Lakeland Financial Corporation
(NASDAQ: LKFN)
Jingyuan Xia
Vignesh Murali
Olamide Esan
Kuralay Seitalina
Date Presented: April 29th 2010
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Holding company for Lake City Bank
 Founded in 1872 in Warsaw, Indiana, $ 2.5 billion in
assets(50% market share)
 Third-oldest financial institution headquartered in
Indiana.
 Serves area business customers and individuals
through 43branches
 The bank offers
▪ retail services as checking and savings accounts
▪ money market accounts, and CDs.
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Market Cap: $339.8M
Stock Price: $21.11 (as of April 29, 2010)
Expansion strategy: Organic Growth
Feb 09: Participated in TARP - $56.0 million
Nov 09: Raised $57.9 million in a public
offering of common stock to strengthen
capital position
http://www.snl.com/
As of December 31, 2009
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Minimum regulatory capital requirements for bank holding
companies established by Federal Reserves:
 (i) a risk−based requirement expressed as a percentage of
total assets weighted according to risk
 (ii) a leverage requirement expressed as a percentage of
total assets.
Risk−based requirement: minimum ratio of total capital to
total risk−weighted assets of 8% and a minimum ratio of Tier
1 capital to total risk−weighted assets of 4%.
Leverage requirement: minimum ratio of Tier 1 capital to
total assets of 3% for the most highly rated companies, with
a minimum requirement of 4% for all others.
As of December 31, 2009
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Tier 1 capital: permanent stockholders equity
less intangible assets (other than certain loan
servicing rights and purchased credit card
relationships).
Tier 2 Capital: other non-permanent capital
items that do not qualify for Tier 1 Capital and
a portion of the allowance for loan and lease
losses.
Total capital = Tier 1 capital plus Tier 2 capital
As of December 31, 2009:
(In Thousands)
Total Capital/RWA
Bank
Required Minimum
Actual
For Capital Adequacy
Excess Amount
Amount
Ratio
Amount
Ratio
278,453
12.7%
175,768
8.0%
102,685
250,932
11.4%
87,884
4.0%
163,048
250,932
9.9%
101,377
4.0%
149,555
Tier I Capital/RWA
Bank
Tier I Capital/Average Assets
Bank
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NAICS code: 522110
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Industry comprises of firms primarily engaged in accepting deposits and
making commercial, industrial and consumer loans
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According to the FDIC, there are 7928 lending institutions
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Primary players : Bank of America, JP Morgan Chase and Citigroup
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Regional banks are smaller than money centers and are bigger than
community banks. They usually carry between $100 million to $2 billion
in assets .
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8012 FDIC insured Institutions in the United States

In 2009, 140 regional banks closed down. This number is projected
to peak in second quarter 2010 and then slow down

Those who are surviving, are beginning to recover and looking to
expand

Significant M&A Activity: Bigger banks looking to expand by
buying smaller banks to enhance market reach
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Brick & Mortar banking branches becoming less popular as online
banking services provide a cheaper alternative
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Small business lending has gone up past quarters, mortgage and
home equity loans projected to pick up in 2011
Blair, Sheila. Banks still struggling with
Problem loans... National Mortgage News. March
10th 2010

A continued downturn in Northern Indiana has resulted in home
prices being driven low, industries closing and high unemployment.
Some of these factors have shown slight improvement but needs
more.

Commercial banks such as Lake City depend on high business
activity in the vicinity, home buying and consumer spending to
thrive.

Regional banks also depend on success of small business
entrepreneurship. Small business lending is an integral part of their
portfolio

