Lakeland Financial Reports Record First Quarter 2021 Performance

WARSAW, Ind., April 26, 2021 (GLOBE NEWSWIRE) -- Lakeland Financial Corporation (Nasdaq Global Select/LKFN), parent company of Lake City Bank, today reported record quarterly net income of $23.0 million for the three months ended March 31, 2021, an increase of 33% versus $17.3 million for the first quarter of 2020. Diluted earnings per share increased 34% to $0.90 for the first quarter of 2021, versus $0.67 for the first quarter of 2020. On a linked quarter basis, net income decreased $1.6 million, or 7%, from the fourth quarter of 2020, in which the company had net income of $24.6 million, or $0.97, diluted earnings per share. Pretax pre-provision earnings1 were $29.5 million for the first quarter of 2021, an increase of 7%, or $1.9 million, from $27.5 million for the first quarter of 2020. On a linked quarter basis, pretax pre-provision earnings decreased 7%, or $2.1 million, from $31.6 million for the fourth quarter of 2020.

David M. Findlay, President and Chief Executive Officer stated, “As we look back on the last year, we are immensely proud of our performance, both financially and operationally. With first quarter record net income, we continue to move through the challenging environment with strong financial results. Operationally, we continue to take care of our clients in our Indiana communities. During the quarter we were excited to reopen our branch lobbies to an enthusiastic response from our clients. And it was good to see them. We also took the next step in our unwavering focus on delivering technology-driven solutions to our clients with the roll out of Lake City Bank Digital, our next generation digital platform for retail and commercial banking clients.”

Financial Performance – First Quarter 2021

First Quarter 2021 versus First Quarter 2020 highlights:

• Return on average equity of 14.27%, compared to 11.51%
• Return on average assets of 1.58%, compared to 1.40%
• Loan growth of $389 million, or 10%
  • Paycheck Protection Program (PPP) loans of $397 million outstanding
  • Average loan growth, excluding PPP loans, of $105 million, or 3%
• Core deposit growth of $1.0 billion, or 25%
  • Noninterest bearing demand deposit account growth of $546 million, or 52%
• Net interest income increase of $4.8 million, or 12%
• Noninterest income increase of $1.8 million, or 17%
• Revenue growth of $6.6 million, or 13%
• Noninterest expense increase of $4.7, or 21%
• Pretax pre-provision earnings1 increase of $1.9 million, or 7%
• Provision for credit losses2 of $1.5 million compared to $6.6 million, a decrease of $5.1 million
• Average total equity increase of $49 million, or 8%

First Quarter 2021 versus Fourth Quarter 2020 highlights:

• Return on average equity of 14.27%, compared to 15.18%
• Return on average assets of 1.58%, compared to 1.70%
• Average loan growth, excluding PPP loans, of $50 million, or 1%
• Core deposit growth of $198 million, or 4%
• Net interest income decrease of $1.0 million, or 2%
• Noninterest income increase of $775,000, or 7%
• Provision for credit losses2 of $1.5 million compared to $920,000, an increase of $557,000
• Noninterest expense increase of $1.8 million, or 7%
• Average total equity increase of $8.7 million, or 1%

Return on average total equity for the first quarter of 2021 was 14.27%, compared to 11.51% in the first quarter of 2020 and 15.18% in the linked fourth quarter of 2020. Return on average assets for the first quarter of 2021 was 1.58%, compared to 1.40% in the first quarter of 2020 and 1.70% in the linked fourth quarter of 2020. The company’s total capital as a percent of risk-weighted assets was 15.20% at March 31, 2021, compared to 14.23% at March 31, 2020 and 14.65% at December 31, 2020. The company’s tangible common equity to tangible assets ratio1 was 10.77% at March 31, 2021, compared to 11.99% at March 31, 2020 and 11.21% at December 31, 2020.

As announced on April 13, 2021, the board of directors approved a cash dividend for the first quarter of $0.34 per share, payable on May 5, 2021, to shareholders of record as of April 25, 2021. The first quarter dividend per share of $0.34 is unchanged from the dividend per share paid for the fourth quarter of 2020.

