Lakeland Financial Reports Second Quarter 2020 Performance

WARSAW, Ind., July 27, 2020 (GLOBE NEWSWIRE) -- Lakeland Financial Corporation (Nasdaq Global Select/LKFN), parent company of Lake City Bank, today reported quarterly net income of $19.7 million for the three months ended June 30, 2020, a decrease of 9% versus $21.7 million for the second quarter of 2019. Diluted earnings per share decreased 9% to $0.77 for the second quarter of 2020, versus $0.85 for the second quarter of 2019. On a linked quarter basis, net income increased $2.4 million, or 14%, from the first quarter of 2020, in which the company had net income of $17.3 million, or $0.67, diluted earnings per share. Pretax pre-provision earnings1 were $29.6 million for the second quarter of 2020, an increase of 6%, or $1.7 million, as compared to the second quarter of 2019. On a linked quarter basis, pretax pre-provision earnings increased 8%, or $2.1 million, from $27.5 million for the first quarter of 2020.

The company further reported net income of $37.0 million for the six months ended June 30, 2020 versus $43.4 million for the comparable period of 2019, a decrease of 15%. Diluted earnings per share also decreased 15% to $1.44 for the six months ended June 30, 2020 versus $1.69 for the comparable period of 2019. Pretax pre-provision earnings1 were $57.2 million for the six months ended June 30 2020, versus $55.2 million for the comparable period of 2019, an increase of 4%, or $2.0 million.

David M. Findlay, President and Chief Executive Officer commented, “The Lake City Bank team has done a tremendous job in managing through this unprecedented period. The strength of our financial performance is evident in our operating performance as demonstrated by the healthy growth of pretax pre-provision earnings. Yet the real strength of our performance is the most intangible one, our team’s positive attitude and ‘get it done’ mindset that has defined our COVID-19 pandemic response. At every step during this crisis, the culture of efficient execution that we have developed over the past two decades has driven our team’s actions.”

Financial Performance – Second Quarter 2020

Second Quarter 2020 versus Second Quarter 2019 highlights:

• Return on average equity of 12.92%, compared to 15.76%
• Return on average assets of 1.45%, compared to 1.76%
• Loan growth of $492 million, or 12%
• Paycheck Protection Program (PPP) loans of $555 million funded
• Core deposit growth of $612 million, or 15%
• Noninterest bearing DDA growth of $479 million, or 51%
• Net interest income increase of $1.1 million, or 3%
• Revenue growth of $698,000, or 1%
• Provision for loan losses of $5.5 million compared to $785,000, an increase of $4.7 million, or 601%
• Noninterest expense decrease of $1.0 million, or 5%
• Pretax pre-provision earnings increase of $1.7 million, or 6%
• Average total equity increase of $60 million, or 11%

Second Quarter 2020 versus First Quarter 2020 highlights:

• Return on average equity of 12.92%, compared to 11.51%
• Return on average assets of 1.45%, compared to 1.40%
• Average loan growth of $401 million, or 10%
• Average PPP loans outstanding increased by $458 million
• Core deposit growth of $443 million, or 11%
• Noninterest bearing DDA growth of $368 million, or 35%
• Net interest income increase of $674,000, or 2%
• Noninterest income increase of $392,000, or 4%
• Revenue growth of $1.1 million, or 2%
• Provision expense decline of $1.1 million to $5.5 million
• Noninterest expense decrease of $1.0 million, or 5%
• Pretax pre-provision earnings increase of $2.1 million, or 8%
• Average total equity increase of $8.0 million, or 1%

Return on average total equity for the second quarter of 2020 was 12.92%, compared to 15.76% in the second quarter of 2019 and 11.51% in the linked first quarter of 2020. Return on average total equity for the first six months of 2020 was 12.22%, compared to 16.17% in the same period of 2019. Return on average assets for the second quarter of 2020 was 1.45%, compared to 1.76% in the second quarter of 2019 and 1.40% in the linked first quarter of 2020. Return on average assets for the first six months of 2020 was 1.43% compared to 1.78% in the same period of 2019. The company’s total capital as a percent of risk-weighted assets was 14.93% at June 30, 2020, compared to 14.49% at June 30, 2019 and 14.23% at March 31, 2020. The company’s tangible common equity to tangible assets ratio1 was 11.35% at June 30, 2020, compared to 11.30% at June 30, 2019 and 11.99% at March 31, 2020.

