Lakeland Financial (LKFN) - 2019 Q4 - Annual Report

PART I Item 1. Business An Indiana-based bank holding company with $4.9 billion in assets, focusing on organic growth and subject to extensive financial regulation Company Overview and Strategy The company is a $4.9 billion Indiana-based bank holding company pursuing an organic growth strategy through community-based banking - Lakeland Financial is a bank holding company headquartered in Warsaw, Indiana, with its primary subsidiary being Lake City Bank and $4.9 billion in consolidated total assets as of December 31, 2019[13] - The company's business strategy is centered on organic growth, expanding from $286 million in assets in 1990 to $4.9 billion in 2019, a compound annual growth rate of 11%[20] - The Bank operates 50 offices across fifteen counties in Northern and Central Indiana, focusing on long-term commercial and retail relationships[15][17] - The company faces intense competition from national and community banks, credit unions, and fintech companies[22] Supervision and Regulation The company and its bank subsidiary are subject to extensive federal and state regulations, with a primary focus on capital adequacy - The Company and its bank subsidiary are extensively regulated by agencies including the DFI, Federal Reserve, FDIC, and CFPB for depositor protection[30][31] - The Company and the Bank are subject to the Basel III Rule, which mandates stringent minimum capital ratios and a capital conservation buffer[40][45] Well-Capitalized Requirements | Capital Ratio | Minimum to be Well-Capitalized | | :--- | :--- | | Common Equity Tier 1 to risk-weighted assets | 6.5% or more | | Tier 1 Capital to risk-weighted assets | 8.0% or more | | Total Capital to risk-weighted assets | 10.0% or more | | Tier 1 Capital to total adjusted average quarterly assets | 5.0% or greater | - As of December 31, 2019, both the Company and the Bank were well-capitalized and in compliance with the capital conservation buffer[48] - As a financial holding company, Lakeland Financial must maintain its well-capitalized status to engage in a wider range of nonbanking activities[59] - The Bank's ability to pay dividends to the holding company is restricted by state law and Federal Reserve regulations[73][75] Item 1A. Risk Factors The company faces credit, market, operational, and regulatory risks, including loan portfolio concentrations and interest rate sensitivity - Credit & Concentration Risk: Success is heavily dependent on the economic conditions in its Northern and Central Indiana markets[95] - Loan Portfolio Risk: The loan portfolio has significant concentrations in commercial & industrial (35.1%) and commercial real estate (41.1%) loans[101][102] - Market & Liquidity Risk: Shifts in interest rates can compress net interest income, and a 27% deposit concentration in public funds presents liquidity risk[108][116] - Regulatory & Compliance Risk: The company must maintain sufficient capital to meet heightened regulatory requirements like Basel III[127][128] - Operational & Technology Risk: The company faces significant risks from cybersecurity attacks that could interrupt business and compromise data[136] - Accounting & Transition Risk: The company faces risks from the discontinuance of LIBOR and the adoption of the Current Expected Credit Losses (CECL) methodology[145][147][148] Item 1B. Unresolved Staff Comments The company reports no unresolved comments from the SEC staff - There are no unresolved SEC staff comments[152] Item 2. Properties The company operates from 55 locations, primarily owned by the Bank, with its headquarters in Warsaw, Indiana - The Company's headquarters is located at 202 E. Center Street, Warsaw, Indiana[153] - The Company operates in 55 locations, with 49 properties owned by the Bank and 6 leased from third parties[153] Item 3. Legal Proceedings The company is not a party to any material pending legal proceedings - There are no material pending legal proceedings against the Company or the Bank[155] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[156] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq (LKFN), with a share repurchase program and a history of consistent dividend payments 2019 Quarterly Stock Prices and Dividends | Quarter | High Price | Low Price | Cash Dividend | | :--- | :--- | :--- | :--- | | Fourth | $49.90 | $42.48 | $0.300 | | Third | $47.10 | $41.41 | $0.300 | | Second | $49.04 | $43.95 | $0.300 | | First | $48.68 | $40.75 | $0.260 | - A share repurchase program authorizing up to $30 million in stock purchases was reauthorized on January 14, 2020[170] - In February 2019, the company issued 224,066 shares of common stock upon the cashless exercise of