Findlay added, “Our exceptional capital strength has represented a strong foundation as we have navigated the uncertainty of the past year. Our balance sheet is well positioned for future growth and we’re looking forward to a more normalized environment to continue our focus on doing what we do best and that is to grow our balance sheet through organic loan opportunities in all of our markets. Our strong capital position has also provided the ability to consistently grow dividends for our shareholders over a long period of time.”

During the first quarter of 2020, the company repurchased 289,101 shares of its common stock for $10 million at a weighted average price per share of $34.63. Share repurchases under the repurchase plan were suspended in March with $20 million of authorization remaining available under the plan. No shares were repurchased under the plan during the remainder of 2020, and the share repurchase program expired on January 21, 2021. On April 13, 2021, the company’s board of directors reauthorized and extended the share repurchase program through April 30, 2023. Under the program the company is authorized to repurchase, from time to time as the company deems appropriate, shares of the company’s common stock with an aggregate purchase price of up to $30 million.

Average total loans for the first quarter of 2021 were $4.57 billion, an increase of $508.1 million, or 13%, versus $4.06 billion for the first quarter 2020. Average PPP loans were $402.7 million during the first quarter 2021. Excluding PPP loans, average loans were $4.16 billion compared to $4.06 billion for the first quarter of 2020, an increase of $105.3 million, or 3%. On a linked quarter basis, average total loans decreased $50.7 million, or 1%, from $4.62 billion for the fourth quarter of 2020 due to seasonal pay downs of agriculture loans. Average loans excluding PPP loans increased by $49.6 million, or 1%, on a linked quarter basis.

Findlay commented, “We are pleased to have supported the Paycheck Protection Program as it has truly made a difference for many of our clients as they have navigated the challenges of the last year. Clearly, the environment of the last year has negatively impacted overall loan growth. With commercial line utilization at a historic low of 39% due to excess liquidity available on our customer’s balance sheets, we are eager for an opportunity to return to a more normalized in-person relationship with our clients.”

Total loans outstanding grew $388.9 million, or 10%, from $4.09 billion as of March 31, 2020 to $4.47 billion as of March 31, 2021. PPP loans outstanding were $396.7 million as of March 31, 2021. Total loans excluding PPP loans decreased by $7.8 million, as of March 31, 2021 as compared to March 31, 2020. On a linked quarter basis, total loans excluding PPP loans were $4.08 billion as of March 31, 2021, a decrease of $159.2 million, or 4%, as compared to the fourth quarter of 2020.

Average total deposits were $5.11 billion for the first quarter of 2021, an increase of $902.9 million, or 21%, versus $4.20 billion for the first quarter of 2020. On a linked quarter basis, average total deposits increased by $147.6 million, or 3%. Total deposits grew $948.3 million, or 22%, from $4.28 billion as of March 31, 2020 to $5.23 billion as of March 31, 2021. On a linked quarter basis, total deposits increased by $193.2 million, or 4%, from $5.04 billion as of December 31, 2020.

Importantly, core deposits, which exclude brokered deposits, increased $1.05 billion, or 25%, from $4.17 billion at March 31, 2020 to $5.22 billion at March 31, 2021. This increase was due to growth in commercial deposits of $625.5 million, or 45%; growth in retail deposits of $350.6 million, or 21%; and growth in public fund deposits of $71.7 million, or 6%. On a linked quarter basis core deposits increased by $198.2 million, or 4%, at March 31, 2021 as compared to December 31, 2020. PPP loan proceeds to borrowers and an additional round of economic impact payments to consumer customers continued to impact the increase in deposits during the quarter as proceeds were deposited into borrower and consumer checking accounts at the bank.

