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LAKELAND BANCORP INC - Quarter Report: 2010 September (Form 10-Q)

For the quarterly period ended September 30, 2010
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, 2010

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 29, 2010 there were 24,064,190 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, 2010 (unaudited) and December 31, 2009      1   
  Consolidated Statements of Operations - Unaudited Three Months and Nine Months ended September 30, 2010 and 2009      2   
  Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income - Unaudited Nine Months ended September 30, 2010      3   
  Consolidated Statements of Cash Flows - Unaudited Nine Months ended September 30, 2010 and 2009      4   
  Notes to Consolidated Financial Statements (unaudited)      5   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      17   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      30   
Item 4.   Controls and Procedures      31   
  Part II    Other Information   
Item 1.   Legal Proceedings      32   
Item 1A.   Risk Factors      32   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      32   
Item 3.   Defaults Upon Senior Securities      32   
Item 4.   Reserved      32   
Item 5.   Other Information      32   
Item 6.   Exhibits      32   
Signatures        33   
  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.   

 


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Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

ASSETS    September 30, 2010
(unaudited)
          December 31,
2009
 
     (dollars in thousands)   

Cash

     $42,547           $31,869   

Federal funds sold and Interest-bearing deposits due from banks

     54,048           26,794   
   

Total cash and cash equivalents

     96,595           58,663   

Investment securities available for sale, at fair value

     437,597           375,530   

Investment securities held to maturity; fair value of $74,071 in 2010 and $84,389 in 2009

     71,009           81,821   

Loans and leases, net of deferred costs

     1,984,822           2,009,721   

Leases held for sale

     2,029           7,314   

Less: allowance for loan and lease losses

     27,218           25,563   
   

Net loans

     1,959,633           1,991,472   

Premises and equipment, net

     27,792           29,196   

Accrued interest receivable

     8,787           8,943   

Goodwill

     87,111           87,111   

Other identifiable intangible assets, net

     843           1,640   

Bank owned life insurance

     42,867           41,720   

Other assets

     37,237           47,872   
   

TOTAL ASSETS

     $2,769,471           $2,723,968   
   

LIABILITIES

       
   

Deposits:

       

Noninterest bearing

     $379,625           $323,175   

Savings and interest-bearing transaction accounts

     1,413,063           1,368,272   

Time deposits under $100 thousand

     256,705           283,512   

Time deposits $100 thousand and over

     185,379           182,228   
   

Total deposits

     2,234,772           2,157,187   

Federal funds purchased and securities sold under agreements to repurchase

     68,448           63,672   

Long-term debt

     115,900           145,900   

Subordinated debentures

     77,322           77,322   

Other liabilities

     12,304           11,901   
   

TOTAL LIABILITIES

     2,508,746           2,455,982   
   

Commitments and contingencies

       

STOCKHOLDERS EQUITY

       

Preferred stock, Series A, no par value, $1,000 liquidation value, authorized 1,000,000 shares; issued 39,000 shares at September 30, 2010 and 59,000 shares at December 31, 2009

     37,365           56,023   

Common stock, no par value; authorized shares, 40,000,000; issued 24,740,564 shares, at September 30, 2010 and December 31, 2009

     258,497           259,521   

Accumulated deficit

     (27,760        (34,961

Treasury stock, at cost, 679,330 shares at September 30, 2010 and 868,428 at December 31, 2009

     (9,377        (11,940

Accumulated other comprehensive income (loss)

     2,000           (657
   

TOTAL STOCKHOLDERS’ EQUITY

     260,725           267,986   
   

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

     $2,769,471           $2,723,968   
   

The accompanying notes are an integral part of these financial statements.

 

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Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

     For the three months
ended September 30,
    For the nine months
ended Septemeber 30,
 
     2010      2009     2010      2009  
   
     (In thousands, except per share data)  

INTEREST INCOME

          

Loans, leases and fees

     $27,670         $28,633        $83,971         $87,931   

Federal funds sold and interest-bearing deposits with banks

     42         32        110         89   

Taxable investment securities

     3,107         3,775        9,099         10,566   

Tax-exempt investment securities

     495         550        1,512         1,713   
   

TOTAL INTEREST INCOME

     31,314         32,990        94,692         100,299   
   

INTEREST EXPENSE

          

