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LAKELAND BANCORP INC - Quarter Report: 2009 September (Form 10-Q)

Form 10-Q
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended                                     September 30, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                      to                                     

Commission file number                                 000-17820

LAKELAND BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

New Jersey   22-2953275
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
250 Oak Ridge Road, Oak Ridge, New Jersey   07438
(Address of principal executive offices)   (Zip Code)
(973) 697-2000
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed
since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                         Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, any Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).        Yes  ¨    No  ¨    Not applicable.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: (Check one):

Large accelerated filer ¨        Accelerated filer x        Non-accelerated filer ¨        Smaller reporting Company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):

Yes  ¨    No  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of October 30, 2009 there were 23,834,625 outstanding shares of Common Stock, no par value.


Table of Contents

LAKELAND BANCORP, INC.

Form 10-Q Index

 

         PAGE
  Part I     Financial Information   
Item 1.  

Financial Statements:

  
 

Consolidated Balance Sheets - September 30, 2009 (unaudited) and December 31, 2008

   1
 

Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income (Loss) - Unaudited Three and Nine Months ended September 30, 2009 and 2008

   2
 

Consolidated Statements of Changes in Stockholders’ Equity - Unaudited Nine Months ended September 30, 2009 and 2008

   3
 

Consolidated Statements of Cash Flows - Unaudited Nine Months ended September 30, 2009 and 2008

   4
 

Notes to Consolidated Financial Statements (unaudited)

   5
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   18
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

   30
Item 4.  

Controls and Procedures

   30
  Part II     Other Information   
Item 1.  

Legal Proceedings

   31
Item 1A.  

Risk Factors

   31
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

   31
Item 3.  

Defaults Upon Senior Securities

   31
Item 4.  

Submission of Matters to a Vote of Security Holders

   31
Item 5.  

Other Information

   31
Item 6.  

Exhibits

   31
Signatures      32
  The Securities and Exchange Commission maintains a web site which contains reports, proxy and information statements and other information relating to registrants that file electronically at the address: http:/ / www.sec.gov.   


Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

ASSETS    September 30, 2009
(unaudited)
          December 31,
2008
 
     (dollars in thousands)   

Cash

   $37,180         $35,238   

Federal funds sold and Interest-bearing deposits due from banks

   7,836         14,538   
   

Total cash and cash equivalents

   45,016         49,776   

Investment securities available for sale

   488,124         282,174   

Investment securities held to maturity; fair value of $91,079 in 2009 and $111,881 in 2008

   88,036         110,114   

Loans and leases, net of deferred costs

   1,959,086         2,034,831   

Leases held for sale

   8,946         0   

Less: allowance for loan and lease losses

   24,149         25,053   
   

Net loans

   1,943,883         2,009,778   

Premises and equipment - net

   29,815         29,479   

Accrued interest receivable

   9,444         8,598   

Goodwill

   87,111         87,111   

Other identifiable intangible assets, net

   1,905         2,701   

Bank owned life insurance

   41,211         39,217   

Other assets

   34,918         23,677   
   

TOTAL ASSETS

   $2,769,463         $2,642,625   
   

LIABILITIES AND STOCKHOLDERS’ EQUITY

                 

LIABILITIES:

       

Deposits:

       

Noninterest bearing

   $323,630         $302,492   

Savings and interest-bearing transaction accounts

   1,263,139         1,142,609   

Time deposits under $100 thousand

   348,182         393,549   

Time deposits $100 thousand and over

   209,200         217,483   
   

Total deposits

   2,144,151         2,056,133   

Federal funds purchased and securities sold under agreements to repurchase

   62,001         62,363   

Long-term debt

   200,900         210,900   

Subordinated debentures

   77,322         77,322   

Other liabilities

   15,989         14,966   
   

TOTAL LIABILITIES

   2,500,363         2,421,684   
   

Commitments and contingencies

       

Stockholders’ equity:

       

Preferred stock, Series A, no par value, $1,000 liquidation value, authorized 1,000,000 shares; issued 59,000 shares at September 30, 2009

   55,876         0   

Common stock, no par value; authorized shares, 40,000,000; issued shares, 24,740,564 at September 30, 2009 and December 31, 2008

   259,787         257,051   

Accumulated deficit

   (35,028      (19,246

Treasury stock, at cost, 907,316 shares at September 30, 2009 and 1,053,561 at December 31, 2008

   (12,477      (14,496

Accumulated other comprehensive income (loss)

   942         (2,368
   

TOTAL STOCKHOLDERS’ EQUITY

   269,100         220,941   
   

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $2,769,463         $2,642,625   
   

See accompanying notes to consolidated financial statements

 

1


Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

    For the three months
ended September 30,
  For the nine months
ended September 30,
    2009      2008   2009      2008
  (In thousands, except per share data)

INTEREST INCOME

       

Loans, leases and fees

  $28,633      $32,336   $87,931      $95,725

Federal funds sold and interest-bearing deposits with banks

  32      68   89      293

Taxable investment securities

  3,775      3,331   10,566      10,369

Tax-exempt investment securities

  550      527   1,713      1,864
 

TOTAL INTEREST INCOME

  32,990      36,262   100,299      108,251
 

INTEREST EXPENSE

       

Deposits

  6,561      8,973   21,469      29,924

Federal funds purchased and securities sold under agreements to repurchase

  29      437   96      1,356

Long-term debt

  3,378      3,712   10,337      10,845
 

TOTAL INTEREST EXPENSE

  9,968      13,122   31,902      42,125
 

NET INTEREST INCOME

  23,022      23,140   68,397      66,126

Provision for loan and lease losses

  4,718      3,273   45,177      12,698
 

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES

  18,304      19,867   23,220      53,428

NONINTEREST INCOME

       

Service charges on deposit accounts

  2,768      2,856   8,134      8,261

Commissions and fees

  1,045      847   2,741      2,672

Gains on investment securities

  0      1   353      53

Income on bank owned life insurance

  324      344   1,473      1,015

Gains (losses) on leasing related assets

  (709   109   (1,055   921

Other income

  126      61   291      329
 

TOTAL NONINTEREST INCOME

  3,554      4,218   11,937      13,251
 

NONINTEREST EXPENSE

       

Salaries and employee benefits

  8,545      8,282   25,867      24,379

Net occupancy expense

  1,596      1,511   5,067      4,574

Furniture and equipment

  1,235      1,165   3,719      3,697

Stationery, supplies and postage

  394      370   1,215      1,243

Marketing expense

  667      648   2,008      1,650

Core deposit intangible amortization

  265      265   796      796

FDIC insurance expense

  1,231      330   4,547      930

Collection expense

  405      81   1,287      289

Other real estate and repossessed asset expense

  133      0   917      34

Other expenses

  2,606      2,268   8,058      7,083
 

TOTAL NONINTEREST EXPENSE

  17,077      14,920   53,481      44,675
 

Income (loss) before provision for income taxes

  4,781      9,165   (18,324   22,004

Provision for income taxes (benefit)

  2,770      3,309   (10,788   7,728
 

NET INCOME (LOSS)

  $2,011      $5,856   ($7,536   $14,276
 

Dividends on Preferred Stock and Accretion

  885      0   2,309      0
 

Net Income (Loss) Available to Common Stockholders

  $1,126      $5,856   ($9,845   $14,276
 

PER SHARE OF COMMON STOCK

       

Basic earnings (loss)

  $0.05      $0.25   $(0.42   $0.61
 

Diluted earnings (loss)

  $0.05      $0.25   $(0.42   $0.61
 

Dividends

  $0.05      $0.10   $0.25      $0.30
 

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

   
 
For the three months
ended September 30,
  
  
   
 
For the nine months
ended September 30,
  
  
      2009     2008        2009        2008   
   
(in thousands)
  

NET INCOME (LOSS)

    $2,011     $5,856        ($7,536     $14,276   
   

OTHER COMPREHENSIVE INCOME (LOSS) NET OF TAX:

       

Unrealized securities gain (loss) during period

    2,925     (985     3,524        (2,643

Less: reclassification for gains (losses) included in net income (loss)

    0     1        229        35   

Change in pension liability, net

    5     5        15        (39
   

Other Comprehensive Income (Loss)

    2,930     (981     3,310        (2,717
   

TOTAL COMPREHENSIVE INCOME (LOSS)

  $ 4,941   $ 4,875      ($ 4,226   $ 11,559   
   

See accompanying notes to consolidated financial statements

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months ended September 30, 2009

 

             Accumulated     
   Common stock      Series A          Other     
     Number of
Shares
  
  
  Amount      Preferred
Stock
  
  
  Accumulated
deficit
  
  
  Treasury
Stock
  
  
  Comprehensive
Income (Loss)
  
  
  Total   
   (dollars in thousands)   

BALANCE DECEMBER 31, 2008

   24,740,564       $257,051      $0      ($19,246   ($14,496   ($2,368   $220,941   

Net Loss

         (7,536       (7,536

Other comprehensive income net of tax

             3,310      3,310   

Preferred Stock issued

       58,838            58,838   

Preferred dividends

         (1,926       (1,926

Accretion of discount

       383      (383         

Common stock warrant

     3,345      (3,345           

Stock based compensation

     326              326   

Issuance of restricted stock awards

     (199       199          

Issuance of stock to dividend reinvestment and stock repurchase plan

     (722     (1,049   1,795        24   

Exercise of stock options, net of excess tax benefits

     (14       25        11   

Cash dividends, common stock

         (4,888       (4,888
   

BALANCE September 30, 2009 (UNAUDITED)

   24,740,564      $259,787      $55,876      ($35,028   ($12,477   $942      $269,100   
   
Nine Months ended September 30, 2008           
             Accumulated     
   Common stock      Series A          Other     
     Number of
Shares
  
  
  Amount      Preferred
Stock
  
  
  Accumulated
deficit
  
  
  Treasury
Stock
  
  
  Comprehensive
Loss
  
  
  Total   
   (dollars in thousands)   

BALANCE DECEMBER 31, 2007

   24,740,564      $258,037      $0      ($24,465   ($20,140   ($1,833   $211,599   

Cumulative adjustment for adoption of EITF 06-04

         (546       (546
   

BALANCE JANUARY 1, 2008 as revised

   24,740,564      $258,037      $0      ($25,011   ($20,140   ($1,833   $211,053   

Net Income

         14,276          14,276   

Other comprehensive loss net of tax

             (2,717   (2,717

Issuance of stock for restricted stock awards

     (993       993          

Stock based compensation

     249                 249   

Exercise of stock options, net of excess tax benefits

     (31       2,915        2,884   

Issuance of stock to dividend reinvestment and stock repurchase plan

     8        (908   950        50   

Cash dividends

         (6,128       (6,128
   

BALANCE September 30, 2008 (UNAUDITED)

