Lakeland Financial Corp. 10-Q Summary
Business Context and Reporting Period
Lakeland Financial Corporation, the holding company for Lake City Bank, operates 43 offices in northern Indiana. This report covers the quarterly period ended June 30, 2009. The Company is an accelerated filer and is not a shell company. As of July 31, 2009, there were 12,432,430 shares of common stock outstanding.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Net Income | $8.33 million | $10.04 million |
| Net Income Available to Common Shareholders | $7.24 million | $10.04 million |
| Diluted EPS | $0.58 | $0.81 |
| Net Interest Income | $36.55 million | $30.00 million |
| Net Interest Margin | 3.29% | 3.13% |
| Provision for Loan Losses | $9.45 million | $4.17 million |
| Total Assets | $2.404 billion | $2.377 billion (Dec 31, 2008) |
| Total Loans (Net) | $1.857 billion | $1.814 billion (Dec 31, 2008) |
| Allowance for Loan Losses | $25.09 million | $18.86 million (Dec 31, 2008) |
| Total Deposits | $1.735 billion | $1.885 billion (Dec 31, 2008) |
| Total Equity | $212.19 million | $149.97 million (Dec 31, 2008) |
| Cash and Cash Equivalents | $41.78 million | $64.01 million (Dec 31, 2008) |
Material Changes vs. Prior Period
- Profitability: Net income decreased 17.1% year-over-year for the six-month period, driven by a $5.3 million increase in the provision for loan losses and a $3.9 million increase in noninterest expense, which offset a $6.5 million increase in net interest income.
- Asset Quality: The allowance for loan losses increased 33.0% to $25.09 million. Nonperforming assets decreased 8.6% to $20.47 million, primarily due to paydowns and charge-offs on impaired commercial credits.
- Liquidity and Funding: Total deposits decreased $150.2 million (8.0%) from year-end 2008, while short-term borrowings increased $163.0 million (80.4%), largely due to increased usage of the Federal Reserve Bank's Term Auction Facility.
- Capital Structure: Total equity increased 41.5% to $212.19 million, primarily due to the issuance of $56.0 million in preferred stock to the U.S. Treasury under the Capital Purchase Program (TARP) in February 2009.
Outlook, Risks, and Management Commentary
- Capital Purchase Program: The Company issued 56,044 shares of Fixed Rate Cumulative Perpetual Preferred Stock and a warrant to purchase 396,538 shares of common stock to the Treasury. This transaction positively impacted capital ratios and liquidity.
- Interest Rate Environment: Net interest margin improved to 3.29% for the six-month period. Management notes a shift toward a neutral balance sheet structure, which may reduce sensitivity to rate movements but increases reliance on deposit mix and pricing.
- Asset Quality Risks: Management does not foresee a rapid economic recovery. Specific risks include exposure to the housing industry, recreational vehicle manufacturing, and commercial real estate development. The Company maintains a high percentage of commercial loans, which carry higher credit risk due to concentration.
- Securities Portfolio: The Company holds $76.6 million in private-label mortgage-backed securities. While 17 of 24 have been downgraded, management does not believe other-than-temporary impairment is required based on cash flow projections.
- Regulatory Expenses: Noninterest expense increased significantly due to higher FDIC insurance premiums, a trend expected to continue.
Investor Verification Checklist
- Verify the sustainability of the Net Interest Margin improvement given the shift to higher-cost brokered deposits and public funds.
- Monitor the trajectory of the Provision for Loan Losses and the specific performance of the $128.4 million in classified loans.
- Assess the impact of the TARP preferred stock dividends ($5% for 5 years, then 9%) on future earnings available to common shareholders.
- Review the valuation assumptions for the $76.6 million private-label mortgage-backed securities portfolio, particularly the 17 downgraded issues.
- Track the Company's reliance on the Federal Reserve's Term Auction Facility and the stability of short-term borrowings.