Deposits

     3,584         6,561        11,857         21,469   

Federal funds purchased and securities sold under agreements to repurchase

     27         29        95         96   

Long-term debt

     2,713         3,378        8,234         10,337   
   

TOTAL INTEREST EXPENSE

     6,324         9,968        20,186         31,902   
   

NET INTEREST INCOME

     24,990         23,022        74,506         68,397   

Provision for loan and lease losses

     4,857         4,718        14,737         45,177   
   

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES

     20,133         18,304        59,769         23,220   

NONINTEREST INCOME

          

Service charges on deposit accounts

     2,678         2,768        7,626         8,134   

Commissions and fees

     965         1,045        2,683         2,741   

Gains on investment securities

     1,681                1,682         353   

Income on bank owned life insurance

     376         324        1,147         1,473   

Gains (losses) on leasing related assets

     312         (709     1,171         (1,055

Other income

     77         126        442         291   
   

TOTAL NONINTEREST INCOME

     6,089         3,554        14,751         11,937   
   

NONINTEREST EXPENSE

          

Salaries and employee benefits

     9,073         8,545        26,972         25,867   

Net occupancy expense

     1,594         1,596        5,025         5,067   

Furniture and equipment

     1,270         1,235        3,661         3,719   

Stationery, supplies and postage

     360         394        1,172         1,215   

Marketing expense

     511         667        1,713         2,008   

Core deposit intangible amortization

     265         265        796         796   

FDIC insurance expense

     937         1,231        2,834         4,547   

Collection expense

     188         405        495         1,287   

Legal expense

     411         353        1,175         654   

Other real estate and repossessed asset expense

     119         133        354         917   

Long term debt prepayment fee

     1,835                1,835           

Other expenses

     2,388         2,253        6,806         7,404   
   

TOTAL NONINTEREST EXPENSE

     18,951         17,077        52,838         53,481   
   

Income (loss) before provision for income taxes

     7,271         4,781        21,682         (18,324

Income tax expense (benefit)

     2,399         2,770        7,491         (10,788
   

NET INCOME (LOSS)

     $4,872         $2,011        $14,191         ($7,536
   

Dividends on Preferred Stock and Accretion

     1,589         885        3,391         2,309   
   

Net Income (Loss) Available to Common Stockholders

     $3,283         $1,126        $10,800         ($9,845
   

PER SHARE OF COMMON STOCK

          

Basic earnings (loss)

     $0.14         $0.05        $0.45         $(0.42
   

Diluted earnings (loss)

     $0.14         $0.05        $0.45         $(0.42
   

Dividends

     $0.05         $0.05        $0.15         $0.25   
   

The accompanying notes are an integral part of these financial statements.

 

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Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months ended September 30, 2010

 

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

BALANCE DECEMBER 31, 2009

     24,740,564       $ 259,521        $56,023        ($34,961     ($11,940     ($657   $ 267,986   

Comprehensive income:

               

Net Income

                           14,191                      14,191   

Other comprehensive income, net of tax

                                         2,657        2,657   
                     

Total comprehensive income

                  16,848   
                     

Preferred dividends

                           (2,049                   (2,049

Accretion of discount

                    1,342        (1,342                     

Stock based compensation

             402                                    402   

Redemption of preferred stock

          (20,000           (20,000

Issuance of restricted stock awards

             (476                   476                 

Issuance of stock to dividend reinvestment and stock purchase plan

             (425            (623     1,091               43   

Exercise of stock options, net of excess tax benefits

             (525                   996               471   

Cash dividends, common stock

                           (2,976                   (2,976
   

BALANCE September 30,

2010 (UNAUDITED)

     24,740,564       $ 258,497        $37,365        ($27,760     ($9,377     $2,000      $ 260,725   
   

The accompanying notes are an integral part of these financial statements.

 

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Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     For the nine months ended
September 30,
 
      2010                2009  

CASH FLOWS FROM OPERATING ACTIVITIES

     (dollars in thousands)   

Net income (loss)

     $14,191                $(7,536

Adjustments to reconcile net income to net cash provided by operating activities:

            

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

     2,828                2,604   

Depreciation and amortization

     3,103                3,285   

Provision for loan and lease losses

     14,737                45,177   

Gains on securities

     (1,682             (353

(Gains) losses on held for sale leases

     (635             1,028   

(Gains) losses on sales of other assets

     (536             285   

Gains on sales of premises and equipment

     (82               

Writedown of other repossessed assets

                    780   

Stock-based compensation

     402                326   

(Increase) decrease in other assets

     7,947                (17,617

Increase in other liabilities

     559                668   
   

NET CASH PROVIDED BY OPERATING ACTIVITIES

     40,832                28,647   
   

CASH FLOWS FROM INVESTING ACTIVITIES

            

