Enlarge This ImageLoan demand has been weak for three years now, so when a banking company posts record earnings on the strength of organic loan growth — in slow-growing northern Indiana, no less — people take notice.
Such is the case with Lakeland Financial Corp. in Warsaw, Ind., the parent of Lake City Bank.
In September, Sandler O'Neill & Partners LP named the $2.8 billion-Lakeland as one of its 25 small bank all-stars for 2011, based on such metrics as profitability, credit quality and capital strength. Sandler culled the rankings from 486 publicly traded institutions with a market capitalization of less than $2 billion.
"Lakeland's solid performance within the last 12 months certainly makes it a company that warrants the attention of investors," said Dan Arnold, a Sandler O'Neill associate director.
Indeed, investors have taken notice. While stocks of banks of all sizes have plummeted this year — most bank stock indexes show double-digit declines since Jan. 1 — Lakeland's shares in mid-November were trading at close to their 52-week high.
Much of Lakeland's success of late can be traced to its basic strategy of lending to established businesses and adhering to strict underwriting rules. The bank never loaded up on construction or housing loans and therefore has been largely unaffected by the real estate bust.
But Lakeland's secret also lies in aggressively stealing market share away from competitors, a strategy that has become the bank's hallmark under President and Chief Executive Michael Kubacki.
Kubacki, a former executive at Northern Trust Corp. who took the helm at Lakeland in 1998, routinely shadows loan officers on customer calls, coaching them on what they should and should not do to win the business. Kubacki said that traditional sales training can be "formulaic and manipulative" because it generally teaches salespeople to tell prospective clients whatever they want to hear to win their business,
"I try to be more straightforward," Kubacki said. "I tell the prospect about our capabilities, our reputation for helping companies like them and that they ought to do business with us."
Under Kubacki, Lakeland has also increased market share by stealing talent. The company has hired about two dozen lenders from larger rivals such as JPMorgan Chase & Co. and PNC Financial Services Group Inc. (and their predecessors) in the last decade or so, all of whom have come with established books of business.
Its efforts are clearly paying off. From mid-2008 to mid-2011, Lakeland increased its total book of loans by nearly 27%, according to Federal Deposit Insurance Corp. data — without making a single acquisition. By contrast, total loans at all other Indiana-based banks declined by 17% in that same span.
The company not only didn't lose money in any quarter during the financial crisis, but it has achieved record net income in two of the last three calendar years and is on its way to another record year. Through the first nine months of 2011, the company earned $22.4 million, up 19% from the same period last year.
For his success in building Lakeland into one of the industry's top performers, American Banker has named Kubacki one of its Community Bankers of the Year for 2011.
Kubacki, 60, always knew that he would become a banker, following in the footsteps of his father, Leon, who led Pierceton State Bank — located just eight miles from Lake City Bank's headquarters. After receiving his bachelor's degree at Indiana University in 1973, Kubacki took a job at Northern Trust as a commercial lending trainee, at the same time earning a master's of business administration degree from the University of Chicago.
Kubacki said he was drawn to Northern Trust for its traditional values. "All of the other banks' recruiting brochures were all about, 'We're a bank, but we're really cool. We have a young staff,' " Kubacki said. "But Northern Trust's recruiting literature was just, 'We believe in doing the right thing and being really good at the business of banking and we make no apologies for that. If that appeals to you, then we'll talk.' They were unapologetically conservative and proud of it, and that appealed to me."
In 1991, Northern Trust transferred Kubacki to Los Angeles where he was responsible for expanding its trust business. Kubacki said he expected to retire there, but when he was offered the CEO position of a banking company so close to his hometown, he couldn't resist.
One of his first orders of business was establishing an in-house training center, Lake City University, because he wanted employees at the bank's more than 40 branches spread across northern Indiana to feel more connected and the training to be more consistent.