As announced on July 14, 2020, the board of directors approved a cash dividend for the second quarter of $0.30 per share, payable on August 5, 2020, to shareholders of record as of July 25, 2020. The second quarter dividend per share of $0.30 is unchanged from the dividend per share paid in the first quarter of 2020.

Findlay continued, “Our fortress balance sheet continued to strengthen in the first half of 2020 as both our capital and loan loss reserve levels grew. Our dividend reflects both the historical strength of our balance sheet and our confidence in the future.”

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 second quarter of 2020.Average total loans for the second quarter of 2020 were $4.46 billion, an increase of $499.1 million, or 13%, versus $3.96 billion for the second quarter 2019. Average PPP loans for the second quarter of 2020 were $458 million. Excluding PPP loans, average loans were $4.00 billion compared to $3.96 billion for the second quarter of 2019, an increase of $41.3 million, or 1%. On a linked quarter basis, average total loans grew $401.2 million, or 10%, from $4.06 billion for the first quarter of 2020. Average loans excluding PPP loans decreased by $56.5 million, or 1%, on a linked quarter basis. Total loans outstanding grew $491.9 million, or 12%, from $4.00 billion as of June 30, 2019 to $4.49 billion as of June 30, 2020. Total loans excluding PPP loans decreased by $62.7 million, or 2%, as of June 30, 2020 as compared to June 30, 2019. On a linked quarter basis, total loans excluding PPP loans decreased by $149.8 million, or 4%, as of June 30, 2020 as compared to the first quarter of 2020. The company believes that some borrowers initially reduced outstanding loans utilizing PPP proceeds and expects these loan outstandings will return as PPP proceeds are utilized.

The Small Business Administration (SBA) and the United States Treasury Department formally announced the PPP on March 31, 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). At June 30, 2020, the company had $554.6 million of PPP loans outstanding. The yield on PPP loans was 2.66% for the second quarter of 2020, which reflects the combined impact of the 1.00% interest rate on PPP loans and net PPP loan fee accretion.

Findlay added, “Our efforts to support our customers with the PPP loan program continue. We believe that liquidity from PPP loans has provided our borrowers with critical support for their businesses and employees during this trying time and we are pleased to be able to provide it.”

Average total deposits were $4.70 billion for the second quarter of 2020, an increase of $396.1 million, or 9%, versus $4.30 billion for the second quarter of 2019. On a linked quarter basis, average total deposits increased by $492.7 million, or 12%. Total deposits grew $422.1 million, or 10%, from $4.22 billion as of June 30, 2019 to $4.64 billion as of June 30, 2020. On a linked quarter basis, total deposits increased by $361.7 million, or 8% as of June 30, 2020 as compared to the first quarter 2020. In addition, total core deposits, which exclude brokered deposits, increased $612.1 million, or 15%, from $4.00 billion at June 30, 2019 to $4.62 billion at June 30, 2020 due to growth in commercial deposits of $595.9 million, or 50% and growth in retail deposits of $166.9 million or 11% offset by decreases in public fund deposits of $150.7 million, or 12%. On a linked quarter basis core deposits increased by $443.2 million, or 11% at June 30, 2020 as compared to the first quarter 2020 due to growth in commercial deposits of $401.1 million, or 29% and growth in retail deposits of $71.6 million, or 4% offset by a decrease in public funds of $29.4 million or 3%. PPP loan proceeds to borrowers impacted the increase in deposits during the quarter as loan proceeds were deposited into borrower checking accounts at the bank. Management expects demand deposit balances to decrease over time as PPP loan proceeds are deployed by borrowers for payroll and other business operating needs.

The company’s net interest margin decreased 27 basis points to 3.10% for the second quarter of 2020 compared to 3.37% for the second quarter of 2019. The company’s net interest margin excluding PPP loans was 3.17%(1), or 7 basis points higher, and reflects a 20 basis point decline from 3.37% the second quarter of 2019. Linked quarter net interest margin excluding PPP loans decreased by 18 basis points to 3.17% from 3.35% for the first quarter 2020. The lower margin in the second quarter of 2020 was due to lower yields on loans and securities, partially offset by a lower cost of funds, driven by the Federal Reserve Bank decreasing the target Federal Funds Rate by 225 basis points since the second half of 2019, inclusive of two Federal Reserve Bank emergency cuts to the Federal Funds Rate during March 2020. The two emergency cuts reduced the Federal Funds Rate by 150 basis points and brought the Federal Funds Rate back to the zero bound range of 0.00% to 0.25%. In addition, the second quarter net interest margin was impacted by the lower yield on the PPP loan portfolio.