   24,740,564      $257,270      $0      ($17,771   ($15,282   ($4,550   $219,667   
   

See accompanying notes to consolidated financial statements

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS-(UNAUDITED)

 

     For the nine months ended
September 30,
 
      2009           2008  

CASH FLOWS FROM OPERATING ACTIVITIES

     (in thousands)   

Net income (loss)

   $(7,536      $14,276   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

       

Net amortization of premiums, discounts and deferred loan fees and costs

   2,604         1,022   

Depreciation and amortization

   3,285         3,397   

Provision for loan and lease losses

   45,177         12,698   

Gain on securities

   (353      (53

(Gains) losses on sales of leases

   1,028         (300

Losses on sales of other assets

   285           

Writedown of other repossessed assets

   780           

Stock-based compensation

   326         249   

Increase in other assets

   (17,617      (1,215

Increase (decrease) in other liabilities

   668         (4,146
   

NET CASH PROVIDED BY OPERATING ACTIVITIES

   28,647         25,928   
   

CASH FLOWS FROM INVESTING ACTIVITIES

       

Proceeds from repayments on and maturity of securities:

       

Available for sale

   96,838         79,105   

Held to maturity

   34,764         30,143   

Proceeds from sales of securities:

       

Available for sale

   25,778         10,108   

Purchase of securities:

       

Available for sale

   (324,661      (56,081

Held to maturity

   (12,800      (6,107

Purchase of bank owned life insurance

   (1,304      0   

Sales of leases held for sale

   53,407         —     

Net increase in loans and leases

   (38,225      (139,749

Proceeds on sales of other repossessed assets

   5,529         1,004   

Capital expenditures

   (2,825      (1,861
   

NET CASH USED IN INVESTING ACTIVITIES

   (163,499      (83,438
   

CASH FLOWS FROM FINANCING ACTIVITIES

       

Net increase (decrease) in deposits

   88,018         (35,864

Increase (decrease) in federal funds purchased and securities sold under agreements to repurchase

   (362      3,755   

Repayments of long-term debt

   (10,000      (30,855

Issuance of long-term debt

           125,103   

Proceeds on issuance of preferred stock, net of costs

   58,838           

Exercise of stock options

   10         2,884   

Excess tax benefits

   1         117   

Issuance of stock to dividend reinvestment and stock purchase plan

   24         50   

Dividends paid

   (6,437      (6,128
   

NET CASH PROVIDED BY FINANCING ACTIVITIES

   130,092         59,062   
   

Net increase (decrease) in cash and cash equivalents

   (4,760      1,552   

Cash and cash equivalents, beginning of year

   49,776         57,188   
   

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $45,016         $58,740   
   

See accompanying notes to consolidated financial statements

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

Note 1. Significant Accounting Policies

Basis of Presentation.

This quarterly report presents the consolidated financial statements of Lakeland Bancorp, Inc. (the Company) and its subsidiary, Lakeland Bank (Lakeland). The accounting and reporting policies of the Company and Lakeland and its subsidiaries conform with accounting principles generally accepted in the United States of America (US GAAP) and predominant practices within the banking industry.

The Company’s financial statements reflect all adjustments and disclosures which management believes are necessary for a fair presentation of interim results. The results of operations for the quarter presented do not necessarily indicate the results that the Company will achieve for all of 2009. You should read these interim financial statements in conjunction with the consolidated financial statements and accompanying notes that are presented in the Lakeland Bancorp, Inc. Annual Report on Form 10-K for the year ended December 31, 2008 (the 10-K).

The financial information in this quarterly report has been prepared in accordance with the Company’s customary accounting practices; these financial statements have not been audited. Certain information and footnote disclosures required under generally accepted accounting principles have been condensed or omitted, as permitted by rules and regulations of the Securities and Exchange Commission.

The Company evaluated its September 30, 2009 financial statements for subsequent events through November 9, 2009, the date the financial statements were available to be issued. The Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements.

Note 2. Stock-Based Compensation

On May 21, 2009, the Company’s shareholders approved the 2009 Equity Compensation Program, which authorizes the granting of incentive stock options, supplemental stock options, restricted shares and restricted stock units to employees of the Company, including those employees serving as officers and directors of the Company. The plan authorizes the issuance of 2 million shares in connection with options and awards granted under the 2009 program. No awards have been granted under the 2009 program.

The Company established the 2000 Equity Compensation Program which authorized the granting of incentive stock options and supplemental stock options to employees of the Company, including those employees serving as officers and directors of the Company. The Company’s 2000 program also allowed for the grant of restricted shares, as well as stock option grants. The 2000 program authorized the issuance of up to 2,257,368 shares of common stock of the Company. The Company has no outstanding option awards with market or performance conditions attached to them. The Company generally issues shares for option exercises from its treasury stock. The 2009 Equity Compensation Program supersedes the 2000 Equity Compensation Program. No further awards will be granted from the 2000 program.

Share-based compensation expense of $326,000 and $249,000 was recognized for the nine months ended September 30, 2009 and 2008, respectively. As of September 30, 2009, there was unrecognized compensation cost of $1.1 million related to unvested restricted stock; that cost is expected to be recognized over a weighted average period of approximately 2.6 years. Unrecognized compensation expense related to unvested stock options was approximately $70,000 as of September 30, 2009 and is expected to be recognized over a period of 2.2 years.

In the first nine months of 2009, the Company granted 14,452 shares of restricted stock at a market value of $9.26 per share under the 2000 program. These shares vest over a four year period. Compensation expense on these shares is expected to be approximately $26,000 per year for the next four years. In the first nine months of 2008, the Company granted 72,000 shares of restricted stock at a weighted market value of $12.85 per share. Compensation expense on these shares is expected to be approximately $194,000 per year over an average period of 4.1 years.

 

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Table of Contents

There were no grants of stock options in the first nine months of 2009. In the first nine months of 2008, the Company granted options to purchase 25,000 shares to a new non-employee director of the Company at an exercise price of $13.16 per share. The director’s options vest in five equal installments beginning on the date of grant and continuing on the next four anniversaries of the date of grant. The Company estimated the fair value of the 2008 option grant using a Black-Scholes option pricing model using the following assumptions: the risk-free interest rate was 3.09%; the expected dividend yield 3.25%; the expected volatility was 32% and the expected life was seven years. The fair value of the option granted was estimated to be $3.42. The expected compensation expense to be recorded over the vesting period was $86,000.

Option activity under the Company’s stock option plans as of September 30, 2009 is as follows:

 

       Number of
shares
    Weighted
average
exercise
price
   Weighted
average
remaining
contractual
term
(in years)
   Aggregate
intrinsic value
    

Outstanding, January 1, 2009

   895,521      $12.45       $793,473

Granted

   0      0.00      

Exercised

   (1,800   6.16      

Forfeited

   (42,062   14.30      
          

Outstanding, September 30, 2009

   851,659      $12.37    3.51    $94,436
    

Options exercisable at
September 30, 2009

   826,157      $12.38    3.37    $94,436
    

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the third quarter of 2009 and the exercise price, multiplied by the number of in-the-money options).

Stock options outstanding were 851,659 and 898,886 at September 30, 2009 and 2008, respectively. The aggregate intrinsic value of options exercised during the first nine months ended September 30, 2009 and 2008 was $6,000 and $364,000, respectively. Exercise of stock options during the first nine months of 2009 and 2008 resulted in cash receipts of $11,000 and $2.9 million, respectively.

Information regarding the Company’s restricted stock (all unvested) and changes during the nine months ended September 30, 2009 is as follows:

 

       Number of
shares
    Weighted
average
price
   
      

Outstanding, January 1, 2009

   114,008      $ 12.53  

Granted

   14,452        9.26  

Vested

   (1,125     10.56  

Forfeited

   (543     11.19  
      

Outstanding, September 30, 2009

   126,792      $ 12.18  
      

 

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Note 3. Comprehensive Income

The components of other comprehensive income are as follows:

 

    September 30, 2009       September 30, 2008  
For the quarter ended:   Before
  tax amount
  Tax Benefit
(Expense)
    Net of
tax amount
      Before
tax amount
    Tax Benefit
(Expense)
    Net of
tax amount
 
           
    (dollars in thousands)       (dollars in thousands)  

Net unrealized gains (losses) on available for sale securities

             

Net unrealized holding gains (losses) arising during period

  $4,643   ($1,718   $2,925     ($1,605   $620      ($985

Less reclassification adjustment for net gains arising during the period

  0   0      0     1      0      1   
           

Net unrealized gains (losses)

  $4,643   ($1,718   $2,925     ($1,606   $620      ($986

Change in minimum pension liability

  7   (2   5     7      (2   5   
           

Other comprehensive gains (loss), net

  $4,650   ($1,720   $2,930     ($1,599   $618      ($981
           
For the nine months ended:   Before
  tax amount
  Tax Benefit
(Expense)
    Net of
tax amount
      Before
tax amount
    Tax Benefit
(Expense)
    Net of
tax amount
 
     
    (dollars in thousands)       (dollars in thousands)  

Net unrealized gains (losses) on available for sale securities

             

Net unrealized holding gains (losses) arising during period

  $5,638   ($2,114   $3,524     ($4,222   $1,579      ($2,643

Less reclassification adjustment for net gains arising during the period

  353   (124   229     53      (18   35   
           

Net unrealized gains (losses)

  $5,285   ($1,990   $3,295     ($4,275   $1,597      ($2,678

Change in minimum pension liability

  23   (8   15     (60   21      (39
           

Other comprehensive gains (loss), net

  $5,308   ($1,998   $3,310     ($4,335   $1,618      ($2,717
           

Note 4. Statement of Cash Flow Information.

 

     For the nine months ended
September 30,
     2009    2008
    
     (in thousands)

Supplemental schedule of noncash investing and financing activities:

     

Cash paid during the period for income taxes

   $2,745    $9,237

Cash paid during the period for interest

   32,628    43,781

Transfer of loans and leases into other repossessed assets

   3,751    3,091

Transfer of loans and leases receivable to leases held for sale

   67,945   

Cash flows of $26.9 million related to the sales of the held for sale leasing pools were presented in operating activities for the six months ended June 30, 2009. These cash flows were reclassified during the third quarter to investing activities to more appropriately reflect the original classification of the lease pools as the reclassification was not considered material to the overall financial statements.