Proceeds from repayments on and maturity of securities:

            

Available for sale

     121,476                96,838   

Held to maturity

     21,016                34,764   

Proceeds from sales of securities:

            

Available for sale

     72,747                25,778   

Purchase of securities:

            

Available for sale

     (252,937             (324,661

Held to maturity

     (10,296             (12,800

Purchase of bank owned life insurance

                    (1,304

Proceeds from sales of leases

            

Held for sale

     931                53,407   

Net (increase) decrease in loans and leases

     14,240                (38,225

Proceeds from sales of other repossessed assets

     3,026                5,529   

Capital expenditures

     (1,093             (2,825

Proceeds from sales of bank premises and equipment

     273                  
   

NET CASH USED IN INVESTING ACTIVITIES

     (30,617             (163,499
   

CASH FLOWS FROM FINANCING ACTIVITIES

            

Net increase in deposits

     77,585                88,018   

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

     4,776                (362

Repayments of long-term debt

     (30,000             (10,000

Proceeds on issuance of preferred stock, net of costs

                    58,838   

Redemption of preferred stock

     (20,000               

Exercise of stock options

     463                10   

Excess tax benefits

     8                1   

Issuance of stock to dividend reinvestment and stock purchase plan

     43                24   

Dividends paid

     (5,158             (6,437
   

NET CASH PROVIDED BY FINANCING ACTIVITIES

     27,717                130,092   
   

Net decrease in cash and cash equivalents

     37,932                (4,760

Cash and cash equivalents, beginning of year

     58,663                49,776   
   

CASH AND CASH EQUIVALENTS, END OF PERIOD

     $96,595                $45,016   
   

The accompanying notes are an integral part of these financial statements.

 

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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 conform with accounting principles generally accepted in the United States of America (U.S. GAAP) and predominant practices within the banking industry.

The Company’s unaudited interim financial statements reflect all adjustments, such as normal recurring accruals that are, in the opinion of management, necessary for fair statement of the results of interim periods presented. The results of operations for the quarter presented do not necessarily indicate the results that the Company will achieve for all of 2010. 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, 2009.

The financial information in this quarterly report has been prepared in accordance with the Company’s customary accounting practices. Certain information and footnote disclosures required under U.S. GAAP have been condensed or omitted, as permitted by rules and regulations of the Securities and Exchange Commission.

The Company evaluated its September 30, 2010 consolidated financial statements for subsequent events through 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

Share-based compensation expense of $402,000 and $326,000 was recognized for the nine months ended September 30, 2010 and 2009, respectively. As of September 30, 2010, there was unrecognized compensation cost of $864,000 related to unvested restricted stock; that cost is expected to be recognized over a weighted average period of approximately 2.4 years. Unrecognized compensation expense related to unvested stock options was approximately $102,000 as of September 30, 2010 and is expected to be recognized over a period of 1.6 years.

In the first nine months of 2010, the Company granted 34,626 shares of restricted stock at a fair value of $7.18 per share under the 2009 program. These shares vest over a five year period. Compensation expense on these shares is expected to be approximately $50,000 per year for the next five years. In the first nine months of 2009, the Company granted 14,452 shares of restricted stock at a weighted market value of $9.26 per share under the 2000 program. Compensation expense on these shares is expected to be approximately $26,000 per year over an average period of four years.

In the first nine months of 2010, the Company granted options to purchase 25,000 shares of stock to a new non-employee director of the Company at an exercise price of $9.07 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 the grant. The Company estimated the fair value of the option grant using a Black-Scholes option pricing model using the following assumptions: The risk-free interest rate was 2.32%; the expected dividend yield, 2.20%; the expected volatility, 47%; and the expected life, six years. The fair value of the options granted was estimated to be $3.48. The expected compensation expense to be recorded over the vesting period is $87,000.

There were no grants of stock options in the first nine months of 2009.