Net interest income increased by $1.1 million, or 3%, for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. On a linked quarter basis, net interest income increased $674,000, or 2%, from the first quarter of 2020. Pre-tax PPP loan interest and fee income was $3.0 million during the second quarter 2020.

The company’s net interest margin decreased 20 basis points to 3.22% for the six months ended June 30, 2020 compared to 3.42% for the six months ended June 30, 2019. The company’s net interest margin excluding PPP loans was 3.25%(1), or 3 basis points higher for the six months ended June 30, 2020. Net interest income increased by $1.8 million, or 2%, for the six months ended June 30, 2020 as compared to the first half of 2019 due to loan and core deposit growth offset by margin compression.

Pursuant to the incurred loan loss methodology, the company recorded a provision for loan losses of $5.5 million in the second quarter of 2020, compared to $785,000 in the second quarter of 2019, an increase of 601%. On a linked quarter basis, the provision decreased from $6.6 million in the first quarter of 2020. The company recorded a provision for loan losses of $12.1 million in the six months ended June 30, 2020 compared to $2.0 million for the comparable period of 2019. The higher provision in 2020 was driven by the potential negative impact of the COVID-19 pandemic on the company’s customers. The company’s loan loss reserve to total loans was 1.31% at June 30, 2020 versus 1.26% at June 30, 2019 and 1.31% at March 31, 2020. The company’s loan loss reserve to total loans excluding PPP loans1 was 1.50% at June 30, 2020 versus 1.26% at June 30, 2019 and 1.31% at March 31, 2020. PPP loans are guaranteed by the United States SBA and have not been allocated for within the allowance for loan losses. As permitted by the CARES Act, the company elected to defer its application of FASB’s new rule covering the Current Expected Credit Loss (CECL) standard. The company will continue to monitor developments related to CECL adoption and will manage the process accordingly.

Net charge offs in the second quarter of 2020 were $90,000 versus net recoveries of $217,000 in the second quarter of 2019 and net charge offs of $3.6 million during the linked first quarter of 2020. The higher net charge offs in the first quarter of 2020 were due primarily to a $3.7 million charge-off resulting from a single commercial manufacturing borrower. Annualized net charge offs to average loans were 0.01% for the second quarter of 2020 versus net recoveries to average loans of 0.02% for the second quarter of 2019, and net charge offs to average loans of 0.36% for the linked first quarter of 2020. On a year-to-date basis, net charge offs to average loans were 0.18% compared to net recoveries to average loans of 0.01% for the first six months of 2019.

Nonperforming assets decreased $204,000, or 1%, to $15.1 million as of June 30, 2020 versus $15.3 million as of June 30, 2019. On a linked quarter basis, nonperforming assets were $798,000, or 6%, higher than the $14.3 million reported as of March 31, 2020. The ratio of nonperforming assets to total assets at June 30, 2020 decreased to 0.28% from 0.31% at June 30, 2019 and was unchanged from 0.28% at March 31, 2020. Total impaired and watch list loans increased by $320,000, or 0%, to $208.2 million at June 30, 2020 versus $207.9 million as of June 30, 2019. On a linked quarter basis, total impaired and watch list loans increased by $24.4 million, or 13%, from $183.8 million at March 31, 2020. The increase in total impaired and watch list loans was due primarily to an increase in non-impaired watch list credits that resulted from five downgraded credits, which were offset by four upgraded credits. Impaired watch list loans decreased by $284,000, or 1%, to $24.0 million at June 30, 2020 versus June 30, 2019. On a linked quarter basis, impaired watch list loans increased by $1.1 million, or 5%, from $22.9 million at March 31, 2020 due to the addition of two nonaccrual commercial loans offset by paydowns of impaired loans.

“Since year-end 2019, we have increased our allowance for loan losses by 17%, or $8.4 million. In addition, we delayed the implementation of CECL to ensure that we can maintain our granular, credit by credit, approach to reserve adequacy,” Findlay said. “When the COVID-19 crisis emerged late in the first quarter, we took steps to identify where we believed the risk existed in our loan portfolio and have built the allowance to a conservative level reflective of our historical approach. We will continue to manage our allowance with a bias towards conservatism. Yet, it remains too early to really know the full impact of the crisis on borrower creditworthiness.”