 

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Note 5. Earnings Per Share.

Basic earnings per share for a particular period of time is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during that period.

Diluted earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of outstanding common shares and common share equivalents. The Company’s outstanding “common share equivalents” are options to purchase its common stock, restricted stock and a warrant issued to the United States Treasury to purchase its common stock.

All weighted average, actual shares and per share information set forth in this quarterly report on Form 10-Q have been adjusted retroactively for the effects of stock dividends. The following schedule shows the Company’s earnings per share for the periods presented:

 

     For the three months ended
September 30,
   For the nine months ended
September 30,
(In thousands except per share data)    2009    2008    2009     2008
    

Income (loss) available to common stockholders

   $1,126    $5,856    $(9,845   $14,276

Weighted average number of common shares outstanding - basic

   23,695    23,541    23,651      23,423

Share-based plans

   36    82    0      95
         

Weighted average number of common shares and common share equivalents - diluted

   23,731    23,623    23,651      23,518

Basic earnings (loss) per share

   $0.05    $0.25    $(0.42   $0.61
      

Diluted earnings (loss) per share

   $0.05    $0.25    $(0.42   $0.61
      

Options to purchase 683,483 shares of common stock at a weighted average price of $13.76 per share, a warrant to purchase 949,570 shares of common stock at a price of $9.32 per share, and 100,831 shares of restricted stock at a weighted average price of $12.87 per share were outstanding and were not included in the computation of diluted earnings per share for the quarter ended September 30, 2009 because the option exercise price and the grant-date price were greater than the average market price. Options to purchase 691,902 shares of common stock and 66,000 shares of restricted stock at a weighted average price of $13.95 and $13.06 per share, respectively, were outstanding and were not included in the computations of diluted earnings per share for the quarter ended September 30, 2008 because the option exercise price and the grant-date price were greater than the average market price during the period.

Options to purchase 851,659 shares of common stock at a weighted average price of $12.37 per share, a warrant to purchase 949,571 shares of common stock at a price of $9.32 per share, and 126,792 shares of restricted stock at a weighted average price of $12.18 per share were outstanding and were not included in the computation of diluted earnings per share for the nine months ended September 30, 2009 due to the net loss recorded. Options to purchase 691,902 shares of common stock at a weighted average price of $13.95 per share were outstanding and were not included in the computations of diluted earnings per share for the nine months ended September 30, 2008 because the option exercise price was greater than the average market price during the period.

 

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Note 6. Investment Securities

 

AVAILABLE FOR SALE   September 30, 2009           December 31, 2008      
 
(in thousands)   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
   

Fair

Value

    Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
   

Fair

Value

 

U.S. government agencies

  $102,797   $271   ($54   $103,014      $52,131   $1,045   $(2   $53,174

Mortgage-backed securities

  329,241   5,724   (656   334,309      180,938   2,600   (1,498   182,040

Obligations of states and political subdivisions

  14,270   577   (1   14,846      10,733   272   (15   10,990

Corporate debt securities

  14,983   40   (2,392   12,631      16,567   3   (3,886   12,684

Other equity securities

  23,892   188   (756   23,324      24,149   129   (992   23,286
 
  $485,183   $6,800   $(3,859   $488,124      $284,518   $4,049   $(6,393   $282,174
 
HELD TO MATURITY   September 30, 2009           December 31, 2008      
 
(in thousands)   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
    Fair
Value
    Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
    Fair
Value
 

U.S. government agencies

  $5,994   $346   $ —      $6,340      $21,760   $684   $0      $22,444

Mortgage-backed securities

  29,530   985   (4   30,511      34,141   524   (102   34,563

Obligations of states and political subdivisions

  50,932   1,753   (12   52,673      52,626   872   (74   53,424

Corporate debt securities

  1,580   11   (36   1,555      1,587     (137   1,450
 
  $88,036   $3,095   $(52   $91,079      $110,114   $2,080   $(313   $111,881
 

 

      September 30, 2009
     Available for Sale    Held to Maturity
         
     Amortized
Cost
   Fair
Value
   Amortized
Cost
   Fair
Value
 
     (in thousands)

Due in one year or less

   $5,269    $5,292    $15,101    $15,231

Due after one year through five years

   69,952    70,416    23,666    24,827

Due after five years through ten years

   36,158    34,656    17,920    18,593

Due after ten years

   20,671    20,127    1,819    1,917
 
   132,050    130,491    58,506    60,568

Mortgage-backed securities

   329,241    334,309    29,530    30,511

Other equity securities

   23,892    23,324      
 

Total securities

   $485,183    $488,124    $88,036    $91,079
 

The following table shows proceeds from sales of securities, gross gains on sales of securities, gross losses on sales of securities and other than temporary impairments for the periods indicated (in thousands):

 

     For the three months ended
September 30,
   For the nine months ended
September 30,
     2009    2008    2009     2008
         

Sale proceeds

   $ —    $ —    $25,778      $10,108

Gross gains

         993      52

Gross losses

         (108  

Other than temporary impairment

         (532  

 

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Securities with a carrying value of approximately $284.7 million and $280.9 million at September 30, 2009 and December 31, 2008, respectively, were pledged to secure public deposits and for other purposes required by applicable laws and regulations.

The following table indicates the length of time individual securities have been in a continuous unrealized loss position at September 30, 2009 and December 31, 2008:

 

September 30, 2009   Less than 12 months   12 months or longer        Total
     
AVAILABLE FOR SALE     Fair value   Unrealized
Losses
  Fair value   Unrealized
Losses
  Number of
securities
  Fair value   Unrealized
Losses
     
             (dollars in thousands)             

U.S. government agencies

  $22,224   $54   $ —   $ —   6   $22,224   $54

Mortgage-backed securities

  $57,604   380   12,612   276   31   70,216   656

Obligations of states and political subdivisions

  310     64   1   2   374   1

Corporate debt securities

  0     9,563   2,392   4   9,563   2,392

Equity securities

  277   48   4,566   708   6   4,843   756
 
    $80,415   $482   $26,805   $3,377   49   $107,220   $3,859
 

HELD TO MATURITY

                 
     

U.S. government agencies

  $ —   $ —   $ —   $ —     $ —   $ —

Mortgage-backed securities

  981   4   9     2   990   4

Obligations of states and political subdivisions

      1,126   12   3   1,126   12

Other debt securities

      1,008   36   2   1,008   36
 
    $981   $4   $2,143   $48   7   $3,124   $52
 
             
December 31, 2008   Less than 12 months   12 months or longer        Total
     
AVAILABLE FOR SALE   Fair value   Unrealized
Losses
  Fair value   Unrealized
Losses
  Number of
securities
  Fair value   Unrealized
Losses
     
             (dollars in thousands)             

U.S. government agencies

  $5,000   $2   $ —   $ —   1   $5,000   $2

Mortgage-backed securities

  15,786   540   21,045   958   37   36,831   1,498

Obligations of states and political subdivisions

  528   15       2   528   15

Corporate debt securities

  507   1   8,071   3,885   5   8,578   3,886

Equity securities

  5,480   551   4,674   441   6   10,154   992
 
    $27,301   $1,109   $33,790   $5,284   51   $61,091   $6,393
 

HELD TO MATURITY

                 
     

U.S. government agencies

  $ —   $ —   $ —   $ —     $0   $0

Mortgage-backed securities

  4,653   54   3,937   48   12   8,590   102

Obligations of states and political subdivisions

  2,001   67   354   7   7   2,355   74

Other debt securities

      1,450   137   3   1,450   137
 
    $6,654   $121   $5,741   $192   22   $12,395   $313
 

Management has evaluated the securities in the above table and has concluded that, with the exception of the equity security discussed below, none of the securities with losses has impairments that are other-than-temporary. In its evaluation, management considered the credit rating on the securities and the results of discounted cash flow analysis. Investment securities, including the mortgage backed securities and corporate securities are evaluated on a periodic basis to determine if factors are identified that would require further analysis. In evaluating the Company’s securities, including mortgage backed securities and

 

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corporate securities, management considers the following items:

 

   

The credit ratings of the underlying issuer and if any changes in the credit rating have occurred;

   

The Company’s ability and intent to hold the securities, including an evaluation of the need to sell the security to meet certain liquidity measures, or whether the Company has sufficient levels of cash to hold the identified security in order to recover the entire amortized cost of the security;

   

The length of time the security’s fair value has been less than amortized cost; and

   

Adverse conditions related to the security or its issuer if the issuer has failed to make scheduled payments or other factors.

In the second quarter of 2009, the Company recorded an other-than-temporary impairment charge of $532,000 on one investment in the equity securities portfolio. Management evaluated its portfolio of equity securities and, based on its evaluation of the financial condition and near-term prospects of an issuer, management was unsure that it could recover its investment in the security.

Note 7. Loans and Leases.

 

     September 30,
2009
        December 31,
2008
 
     (in thousands)

Commercial

   $1,026,102       $958,620

Leases

   130,011       311,463

Leases held for sale, at fair value

   8,946       0

Real estate-construction

   107,210       107,928

Real estate-mortgage

   372,877       336,951

Installment

   319,478       315,704
 

Total loans

   1,964,624       2,030,666
 

Plus: deferred costs

   3,408       4,165
 

Loans net of deferred costs

   $1,968,032       $2,034,831
 

Loans are considered impaired when, based on current information and events, it is probable that Lakeland will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral-dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. Most of Lakeland’s impaired loans are collateral dependent. Lakeland groups commercial loans under $250,000 into a homogeneous pool and collectively evaluates them for impairment.

The following table shows Lakeland’s recorded investment in impaired loans and leases, the related valuation allowance and the year-to-date average recorded investment as of September 30, 2009, December 31, 2008 and September 30, 2008:

 

Date    Investment    Valuation Allowance    Average Recorded
Investment
Year-to-date
September 30, 2009    $34.0 million    $3.0 million    $21.0 million
December 31, 2008    $ 14.1 million    $3.7 million    $ 9.7 million
September 30, 2008    $ 9.5 million    $1.9 million    $ 9.4 million

Interest received on impaired loans and leases may be recorded as interest income. However, if management is not reasonably certain that an impaired loan will be repaid in full, or if a specific time frame to resolve full collection cannot yet be reasonably determined, all payments received are recorded as reductions of principal. Lakeland recognized interest on impaired loans and leases of $51,000 and $184,000 in the first nine months of 2009 and 2008, respectively. Interest that would have accrued had the loans and leases performed under original terms would have been $1.9 million and $509,000 for the first nine months of 2009 and 2008, respectively.

