Lakeland Financial (LKFN) - 2020 Q2 - Quarterly Report

Part I Financial Statements The consolidated financial statements detail the company's financial position, operations, and cash flows, reflecting asset growth and a decrease in net income due to increased loan loss provisions Consolidated Balance Sheet Highlights (in thousands) | | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $5,441,092 | $4,946,745 | | Loans, net | $4,431,513 | $4,015,176 | | Total Deposits | $4,643,427 | $4,133,819 | | Total Liabilities | $4,820,200 | $4,348,645 | | Total Equity | $620,892 | $598,100 | Consolidated Income Statement Highlights (in thousands, except per share data) | | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net Interest Income | $78,382 | $76,620 | | Provision for loan losses | $12,100 | $1,985 | | Net Income | $36,969 | $43,395 | | Diluted EPS | $1.44 | $1.69 | Consolidated Cash Flow Highlights (in thousands) | Six Months Ended June 30, | 2020 | 2019 | | :--- | :--- | :--- | | Net cash from operating activities | $40,740 | $44,659 | | Net cash from investing activities | ($436,259) | ($95,277) | | Net cash from financing activities | $422,473 | $30,066 | | Net change in cash and cash equivalents | $26,954 | ($20,552) | Note 1: Basis of Presentation The financial statements adhere to U.S. GAAP, with new accounting standards adopted without material impact, and CECL adoption delayed per the CARES Act - The company adopted ASU 2017-04 (Goodwill Impairment), ASU 2018-13 (Fair Value Disclosures), and ASU 2018-15 (Cloud Computing Costs) on January 1, 2020, none of which had a no material impact on its financial condition or results of operations[17][21][22] - Under a provision of the CARES Act, the Company elected to delay the adoption of the CECL standard. Adoption will be retroactive to January 1, 2020, once the delay period ends[24] Note 2: Securities Securities available-for-sale increased to $632.9 million, primarily state/municipal and residential mortgage-backed securities, with unrealized losses deemed temporary Securities Available-for-Sale (in thousands) | Category | Fair Value at June 30, 2020 | Fair Value at Dec 31, 2019 | | :--- | :--- | :--- | | Mortgage-backed securities: residential | $274,749 | $288,181 | | Mortgage-backed securities: commercial | $40,569 | $36,972 | | State and municipal securities | $317,590 | $283,080 | | Total | $632,908 | $608,233 | - As of June 30, 2020, securities with a carrying value of $420.3 million were pledged as collateral for borrowings and other purposes[35] - Management considers unrealized losses on securities to be primarily interest-rate driven and temporary, as it does not have the intent to sell and it is not more likely than not that it will be required to sell these securities before recovery[39] Note 3: Loans The net loan portfolio grew to $4.43 billion, driven by commercial and industrial loans, largely due to PPP loan originations Loan Portfolio Composition (in thousands) | Loan Category | June 30, 2020 | % of Total | Dec 31, 2019 | % of Total | | :--- | :--- | :--- | :--- | :--- | | Commercial and industrial loans | $1,807,177 | 40.1% | $1,426,868 | 35.1% | | Commercial real estate & multi-family | $1,781,299 | 39.5% | $1,673,322 | 41.1% | | Agri-business and agricultural loans | $352,051 | 7.8% | $379,531 | 9.3% | | Consumer 1-4 family mortgage loans | $355,361 | 7.9% | $376,745 | 9.3% | | Other loans | $209,500 | 4.7% | $210,919 | 5.2% | | Subtotal | $4,505,388 | 100.0% | $4,067,385 | 100.0% | Note 4: Allowance for Loan Losses and Credit Quality The allowance for loan losses increased to $59.0 million due to COVID-19 impacts, with $652.5 million in COVID-related loan deferrals not classified as TDRs Allowance for Loan Losses Activity - Six Months Ended June 30, 2020 (in thousands) | | Amount | | :--- | :--- | | Beginning Balance (Jan 1, 2020) | $50,652 | | Provision for loan losses | $12,100 | | Net loans charged-off | ($3,733) | | Ending Balance (June 30, 2020) | $59,019 | - As of June 30, 2020, total loan deferrals attributed to COVID-19 were $652.5 million, representing 15% of the total loan portfolio. In accordance with the CARES Act, these were not considered troubled debt restructurings[57] - Paycheck Protection Program (PPP) loans