Option activity under the Company’s stock option plans as of September 30, 2010 is as follows:

 

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       Number of
shares
    Weighted
average
exercise
price
    

Weighted
average
remaining
contractual
term

(in years)

     Aggregate
intrinsic value
 
        

Outstanding, January 1, 2010

     815,473        $12.38            $27,604   

Issued

     25,000        9.07         

Exercised

     (87,272     6.59         

Forfeited

     (6,867     14.28         

Expired

     (15,720     6.67         
              

Outstanding, September 30, 2010

     730,614        $13.06         3.50         $83,909   
        

Options exercisable at
September 30, 2010

     695,174        $13.19         3.24         $83,873   
        

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 2010 and the exercise price, multiplied by the number of in-the-money options).

The aggregate intrinsic value of options exercised during the first nine months ended September 30, 2010 and 2009 was $106,000 and $6,000, respectively. Exercise of stock options during the first nine months of 2010 and 2009 resulted in cash receipts of $463,000 and $10,000, respectively.

Information regarding the Company’s restricted stock (all unvested) and changes during the nine months ended September 30, 2010 is as follows:

 

       Number of
shares
    Weighted
average
price
 
        

Outstanding, January 1, 2010

     96,891        $11.97   

Granted

     34,626        7.18   

Vested

     (4,576     9.58   

Forfeited

     (869     10.81   
        

Outstanding, September 30, 2010

     126,072        $10.75   
        

 

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Note 3. Comprehensive Income

The components of other comprehensive income are as follows:

 

     September 30, 2010            September 30, 2009  
For the quarter ended:    Before
  tax amount
    Tax Benefit
(Expense)
    Net of
tax amount
           Before
tax amount
     Tax
Benefit
    Net of
tax amount
 
                   
     (in thousands)            (in thousands)  

Net unrealized gains on available for sale securities

                

Net unrealized holding gains arising during period

     $721        ($278     $443           $4,643         ($1,718     $2,925   

Less reclassification adjustment for net gains arising during the period

     1,681        (602     1,079                            
                   

Net unrealized gains (losses)

     ($960     $324        ($636        $4,643         ($1,718     $2,925   

Change in minimum pension liability

     8        (3     5           7         (2     5   
                   

Other comprehensive income (loss), net

     ($952     $321        ($631        $4,650         ($1,720     $2,930   
                   
For the nine months ended:   

Before

  tax amount

    Tax Benefit
(Expense)
   

Net of

tax amount

          

Before

tax amount

     Tax
Benefit
   

Net of

tax amount

 
                   
     (in thousands)            (in thousands)  

Net unrealized gains on available for sale securities

                

Net unrealized holding gains arising during period

     $5,892        ($2,170     $3,722           $5,638         ($2,114     $3,524   

Less reclassification adjustment for net gains arising during the period

     1,682        (602     1,080           353         (124     229   
                   

Net unrealized gains

     $4,210        ($1,568     $2,642           $5,285         ($1,990     $3,295   

Change in minimum pension liability

     23        (8     15           23         (8     15   
                   

Other comprehensive income, net

     $4,233        ($1,576     $2,657           $5,308         ($1,998     $3,310   
                   

Note 4. Statement of Cash Flow Information, Supplemental Information

 

     For the nine months ended
September 30,
 
     2010      2009  
        
     (in thousands)  

Supplemental schedule of noncash investing and financing activities:

     

Cash paid during the period for income taxes

     $3,073         $2,745   

Cash paid during the period for interest

     20,637         32,628   

Transfer of loans and leases into other repossessed assets and other real estate owned

     2,371         3,751   

Transfer of loans and leases receivable to leases held for sale, at fair value

             67,945   

Transfer of leases from held for sale to held for investment

     1,888           

 

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Note 5. Earnings Per Share.

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)    2010      2009      2010      2009  
        