 

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During the nine months ended September 30, 2009, Lakeland classified $90.1 million in lease pools as held for sale and recorded a mark-to-market adjustment of $22.1 million upon transfer into held for sale to record the leases at lower of cost or market. During the nine months ended September 30, 2009, Lakeland sold lease pools with a carrying value of $54.2 million for $53.4 million and recorded a loss on sale of leases of $792,000. The following table shows the components of losses on held for sale leasing assets for the periods presented:

 

    For the three months ended
September 30, 2009
  For the nine months ended
September 30, 2009
 

Losses on sales of Held for sale Leases

  ($792)   ($792)

Mark-to-market adjustment on held for sale leases

    (790)     (790)

Realized gains on paid off held for sale leases

      554       554

Gains (losses) on other repossessed assets

      301       (285)
 

Total loss on held for sale leasing assets

  ($727)   ($1,313)
 

Loss on held for sale leasing assets is included in gain (loss) on leasing related assets along with other miscellaneous leasing income normally recorded in Lakeland’s leasing business.

Lakeland had leases held for sale with a fair market value of $8.9 million as of September 30, 2009. Management recorded the mark-to-market adjustments on the pools of leases based on indications of interest from potential buyers, and sales prices of similar leases previously sold adjusted for differences in types of collateral and other characteristics.

Note 8. Employee Benefit Plans

The components of net periodic pension cost for the Newton Trust Company’s defined pension plan are as follows:

 

    For the three months ended
September 30,
    For the nine months ended
September 30,
 
    2009     2008     2009     2008  
           
    (in thousands)     (in thousands)  

Interest cost

  $23      $25      $70      $74   

Expected return on plan assets

  (12   (23   (37   (69

Amortization of unrecognized net actuarial loss

  18      6      54      17   
           

Net periodic benefit expense

  $29      $8      $87      $22   
           

Note 9. Directors’ Retirement Plan

The components of net periodic plan costs for the directors’ retirement plan are as follows:

 

     For the three months ended
September 30,
   For the nine months ended
September 30,
     2009    2008    2009    2008
         
     (in thousands)    (in thousands)

Service cost

   $7    $6    $20    $17

Interest cost

   13    15    38    45

Amortization of prior service cost

   7    7    23    23

Amortization of unrecognized net actuarial loss

   3    2    9    7
         

Net periodic benefit expense

   $30    $30    $90    $92
         

The Company made contributions of $80,000 to the plan during the nine months ended September 30, 2009 and does not expect to make any more contributions in 2009.

 

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Note 10. Estimated Fair Value of Financial Instruments and Fair Market Value

US GAAP, under FASB ASC Topic 825, “Financial Instruments,” requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments. However, many such instruments lack an available trading market, as characterized by a willing buyer and seller engaging in an exchange transaction. Also, it is the Company’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities, except for certain loans. Therefore, the Company had to use significant estimations and present value calculations to prepare this disclosure.

Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.

Estimated fair values have been determined by the Company using the best available data and an estimation methodology suitable for each category of financial instruments. The estimation methodologies used, the estimated fair values, and recorded book balances at September 30, 2009 and December 31, 2008 are outlined below.

For cash and cash equivalents and interest-bearing deposits with banks, the recorded book values approximate fair values. The estimated fair values of investment securities are based on quoted market prices, if available. Estimated fair values are based on quoted market prices of comparable instruments if quoted market prices are not available.

The net loan portfolio at September 30, 2009 and December 31, 2008 has been valued using a present value discounted cash flow where market prices were not available. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk. The carrying value of accrued interest approximates fair value.

The estimated fair values of demand deposits (i.e. interest (checking) and non-interest bearing demand accounts, savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). The carrying amounts of variable rate accounts approximate their fair values at the reporting date. For fixed maturity certificates of deposit, fair value was estimated using the rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.

The fair value of federal funds purchased, securities sold under agreements to repurchase, long-term debt and subordinated debentures are based upon discounted value of contractual cash flows. The Company estimates the discount rate using the rates currently offered for similar borrowing arrangements.

The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter parties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counter parties at the reporting date.

The carrying values and estimated fair values of the Company’s financial instruments are as follows:

 

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     September 30,    December 31,
     2009    2008
      Carrying
Value
   Estimated
fair value
   Carrying
Value
   Estimated
fair value

Financial Assets:

   (in thousands)

Cash and cash equivalents

   $45,016    $45,016    $49,776    $49,776

Investment securities available for sale

   488,124    488,124    282,174    282,174

Investment securities held to maturity

   88,036    91,079    110,114    111,881

Loans

   1,959,086    1,971,169    2,034,831    2,085,336

Leases held for sale

   8,946    8,946      

Financial Liabilities:

           

Deposits

   2,144,151    2,148,883    2,056,133    2,065,332

Federal funds purchased and securities sold under agreements to repurchase

   62,001    62,001    62,363    62,363

Long-term debt

   200,900    223,806    210,900    225,760

Subordinated debentures

   77,322    82,116    77,322    83,858

Commitments:

           

Standby letters of credit

      25       11

US GAAP, under FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest level priority to unobservable inputs (level 3 measurements). The following describes the three levels of fair value hierarchy:

Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; estimates using pricing models or matrix pricing; inputs other than quoted prices that are observable for the asset or liability (such as interest rates, yield curves, volatilities, etc.)

Level 3 – unobservable inputs for the asset or liability – these shall be used to the extent that observable inputs are not available allowing for situations in which there is little, if any, market activity available.

 

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The following table sets forth the Company’s financial assets that were accounted for at fair values as of September 30, 2009 by level within the fair value hierarchy. The Company had no liabilities accounted for at fair value as of September 30, 2009. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:

 

(in thousands)  

Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)

  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 

Balance

as of
September 30,
2009

   

Assets:

       

Investment securities, available for sale

       

US government agencies

  $ —   $103,014   $ —   $103,014

Mortgage backed securities

    334,309     334,309

Obligations of states and political subdivisions

    14,846     14,846

Corporate debt securities

    12,631     12,631

Other equity securities

  1,598   21,726     23,324
   

Total securities available for sale

  $1,598   $486,526   $ —   $488,124

The following table sets forth the Company’s financial assets subject to fair value adjustments (impairment) on a nonrecurring basis as they are valued at the lower of cost or market. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:

 

(in thousands)   

Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)

   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
  

Balance

as of
September 30,
2009

    

Assets:

           

Leases held for sale

   $ —    $ —    $8,946    $8,946

Impaired Loans and Leases

         33,995    $33,995

Leases held for sale are those leases that Lakeland identified and intends to sell. Leases held for sale were valued at the lower of cost or market. Market indications were derived from sale price indications from potential buyers and based on sale prices of prior lease pools adjusted for differences in types of collateral and other characteristics.

Impaired loans and leases are evaluated and valued at the time the loan is identified as impaired at the lower of cost or market value. Market value is measured based on the value of the collateral securing these loans and leases and is classified at a level 3 in the fair value hierarchy. Collateral may be real estate, accounts receivable, inventory, equipment and/or other business assets. The value of the real estate is assessed based on appraisals by qualified third party licensed appraisers. The value of the equipment may be determined by an appraiser, if significant, inquiry through a recognized valuation resource, or by the value on the borrower’s financial statements. Field examiner reviews on business assets may be conducted based on the loan exposure and reliance on this type of collateral. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Impaired loans and leases are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

 

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Note 11. Preferred Stock

On February 6, 2009, under the Troubled Asset Relief Program (TARP) Capital Purchase Program (CPP), the Company issued 59,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A preferred stock”) to the U.S. Department of the Treasury for a purchase price of $59.0 million. The Series A preferred stock has a 5% annual dividend rate for the first five years and a 9% annual dividend thereafter if the Series A preferred stock are not redeemed by the Company. The Company may redeem the Series A preferred stock with the consent of the Treasury Department in conjunction with the Company’s primary regulator at any time.

In conjunction with the issuance of our Series A preferred stock, the Company also issued a warrant to purchase 949,571 shares of the Company’s common stock to the Treasury Department. The warrant has a 10-year term and is immediately exercisable at an exercise price, subject to anti-dilution adjustments, of $9.32 per share.

The proceeds from the Treasury Department are allocated to the Series A preferred stock and the warrant based on their relative fair values. The fair value of the Series A preferred stock was determined through a discounted future cash flow model. The Company calculated the fair value of the Series A preferred stock by using a 14% discount rate and discounting the cash flows over a 10 year period. A Black-Scholes pricing model was used to calculate the fair value of the warrant. The Black-Scholes model used the following assumptions, a dividend yield of 5.12%, volatility of 32% and a risk-free interest rate of 3.05%.

A $3.3 million discount is being amortized over a five year period using a level yield method. The effective yield on the amortization of the Series A Preferred Stock is approximately 6.36%. In determining net income (loss) available to common shareholders, the periodic amortization and the cash dividend on the Series A preferred stock are subtracted from net income (loss).

Note 12. Recent Accounting Pronouncements

On June 29, 2009, the FASB issued an accounting pronouncement establishing the FASB Accounting Standards CodificationTM (the “ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities. This pronouncement, FASB ASC Topic 105, “Generally Accepted Accounting Principles,” was effective for financial statements issued for interim and annual periods ending after September 15, 2009, for most entities. On the effective date, all non-SEC accounting and reporting standards will be superseded. The Company adopted this new accounting pronouncement for the quarterly period ended September 30, 2009, as required, and adoption did not have a material impact on the Company’s financial statements taken as a whole.

In June 2008, the FASB issued guidance addressing whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the calculation of earnings per share (EPS). The guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008 with prior period EPS data adjusted retrospectively to conform to its provisions, and did not have a material effect on the Company’s EPS. This guidance was codified under FASB ASC Topic 260, “Earnings Per Share.”

In December 2008, the FASB issued guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. This guidance was codified under ASC Topic 715, “Compensation - Retirement Benefits.” ASC Topic 715 requires disclosure of the fair value of each major category of plan assets for pension plans and other postretirement benefit plans as of the annual reporting date. This guidance becomes effective for fiscal years ending after December 15, 2009. The Company is currently evaluating the impact of adopting ASC Topic 715 on the consolidated financial statements, but it is not expected to have a material impact.

On April 9, 2009, the FASB issued the following three final staff positions that were intended to provide additional guidance and enhance disclosures regarding fair value measurements and impairments of securities:

 

   

“Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” provides guidelines for making fair value

 

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measurements more consistent with the existing accounting principles when the volume and level of activity of an asset or liability have decreased significantly. This guidance was subsequently codified into FASB ASC 820, “Fair Value Measurements.”