totaling $554.6 million were included in the 'Pass' risk rating category as they are fully guaranteed by the SBA[67] Note 6: Fair Value Disclosures Fair value measurements are detailed across three levels, with recurring assets totaling $659.1 million, primarily Level 2 securities and derivatives - Fair value is determined using a three-level hierarchy. Level 1 uses quoted prices, Level 2 uses observable inputs (e.g., matrix pricing), and Level 3 uses significant unobservable inputs[71][72] Assets Measured at Fair Value on a Recurring Basis - June 30, 2020 (in thousands) | Asset Type | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | Securities | $0 | $632,763 | $145 | $632,908 | | Mortgage banking derivative | $0 | $1,766 | $0 | $1,766 | | Interest rate swap derivative | $0 | $24,464 | $0 | $24,464 | | Total Assets | $0 | $658,993 | $145 | $659,138 | - Impaired loans are measured at fair value on a nonrecurring basis, primarily using collateral-based measurements (Level 3 inputs), with a fair value of $11.1 million as of June 30, 2020[81] Note 11: COVID-19 and Current Economic Conditions COVID-19 has impacted operations, with loan deferrals decreasing, though potential future impairment losses on assets like goodwill are acknowledged - As of July 22, 2020, total COVID-19 related loan deferrals had decreased to $425.1 million (9% of the total loan portfolio), down from $652.5 million on June 30, 2020[95] - The carrying value of certain assets, including goodwill, right-of-use lease assets, other real estate owned, and mortgage servicing rights, could be negatively impacted by the effects of COVID-19, potentially resulting in future impairment losses[96] Management's Discussion and Analysis of Financial Condition and Results of Operations Net income decreased due to higher loan loss provisions, while total assets grew significantly, driven by PPP loans, with the company maintaining strong liquidity and capital despite net interest margin compression Overview Net income declined due to increased loan loss provisions related to COVID-19, while total assets grew significantly, primarily driven by PPP loan originations Performance Summary - First Six Months 2020 vs 2019 | Metric | H1 2020 | H1 2019 | | :--- | :--- | :--- | | Net Income | $37.0 million | $43.4 million | | Diluted EPS | $1.44 | $1.69 | | Provision for Loan Losses | $12.1 million | $2.0 million | | Pretax Pre-provision Earnings | $57.2 million | $55.2 million | - Total assets increased by $494.3 million (10.0%) since year-end 2019, primarily due to a $416.3 million increase in net loans, driven by $554.6 million in outstanding Paycheck Protection Program (PPP) loans[102] - As of July 22, 2020, COVID-related loan deferrals had declined by 42% from their peak to $425 million, representing 9% of the total loan portfolio[109] Critical Accounting Policies Critical accounting policies include the subjective allowance for loan losses and the valuation of investment securities, both requiring significant management judgment and estimates - The allowance for loan losses is a critical accounting policy due to the subjective nature of estimating probable incurred credit losses. The process involves specific allocations for impaired loans and general allocations for pools of similar loans based on historical experience and environmental factors[117][119] - Valuation and other-than-temporary impairment of available-for-sale securities is another critical policy, requiring significant judgment in assessing fair value and determining if a decline below cost is permanent[124][125] Results of Operations Net interest income grew despite margin compression, while a surge in loan loss provisions and a decline in noninterest income impacted results, partially offset by lower noninterest expenses Net Interest Margin Analysis (Six Months Ended June 30) | | 2020 | 2019 | | :--- | :--- | :--- | | Net Interest Income (FTE) | $79,567 | $77,631 | | Average Earning Assets | $4,975,358 | $4,588,656 | | Net Interest Margin (FTE) | 3.22% | 3.42% | - The provision for loan loss expense was $12.1 million for H1 2020, a significant increase from $2.0 million in H1 2019, primarily due to the economic impact of the COVID-19 pandemic[148] - Noninterest income for H1 2020 