"I didn't want an outpost mentality," said. "Our approach isn't to send a memo mandating that people be friendly by smiling and calling people by their first name. Rather, at the university, we talk about why it's important to be friendly — and so if people want to sit in the back of the room and think this stuff doesn't work for them, then they need to find a place more suitable."
Employees can take online courses or attend classes at one of Lake City's operations buildings, for professional tracks such as operations, retail banking or commercial lending, or more general professional development classes. The average number of training hours per employee exceeds 40 hours a year.
Kubacki became CEO right after a number of northern Indiana banks such as First National Bank of Elkhart and Fort Wayne National Bank sold themselves to larger regionals like Bank One and National City Bank (which later merged into larger banks) and Kubacki and his team wasted little time in going after those customers who might have wanted to reconnect with a community bank.
"Mike inherited a bank that was really primed to its growth and to take advantage of the consolidation in the marketplace in the northern Indiana marketplace," said David Findlay, Lakeland's chief financial offer. Findlay is one of a number of executives Kubacki brought on to help take what was already a solid bank to new heights. A Northern Trust colleague of Kubacki's, Findlay was working as CFO at a Fort Wayne restaurant company when Kubacki called him in 2000 and asked if he was interested in returning to banking,
Findlay didn't hesitate. "The chance to work with Mike again after a 13-year hiatus was something I jumped at doing," he said. "Mike is the opposite of a micro-manager — he makes sure he puts in good people who are qualified to run their part of the bank and he allows them to run it."
Outside of making acquisitions, poaching customers and employees from rivals is one of the few ways for a bank to grow loans, an area that has lagged the rest of the nation in economic growth. The strategy became even more important after the recession hit and demand for loans weakened.
Kubacki said that the key to making quality business loans is to look beyond a company's numbers and consider the aptitude of its owners. "Do we know them? Can we trust them? Do they know their product? Do they understand cash flow? Can they manage through thick and thin?" he said. "When it comes down to it, lending is a subjective experience — a judgment call on these people."
That approach has served the bank well through good and bad economic cycles, but even Lakeland's management was spooked enough by the financial crisis that it opted to participate in the government's Troubled Asset Relief Program to provide itself a cushion in case economic conditions worsened. In February 2009 the company received $56 million in Tarp funds.
"We really didn't want to take it and get chastised for taking a 'bailout.' " Kubacki said. "But the bank has been around since 1872 and I didn't think it was our call to say, 'Well, things might not be as bad as we might think, let's just try to get through this.' It was better to be safe than sorry."
In June, 2010, Lakeland exited Tarp with the aid of a December 2009 common stock offering that yielded $57.9 million.
The infusions have also enabled Lakeland to make more loans at a time when many other banks were still too bogged down with credit quality issues. Steven Geyen, an analyst at Stifel Nicolaus & Co. Inc., added that capital levels have been a key selling point for Lakeland in its effort to attract lenders from rival banks, "Moving to Lakeland — which has an abundance of capital — allows [lenders] to fully develop relationships" with their customers, he said.
David Long, an analyst at Raymond James & Associates Inc., said Lakeland's loan portfolio is very granular, with no large bets in any one industry. "While a lot of banks are still struggling with credit quality issues, Lakeland has been able to keep its focus on production, which is one of the reasons they've been able to grow and why they really stand out,"
By most measures, Lakeland is significantly outperforming its peers. According to Sandler's analysis, its return on average equity at June 30 was 10.5%, versus a median 4.4% for its peers; nonperforming assets equaled 1.86% of total assets, compared to a median 3.29%; and its earnings per share increased by 31% in the one-year period that ended June 30, compared to a median of 18%.
While Lakeland's board would never rule out acquisitions, the plan is to continue to grow organically. Kubacki said that the board tends to shy away from stated goals such as growing the company to $5 billion in five years or $10 billion in 10 years, because employees can get too hung up on numbers and not the holistic customer experience. "If your goal is simply to be bigger, you will never be big enough," he said. "If you want to be better every day, you have a chance to be great."
Katie Kuehner-Hebert is a freelance writer based in San Diego.