 

   

“Interim Disclosures about Fair Value of Financial Instruments” enhances consistency in financial disclosure by requiring fair value disclosures for financial instruments to be reported in interim financial statements. Previously, fair values for financial instruments were only disclosed annually. This guidance was subsequently codified into FASB ASC 825-10-50, “Financial Instruments.”

 

   

“Recognition and Presentation of Other-Than-Temporary Impairments,” provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. This guidance is intended to bring greater consistency to the timing of impairment recognition, and provide greater clarity to investors about the credit and noncredit components of impaired debt securities that are not expected to be sold. This guidance was subsequently codified into FASB ASC 320-10, “Investments in Debt and Equity Securities.”

The above guidance was effective for interim and annual periods ending after June 15, 2009. The Company adopted this guidance in the second quarter and expanded the disclosures as required.

On April 13, 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 111, “Other Than Temporary Impairment of Certain Investments in Equity Securities” (“SAB 111”). SAB 111 provides guidance on how to evaluate equity securities for other than temporary impairment and when a write-down of the carrying value is required. There was no material impact on the Company’s consolidated financial statements upon adoption. The company recorded an other-than-temporary impairment on one of its equity securities in second quarter 2009 as disclosed in Note 6.

On May 28, 2009, the FASB issued FASB ASC 855, “Subsequent Events,” which established general standards of accounting for and disclosure of subsequent events, which are events occurring after the balance sheet date but before the date the financial statements are issued or available to be issued. In particular, the pronouncement requires entities to recognize in the financial statements the effect of all subsequent events that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities may not recognize the impact of subsequent events that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. This pronouncement also requires entities to disclose the date through which subsequent events have been evaluated. This pronouncement was effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted the provisions of this pronouncement for the quarter ended June 30, 2009, as required, and adoption did not have a material impact on the Company’s financial statements taken as a whole.

On June 12, 2009, the FASB issued two related accounting pronouncements changing the accounting principles and disclosures requirements related to securitizations and special-purpose entities. Specifically, SFAS No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140” and SFAS No 167, “Amendments to FASB Interpretation No. 46(R)” eliminate the concept of a “qualifying special-purpose entity,” change the requirements for derecognizing financial assets and change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. These pronouncements also expand existing disclosure requirements to include more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. These pronouncements will be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The recognition and measurement provisions regarding transfers of financial assets shall be applied to transfers that occur on or after the effective date. Management has not determined the impact adoption may have on the Company’s consolidated financial statements. These accounting pronouncements have not yet been codified.

In August 2009, the FASB issued Accounting Standards Update (ASU )No. 2009-05, “Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value”. This ASU provides amendments for fair value measurements of liabilities. It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques. ASU 2009-05 also clarifies that

 

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when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance or the fourth quarter of 2009 for the Company. The Company is assessing the impact of ASU 2009-05 on our financial condition, results of operations, and disclosures.

PART I — ITEM 2

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

You should read this section in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. All weighted average, actual share and per share information set forth in this Quarterly Report on Form 10-Q has been adjusted retroactively for the effects of stock dividends.

Statements Regarding Forward Looking Information

The information disclosed in this document includes various forward-looking statements that are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to credit quality (including delinquency trends and the allowance for loan and lease losses), corporate objectives, and other financial and business matters. The words “anticipates,” “projects,” “intends,” “estimates,” “expects,” “believes,” “plans,” “may,” “will,” “should,” “could,” and other similar expressions are intended to identify such forward-looking statements. The Company cautions that these forward-looking statements are necessarily speculative and speak only as of the date made, and are subject to numerous assumptions, risks and uncertainties, all of which may change over time. Actual results could differ materially from such forward-looking statements.

In addition to the risk factors disclosed elsewhere in this document, the following factors, among others, could cause the Company’s actual results to differ materially and adversely from such forward-looking statements: changes in the financial services industry and the U.S. and global capital markets, changes in economic conditions nationally, regionally and in the Company’s markets, the nature and timing of actions of the Federal Reserve Board and other regulators, the nature and timing of legislation affecting the financial services industry, government intervention in the U.S. financial system, passage by the U.S. Congress of legislation which unilaterally amends the terms of the U.S. Treasury Department’s preferred stock investment in the Company, changes in levels of market interest rates, pricing pressures on loan and deposit products, credit risks of the Company’s lending and leasing activities, customers’ acceptance of the Company’s products and services and competition.

The above-listed risk factors are not necessarily exhaustive, particularly as to possible future events, and new risk factors may emerge from time to time. Certain events may occur that could cause the Company’s actual results to be materially different than those described in the Company’s periodic filings with the Securities and Exchange Commission. Any statements made by the Company that are not historical facts should be considered to be forward-looking statements. The Company is not obligated to update and does not undertake to update any of its forward-looking statements made herein.

Significant Accounting Policies, Judgments and Estimates

The accounting and reporting policies of the Company and its subsidiaries conform with accounting principles generally accepted in the United States of America and predominant practices within the banking industry. The consolidated financial statements include the accounts of the Company, Lakeland, Lakeland Investment Corp. and Lakeland NJ Investment Corp. All inter-company balances and transactions have been eliminated.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also affect reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates implicit in these financial statements are as follows:

The principal estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan

 

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and lease losses, the valuation of the Company’s securities portfolio, the analysis of goodwill impairment and the Company’s deferred tax assets. The evaluation of the adequacy of the allowance for loan and lease losses includes, among other factors, an analysis of historical loss rates, by category, applied to current loan totals. However, actual losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans and leases, which also are provided for in the evaluation, may vary from estimated loss percentages.

The allowance for loan and lease losses is established through a provision for loan and lease losses charged to expense. Loan principal considered to be uncollectible by management is charged against the allowance for loan and lease losses. The allowance is an amount that management believes will be adequate to absorb losses on existing loans and leases that may become uncollectible based upon an evaluation of known and inherent risks in the loan portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the loan portfolio, overall portfolio quality, specific problem loans and leases, and current economic conditions which may affect the borrowers’ ability to pay. The evaluation also details historical losses by loan category, the resulting loss rates for which are projected at current loan total amounts. Loss estimates for specified problem loans and leases are also detailed. All of the factors considered in the analysis of the adequacy of the allowance for loan and lease losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan and lease losses may be required that would adversely impact earnings in future periods.

The Company accounts for impaired loans and leases in accordance with US GAAP. Impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral-dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable.

Fair values of financial instruments are volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates, credit ratings and yield curves. Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on the quoted prices of similar instruments or an estimate of fair value by using a range of fair value estimates in the market place as a result of the illiquid market specific to the type of security. In the second and third quarters of 2009, the Company reclassified certain leases as held for sale and recorded them at estimated fair value based on sale price indications from potential buyers and on prior lease sales adjusted for differences in collateral and other characteristics.

When the fair value of a security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair value is below amortized cost, additional analysis is performed to determine whether an other-than-temporary impairment condition exists. Available-for-sale and held-to-maturity securities are analyzed quarterly for possible other-than-temporary impairment. The analysis considers (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on the Company’s results of operations and financial condition.

The Company accounts for income taxes under the liability method of accounting for income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement and tax return purposes are the allowance for loan and lease losses, deferred loan fees, deferred compensation and securities available for sale. The Company evaluates the realizability of its deferred tax assets by examining its earnings history and projected future earnings and by assessing whether it is more likely than not that carryforwards would not be realized. Because the majority of the Company’s deferred tax assets have no expiration date, because of the Company’s earnings history, and because of the projections of future earnings, the Company’s management believes that it is more likely than not that all of the Company’s deferred tax assets will be realized.

The Company evaluates tax positions that may be uncertain using a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Additional information regarding the Company’s uncertain tax positions is set forth in Note 9 to the Financial Statements of the Company’s Form 10-K for the year ended December 31, 2008.

 

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The Company tests goodwill for impairment annually or when circumstances indicate a potential for impairment at the reporting unit level. The Company has determined that it has one reporting unit, Community Banking. The Company analyzes goodwill using various market valuation methodologies including an analysis of the Company’s enterprise value and a comparison of pricing multiples in recent acquisitions of similar companies and applying these multiples to the Company. The Company tested the goodwill as of December 31, 2008 and determined that it is not impaired. There were no triggering events in the third quarter of 2009 that would cause the Company to do an interim valuation.

Results of Operations

(Third Quarter 2009 Compared to Third Quarter 2008)

Net Income

Net income for the third quarter of 2009 was $2.0 million, compared to net income of $5.9 million for the same period in 2008, a decrease of $3.8 million. Net income available to common shareholders was $1.1 million compared to $5.9 million for the same period last year. Diluted earnings per share was $0.05 for the third quarter of 2009, compared to diluted earnings of $0.25 per share for the same period last year.

The third quarter 2009 results were impacted by a loan and lease loss provision of $4.7 million, compared to a provision of $3.3 million for the same period last year. Of the total provision recorded in the third quarter of 2009, $1.3 million was allocated to leasing. Also impacting third quarter 2009 results were $709,000 in losses on leasing related assets and $1.2 million in FDIC expense compared to $330,000 for the same period last year.

In the third quarter of 2009, the Company continued to reduce its exposure in the leasing business. Total leases, including leases held for sale, at September 30, 2009 were $139.0 million, a $54.6 million, or 28%, decline from the $193.6 million at June 30, 2009. Leases held for sale were $8.9 million at September 30, 2009, down from $39.2 million at June 30, 2009. The reduction in total leases includes the sales in the third quarter of approximately $27.9 million of leases, and other lease related transactions, which resulted in a loss on sale and disposition of leases of $1.0 million offset by $301,000 in gains on sales of other repossessed assets. At September 30, 2009, leases represent 7% of total loans and leases compared to 15% at year end 2008. This will be discussed in more detail below.

Net Interest Income

Net interest income on a tax equivalent basis for the third quarter of 2009 was $23.3 million, which was $106,000 below the $23.4 million net interest income earned in the third quarter of 2008. The net interest margin declined from 3.92% in the third quarter of 2008 to 3.62% in the third quarter of 2009 as a result of a decline in rates and a shift in interest-earning assets from loans and leases to the investment portfolio primarily as a result of the reduction in leasing assets. The components of net interest income will be discussed in greater detail below.

The following table reflects the components of the Company’s net interest income, setting forth for the periods presented, (1) average assets, liabilities and stockholders’ equity, (2) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) the Company’s net interest spread (i.e., the average yield on interest-earning assets less the average cost of interest-bearing liabilities) and (5) the Company’s net interest margin. Rates are computed on a tax equivalent basis using a tax rate of 35%.