was negatively impacted by a $4.2 million decrease in service charges on deposit accounts, which was partially offset by a $1.3 million increase in mortgage banking income and a $1.2 million increase in swap fee income[149][151] Financial Condition Total assets grew significantly, driven by loan growth including PPP loans, while nonperforming assets decreased and deposit funding increased, maintaining a strong financial position Loan Portfolio Change (in thousands) | Loan Category | June 30, 2020 | Dec 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Commercial and industrial | $1,807,177 | $1,426,868 | $380,309 | | Commercial real estate | $1,781,299 | $1,673,322 | $107,977 | | Total Gross Loans | $4,505,388 | $4,067,385 | $438,003 | - Nonperforming assets decreased by $3.9 million (20.6%) to $15.1 million at June 30, 2020. The ratio of nonperforming assets to total assets improved to 0.28% from 0.38% at year-end 2019[171] - Total deposits increased by $509.6 million (12.3%) since year-end 2019, driven by a $595.1 million increase in core deposits, while brokered deposits decreased by $85.5 million. The growth was largely fueled by PPP loan proceeds being deposited into customer accounts[187][189] Capital Stockholders' equity increased due to net income and comprehensive income, despite dividends and share repurchases, with all regulatory capital ratios remaining well-capitalized - Total stockholders' equity increased by $22.8 million since year-end 2019, driven by net income, offset by dividends and share repurchases[192] - The company repurchased 289,101 shares for $10 million in Q1 2020 but suspended the repurchase plan in March. No shares were repurchased under the plan in Q2 2020[193][212] Regulatory Capital Ratios - Consolidated | Ratio | June 30, 2020 | Minimum to be Well Capitalized* | | :--- | :--- | :--- | | Total Capital (to RWA) | 14.93% | 10.00% (Bank) | | Tier I Capital (to RWA) | 13.68% | 8.00% (Bank) | | Common Equity Tier 1 (CET1) | 13.68% | 6.50% (Bank) | | Tier I Capital (to Average Assets) | 10.84% | 5.00% (Bank) | *Well capitalized ratios are shown for the Bank level as specified in the table. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with simulation analysis indicating an asset-sensitive balance sheet and acceptable risk levels Net Interest Income Sensitivity Analysis (as of June 30, 2020) | Rate Scenario (Change in Basis Points) | Change in Net Interest Income (in thousands) | % Change from Base | | :--- | :--- | :--- | | +300 | $21,454 | 13.31% | | +200 | $14,475 | 8.98% | | +100 | $7,878 | 4.89% | | +50 | $3,890 | 2.41% | | -25 | ($2,331) | (1.45)% | Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of June 30, 2020[204] - No changes were made to the Company's internal control over financial reporting during the quarter ended June 30, 2020, that have materially affect, or are reasonably likely to materially affect, its internal control over financial reporting[205] Part II Legal Proceedings The company is not involved in 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[208] Risk Factors No material changes to risk factors from the 2019 Form 10-K, except as previously disclosed in the Q1 2020 Form 10-Q - No material changes to risk factors from the Annual Report on Form 10-K for the year ended December 31, 2019, other than those disclosed in the Q1 2020 Form 10-Q[209] Unregistered Sales of Equity Securities and Use of Proceeds The company's share repurchase program was suspended in March 2020, with no repurchases in Q2 2020 and approximately $20 million remaining authorized - The company's board reauthorized a $30 million share repurchase program on January 14, 2020, effective through January 31, 2021[211] - No shares were repurchased under the publicly announced plan during the second quarter of 2020. As of June 30, 2020, approximately $20 million remained available for repurchase under the program[212][213] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications and the Interactive Data File (XBRL) - The filing includes CEO and CFO certifications pursuant to Rules 13a-14(a)/15d-14(a) and Section 906 of the Sarbanes-Oxley Act of 2002[219] - Interactive data files (XBRL) for the consolidated financial statements and notes are included as an exhibit[217]