Lakeland Financial (LKFN) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents Lakeland Financial Corporation's unaudited consolidated financial statements for Q1 2020, detailing financial position, performance, and cash flows, with notes on accounting policies and CECL adoption Consolidated Balance Sheets Total assets increased to $5.03 billion as of March 31, 2020, driven by higher cash, loans, and deposits, while borrowings decreased and equity rose Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $5,030,078 | $4,946,745 | | Total cash and cash equivalents | $132,581 | $99,381 | | Loans, net | $4,032,129 | $4,015,176 | | Total Liabilities | $4,423,506 | $4,348,645 | | Total deposits | $4,281,703 | $4,133,819 | | Total borrowings | $85,500 | $170,000 | | Total Equity | $606,572 | $598,100 | Consolidated Statements of Income Net income for Q1 2020 decreased to $17.3 million, primarily due to a significant increase in the provision for loan losses, despite a slight rise in net interest income Income Statement Summary (in thousands, except per share data) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net Interest Income | $38,854 | $38,209 | | Provision for loan losses | $6,600 | $1,200 | | Noninterest Income | $10,777 | $11,525 | | Noninterest Expense | $22,089 | $22,473 | | Net Income | $17,299 | $21,682 | | Diluted EPS | $0.67 | $0.84 | Consolidated Statements of Cash Flows Net cash from operating activities was $19.5 million, while investing activities used $29.8 million, and financing activities generated $43.4 million, leading to a $33.2 million net increase in cash Cash Flow Summary - Three Months Ended March 31 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash from operating activities | $19,515 | $23,659 | | Net cash from investing activities | $(29,753) | $(22,780) | | Net cash from financing activities | $43,438 | $(29,048) | | Net change in cash and cash equivalents | $33,200 | $(28,169) | Notes to the Consolidated Financial Statements Notes detail accounting policies, financial instruments, loan portfolio, fair value measurements, and the initial impact of COVID-19, including delayed CECL adoption - The company elected to delay the adoption of the new CECL standard under a provision of the CARES Act until the earlier of the end of the national emergency or December 31, 2020. Adoption will be retroactive to January 1, 2020[24] - As of March 31, 2020, total loan deferrals attributed to COVID-19 were $99.8 million, representing 77 borrowers (2% of the total loan portfolio). These were not considered troubled debt restructurings per regulatory guidance[57] - The company is transitioning from LIBOR to the Secured Overnight Financial Rate (SOFR) and expects to adopt the transition relief allowed under ASC 848[28] Management's Discussion and Analysis (MD&A) Management discusses Q1 2020 financial results, highlighting a 20.2% net income decrease due to increased loan loss provisions from COVID-19, and details the company's pandemic response and financial condition - Net income for Q1 2020 was $17.3 million, down 20.2% from Q1 2019, mainly due to a $6.6 million provision for loan losses, a 450% increase YoY, driven by the economic impact of the COVID-19 pandemic[104] - The company is participating in the Paycheck Protection Program (PPP) and had received approval for 1,677 client loans totaling $530 million as of April 16, 2020[128] - As permitted by the CARES Act, the company elected to defer its application of the CECL standard, believing the current incurred loss method is more accurate in the current uncertain environment[125] Impact of COVID-19 The company actively managed the COVID-19 crisis, identifying 19% of the loan portfolio in impacted industries, with deferrals reaching $467.1 million, while enhancing liquidity and participating in PPP COVID-19 Related Loan Deferrals | Date | Total Deferrals | Borrower Count | % of Total Loans | | :--- | :--- | :--- | :--- | | March 31, 2020 | $99.8 million | 77 | 2% | | April 22, 2020 | $467.1 million | 404 | 11% | - An initial review identified industries most likely to be impacted by COVID-19, representing approximately 19% of the total loan portfolio. These include recreational vehicles (4%), nursing homes (4%), hotels (2%), and restaurants (2%)[115] Results of Operations Q1 2020 net income decreased to $17.3 million due to a surge in loan loss provisions and compressed net interest margin, despite a slight rise in net interest income Key Performance Metrics - Q1 2020 vs Q1 2019 | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net Interest Margin | 3.35% | 3.45% | | Net Charge-offs to Average Loans | 0.36% | 0.01% | | Efficiency Ratio | 44.51% | 45.19% | | Pretax Pre-Provision Earnings | $27,542 thousand | $27,261 