Net income (loss) available to common shareholders

     $3,283         $1,126         $10,800         $(9,845

Less: earnings allocated to participating securities

     17                 37           
                 

Net income (loss) allocated to common shareholders

     3,266         1,126         10,763         (9,845
                 

Weighted average number of common shares outstanding - basic

     23,921         23,695         23,880         23,651   

Share-based plans

     37         36         25           
                 

Weighted average number of common shares diluted

     23,958         23,731         23,905         23,651   

Basic earnings (loss) per share

     $0.14         $0.05         $0.45         $(0.42
            

Diluted earnings (loss) per share

     $0.14         $0.05         $0.45         $(0.42
            

Options to purchase 668,732 shares of common stock at a weighted average price of $13.62 per share, a warrant to purchase 949,571 shares of common stock at a price of $9.32 per share, and 2,250 shares of restricted stock at a weighted average price of $10.56 per share were outstanding and were not included in the computation of diluted earnings per share for the quarter ended September 30, 2010 because the exercise price was greater than the average market price. Options to purchase 683,483 shares of common stock at a weighted average price of $13.76 per share, a warrant to purchase 949,571 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 668,732 shares of common stock at a weighted average price of $13.62 per share, a warrant to purchase 949,571 shares of common stock at a price of $9.32 per share, and 2,250 shares of restricted stock at a weighted average price of $10.56 per share were outstanding and were not included in the computation of diluted earnings per share for the nine months ended September 30, 2010 because the exercise price and the grant-date price were greater than the average market price. 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.

 

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Note 6. Investment Securities

 

AVAILABLE FOR SALE   September 30, 2010     December 31, 2009  
   
(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

    $91,138        $606        $—        $91,744        $81,678        $74        $(271     $81,481   

Mortgage-backed securities

    274,333        3,476        (355     277,454        243,118        2,304        (594     244,828   

Obligations of states and political subdivisions

    24,395        869               25,264        14,666        369        (33     15,002   

Corporate debt securities

    23,107        286        (875     22,518        14,981        41        (1,701     13,321   

Equity securities

    20,434        434        (251     20,617        21,107        197        (406     20,898   
   
    $433,407        $5,671        $(1,481     $437,597        $375,550        $2,985        $(3,005     $375,530   
   
HELD TO MATURITY   September 30, 2010     December 31, 2009  
   
(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

    $4,996        $280        $—        $5,276        $4,994        $307        $—        $5,301   

Mortgage-backed securities

    22,772        1,121               23,893        27,837        951        (19     28,769   

Obligations of states and political subdivisions

    41,670        1,571        (9     43,232        47,412        1,383        (33     48,762   

Corporate debt securities

    1,571        99               1,670        1,578        3        (24     1,557   
   
    $71,009        $3,071        $(9     $74,071        $81,821        $2,644        $(76     $84,389   
   

The following table shows investment securities by stated maturity. Securities backed by mortgages have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay, and are, therefore, classified separately with no specific maturity date (in thousands):

 

     September 30, 2010  
   
     Available for Sale      Held to Maturity  
                 
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
   

Due in one year or less

     $5,135         $5,172         $10,887         $10,978   

Due after one year through five years

     95,841         96,749         23,156         24,330   

Due after five years through ten years

     29,661         30,023         12,887         13,489   

Due after ten years

     8,003         7,582         1,307         1,381   
   
     138,640         139,526         48,237         50,178   

Mortgage-backed securities

     274,333         277,454         22,772         23,893   

Equity securities

     20,434         20,617                   
   

Total securities

     $433,407         $437,597         $71,009         $74,071   
   

 

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The following table shows proceeds from sales of securities, gross gains and gross losses on sales or calls 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,
 
     2010      2009      2010      2009  
                 

Sale proceeds

     $72,747         $ —         $72,747         $25,778   

Gross gains

     1,691                 1,692         993   

Gross losses

     (10)                 (10)         (108)   

Other than temporary impairment

                             (532)   

Securities with a carrying value of approximately $339.1 million and $331.7 million at September 30, 2010 and December 31, 2009, 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, 2010 and December 31, 2009:

 

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September 30, 2010   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

    $2,498        $ —        $ —        $ —        1        $2,498        $ —     

Mortgage-backed securities

    50,139        323        5,620        32        18        55,759        355   

Obligations of states and political subdivisions

    860               40               3        900        —     

Other debt securities

                  6,079        875        3        6,079        875   

Equity securities

    261        136        686        115        4        947        251   
      $53,758        $459        $12,425        $1,022        29        $66,183        $1,481   
                                                         

HELD TO MATURITY

                 
     

U.S. government agencies

    $ —        $ —        $ —        $ —               $ —        $ —   

Mortgage-backed securities

                  5               1        5          

Obligations of states and political subdivisions

                  435        9        2        435        9   

Other debt securities

                                                
      $ —        $ —        $440        $9        3        $440        $9   
                                                         
             
December 31, 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

    $32,681        $271        $ —        $ —        8        $32,681        $271   

Mortgage-backed securities

    66,874        467        6,507        127        26        73,381        594   

Obligations of states and political subdivisions

    2,541        32        64        1        6        2,605        33   

Other debt securities

                  10,255        1,701        4        10,255        1,701   

Equity securities

    620        134        812        272        5        1,432        406   
      $102,716        $904        $17,638        $2,101        49        $120,354        $3,005   
                                                         

