Lakeland Financial Corp. 10-Q Summary: Period Ended June 30, 2010
Business Context and Reporting Period
Lakeland Financial Corporation (the "Company") is the holding company for Lake City Bank, headquartered in Warsaw, Indiana, operating 43 offices in Northern Indiana. This Form 10-Q covers the quarterly period ended June 30, 2010, and the six-month period ended on that date. The Company is an accelerated filer and is not a shell company.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Interest Income | $46.1 million | $36.6 million |
| Net Income | $12.2 million | $8.3 million |
| Net Income Available to Common Shareholders | $9.1 million | $7.2 million |
| Diluted EPS | $0.56 | $0.58 |
| Net Interest Margin | 3.80% | 3.29% |
| Total Assets | $2.63 billion | $2.41 billion (Dec 31, 2009) |
| Total Loans (Net) | $2.02 billion | $1.98 billion (Dec 31, 2009) |
| Total Deposits | $2.13 billion | $1.85 billion (Dec 31, 2009) |
| Allowance for Loan Losses | $37.4 million | $32.1 million (Dec 31, 2009) |
| Nonperforming Assets | $31.1 million | $31.6 million (Dec 31, 2009) |
| Cash and Cash Equivalents | $56.9 million | $56.0 million (Dec 31, 2009) |
Material Changes vs. Prior Period
- Profitability: Net income increased 46.9% year-over-year for the six-month period, driven primarily by a $9.6 million increase in net interest income and a $367,000 decrease in noninterest expense. However, earnings per share (EPS) declined slightly due to the issuance of 3.6 million common shares in late 2009 and higher preferred stock dividends/accretion prior to redemption.
- Interest Income & Expense: Net interest income rose due to a 51 basis point expansion in the net interest margin (to 3.80%) and an 8.8% increase in average earning assets. Interest expense decreased 26.0% due to lower market rates, reducing the cost of funds to 1.3%.
- Asset Quality: The provision for loan losses increased to $11.3 million (from $9.5 million in 2009) due to higher charge-offs ($6.4 million) and the addition of two commercial credits to the impaired loan category. Total impaired loans rose to $41.0 million. Nonperforming assets decreased slightly to $31.1 million.
- Noninterest Income: Total noninterest income decreased 12.0% to $10.2 million. This was primarily due to a 64.5% drop in merchant card fee income (due to a change in processing methodology) and an 83.1% drop in mortgage banking income. Additionally, the Company recorded $252,000 in other-than-temporary impairment losses on non-agency mortgage-backed securities.
- Capital Structure: On June 9, 2010, the Company redeemed all 56,044 shares of Series A Preferred Stock issued under the TARP Capital Purchase Program for $56.0 million. This action terminated restrictions on dividends and executive compensation but resulted in a non-cash reduction of net income available to common shareholders of $1.8 million (unamortized discount accretion).
Guidance, Outlook, and Risks
- Outlook: Management notes that while mortgage rates declined toward the end of the second quarter, it is too early to determine if this will lead to increased mortgage loan activity. The Company expects continued challenges from the economic recession in its geographic footprint, particularly in real estate development and recreational vehicle manufacturing.
- Regulatory Risks: The Company highlights the impact of the newly enacted "Dodd-Frank Wall Street Reform and Consumer Protection Act." Potential impacts include increased operating costs, higher capital requirements, limitations on revenue from deposits, and changes to deposit insurance assessments.
- Asset Quality Risks: Management warns that if economic conditions do not improve, nonperforming loans, charge-offs, and delinquencies could rise, requiring further increases in the provision for loan losses. The portfolio is heavily concentrated in commercial and commercial real estate loans, which carry higher credit risk.
- Securities Portfolio: The Company holds $68.9 million in non-agency collateralized mortgage obligations. While 5 remain rated AAA/Aaa, 19 have been downgraded, with 16 ranked below investment grade. Management continues to monitor these for other-than-temporary impairment.
Investor Verification Checklist
- TARP Redemption Impact: Verify the non-cash charge of $1.8 million related to the unamortized discount on the redeemed preferred stock and its effect on common EPS.
- Non-Agency Securities: Review the specific details of the 19 downgraded non-agency mortgage-backed securities and the methodology used to determine that remaining unrealized losses are temporary.
- Charge-Off Concentration: Note that 90% of Q2 charge-offs ($4.2 million) were concentrated in three borrowers, primarily in the manufacturing sector.
- Merchant Card Accounting: Confirm the impact of the change in merchant card processing on the comparability of noninterest income and expense between 2009 and 2010.
- Dodd-Frank Compliance: Assess the potential future capital and liquidity requirements imposed by the Dodd-Frank Act on the Company's business model.