Inflation: Banks are hurt by increasing inflation as unexpected
changes in anticipated inflation
Strengths
1.
2.
Weaknesses
1.
Real Estate values have fallen steadily,
mortgage portfolio hurt and recoverable
assets has gone down
2.
Credit demand has decreased due to lesser
spending by individuals. Net Income has
gone down because spreads have become
narrower
50% market share in operating areas, good
reputation in community
20 years average experience in the banking
in management consistent of 33 officers
Opportunities
Threats
1.
Asset quality indicate great growth potential
1.
11 – 16% unemployment range , Industrial
activity deeply impacted by recession
2.
Banks which survive have great potential to
acquire others at discounted prices
2.
Mortgage lending and real estate prices do
not recover
3.
Financial regulation might impact future
cash flows ( example higher reserve req. )
Statistic
Industry
Leader
LKFN
LKFN Rank
Market Cap
US Bancorp (USB)
52.29B
339.68M
21 / 95
P/E Ratio (ttm)
Oak Financial (OKFC)
154.75
16.78
20 / 95
PEG Ratio (ttm, 5 yr expected)
Fifth Third Bank (FITB)
171.90
1.47
17 / 95
Revenue Growth (Qtrly YoY)
United Bancorp (UBMI)
681.70%
12.40%
25 / 95
EPS Growth (Qtrly YoY)
LaPorte Bancorp (LPSB)
1047.00%
-9.60%
16 / 95
Long Term Growth Rate (5Yr)
Private Bancorp (PVTB)
13.00%
10.00%
4 / 95
Return on Equity (ttm)
First Financial Bancorp
(FFBC)
48.18%
8.83%
8 / 95
Dividend Yield (Annual)
United Bancorp (UBCP)
6.60%
2.90%
24 / 95
Ratios
2005
2006
2007
2008
2009
Margin Analysis
Net Interest Income/
Total Revenue
77.8%
76.4%
77.4%
83.5%
98.7%
Nonperforming
Loan/Total Loan
0.6%
1.0%
0.5%
1.2%
1.5%
Allow. for Credit Losses/
Total Loan
1.1%
1.1%
1.0%
1.0%
1.6%
94.7%
91.7%
103.0%
97.3%
108.8%
Asset Quality
Capital and Funding
Gross Loan/
Total Deposit
2005
2006
2007
2008
2009
Net Profit Margin
27.8%
27.3%
27.2%
26.0%
23.3%
Asset Turnover
0.042
0.039
0.037
0.035
0.033
Leverage
14.36
14.25
13.83
14.75
11.51
ROE
16.7%
15.4%
13.9%
13.3%
8.8%
ROA
1.2%
1.1%
1.0%
0.9%
0.8%
ROD
1.4%
1.3%
1.3%
1.0%
1.0%
18.00
1.60%
16.00
1.40%
14.00
1.20%
12.00
1.00%
10.00
Leverage
8.00
ROE(%)
6.00
0.80%
ROA
0.60%
ROD
4.00
0.40%
2.00
0.20%
0.00
0.00%
2005
2006
2007
2008
2009
2005
2006
2007
2008
2009
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1st Source Corporation (NASDAQ:SRCE)
Commercial and Consumer banking, Trust and Investment
Management, Insurance .
 76 banking centers in 17 counties in Indiana and Michigan.
 2009 Revenue=$285.8M
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First Financial Corporation(NASDAQ:THFF)
First Financial Bank, Morris Plan and Forrest Sherer Inc.
Commercial, Mortgage and Consumer Lending, Lease financing,
insurance.
 54 branches in West-Central Indiana and East-Central Illinois.
 2009 Revenue=$154.8M
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German American Bancorp, Inc. (NASDAQ: GABC)
Commercial and Consumer banking, Financial Planning, Brokerage
and Trust Administration, Insurance Services.
 28 retail banking offices in Southern Indiana counties.
 2009 Revenue=$79.6M
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MainSource Financial Group, Inc. (NASDAQ:MSFG)
Deposits, Mortgage loans, Insurance Services, trust services and
others.
 85 branch banking offices in Indiana, Illinois, Ohio, and Kentucky, 12
insurance offices in Indiana and 1 in Illinois.
 2009 Revenue=$183.8M
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Multiple Valuation
Equity Cash Flow Method
 Forecast Free Cash Flows to Equity
 Discount at Cost of Equity
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Spread or Income Model
▪ Spread model: Forecast difference between the rate
paid on borrowings and the rate received on loans and
investments.
▪ Income model: Forecast the balance sheet accounts and
use as drivers for income statement forecast
Company (Ticker)
Forward P/E
P/B
P/Total
Revenue
Lakeland (LKFN)
12.13
1.49
4.16
1st Source (SRCE)
21.00
0.99
2.55
First Financial (THFF)
13.79
1.27
3.93
German American (GABC)
13.77
1.52
3.06
MainSource (MSFG)
High
13.58
21.00
0.70
1.52
1.83
4.16
Mean
14.85
1.19
3.11
Median
13.77
1.27
3.06
Low
12.13
0.7
1.83
Valuation: Measuring and Managing the Value of Companies Mckinsey & Company
Valuation: Measuring and Managing the Value of Companies Mckinsey & Company
Assumptions
Growth Rate
Discount Rate
Equity Cash Flow
TV
PV of Total Equity
3%
12%
2010E
(14,951)
2011E
73,487
2012E
75,489
2013E
35,706
(14,951)
264,047
73,487
75,489
35,706
Share Outstanding
12,852
Value per Share
$20.55
2014E
21,627
236,449
258,076
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Market ROE 16%
CAPM discount rate 10.1%
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Weight 60% of CAPM discount rate
Weight 40% of Market ROE
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Discount Rate used 12%
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