a warrant[172] Item 6. Selected Financial Data The company shows consistent five-year growth in assets, loans, and net income, with improving performance ratios Selected Financial Data (2015-2019) | (in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Assets | $4,946,745 | $4,875,254 | $4,682,976 | $4,290,025 | $3,766,286 | | Loans, net | $4,065,828 | $3,914,745 | $3,818,459 | $3,470,927 | $3,080,929 | | Total equity | $598,100 | $521,704 | $468,667 | $427,067 | $392,901 | | Net income | $87,047 | $80,411 | $57,330 | $52,084 | $46,367 | | Diluted EPS | $3.38 | $3.13 | $2.23 | $2.05 | $1.84 | Key Performance Ratios (2015-2019) | Ratio | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Return on average assets | 1.76% | 1.69% | 1.29% | 1.29% | 1.29% | | Return on average total equity | 15.47% | 16.51% | 12.72% | 12.52% | 12.26% | | Net interest margin | 3.38% | 3.43% | 3.33% | 3.18% | 3.19% | | Efficiency | 44.70% | 45.01% | 46.11% | 48.22% | 49.64% | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net income grew 8.3% in 2019, driven by higher income and lower provisions, despite slight net interest margin compression Results of Operations Net income increased in 2019 due to higher noninterest income and lower loan loss provisions, though the net interest margin tightened Income Statement Summary (2017-2019) | (dollars in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net interest income | $155,047 | $151,271 | $135,892 | | Provision for loan losses | $3,235 | $6,400 | $3,000 | | Noninterest income | $44,997 | $40,302 | $36,040 | | Noninterest expense | $89,424 | $86,229 | $79,298 | | Net Income | $87,047 | $80,411 | $57,330 | - Net income increased by 8.3% in 2019 to $87.0 million, driven by higher noninterest income and a lower provision for loan losses[199][201] - Net interest margin decreased to 3.38% in 2019 from 3.43% in 2018 due to higher funding costs[209] - Noninterest income grew 11.6% in 2019, driven by a $1.7 million increase in swap fees from commercial lending[216] - Noninterest expense increased 3.7% in 2019, mainly from higher salaries and fees, partially offset by a $1.1 million FDIC insurance credit[221] Financial Condition Total assets grew to $4.95 billion in 2019, supported by loan and deposit growth, while stockholders' equity strengthened - Total assets increased by $71.5 million (1.5%) to $4.947 billion at year-end 2019, driven by a 3.9% growth in total loans[224] Loan Portfolio Composition (December 31, 2019) | Loan Category | Amount (in billions) | % of Total Loans | | :--- | :--- | :--- | | Commercial and industrial | $1.427 | 35.1% | | Commercial real estate & multi-family | $1.673 | 41.1% | | Agri-business and agricultural | $0.380 | 9.3% | | Consumer 1-4 family mortgage | $0.377 | 9.3% | | Other | $0.211 | 5.2% | - Total deposits grew by $89.8 million to $4.134 billion in 2019, with core deposits representing 97.2% of the total[240][243] - Total stockholders' equity increased by 14.6% to $598.0 million in 2019, improving the tangible equity ratio to 12.0%[246][247] Risk Management The company actively manages credit, liquidity, and interest rate risks, noting an increase in nonperforming loans in 2019 - Credit Risk: Nonperforming loans increased to $18.7 million (0.46% of total loans) in 2019, primarily due to a single manufacturing borrower[254][256][259] Allowance for Loan Losses | Metric | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Allowance for Loan Losses | $50.7 million | $48.5 million | | Allowance / Total Loans | 1.25% | 1.24% | | Allowance / Nonperforming Loans | 270.58% | 667.40% | - Liquidity Risk: The company maintains a Contingency Funding Plan with access to $2.278 billion in secondary funding sources[277][280] - Interest Rate Risk: The company has an asset-sensitive balance sheet; a simulated 100 bps rate drop would decrease net interest income by 5.73% over 12 months[289][300] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with an asset-sensitive position vulnerable to falling rates - The company's primary market risk exposure is interest rate risk, with no material foreign currency or trading portfolio exposure[292] Net Interest Income Sensitivity Analysis (as of Dec 31, 2019) | Rate Scenario | Change in Net Interest Income (12-month) | % Change from Base | | :--- | :--- | :--- | | Rising 300 bps | +$19.1 million | +11.63% | | Rising 100 bps | +$6.7 million | +4.11% | | Base Case | $164.2 million | N/A | | Falling 100 bps | -$9.4 million | -5.73% | - The company relies on net interest income simulation modeling over traditional GAP analysis for more dynamic risk assessment[296] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements and the independent auditor's