HELD TO MATURITY

                 
     

Mortgage-backed securities

    $1,795        $19        $8        $ —        2        $1,803        $19   

Obligations of states and political subdivisions

                  1,088        33        3        1,088        33   

Other debt securities

                  1,019        24        2        1,019        24   
      $1,795        $19        $2,115        $57        7        $3,910        $76   
                                                         

Management has evaluated the securities in the above table and has concluded that none of the securities with unrealized losses have impairments that are other-than-temporary. In its evaluation, management considered the credit rating on the securities and the results of discounted cash flow analyses. Investment securities, including 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, 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.

 

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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,
2010
          December 31,
2009
 
   
     (in thousands)  

Commercial loans secured by real estate

     $948,504            $918,517   

Commercial and Industrial loans

     173,163            168,450   

Leases

     77,440            113,160   

Leases held for sale, at fair value

     2,029            7,314   

Real estate-construction

     78,164            116,997   

Real estate-mortgage

     397,752            374,091   

Home Equity and consumer installment

     307,087            315,598   
   

Total loans

     1,984,139            2,014,127   
   

Plus: deferred costs

     2,712            2,908   
   

Loans net of deferred costs

     $1,986,851            $2,017,035   
   

Loans and leases 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 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, 2010, December 31, 2009 and September 30, 2009:

 

Date    Investment    Valuation Allowance    Average Recorded
Investment
Year-to-date
September 30, 2010    $29.8 million    $1.6 million    $31.0 million
December 31, 2009    $31.4 million    $3.7 million    $25.2 million
September 30, 2009    $34.0 million    $3.0 million    $21.0 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 and lease 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. At September 30, 2010 and December 31, 2009, Lakeland had $20.9 million and $14.6 million, respectively, in impaired loans and leases for which there was no related allowance for loan and lease losses. Lakeland recognized interest on impaired loans and leases of $294,000 and $51,000 in the first nine months of 2010 and 2009, respectively. Interest that would have accrued had the loans and leases performed under original terms would have been $1.9 million for each of the first nine months of 2010 and 2009.

Lakeland had leases held for sale with a fair market value of $2.0 million as of September 30, 2010, compared to $7.3 million as of December 31, 2009. Management records 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

 

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types of collateral and other characteristics. During the first nine months of 2010, the Company sold leases held for sale with a carrying value of $931,000 for $913,000 and recorded a net loss of $18,000 in noninterest income. The Company also reclassified $1.9 million from held for sale to held for investment because management’s intent regarding these leases had changed. The Company also recorded $3.1 million in payments on held for sale leases during the nine months ended September 30, 2010. The following tables show the components of gains (losses) on held for sale leasing assets for the periods presented (in thousands):

 

    For the three months ended
September 30,
    For the nine months ended
September 30,
 
    2010     2009     2010     2009  
               
    (in thousands)     (in thousands)  

Gains (losses) on sales of held for sale leases

    ($45     ($792     ($18     ($792

Mark-to-market adjustment on held for sale leases

    202        (790     484        (790

Realized gains on paid off held for sale leases

    44        554        169        554   

Gains (losses) on other repossessed assets

    111        301        536        (285
           

Total gain (loss) on held for sale leasing assets

    $312        ($727     $1,171        ($1,313
           

Note 8. Employee Benefit Plans

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

 

    For the three months ended
September 30,
    For the nine months ended
September 30,
 
    2010     2009     2010     2009  
               
    (in thousands)     (in thousands)  

Interest cost

    $24        $23        $72        $70   

Expected return on plan assets

    (21     (12     (60     (37

Amortization of unrecognized net actuarial loss

    14        18        41        54   
               

Net periodic benefit expense

    $17        $29        $53        $87   
               

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,
 
    2010     2009     2010     2009  
               
    (in thousands)     (in thousands)  

Service cost

    $6        $7        $20        $20   

Interest cost

    13        13        38        38   

Amortization of prior service cost

    8        7        23        23   

Amortization of unrecognized net actuarial loss

    2        3        6        9   
               

Net periodic benefit expense

    $29        $30        $87        $90   
               

The Company made contributions of $80,000 to the plan during each of the nine months ended September 30, 2010 and 2009. No further contributions are expected to be made in 2010.