The company’s noninterest income decreased $419,000, or 4%, to $11.2 million for the second quarter of 2020, compared to $11.6 million for the second quarter of 2019. Noninterest income was positively impacted by a $956,000 increase, or 240% growth, in mortgage banking income, a $926,000 increase, or 242% growth, in swap fee income generated from commercial lending transactions and a $159,000 increase, or 10% growth, in wealth management fees over the prior year second quarter. The credit valuation adjustments on interest rate swaps increased noninterest income by $271,000 in the second quarter 2020 compared to the second quarter of 2019. Offsetting these increases were decreases of $2.7 million, or 55%, in service charges on deposit accounts driven by lower treasury management fees and lower transaction-based fees. Treasury management fees from a former commercial customer were $2.1 million in the second quarter of 2019. In addition, overdraft fee income declined by $494,000, or 55%, during the second quarter as compared to the prior year second quarter. The company believes that economic stimulus payments paid by the U.S. Treasury to customers during the second quarter of 2020 provided liquidity to our retail customers and reduced overdrafts.

The company’s noninterest income decreased $1.2 million, or 5%, to $21.9 million for the six months ended June 30, 2020 compared to $23.1 million in the prior year period. Noninterest income was positively impacted by a $1.3 million increase, or 213% growth in mortgage banking income, a $1.2 million increase, or 155% growth, in swap fee income generated from commercial lending transactions and a $398,000 increase, or 12% growth, in wealth management fees over the corresponding prior year period. The credit valuation adjustments on interest rate swaps increased noninterest income by $1.0 million in the six months ended June 30, 2020 compared to the corresponding prior year period. Noninterest income was negatively impacted by a $4.2 million decrease in service charges on deposit accounts, as well as decreases of $187,000 in investment brokerage fees and decreases of $187,000 in bank owned life insurance income primarily due to a variable bank owned life insurance product that contains equity based investments. Service charges on deposit accounts for the six months ended June 30, 2019, included $3.7 million of fees from a former commercial customer.

The company’s noninterest expense decreased $1.0 million, or 5%, to $21.1 million in the second quarter of 2020, compared to $22.1 million in the second quarter of 2019. Corporate and business development decreased $544,000 primarily due to reduced business development and training expense. Salaries and employee benefits decreased $430,000 primarily due to lower incentive-based compensation expense. Offsetting the decreases were increases in net occupancy expense driven by COVID-19 related expenses of approximately $395,000 incurred to prepare for our branch reopening and our Return to Workplace Plan. In addition, data processing fees increased driven by the company’s continued investment in customer focused, technology-based solutions and ongoing cybersecurity and data management enhancements.

The company’s noninterest expense decreased by $1.4 million, or 3%, to $43.2 million in the first six months of 2020 compared to $44.6 million in the corresponding prior year period. The decrease was driven by salaries and employee benefits, which decreased by 4%, or $1.1 million, primarily due to lower incentive-based compensation expense. Corporate and business development decreased $639,000 primarily due to reduced business development and training expense. Offsetting the decreases were increases in data processing fees. In addition, net occupancy expense increased driven by COVID-19 related expenses, primarily for personal protective equipment and the implementation of social distancing measures for both employees and customers.

The company’s efficiency ratio was 41.6% for the second quarter of 2020, compared to 44.2% for the second quarter of 2019 and 44.5% for the linked first quarter of 2020. The company’s efficiency ratio was 43.0% for the six months ended June 30, 2020 compared to 44.7% in the prior year period.

1 Non-GAAP financial measure – see “Reconciliation of Non-GAAP Financial Measures”

COVID-19 Crisis Management

During the second quarter, Lake City Bank focused on its response to the crisis for its employees and its customers. The bank closed branch lobbies on March 21, 2020 and directed its clients and communities to its drive up facilities and by-appointment visits in addition to digital channels via online and mobile banking. The bank created a Branch Reopening Task Force, which established guidelines under which the bank could safely open its offices. On June 15, 2020, the bank reopened all of its branch lobbies. The bank will keep all safety protocols in place until it determines that the public health risks posed by COVID-19 no longer require the precautionary measures that are in place.

In addition, the bank continues to utilize its Remote Workplace Plan for staff to reduce staff density in its offices and to ensure operational redundancy in the event of an outbreak in any of the bank’s facilities. Technology has played a large role in the successful Remote Workplace Plan and the bank’s digital solution utilization by its customers has increased significantly.