thousand | - The provision for loan losses increased by $5.4 million (450%) YoY, primarily due to the economic impact of COVID-19 and a $3.7 million charge-off on a single commercial manufacturing relationship[147][154] - Noninterest income was negatively impacted by a $1.5 million decrease in service charges on deposit accounts, partly due to the termination of a large treasury management client relationship in June 2019, and a $736,000 loss on bank owned life insurance[155] Financial Condition Total assets grew to $5.03 billion, with modest loan growth and improved asset quality, as nonperforming assets decreased and the allowance for loan losses increased, supported by strong core deposit growth Non-Performing Assets (in thousands) | Metric | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total nonperforming loans | $13,954 | $18,720 | | Total nonperforming assets | $14,316 | $19,036 | | Nonperforming assets to total assets | 0.28% | 0.38% | - The allowance for loan losses increased by $3.0 million to $53.6 million at March 31, 2020. The ratio of allowance to total loans increased to 1.31% from 1.25% at year-end 2019[179][185] - Total deposits increased by $147.9 million, driven by a $151.8 million increase in core deposits, while total borrowings decreased by $84.5 million[192][194] Capital Stockholders' equity increased to $606.5 million in Q1 2020, driven by net income and AOCI, partially offset by share repurchases and dividends, with all capital ratios remaining strong - During Q1 2020, the company repurchased 289,101 shares for $10.0 million at an average price of $34.63 per share. The repurchase plan was temporarily suspended on March 24, 2020, with $20 million remaining authorized[196][218] Consolidated Capital Ratios - March 31, 2020 | Ratio | Actual | Minimum to be Well Capitalized | | :--- | :--- | :--- | | Total Capital (to Risk Weighted Assets) | 14.23% | N/A | | Tier I Capital (to Risk Weighted Assets) | 13.02% | N/A | | Common Equity Tier 1 (CET1) | 13.02% | N/A | | Tier I Capital (to Average Assets) | 11.67% | N/A | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with simulations showing asset-sensitivity where a 100 bps rate increase boosts net interest income by $7.5 million Net Interest Income Sensitivity Analysis (as of March 31, 2020) | Rate Scenario | NII Change (in thousands) | % Change from Base | | :--- | :--- | :--- | | +300 bps | +$23,380 | +14.98% | | +200 bps | +$15,430 | +9.89% | | +100 bps | +$7,512 | +4.81% | | -25 bps | -$3,411 | -2.19% | - The company's primary market risk exposure is interest rate risk. It does not have material exposure to foreign currency risk or maintain a trading portfolio[203] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2020[207] - No material changes were made to the company's internal control over financial reporting during the first quarter of 2020[208] PART II. OTHER INFORMATION Legal Proceedings The company and its subsidiaries are not party to any material pending legal proceedings beyond ordinary routine litigation - There are no material pending legal proceedings against the Company or its subsidiaries outside of ordinary routine litigation[210] Risk Factors This section highlights significant risks, including the adverse impact of the COVID-19 pandemic on business and the potential for increased volatility from future CECL adoption - The COVID-19 outbreak is having and could continue to have a material adverse impact on the company's business, results of operations, financial condition, and capital levels due to its effects on customers, economic conditions, and operations[211][212] - The company may experience increases and volatility in its allowance for credit losses and provision expense due to the delayed but eventual adoption of the CECL methodology, which requires more management judgment and forward-looking forecasts[214][215] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 289,101 shares for $10 million in Q1 2020 under its reauthorized program before temporarily suspending it on March 24, 2020 Issuer Purchases of Equity Securities - Q1 2020 | Period | Total Shares Purchased | Average Price Paid per Share | Purchased as Part of Public Plan | | :--- | :--- | :--- | :--- | | Jan 1-31 | 3,352 | $48.49 | 0 | | Feb 1-29 | 1,097 | $48.21 | 0 | | Mar 1-31 | 289,101 | $34.63 | 289,101 | | Total | 293,550 | $34.84 | 289,101 | - The share repurchase program was temporarily suspended on March 24, 2020, with $20 million of authorization remaining available[218] Exhibits This section lists exhibits filed with Form 10-Q, including CEO/CFO certifications and Interactive Data Files (Inline XBRL) - Exhibits filed include CEO/CFO certifications (31.1, 31.2, 32.1, 32.2) and Interactive Data Files (101, 104)[222][223]