 

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

U.S. GAAP 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.

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.

The Company’s assets that are measured at fair value on a recurring basis are its available for sale investment securities. The Company obtains fair values on its securities using information from a third party servicer. Standard inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, bids and offers. If quoted prices for securities are available in an active market, those securities are classified as Level 1 securities. The Company has certain equity securities that are classified as Level 1 securities. If quoted prices in active markets are not available, fair values are estimated by the use of pricing models. Level 2 securities were primarily comprised of U.S. Agency bonds, mortgage-backed securities, obligations of state and political subdivisions and corporate securities.

The following table sets forth the Company’s financial assets that were accounted for at fair values on a recurring basis as of the periods presented by level within the fair value hierarchy. The Company had no liabilities accounted for at fair value as of September 30, 2010. During the nine months ended September 30, 2010, the Company did not make any significant transfers between recurring Level 1 fair value measurements and recurring Level 2 fair value measurements. 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)
     Total Fair
Value at
September 30,
2010
 
        

September 30, 2010

           

Assets:

        

Investment securities, available for sale

           

US government agencies

     $ —         $91,744         $ —         $91,744   

Mortgage backed securities

             277,454                 277,454   

Obligations of states and political subdivisions

             25,264                 25,264   

Corporate debt securities

             22,518                 22,518   

Equity securities

     1,761         18,856                 20,617   
        

Total securities available for sale

     $1,761         $435,836         $ —         $437,597   

December 31, 2009

           

Assets:

           

Investment securities, available for sale

           

US government agencies

     $ —         $81,481         $ —         $81,481   

Mortgage backed securities

             244,828                 244,828   

Obligations of states and political subdivisions

             15,002                 15,002   

Corporate debt securities

             13,321                 13,321   

Equity securities

     1,385         19,513                 20,898   
        

Total securities available for sale

     $1,385         $374,145         $ —         $375,530   

The following table sets forth the Company’s assets subject to fair value adjustments (impairment) on a nonrecurring basis as of the periods presented 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:

 

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(in thousands)   

Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)

     Significant
Other
Observable
Inputs
(Level 2)
    

Significant
Unobservable
Inputs

(Level 3)

     Total Fair
Value at
September 30,
2010
 
        

September 30, 2010

           

Assets:

        

Impaired Loans and Leases

     $ —         $ —         $29,813         $29,813   

Other real estate owned and other repossessed assets

                     1,745         1,745   

December 31, 2009

           

Assets:

           

Leases held for sale

     $ —         $ —         $7,314         $7,314   

Impaired Loans and Leases

                     31,377         $31,377   

Other real estate owned and other repossessed assets

                     1,864         $1,864   

Land held for sale

                     952         $952   

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. Fair 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.

Other real estate owned (OREO) and other repossessed assets, representing property acquired through foreclosure, are carried at the lower of the principal balance of the secured loan or lease or fair value less estimated disposal costs of the acquired property.

Land held for sale represents a property held by the Company that is recorded at the lower of book or fair value. There is currently a contract for sale on the property in which the net proceeds of the sale would exceed the book value of the property.

U.S. GAAP also 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 and leases. 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, 2010 and December 31, 2009 are outlined below.

 

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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, 2010 and December 31, 2009 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 the 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 counterparties. 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 counterparties at the reporting date.

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

 

     September 30,      December 31,  
     2010      2009  
      Carrying
Value
     Estimated
fair value
     Carrying
Value
     Estimated
fair value
 

Financial Assets:

     (in thousands)   

Cash and cash equivalents

     $96,595         $96,595         $58,663         $58,663   

Investment securities available for sale

     437,597         437,597         375,530         375,530   

Investment securities held to maturity

     71,009         74,071         81,821         84,389   

Loans, including leases held for sale

     1,986,851         1,991,261         2,017,035         2,015,268   

Financial Liabilities:

           

Deposits

     2,234,772         2,239,189         2,157,187         2,160,445   

Federal funds purchased and securities sold under agreements to repurchase

     68,448         68,448         63,672         63,672   

Long-term debt

     115,900         131,744         145,900         161,023   

Subordinated debentures

     77,322         79,078         77,322         81,503   

Commitments:

           