unqualified opinion from Crowe LLP Report of Independent Registered Public Accounting Firm Crowe LLP issued unqualified opinions on the financial statements and internal controls, identifying the allowance for loan losses as a critical audit matter - Crowe LLP issued an unqualified opinion on the fair presentation of the financial statements for the three-year period ended December 31, 2019[303] - The firm also issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting[303] - The critical audit matter was the audit of management's determination of qualitative factors affecting the allowance for loan losses[311][313] Consolidated Financial Statements The financial statements detail the company's balance sheet, income, and comprehensive income for the reporting periods Consolidated Balance Sheet Highlights | (in thousands) | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Assets | $4,946,745 | $4,875,254 | | Loans, net | $4,015,176 | $3,866,292 | | Total Deposits | $4,133,819 | $4,044,065 | | Total Borrowings | $170,000 | $276,483 | | Total Equity | $598,100 | $521,704 | Consolidated Income Statement Highlights | (in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net Interest Income | $155,047 | $151,271 | $135,892 | | Provision for Loan Losses | $3,235 | $6,400 | $3,000 | | Noninterest Income | $44,997 | $40,302 | $36,040 | | Noninterest Expense | $89,424 | $86,229 | $79,298 | | Net Income | $87,047 | $80,411 | $57,330 | - Comprehensive income for 2019 was $105.3 million, including $87.0 million in net income and $18.3 million in other comprehensive income[320] Notes to Consolidated Financial Statements Key notes detail accounting policy changes, loan loss allowance composition, capital adequacy, and other significant financial events - Note 1 (Accounting Policies): The upcoming CECL standard is expected to increase the allowance for credit losses by 8% - 13% upon adoption[379][384] - Note 4 (Allowance for Loan Losses): The allowance increased to $50.7 million at year-end 2019, consisting of a $10.4 million specific and a $40.3 million general component[401][403] - Note 10 (Subordinated Debentures): On December 31, 2019, the company redeemed $30.0 million of trust preferred securities[464] - Note 16 (Capital Requirements): As of December 31, 2019, the company and bank were well-capitalized, with a consolidated Total risk-based capital ratio of 14.36%[511][512] - Note 23 (Warrant): In February 2019, a warrant was exercised on a cashless basis, resulting in the issuance of 224,066 shares of common stock[532] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - There have been no changes in or disagreements with the Company's accountants in the prior two years[545] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective - Management concluded that the Company's disclosure controls and procedures were effective as of December 31, 2019[546] - Based on the COSO framework, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2019[549] Item 9B. Other Information This item is not applicable - Not applicable[551] PART III Item 10. Directors, Executive Officers and Corporate Governance Information is incorporated by reference from the company's 2020 Proxy Statement - The required information is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders to be held on April 14, 2020[553] Item 11. Executive Compensation Information is incorporated by reference from the company's 2020 Proxy Statement - The required information is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders to be held on April 14, 2020[554] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information is incorporated by reference from the company's 2020 Proxy Statement - The required information is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders to be held on April 14, 2020[555] Item 13. Certain Relationships and Related Transactions, and Director Independence Information is incorporated by reference from the company's 2020 Proxy Statement - The required information is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders to be held on April 14, 2020[557] Item 14. Principal Accountant Fees and Services Information is incorporated by reference from the company's 2020 Proxy Statement - The required information is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders to be held on April 14, 2020[558] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all documents filed as part of the Form 10-K report - A list of all exhibits filed with the Form 10-K is provided, including governance documents, compensation plans, and required certifications[561][563] Item 16. Form 10-K Summary The company states there is no summary for the Form 10-K - None[565]