Findlay noted, “The growth in our core demand deposit accounts over the last year has been extraordinary. Commercial demand deposit balances have grown by 52% and retail demand deposit balances have grown by 64% when compared to balances a year ago. We are in relatively unchartered territory with this type of demand deposit growth, and while we expect this liquidity to abate over time, we are managing our balance sheet liquidity carefully as we anticipate loan demand to return to more normalized levels in the future. On an interim basis, we have deployed nearly $350 million of this excess liquidity through our investment portfolio.”

The company’s net interest margin decreased 16 basis points to 3.19% for the first quarter of 2021 compared to 3.35% for the first quarter of 2020. The lower margin in the first quarter of 2021 as compared to the prior year period was due to lower yields on loans and securities, partially offset by a lower cost of funds. The decline in net interest margin resulted from the Federal Reserve Bank decreases in the target Federal Funds Rate by 150 basis points during 2020, which brought the Federal Funds Rate back to the zero-bound range of 0.00% to 0.25%. The first quarter net interest margin was impacted by the lower yield on the PPP loan portfolio and excess liquidity on the balance sheet, offset by fees earned as a result of PPP loan forgiveness. The company’s net interest margin excluding PPP loans was 13 basis points lower at 3.06% and reflects a 29 basis point decline from 3.35% the first quarter of 2020. Linked quarter net interest margin excluding PPP loans decreased by 6 basis points compared to 3.12% for the fourth quarter of 2020 due to declining earning asset yields offset by lower cost of funds.

“We’ve aggressively managed our cost of deposits from the very beginning of the challenging COVID-19 environment. We’ve lowered our cost of deposits to historical lows and have eliminated nearly all of our non-core deposits. We’ve also worked to strengthen our earning asset yield with the reintroduction of floors on commercial loan relationships and some strategic repositioning within our investment portfolio,” Findlay further commented.

Net interest income increased by $4.8 million, or 12%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. On a linked quarter basis, net interest income decreased $1.0 million, or 2%, from the fourth quarter of 2020. PPP loan income was $5.2 million for the three months ended March 31, 2021, compared to $6.5 million during the fourth quarter of 2020.

The company adopted CECL during the first quarter of 2021, effective January 1, 2021. The day one impact of adoption was an increase in the allowance for credit losses2 of $9.1 million, with an offset, net of taxes, to beginning stockholders’ equity. The company recorded a provision for credit losses2 of $1.5 million in the first quarter of 2021, compared to $6.6 million in the first quarter of 2020, a decrease of $5.1 million. On a linked quarter basis, the provision2 increased by $557,000 from $920,000 in the fourth quarter of 2020. The higher provision2 in the first quarter of 2020 was driven by potential negative impacts on the company’s borrowers from the economic conditions resulting from the COVID-19 pandemic. The company’s credit loss reserve to total loans2 was 1.61% at March 31, 2021 versus 1.31% at March 31, 2020 and 1.32% at December 31, 2020. The company’s credit loss reserve2 to total loans excluding PPP loans1 was 1.76% at March 31, 2021 versus 1.31% at March 31, 2020 and 1.45% at December 31, 2020. PPP loans are guaranteed by the United States Small Business Administration (SBA) and have not been allocated for within the allowance for credit losses2.

Findlay added, “The allowance for credit losses has increased by $10 million in 2021 and reflects the Implementation of CECL. We’re confident that our reserve position represents a conservative position and are encouraged by the stability of our asset quality metrics. The credit cycle has not been nearly as negative as many of us expected during the last year and we are comfortable with the current levels of our reserve.”

Net charge offs in the first quarter of 2021 were $90,000 versus net charge-offs of $3.6 million in the first quarter of 2020 and net charge offs of $259,000 during the linked fourth quarter of 2020. Annualized net charge offs to average loans were 0.01% for the first quarter of 2021 versus 0.36% for the first quarter of 2020, and 0.02% for the linked fourth quarter of 2020.