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 includes a smaller group of industries as compared to the initial list of potentially affected industries disclosed in the company’s April 27, 2020 first quarter release. The company’s current list of industries under review represents 6.6%, or $261.2 million of the total loan portfolio versus $764.9 million, or 18.7% as of April 27, 2020, excluding PPP loans. The following industries are included in the 6.6% along with their respective percentage of the loan portfolio: hotel and accommodations – 2.5%, dairy and hogs – 1.6%, restaurants – 1.0%, education – 1.0% and entertainment and recreation – 0.5%. The company has no direct exposure to oil and gas and limited exposure to retail shopping centers.

“We completed our long-standing semi-annual Loan Portfolio Review Meetings on July 17th. These meetings are an insightful and detailed process for the entire team and included in-depth reviews of the 18.7% of the loan portfolio identified early in the COVID-19 crisis, as well as all credits rated below the pass grade. The meetings include an officer-by-officer review of their loan portfolios. These thorough reports drove the reduction of the industries we believe to be most impacted by the COVID-19 crisis. We are cautiously encouraged by the portfolio review process as it demonstrated that our commercial borrowers are generally managing through the crisis effectively,” Findlay said.

Findlay continued, “We will continue to be diligent and active in identifying and understanding the impact of the COVID-19 crisis on our borrowers. Clearly, this crisis is not over and it will be critical that we stay on top of emerging risk in the loan portfolio to ensure that our historical strength continues on the credit quality front.”

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 June 30, 2020. Agri-business and agricultural loans represented the highest specific industry concentration at 8% 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, in the amount of $737 million, representing 487 borrowers, or 16% of the total loan portfolio. As of July 22, 2020, total deferrals attributable to COVID-19 were $425 million, representing 212 borrowers, or 9% of the total loan portfolio. Total deferrals as of July 22, 2020 represented a decline in deferral balances of 42% from the peak levels. Of that total, 159 were commercial loan borrowers representing $420 million in loans, or 10% of total commercial loans and 53 were retail loan borrowers representing $5 million, or 1% of total retail loans.

As of July 22, 2020, 363 borrowers with loans outstanding of $416 million had reached their initial 90 day deferral maturity. Of this group, 92 borrowers with loans outstanding of $110 million were granted a second deferral. This represents 25% of initial deferral borrowers and 26% of initial deferral loan amounts.

“We were pleasantly surprised by the outcomes on the first wave of deferral maturities. There was a high level of uncertainty with our borrowers when this crisis began, and the initial level of deferrals reflected that uncertainty on both the borrower’s and the bank’s behalf. We have continued to actively communicate with our borrowers and will work with them as we manage through this time of uncertainty. A hallmark of our performance during the Great Recession was our relationship focused efforts when working with borrowers during a downturn. We will continue that effort in this economic cycle,” added Findlay.

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. As of July 22, 2020, 116 borrowers with loans outstanding of $7 million had reached their initial 90 day deferral maturity. 31 borrowers totaling $5 million, or 74% of the aggregate retail deferral amount, were granted a second deferral. 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

The second quarter results reflect nearly a full quarter impact of PPP loan originations to the bank following submission of its first PPP loan application to the SBA on April 3, 2020, the first date SBA began accepting applications. As of July 22, 2020, Lake City Bank completed 2,378 applications for $569.2 million in loans. The majority of the PPP loans were for existing customers and 87% of the PPP loans were for amounts less than $350,000. In addition, roughly 74% of the total number of PPP loans were made to borrowers in amounts of $150,000, or less and would benefit from the pending legislation that may provide expedited relief to these borrowers.

In preparation for the forgiveness application process, the bank has selected a third-party Fintech technology partner to automate the process. The software solution provides tools to facilitate communications with borrowers, gathering of information securely, calculation of forgiveness amounts and, electronic transmission to the SBA for approval.

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 June 30, 2020 declined to 41% versus 48% at March 31, 2020 and 46% at December 31, 2019. The company believes it has experienced a reduction in overall usage on outstanding lines of credit of approximately $200 million as a result of the PPP loan proceeds our borrowers have received. We expect the reduced credit line utilization to be temporary while our borrowers deploy the PPP loan proceeds to pay for qualifying payroll and business expenses. The company has a long-standing liquidity plan in place that ensures there are appropriate liquidity resources available to fund the balance sheet.

Lakeland Financial Corporation is a $5.4 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.

ContactLisa M. O’NeillExecutive Vice President and Chief Financial Officer(574) 267-9125 lisa.oneill@lakecitybank.com

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

Reconciliation of Non-GAAP Financial Measures

The allowance for loan losses to loans, excluding PPP loans and total impaired 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.

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 pre-provision net revenue 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. Pre-provision net revenue 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).