 

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     For the three months ended,
September 30, 2009
    For the three months ended,
September 30, 2008
 
      Average
Balance
    Interest
Income/
Expense
   Average
rates
earned/
paid
    Average
Balance
    Interest
Income/
Expense
   Average
rates
earned/
paid
 
Assets    (dollars in thousands)  

Interest-earning assets:

              

Loans and leases (A)

   $ 1,982,700      $ 28,633    5.73   $ 2,002,869      $ 32,336    6.42

Taxable investment securities

     456,735        3,775    3.31     301,042        3,331    4.43

Tax-exempt securities

     64,733        846    5.23     58,846        811    5.51

Federal funds sold (B)

     49,964        32    0.26     14,718        68    1.85
   

Total interest-earning assets

     2,554,132        33,286    5.18     2,377,475        36,546    6.12

Noninterest-earning assets:

              

Allowance for loan and lease losses

     (26,419          (20,198     

Other assets

     243,645             217,506        
   

TOTAL ASSETS

   $ 2,771,358           $ 2,574,783        
   

Liabilities and Stockholders’ Equity

              

Interest-bearing liabilities:

              

Savings accounts

   $ 306,449      $ 336    0.43   $ 308,840      $ 879    1.13

Interest-bearing transaction accounts

     928,082        2,222    0.95     816,474        3,438    1.68

Time deposits

     600,638        4,003    2.67     519,949        4,656    3.58

Borrowings

     327,607        3,407    4.16     391,567        4,149    4.24
   

Total interest-bearing liabilities

     2,162,776        9,968    1.84     2,036,830        13,122    2.57
   

Noninterest-bearing liabilities:

              

Demand deposits

     322,337             306,480        

Other liabilities

     18,957             13,705        

Stockholders’ equity

     267,288             217,768        
   

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $  2,771,358           $  2,574,783        
   

Net interest income/spread

       23,318    3.33       23,424    3.55

Tax equivalent basis adjustment

       296          284   
   

NET INTEREST INCOME

     $ 23,022        $ 23,140   
   

Net interest margin (C)

        3.62        3.92
   
  (A) Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.
  (B) Includes interest-bearing cash accounts.
  (C) Net interest income divided by interest-earning assets.

Although total interest-earning assets increased $176.7 million or 7% from the third quarter of 2008 to the third quarter of 2009, interest income on a tax equivalent basis decreased $3.3 million or 9% from the third quarter of 2008 to the third quarter of 2009. The decrease in interest income was due to a 94 basis point decrease in the average yield earned on interest earning assets. This decrease reflects the declining interest rate environment along with a lower percentage of earning assets being deployed in loans and leases, as the size of the lease portfolio continues to decrease. Loans and leases as a percent of interest earning assets declined from 84% in the third quarter of 2008 to 78% in the third quarter of 2009. Investments including securities and federal funds sold increased from 16% of interest earnings assets in the third quarter of 2008 to 22% in the third quarter of 2009. Loans typically earn higher yields than investment securities.

Total interest expense decreased from $13.1 million in the third quarter of 2008 to $10.0 million in the third quarter of 2009, a decrease of $3.2 million, or 24%. Average interest-bearing liabilities increased $125.9 million, but the cost of those liabilities decreased from 2.57% in 2008 to 1.84% in 2009. The decrease in yield was due to the declining rate environment. Average interest-bearing deposits increased from $1.65 billion in the third quarter of 2008 to $1.84 billion in the third quarter of 2009, an increase of $189.9 million, or 12%. Average borrowings decreased from $391.6 million in 2008 to $327.6 million in 2009 due to increased liquidity as a result of several factors, including increased deposits and the receipt of $59.0 million in proceeds from the issuance of preferred stock to the U.S. Department of the Treasury in the first quarter of 2009.

 

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Provision for Loan and Lease Losses

In determining the provision for loan and lease losses, management considers historical loan and lease loss experience, changes in composition and volume of the portfolio, the level and composition of non-performing loans and leases, the adequacy of the allowance for loan and lease losses, and prevailing economic conditions.

In the third quarter of 2009, a $4.7 million provision for loan and lease losses was recorded compared to a $3.3 million provision for the same period last year. The Company requires a reserve on its loans and leases based on the financial strength of the borrower, collateral adequacy, delinquency history and other factors discussed under “Risk Elements” below. The reserve for leases is more specifically assessed based on the borrower’s payment history, financial strength of the borrower determined through financial information provided or credit scoring criteria, value of the underlying assets and in the case of recourse transactions, the financial strength of the originator (servicer). As discussed in Note 7 above, in the second and third quarters of 2009, the Company classified certain leases as held for sale as part of a plan to reduce the overall exposure in its leasing portfolio. In the third quarter, management classified $2.4 million of leases held for sale, recorded a mark-to-market adjustment of $542,000 and subsequently sold these leases. The provision for leasing losses was $1.3 million in the third quarter of 2009. The commercial loan provision was $2.6 million because of the increase in the non-performing commercial loans discussed below in Risk Elements.

During the third quarter of 2009, the Company charged off loans of $5.6 million (including $2.8 million in leases) and recovered $667,000 in previously charged off loans and leases compared to $3.5 million and $219,000, respectively, during the same period in 2008. For more information regarding the determination of the provision, see “Risk Elements” under “Financial Condition.”

Noninterest Income

Noninterest income decreased $664,000 or 16% to $3.6 million from the third quarter of 2008 to the third quarter of 2009. Included in noninterest income for the third quarter of 2009 was a $709,000 loss on sale or disposition of leasing related assets, compared to a gain of $109,000 for the same period last year. The loss on sale or disposition of leasing related assets included $792,000 in losses on leases held for sale and a mark-to-market loss of $236,000 on leases held for sale offset by $301,000 in gains on sales of other repossessed assets. Commissions and fees increased by $198,000 or 23% to $1.0 million in the third quarter of 2009 compared to $847,000 for third quarter of 2008 due to increased loan fees and investment services income. Other income at $126,000 increased $65,000 from $61,000 in the third quarter of 2008 due to gains on sales of mortgages.

Noninterest Expense

Noninterest expense for the third quarter of 2009 was $17.1 million compared to $14.9 million in 2008, a 14% increase. Salary and benefit expense increased by $263,000 or 3% to $8.5 million due to increased staffing levels and normal salary increases. Net occupancy expense and furniture and equipment increased 6% to $1.6 million and $1.2 million, respectively, due primarily to the opening of two new branch offices subsequent to the third quarter of 2008. FDIC expense increased by $901,000 to $1.2 million due to increased assessments. Collection expense increased $325,000 to $405,000 in the third quarter of 2009 due to leasing related costs. Other real estate and other repossessed asset expense totaled $133,000 for the quarter as real estate taxes were paid on property in process of foreclosure. Other expenses increased by $338,000 or 15% to $2.6 million in the third quarter of 2009, primarily due to an increase in legal fees and appraisal fees. The Company’s efficiency ratio was 62% in the third quarter of 2009, compared to 53% for the same period last year. The efficiency ratio expresses the relationship between noninterest expense (excluding other repossessed asset expense and core deposit amortization) to total tax-equivalent revenue (excluding gains (losses) on sales of securities). The efficiency ratio increased due primarily to the increase in FDIC insurance expense and leasing related expenses.

 

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(Year-to-Date 2009 Compared to Year-to-Date 2008)

Net Income (Loss)

Net loss for the first nine months of 2009 was $7.5 million, compared to net income of $14.3 million for the same period in 2008. Net loss available to common shareholders was $9.8 million for the first nine months of 2009 compared to net income of $14.3 million for the same period last year. Diluted loss per share was ($0.42) for the first nine months of 2009, compared to diluted earnings per share of $0.61 in the first nine months of 2008. The decline in net income related to the increase in the provision for loan and lease losses from $12.7 million in the first nine months of 2008 to $45.2 million in the first nine months of 2009.

Net Interest Income

Net interest income on a tax equivalent basis for the first nine months of 2009 was $69.3 million, a $2.2 million or 3% increase from the $67.1 million earned in the first nine months of 2008. The increase in net interest income resulted primarily from a decrease in the cost of interest bearing liabilities. The components of net interest income will be discussed in greater detail below.

The following table reflects the components of the Company’s net interest income, setting forth for the periods presented, (1) average assets, liabilities and stockholders’ equity, (2) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) the Company’s net interest spread (i.e., the average yield on interest-earning assets less the average cost of interest-bearing liabilities) and (5) the Company’s net interest margin. Rates are computed on a tax equivalent basis using a tax rate of 35%.

 

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CONSOLIDATED STATISTICS ON A TAX EQUIVALENT BASIS

 

    For the nine months ended,
September 30, 2009
    For the nine months ended,
September 30, 2008
 
     Average
Balance
    Interest
Income/
Expense
  Average
rates
earned/
paid
    Average
Balance
    Interest
Income/
Expense
  Average
rates
earned/
paid
 
Assets   (dollars in thousands)  

Interest-earning assets:

           

Loans (A)

  $ 2,010,594      $ 87,931   5.85   $ 1,952,680      $ 95,725   6.55

Taxable investment securities

    392,892        10,566   3.59     310,516        10,369   4.45

Tax-exempt securities

    66,103        2,635   5.32     68,496        2,868   5.58

Federal funds sold (B)

    46,097        89   0.26     14,854        293   2.63
   

Total interest-earning assets

    2,515,686        101,221   5.38     2,346,546        109,255   6.22

Noninterest-earning assets:

           

Allowance for loan and lease losses

    (25,234         (16,995    

Other assets

    228,751            226,098       
   

TOTAL ASSETS

  $ 2,719,203          $ 2,555,649       
   

Liabilities and Stockholders’ Equity

           

Interest-bearing liabilities:

           

Savings accounts

  $ 302,376      $ 1,300   0.57   $ 316,644      $ 3,075   1.30

Interest-bearing transaction accounts

    870,424        6,766   1.04     791,190        10,476   1.77

Time deposits

    620,001        13,403   2.88     546,503        16,373   3.99

Borrowings

    333,835        10,433   4.17     370,688        12,201   4.39
   

Total interest-bearing liabilities

    2,126,636        31,902   2.00     2,025,025        42,125   2.78
   

Noninterest-bearing liabilities:

           

Demand deposits

    308,878            299,209       

Other liabilities

    17,048            15,356       

Stockholders’ equity

    266,641            216,059       
   

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

  $  2,719,203          $  2,555,649       
   

Net interest income/spread

      69,319   3.38       67,130   3.44

Tax equivalent basis adjustment

      922         1,004  
   

NET INTEREST INCOME

    $ 68,397       $ 66,126  
   

Net interest margin (C)

      3.68       3.82
   
  (A) Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.
  (B) Includes interest-bearing cash accounts.
  (C) Net interest income divided by interest-earning assets.