Nonperforming assets decreased $2.1 million, or 15%, to $12.2 million as of March 31, 2021 versus $14.3 million as of March 31, 2020. On a linked quarter basis, nonperforming assets decreased $235,000, or 2%, versus the $12.4 million reported as of December 31, 2020. The ratio of nonperforming assets to total assets at March 31, 2021 decreased to 0.20% from 0.28% at March 31, 2020 and decreased from 0.21% at December 31, 2020 on a linked quarter basis. Total individually analyzed and watch list loans increased by $87.5 million, or 48%, to $271.3 million at March 31, 2021 versus $183.8 million as of March 31, 2020. On a linked quarter basis, total individually analyzed and watch list loans decreased by $14.8 million, or 5%, from $286.1 million at December 31, 2020. The decrease in total individually analyzed and watch list loans was due primarily to a decrease in non-individually analyzed watch list credits. Individually analyzed watch list loans decreased by $2.8 million, or 12%, to $20.1 million at March 31, 2021 versus $22.9 million at March 31, 2020. On a linked quarter basis, individually analyzed watch list loans decreased by $28,000, from $20.2 million at December 31, 2020.

The company’s noninterest income increased $1.8 million, or 17%, to $12.6 million for the first quarter of 2021, compared to $10.8 million for the first quarter of 2020. Noninterest income was positively impacted by a $1.0 million increase in bank owned life insurance income primarily due to a variable bank owned life insurance product that contains equity-based investments. In addition, mortgage banking income increased $787,000, or 134%; loan and service fees increased $368,000, or 15%; and wealth advisory fees increased $319,000, or 17%. Net securities gains increased $753,000 due to repositioning of the available-for-sale securities portfolio in response to the steepening yield curve during the quarter. Offsetting these increases were decreases of $810,000, or 48%, in other income driven by a credit valuation adjustment on interest rate swaps during the first quarter of 2020. In addition, interest rate swap fee income decreased $404,000, or 62%, and service charges on deposit accounts decreased $281,000, or 10%.

Noninterest income increased by $775,000, or 7%, on a linked quarter basis to $12.6 million. The linked quarter increase resulted primarily from an increase in net securities gains of $683,000, mortgage banking income of $407,000 and wealth advisory fees of $304,000. Offsetting these increases was a $735,000 decline in interest rate swap fee income during the quarter.

The company’s noninterest expense increased $4.7 million, or 21%, to $26.7 million in the first quarter of 2021, compared to $22.1 million in the first quarter of 2020. Salaries and employee benefits increased $2.8 million, or 24%, driven by higher incentive-based compensation expense and higher employee health insurance expense. Professional fees increased $730,000, or 64%, driven by higher legal expense and digital deconversion expenses as the company launched Lake City Bank Digital in March 2021. Data processing fees increased $437,000, or 15%, driven by the company’s continued investment in customer focused, technology-based solutions, such as the online PPP origination and forgiveness platform, and ongoing cybersecurity and data management enhancements. Corporate and business development expense increased $398,000, or 36%, due to higher business and community development expenditures.

On a linked quarter basis, noninterest expense increased by $1.8 million, or 7%, to $26.7 million. Corporate and business development expense increased $740,000 primarily due to higher community development expenses. Salaries and employee benefits increased by $668,000 due primarily to higher incentive-based compensation expenses and increased health insurance expense.

The company’s efficiency ratio was 47.6% for the first quarter of 2021, compared to 44.5% for the first quarter of 2020 and 44.1% for the linked fourth quarter of 2020.

COVID-19 Crisis Management

The company reopened all its branch lobbies on March 15, 2021 for the first time since directing customers to its drive-thru facilities on November 18, 2020. Most company employees returned to the workplace in a Lake City Bank facility by April 12, 2021, with certain business units keeping a portion of employees in a remote workplace setting for business continuity purposes. The company invested in personal protective equipment, installed protective barriers and enhanced social distancing measures in order to prioritize the safety of bank customers and employees. The company will keep all safety protocols in place until it determines that the public health risks posed by COVID-19 no longer require them.

