision for loan losses was $1.8 million versus $1.0 million.
- Nine-month results: Net interest income was $118.3 million and noninterest income $35.1 million; total revenue was $153.4 million, up about 2.2%. Net income declined 7.9% to $59.7 million from $64.8 million, and diluted EPS fell to $2.33 from $2.52. The $13.9 million loan-loss provision was $10.9 million higher year over year.
- Margins and returns: Net interest margin was 3.05% in Q3 and 3.16% for the first nine months, versus 3.38% and 3.40%, respectively, in 2019. Excluding PPP loans, reported margin was 3.17% for Q3 and 3.22% year to date. Nine-month return on average assets was 1.50% and return on average equity 12.96%, down from 1.76% and 15.68% a year earlier. The efficiency ratio improved to 43.2% year to date from 44.9%.
- Balance sheet and liquidity: Assets were $5.55 billion, up 12.2% from year-end 2019. Deposits rose $634.1 million to $4.77 billion, primarily from PPP proceeds and stimulus payments; core deposits increased $718.0 million, while brokered deposits fell $83.8 million. Cash and cash equivalents were $129.1 million. Nine-month cash flow was $61.3 million from operations, negative $545.7 million from investing, and positive $514.2 million from financing, increasing cash by $29.7 million.
- Loans, credit and allowance: Gross loans were $4.60 billion, including $557.9 million of PPP loans; excluding PPP, loans were $33.8 million below year-end 2019. The allowance for loan losses increased to $60.7 million from $50.7 million, or 1.32% of total loans and 1.51% excluding PPP loans. Nonperforming assets were $13.8 million, or 0.25% of assets, versus $19.0 million and 0.38% at year-end. Nine-month net charge-offs were $3.8 million, largely related to one commercial manufacturing borrower.
- Debt and capital: Total borrowings were $85.5 million, down from $170.0 million at year-end: $75.0 million of FHLB advances and $10.5 million drawn on a renewed holding-company credit line. Stockholders’ equity was $636.8 million. Management reported the Company and Bank remained “well-capitalized”; preliminary September 30 Bank ratios included 14.84% total capital, 13.59% Tier 1 risk-based capital, and 13.59% CET1.
Material changes and notable items
- COVID-19-related provisions drove the decline in year-to-date earnings despite higher net interest income, higher noninterest income, and lower noninterest expense. By contrast, Q3 earnings increased, mainly due to noninterest income growth.
- Interest-rate reductions compressed asset yields and margins. Management cautioned that loan and investment yields may decline more than funding costs, potentially causing further margin pressure in 2021. PPP loans also carry a 1.0% rate and affected Q3 margin by 12 basis points and year-to-date margin by six basis points.
- Noninterest income rose 3.5% year to date, with growth in swap fees, mortgage banking, and wealth fees partly offset by a $5.3 million decline in deposit service charges. The 2019 comparison included $4.5 million of fees from a former commercial customer. Q3 swap fees and securities gains also increased materially year over year.
- COVID-related deferrals peaked at $737 million, or 16% of loans, on June 17. At September 30 they were $158.4 million across 102 borrowers; by October 21 they had declined to $110.5 million across 63 borrowers. Deferrals remained on accrual, based on management’s assessment of collectability. Third-round deferrals were concentrated in a small number of hotel/accommodation borrowers.
- The loan portfolio’s industries under particular COVID-19 review represented 5.7%, or $228 million, of loans excluding PPP. Management cited hotel/accommodations, dairy, education, entertainment/recreation, and full-service restaurants among the affected industries. It warned that worsening economic conditions could increase delinquencies, losses, and provisions.
- The Company delayed CECL adoption under the CARES Act. It expected adoption by the earlier of the end of the national emergency or December 31, 2020, retroactive to January 1, with an estimated $7.67 million increase in the allowance and an after-tax offset to equity. The filing also describes a fourth-quarter provision adjustment upon adoption; investors should verify the final accounting and reported impact.
- Share repurchases under the $30 million program were suspended in March; $20.0 million of authorization remained. The Company repurchased $10.0 million of shares in Q1 and none under the program in Q2 or Q3.
- A bankruptcy involving a former treasury-management customer has led to document requests and threatened claims against the Bank and other banks. Management said a loss was neither probable nor estimable and stated it would defend any claim. No other material pending legal proceedings were reported.
Outlook, risks and contingencies
Management provided no specific earnings or financial guidance. It expected COVID-19’s effects to remain uncertain and said future provision expense could stay elevated; the impact depends on the pandemic, economic recovery, borrower performance, and government actions. Other identified risks include interest-rate and margin sensitivity, loan and collateral quality, deposit fluctuations, CECL estimates, LIBOR transition, cybersecurity and third-party service disruptions. Management said disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Subsequent trends in COVID-related deferrals, borrower performance—especially hotel/accommodation exposure—and criticized or watch-list credits.
- Whether the allowance remains adequate as economic conditions evolve, and the final CECL adoption date, adjustment, and fourth-quarter provision treatment.
- PPP forgiveness timing and amounts: as of October 21, 2020, the Bank reported $561.8 million outstanding and $51 million of applications submitted to the SBA, with none yet approved.
- Whether deposit growth and liquidity persist as PPP funds and stimulus payments are spent, and how PPP runoff affects loans, net interest income, and margin.
- Final regulatory capital ratios and any developments in the former customer bankruptcy or related threatened claims.