Interest income on a tax equivalent basis decreased from $109.3 million in the first nine months of 2008 to $101.2 million in 2009, a decrease of $8.0 million or 7%. The decrease in interest income was due primarily to an 84 basis point decrease in the average yield earned on interest earning assets. The decline in the yield in earning assets resulted from the decline in rates and the change in mix discussed previously in the comparison of the results of operations between the third quarter of 2009 and the third quarter of 2008.

Total interest expense decreased from $42.1 million in the first nine months of 2008 to $31.9 million in the first nine months of 2009, a decrease of $10.2 million, or 24%. Average interest-bearing liabilities increased $101.6 million, but the cost of those liabilities decreased from 2.78% in 2008 to 2.00% in 2009 for the same reasons as discussed in the quarterly analysis.

Provision for Loan and Lease Losses

The provision for loan and lease losses increased to $45.2 million for the first nine months of 2009 from $12.7 million for the same period last year. This was primarily a result of management’s evaluation of the adequacy of the allowance for loan and lease losses and the impact current economic conditions have had on our lease portfolio. In the second quarter of 2009, because of continued economic challenges, accelerated deterioration of collateral values due to the supply of transportation and construction vehicles exceeding demand and the resulting affect on delinquencies, the Company increased the reserve percentages on its leases to the highest risk level on its evaluation matrix. Due to continued overcapacity of the collateral impacting resale values, the Company continued to adjust the collateral value of the underlying assets which had the effect of increasing charge-

 

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offs. Because of the increase in the calculated reserves, because of the charge-offs recorded in the second quarter and due to the Company’s decision to sell pools of leases that represented increased risk to the Company, the Company’s year-to-date provision for loan and lease losses was $45.2 million. Included in the provision for loan and lease losses was a $7.1 million provision allocated to commercial loans as a result of an increase in non-performing loans.

During the first nine months of 2009, excluding mark-to-market adjustments, Lakeland charged off loans and leases of $25.7 million and recovered $1.7 million in previously charged off loans and leases compared to $7.7 million and $460,000, respectively, during the same period in 2008. The charge-offs in the first nine months of 2009 included $20.7 million in leases exclusive of the mark-to-market adjustments of leases held for sale. The charge-offs included $11.0 million for the two leasing originators that informed Lakeland that they could no longer perform under contractual recourse provisions. The charge-offs resulted from a continued deterioration in economic conditions and in the underlying collateral value of the leases. For more information regarding the determination of the provision, see “Risk Elements” under “Financial Condition.”

Noninterest Income

Noninterest income was $11.9 million for the first nine months of 2009 compared to $13.3 million earned in the first nine months of 2008. The decrease in this category is primarily due to a $1.1 million loss on sales and dispositions of leasing related assets, as compared to a gain of $921,000 last year. Gains on investment securities was $353,000 for the first nine months of 2009, compared to $52,000 for the first nine months of 2008. Income on bank owned life insurance at $1.5 million increased by $458,000, as the Company received an insurance benefit on a bank owned life insurance policy for insurance proceeds received on the death of a former employee.

Noninterest Expense

For the first nine months of 2009, noninterest expense was $53.5 million, compared to $44.7 million in 2008, an increase of 20%. Salary and benefit costs increased by $1.5 million, to $25.9 million, and net occupancy expense increased by $493,000 due to the same reasons discussed above in the quarterly discussion. FDIC expense at $4.5 million increased by $3.6 million due to increased assessments including the one-time special assessment in the second quarter of 2009. Marketing expense increased to $2.0 million from $1.7 million as a result of deposit promotions and branch openings. Collection expense increased $1.0 million to $1.3 million and other real estate and repossessed asset expense increased by $883,000 to $917,000 in the first nine months of 2009 due to the leasing related items. Other expenses increased by $975,000, or 14% to $8.1 million primarily due to a $704,000 pretax payout to the beneficiary of the bank owned life insurance proceeds previously mentioned. Also impacting other expenses was an increase in appraisal expense and audit expense. The Company’s efficiency ratio was 64% in the first nine months of 2009, compared to 55% for the same period last year.

Income Taxes

The Company’s effective tax rate was 59% in the first nine months of 2009 because of its net loss and the impact that tax advantaged income had on the tax benefit of the loss. The tax advantaged income includes tax exempt security income and income on bank owned life insurance policies. The effective tax rate for the nine months ended September 30, 2008 was 35%.

Financial Condition

The Company’s total assets increased $126.8 million or 5% from $2.64 billion at December 31, 2008, to $2.77 billion at September 30, 2009. Total deposits increased from $2.06 billion on December 31, 2008 to $2.14 billion on September 30, 2009, an increase of $88.0 million or 4%.

Loans and Leases

Gross loans and leases, including leases held for sale, decreased from $2.03 billion on December 31, 2008 to $1.96 billion on September 30, 2009, a decrease of $66.8 million, or 3%. The decrease in gross loans and leases is due to leases decreasing $172.5 million or 55% from $311.5 million at December 31, 2008 to $139.0 million (including $8.9 million held for sale) on September 30, 2009. Excluding leases, loans increased $106.5 million or 6% from December 31, 2009. Commercial

 

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loans and residential mortgages increased by $67.5 million, or 7%, and $35.9 million, or 11%, respectively. For more information on the loan portfolio, see Note 7 in Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Risk Elements

The following schedule sets forth certain information regarding the Company’s non-accrual, past due and renegotiated loans and leases and other real estate owned on the dates presented:

 

(in thousands)     September 30,
2009
  December 31,
2008
  September 30,
2008
   

Non-accrual loans and leases

  $42,174   $16,544   $11,455

Other real estate and other repossessed assets

  1,157   3,997   2,087
   

TOTAL NON-PERFORMING ASSETS

  $43,331   $20,541   $13,542
   

Loans and leases past due 90 days or more and still accruing

  $2,261   $825   $329
   

Troubled debt restructured loans

  $2,562   $275   $0
   

Non-performing assets increased from $20.5 million on December 31, 2008, or 0.78% of total assets, to $43.3 million, or 1.56 % of total assets, on September 30, 2009. The change in non-accrual loans and leases from $16.5 million on December 31, 2008 to $42.2 million on September 30, 2009 included an increase in commercial loan non-accruals of $24.7 million, which was partially offset by a decline in leasing non-accruals of $3.8 million. The increase in commercial loan non-accruals included one commercial relationship totaling $7.2 million and three other relationships totaling $6.9 million. The leasing non-accruals declined because of the sales of lease pools, and the mark-to-market process described in Note 7 above. Other repossessed assets decreased from $4.0 million on December 31, 2008 to $1.1 million on September 30, 2009, which included $1.4 million in assets sold in the sales described above. Loans and leases past due 90 days or more and still accruing at September 30, 2009 increased $1.4 million to $2.3 million from $825,000 on December 31, 2008. Loans and leases past due 90 days or more and still accruing are those loans and leases that are both well-secured and in process of collection.

On September 30, 2009, the Company had $34.0 million in impaired loans and leases (consisting primarily of non-accrual loans and troubled debt restructurings) compared to $14.1 million at year-end 2008. These impaired loans have a valuation allowance of $3.0 million at September 30, 2009 compared to $3.7 million at year-end 2008. For more information on these loans and leases, see Note 7 in Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. The impairment of the loans and leases is measured using the present value of future cash flows on certain impaired loans and leases or is based on the fair value of the underlying collateral for the remaining loans and leases. Based on such evaluation, $3.0 million has been allocated as a portion of the allowance for loan and lease losses for impairment at September 30, 2009. At September 30, 2009, the Company also had $20.1 million in loans and leases that were rated substandard that were not classified as non-performing or impaired.

 

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The following table sets forth for the periods presented, the historical relationships among the allowance for loan and lease losses, the provision for loan losses, the amount of loans and leases charged-off and the amount of loan recoveries:

 

(dollars in thousands)   Nine months
ended
September 30,
2009
    Year ended
December 31,
2008
    Nine months
ended
September 30,
2008
 
     

Balance of the allowance at the beginning of the year

  $25,053      $14,689      $14,689   
                 

Loans and leases charged off:

     

Commercial

  2,936      593      528   

Leases

  20,706      11,211      5,903   

Charge down of leases held for sale(1)

  22,122             

Home Equity and consumer

  1,866      2,044      1,111   

Real estate—mortgage

  189      123      123   
                 

Total loans charged off

  47,819      13,971      7,665   
                 

Recoveries:

     

Commercial

  154      79      94   

Leases

  1,413      150      61   

Home Equity and consumer

  171      376      305   
                 

Total Recoveries

  1,738      605      460   
                 

Net charge-offs:

  46,081      13,366      7,205   

Provision for loan and lease losses

  45,177      23,730      12,698   
                 

Ending balance

  $24,149      $25,053      $20,182   
                 

Ratio of annualized net charge-offs to average loans and leases outstanding:

     

including charge down of leases held for sale

  3.06   0.68   0.49

excluding charge down of leases held for sale

  1.59   0.68   0.49

Ratio of allowance at end of period as a percentage of period end total loans and leases

  1.23   1.23   1.00

(1) Amount recorded upon reclassification from held for investment to held for sale

The ratio of the allowance for loan and lease losses to loans and leases outstanding reflects management’s evaluation of the underlying credit risk inherent in the loan portfolio. The determination of the adequacy of the allowance for loan and lease losses and periodic provisioning for estimated losses included in the consolidated financial statements is the responsibility of management and the Board of Directors. The evaluation process is undertaken on a quarterly basis.

Methodology employed for assessing the adequacy of the allowance for loan and lease losses consists of the following criteria:

 

   

The establishment of reserve amounts for all specifically identified classified loans and leases that have been designated as requiring attention by the Company or its external loan review consultant.

 

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The establishment of reserves for pools of homogeneous types of loans and leases not subject to specific review, including commercial loans under $250,000, 1 – 4 family residential mortgages and consumer loans.

 

   

The establishment of reserve amounts for the non-classified loans and leases in each portfolio based upon the historical average loss experience of these portfolios and management’s evaluation of key factors described below.