Active Management of Credit Risk

The company’s Commercial Banking and Credit Administration leadership continues to review and refine the list of industries that the company believes are most likely to be materially impacted by the potential economic impact resulting from the COVID-19 pandemic. The current assessment of impacted industries remains unchanged from year end 2020 and includes a smaller group of industries as compared to the initial list of potentially affected industries disclosed in the company’s earnings release for the first quarter of 2020. The current list of industries under review represents approximately 3.3%, or $138 million, of the company’s total loan portfolio versus $765 million, or 18.7%, as of April 27, 2020, excluding PPP loans. The following industries are included in the 3.3% along with their respective percentage of the loan portfolio: hotel and accommodations – 2.3%, entertainment and recreation – 0.6% and full-service restaurants – 0.4%. The company has no direct exposure to oil and gas and limited exposure to retail shopping centers.

The company’s commercial loan portfolio is highly diversified, and no industry sector represents more than 8% of the bank’s loan portfolio as of March 31, 2021. Agri-business and agricultural loans represented the highest specific industry concentration at 7% of total loans. The company’s Commercial Banking and Credit Administration teams continue to actively work with customers to understand their business challenges and credit needs during this time.

COVID-19 Related Loan Deferrals

As detailed below, loan deferrals peaked on June 17, 2020, at $737 million, which represented 16% of the total loan portfolio. As of March 31, 2021, total deferrals attributable to COVID-19 were $85 million, representing 26 borrowers, or 2% of the total loan portfolio. Total deferrals as of April 20, 2021 represented a decline in deferral balances of 88% from the peak levels. Of the $85 million, 19 were commercial loan borrowers representing $84 million in loans, or 2% of total commercial loans, and seven were retail loan borrowers representing $1 million, or 1% of total retail loans. All COVID-19 related loan deferrals remain on accrual status, as each deferral is evaluated individually, and management has determined that all contractual cashflows are collectable at this time.

As of April 20, 2021, Of the total commercial deferrals attributed to COVID-19, $14 million represented a first deferral action, $6 million represented a second deferral action, $40 million represented a third deferral action and $25 million represented a fourth deferral action. Two borrowers represented 89% of the fourth deferral population and were commercial real estate nonowner occupied loans supported by adequate collateral and personal guarantors and consist of loans to the hotel and accommodation industry. In accordance with Section 4013 of the CARES Act, these were not considered to be troubled debt restructurings.

The company’s retail loan portfolio is comprised of 1-4 family mortgage loans, home equity lines of credit and other direct and indirect installment loans. A third-party vendor manages the company’s retail and commercial credit card program and the company does not have any balance sheet exposure with respect to this program except for nominal recourse on limited commercial card accounts.

Paycheck Protection Program

During the first quarter of 2021, the company funded PPP loans for its customers through the second round of the PPP program. In addition, the bank has continued processing forgiveness applications for PPP loans made during the first round of the PPP program. As of March 31, 2021, Lake City Bank had $396.7 million in PPP loans outstanding consisting of $258.7 million from PPP round one and $138.0 million from PPP round two. Most of the PPP loans are for existing customers and 55% of the number of PPP loans originated are for amounts less than $50,000. As of March 31, 2021, the SBA has approved forgiveness for $291.2 million in PPP loans originated during round one of the PPP program and the company has submitted forgiveness applications on behalf of customers in the amount of $189.3 million that were awaiting SBA approval.

“Our bankers continue to support our customers through our Fintech partnership providing a digital platform to access round 2 of Paycheck Protection Loans and for submitting forgiveness applications to the SBA. We have processed 1,078 of round two PPP loans with average balances of $145,000. Importantly, we have submitted 86% of the 2,409 loans originated in round one to the SBA for loan forgiveness,” Findlay added.

Liquidity Preparedness

Throughout the COVID-19 crisis, the company has monitored liquidity preparedness. Critical to this effort has been the monitoring of commercial and retail borrowers’ line of credit utilization. The company’s commercial and retail line of credit utilization at March 31, 2021 was 39%, versus 48% at March 31, 2020 and 43% at December 31, 2020. The company has a long-standing liquidity plan in place that ensures that appropriate liquidity resources are available to fund the balance sheet.