Consideration is given to the results of ongoing credit quality monitoring processes, the adequacy and expertise of the Company’s lending staff, underwriting policies, loss histories, delinquency trends, and the cyclical nature of economic and business conditions. Since many of the Company’s loans depend on the sufficiency of collateral as a secondary means of repayment, any adverse trend in the real estate markets could affect underlying values available to protect the Company against loss.

In the second and fourth quarters of 2008, the Company disclosed that it had two leasing originators that indicated that they could no longer meet all of their obligations under contractual recourse provisions. Lakeland assesses the adequacy of the allowance for its lease portfolio based on the borrower’s payment history, financial strength of the borrower determined through financial information provided or credit scoring criteria, value of the underlying assets and in the case of recourse transactions, the financial strength of the originator (servicer). If the servicer is able to continue servicer advances for delinquent leases, Lakeland assesses a reserve on the lease based on credit scores and delinquency status. In the case of the two originators who could no longer perform under their contractual recourse obligations, once the lease becomes over 90 days past due, the lease is charged down to its net realizable value using a recognized valuation method to the extent available and placed on non-accrual. From that point forward, reserves are adjusted as necessary based on delinquency status and where the lease is in the collection process.

The collateral underlying the aforementioned lease pools was predominately transportation and construction use vehicles. Because of economic conditions, including fuel costs in 2008 and the general economic downturn further depressing these industries into 2009, leasing delinquencies and declines in collateral value resulted in increased charge-offs and provisions for lease losses into 2009. As a result, management made a decision in the second quarter of 2009 to reduce the risk in its portfolio by selling those two lease pools as well as other lease pools with characteristics that did not fit into the Company’s core banking strategy.

In the second quarter of 2009, a $34.1 million provision for loan and lease losses was recorded which included a $28.4 million provision for lease losses. This provision was made due to management’s evaluation of identified risk in the lease portfolio as well as the mark-to-market adjustment of $9.1 million on the lease pools sold during the second quarter and the $12.5 million mark-to-market adjustment on additional lease pools held for sale on June 30, 2009. In the third quarter of 2009, management continued to sell the lease pools that were marked to market in the second quarter. Lakeland sold $27.9 million in leases held for sale in the third quarter, leaving remaining held for sale leases of $8.9 million.

While non-performing loans increased from $16.5 million on December 31, 2008 to $42.2 million on September 30, 2009, the allowance for loan and lease losses remained at 1.23% of total loans on September 30, 2009. The increase in non-accrual loans, as discussed above, was primarily in four commercial loans which totaled $14.1 million. These loans were secured by commercial real estate. Management believes, based on appraisals and estimated selling costs, that the majority of these loans were well secured and no specific reserve was necessary.

Based upon the process employed and giving recognition to all accompanying factors related to the loan and lease portfolio, management considers the allowance for loan and lease losses to be adequate at September 30, 2009. The preceding statement constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

Investment Securities

For detailed information on the composition and maturity distribution of the Company’s investment securities portfolio, see Note 6 in the Notes to Consolidated Financial Statements contained in this Form 10-Q. Total investment securities increased from $392.3 million on December 31, 2008 to $576.2 million on September 30, 2009, an increase of $183.9 million, or 47% which resulted from increased liquidity due to increased deposits and a decline in loans and leases.

Deposits

Total deposits increased from $2.06 billion on December 31, 2008 to $2.14 billion on September 30, 2009, an increase of $88.0 million, or 4%. Noninterest bearing deposits increased $21.1 million or 7% to $323.6 million, while savings and

 

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interest bearing transaction accounts increased $120.5 million or 11% to $1.3 billion as of September 30, 2009.

Time deposits decreased from $611.0 million on December 31, 2008 to $557.4 million on September 30, 2009, a decrease of $53.6 million. Time deposits have decreased as a result of the declining rate environment. Depositors would rather keep their deposits in liquid transaction accounts versus a long term account in the current low rate environment.

Liquidity

Cash and cash equivalents, totaling $45.0 million on September 30, 2009, decreased $4.8 million from December 31, 2008. Operating activities provided $28.6 million in net cash. Investing activities used $163.5 million in net cash, primarily reflecting the purchase of securities. Financing activities provided $130.1 million in net cash, reflecting proceeds from the issuance of preferred stock and a warrant to the U.S. Treasury Department and an increase in deposits of $88.0 million partially offset by repayment of long term debt of $10.0 million. The Company anticipates that it will have sufficient funds available to meet its current loan commitments and deposit maturities. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. At September 30, 2009, the Company had outstanding loan origination commitments of $423.5 million. These commitments include $356.4 million that mature within one year; $40.6 million that mature after one but within three years; $7.5 million that mature after three but within five years and $19.0 million that mature after five years. The Company also had $9.9 million in letters of credit outstanding at September 30, 2009. This included $9.7 million that are maturing within one year, $60,000 that mature after one but within three years and $80,000 that mature after 5 years. Time deposits issued in amounts of $100,000 or more maturing within one year total $181.2 million.

Capital Resources

Stockholders’ equity increased from $220.9 million on December 31, 2008 to $269.1 million on September 30, 2009. Book value per common share decreased to $8.95 on September 30, 2009 from $9.33 on December 31, 2008. The increase in stockholders’ equity from December 31, 2008 to September 30, 2009 was primarily due to the issuance of $59.0 million in preferred stock and a warrant to the U.S Treasury Department. For more information, please see Note 11 in Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q. Offsetting the impact of the $59.0 million in preferred stock was a net loss of $7.5 million, and the payment of dividends of $6.4 million.

The Company and Lakeland are subject to various regulatory capital requirements that are monitored by federal banking agencies. Failure to meet minimum capital requirements can lead to certain supervisory actions by regulators; any supervisory action could have a direct material effect on the Company or Lakeland’s financial statements. Management believes, as of September 30, 2009, that the Company and Lakeland meet all capital adequacy requirements to which they are subject.

The capital ratios for the Company and Lakeland at September 30, 2009 and the minimum regulatory guidelines for such capital ratios for qualification as a well-capitalized institution are as follows:

 

Capital Ratios:    Tier 1 Capital
to Total Average
Assets Ratio
September 30,
2009
  Tier 1 Capital
to Risk-Weighted
Assets Ratio
September 30,
2009
  Total Capital
to Risk-Weighted
Assets Ratio
September 30,
2009

The Company

   9.46%   12.80%   14.04%

Lakeland Bank

   8.90%   12.07%   13.32%

“Well capitalized” institution under FDIC Regulations

   5.00%   6.00%   10.00%

 

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

The Company manages interest rate risk and market risk by identifying and quantifying interest rate risk exposures using simulation analysis, economic value at risk models and gap analysis. At September 30, 2009, the cumulative one-year gap was ($102.0) million or (4%) of total assets.

The Company uses net interest income simulation because the Company’s Asset/Liability Management Committee believes that the interest rate sensitivity modeling more accurately reflects the effects and exposure to changes in interest rates. Net interest income simulation considers the relative sensitivities of the balance sheet including the effects of interest rate caps on adjustable rate mortgages and the relatively stable aspects of core deposits. As such, net interest simulation is designed to address the probability of interest rate changes and the behavioral response of the balance sheet to those changes. Market Value of Portfolio Equity represents the fair value of the net present value of assets, liabilities and off-balance-sheet items. The Company’s Market Value of Portfolio Equity at September 30, 2009 was $355.6 million.

Based on its simulation models, the Company estimates that for a 200 basis point rate shock increase, the Company’s Market Value of Portfolio Equity would decline (6.6%) and would decrease (10.1%) for a 200 basis point rate shock decrease. The simulation model also shows that for a 200 basis point rate increase, the Company’s projected net interest income for the next 12 months would decrease (1.8%), and would decrease (2.8%) for a 200 basis point rate decrease. The information provided for net interest income over the next 12 months assumes that changes in interest rates of plus 200 basis points and minus 200 basis points change gradually in equal increments over the following 12 month period. The above information is based on significant estimates and assumptions and constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. For more information regarding the Company’s market risk and assumptions used in the Company’s simulation models, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

ITEM 4. Controls and Procedures

(a)     Disclosure controls and procedures. As of the end of the Company’s most recently completed fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) covered by this report, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and are operating in an effective manner and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b)     Changes in internal controls over financial reporting. There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II OTHER INFORMATION

Item 1.  Legal Proceedings

There are no pending legal proceedings involving the Company or the Bank other than those arising in the normal course of business. Management does not anticipate that the ultimate liability, if any, arising out of such litigation will have a material effect on the financial condition or results of operations of the Company and Lakeland on a consolidated basis.

Item 1A. Risk Factors

Except for the addition of the risk factor detailed below, there have been no material changes in risk factors from those disclosed under Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

If we are unsuccessful in continuing to reduce the risk in the Bank’s lease portfolio, our earnings and profitability could be materially and adversely affected.

The risk profile of the Bank’s lease portfolio is measurably greater than its core loan portfolios. We have undertaken a strategy, which we intend to continue to pursue, to accelerate the disposition of those leases that were generated by originators whose lease pools reflect enhanced risk or do not fit into our core banking strategic direction. From December 31, 2008 through September 30, 2009, our lease portfolio has been reduced from approximately $311.5 million, which was 15% of total loans, to approximately $139.0 million, or approximately 7% of total loans. During 2009, the Bank recorded a $35.4 million provision for losses against the lease portfolio reflecting, in part, the disposition strategy which included the mark-to-market adjustment of certain leases held for sale. Based on the still evident economic uncertainty, we cannot assure you that we will be able to dispose of the leases held for sale or any remaining leases that reflect enhanced risk or do not fit into our core banking strategic direction or that if we are able to dispose of such leases, such sales will not be at prices that represent a discount to the net receivable values of such leases. This could result in a loss in any particular period, and could otherwise materially and adversely affect our earnings and profitability.

 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    Not Applicable
Item 3.    Defaults Upon Senior Securities    Not Applicable
Item 4.    Submission of Matters to a Vote of Security Holders.    Not Applicable
Item 5.    Other Information    Not Applicable

Item 6. Exhibits

 

31.1    Certification by Thomas J. Shara pursuant to Section 302 of the Sarbanes Oxley Act.
31.2    Certification by Joseph F. Hurley pursuant to Section 302 of the Sarbanes Oxley Act.
32.1    Certification by Thomas J. Shara and Joseph F. Hurley pursuant to Section 906 of the Sarbanes Oxley Act.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Lakeland Bancorp, Inc.
(Registrant)
/s/ Thomas J. Shara
Thomas J. Shara
President and Chief Executive Officer
/s/ Joseph F. Hurley
Joseph F. Hurley
Executive Vice President and
  Chief Financial Officer

Date: November 9, 2009

 

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