Lakeland Financial Corporation is a $6.0 billion bank holding company headquartered in Warsaw, Indiana. Lake City Bank, its single bank subsidiary, is the sixth largest bank headquartered in the state and the largest bank 100% invested in Indiana. Lake City Bank operates 50 offices in Northern and Central Indiana, delivering technology-driven and client-centric financial services solutions to individuals and businesses.

Information regarding Lakeland Financial Corporation may be accessed on the home page of its subsidiary, Lake City Bank, at lakecitybank.com. The company’s common stock is traded on the Nasdaq Global Select Market under “LKFN.” In addition to the results presented in accordance with generally accepted accounting principles in the United States, this earnings release contains certain non-GAAP financial measures. The company believes that providing non-GAAP financial measures provides investors with information useful to understanding the company’s financial performance. Additionally, these non-GAAP measures are used by management for planning and forecasting purposes, including measures based on “tangible common equity”, which is “total equity” excluding intangible assets, net of deferred tax, and “tangible assets”, which is “total assets” excluding intangible assets, net of deferred tax. A reconciliation of these non-GAAP measures to the most comparable GAAP equivalents is included in the attached financial tables where the non-GAAP measures are presented.

This document contains, and future oral and written statements of the company and its management may contain, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, plans, objectives, future performance and business of the company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “continue,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. The company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and, accordingly, the reader is cautioned not to place undue reliance on any forward-looking statements made by the company. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the company undertakes no obligation to update any statement in light of new information or future events. Numerous factors could cause the company’s actual results to differ from those reflected in forward-looking statements, including the effects of the COVID-19 pandemic, including its effects on our customers, local economic conditions, our operations and vendors, and the responses of federal, state and local governmental authorities, as well as those identified in the company’s filings with the Securities and Exchange Commission, including the company’s Annual Report on Form 10-K and quarterly reports on Form 10-Q.

LAKELAND FINANCIAL CORPORATIONAVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS(UNAUDITED)

Reconciliation of Non-GAAP Financial Measures

The allowance for credit losses (1) to loans, excluding PPP loans and total individually analyzed and watch list loans to total loans, excluding PPP loans, are non-GAAP ratios that management believes are important because they provide better comparability to prior periods. PPP loans are fully guaranteed by the SBA and have not been allocated for within the allowance for loan losses (1).

A reconciliation of these non-GAAP measures is provided below (dollars in thousands).

Tangible common equity, tangible assets, tangible book value per share, tangible common equity to tangible assets ratio and pretax pre-provision earnings are non-GAAP financial measures calculated using GAAP amounts. Tangible common equity is calculated by excluding the balance of goodwill and other intangible assets from the calculation of equity, net of deferred tax. Tangible assets are calculated by excluding the balance of goodwill and other intangible assets from the calculation of total assets, net of deferred tax. Tangible book value per share is calculated by dividing tangible common equity by the number of shares outstanding less true treasury stock. Pretax pre-provision earnings is calculated by adding net interest income to noninterest income and subtracting noninterest expense. Because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies. However, management considers these measures of the company’s value including only earning assets as meaningful to an understanding of the company’s financial information.

A reconciliation of these non-GAAP financial measures is provided below (dollars in thousands, except per share data).

Net interest margin on a fully-tax equivalent basis, net of PPP loan impact, is a non-GAAP measure that management believes is important because it provides for better comparability to prior periods. Because PPP loans have a low fixed interest rate of 1.0% and because the accretion of net loan fee income can be accelerated upon borrower forgiveness and repayment by the SBA, management is actively monitoring net interest margin on a fully tax equivalent basis with and without PPP loan impact for the duration of this program.

A reconciliation of this non-GAAP financial measure is provided below (dollars in thousands).

ContactLisa M. O’NeillExecutive Vice President and Chief Financial Officer(574) 267-9125 [email protected]