Standby letters of credit

             50                 20   

Note 11. Recent Accounting Pronouncements

On June 12, 2009, the Financial Accounting Standards Board (the “FASB”) issued accounting guidance changing the accounting principles and disclosure requirements related to securitizations and special-purpose entities. This guidance eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. This guidance also expands 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. This guidance is 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. The recognition and measurement provisions regarding transfers of financial assets shall

 

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be applied to transfers that occur on or after the effective date. The Company applied this guidance in the first quarter of 2010 and application did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued accounting guidance to enhance fair value measurement disclosures by requiring the reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reason for the transfers. Furthermore, activity in Level 3 fair value measurements should separately provide information about purchases, sales, issues and settlements rather than providing that information as one net number. These new disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, with the exception of the enhanced Level 3 disclosures, which are effective for interim and annual reporting periods beginning after December 15, 2010. The Company applied this guidance in the first quarter of 2010 and application did not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued accounting guidance to provide financial statement users with greater transparency about an entity’s allowance for loan and lease losses and the credit quality of its loan and lease portfolio. Under the new guidelines, the allowance for loan and lease losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired loans and leases and non-accrual status are to be presented by class of loans and leases. Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the loan and lease portfolio’s risk and performance. This guidance is effective for interim and annual reporting periods ending on or after December 15, 2010. The Company does not anticipate that the application of this guidance will have a material impact on the Company’s consolidated financial statements.

Note 12. Preferred Stock

On August 4, 2010, the Company redeemed 20,000 shares (or approximately 34%) of its Fixed Rate Cumulative Preferred Stock, Series A originally issued to the U.S. Department of the Treasury under the Troubled Asset Relief Program Capital Purchase Program. The Company paid to the Treasury $20.2 million, which included $20.0 million of principal and $219,000 in accrued and unpaid dividends, on August 4, 2010. As a result of the early payment, the Company also accelerated the accretion of $898,000 of the preferred stock discount. The warrant previously issued to the Treasury to purchase 949,571 shares of common stock at an exercise price of $9.32, subject to anti-dilution adjustments, remains outstanding.

PART I — ITEM 2

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

This section should be read 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, 2009.

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

 

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and timing of legislation affecting the financial services industry-including, but not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 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.

Critical 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. There have been no material changes in the Company’s critical accounting policies, judgments and estimates, including assumptions or estimation techniques utilized, as compared to those disclosed in the Company’s most recent Annual Report on Form 10-K.

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 methodologies including an income approach and a market approach. The income approach calculates cash flows to a potential acquirer based on the anticipated financial results assuming a change in control transaction. The market approach includes a comparison of pricing multiples in recent acquisitions of similar companies and applies these multiples to the Company. The Company tested the goodwill as of December 31, 2009 and determined that it is not impaired. There were no triggering events in the first nine months of 2010 that would cause the Company to do an interim valuation.

Results of Operations

(Third Quarter 2010 Compared to Third Quarter 2009)

Net Income

Net income for the third quarter of 2010 was $4.9 million, compared to net income of $2.0 million for the same period in 2009. Net income available to common shareholders was $3.3 million compared to net income of $1.1 million for the same period last year. Diluted earnings per share was $0.14 for the third quarter of 2010, compared to diluted earnings per share of $0.05 per share for the same period last year. As previously reported, the Company repaid $20.0 million of the outstanding $59.0 million in preferred stock to the U.S. Department of the Treasury under the Capital Purchase Program in the third quarter of 2010. In doing so, a non-cash charge of $898,000 was recorded, reflecting the acceleration of the preferred stock discount accretion.

The increase in net income in the third quarter of 2010 compared to the same period in 2009 was due primarily to a reduction in the cost of interest bearing liabilities. Additionally, third quarter 2009 results were impacted by $709,000 in losses on leasing related assets compared to gains of $312,000 for the third quarter of 2010.

 

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Net Interest Income

Net interest income on a tax equivalent basis for the third quarter of 2010 was $25.3 million, which was $1.9 million, or 8%, above the $23.3 million net interest income earned in the third quarter of 2009. The net interest margin increased from 3.62% in the third quarter of 2009 to 3.93% in the third quarter of 2010, primarily as a result of a 66 basis point reduction in the cost of interest-bearing liabilities, which was partially offset by a 25 basis point decline in the yield on interest-earning 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%.

 

     For the three months ended,
September 30, 2010
    For the three months ended,
September 30, 2009
 
      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)

   $ 1,976,248      $ 27,670         5.55   $ 1,982,700      $ 28,633         5.73

Taxable investment securities

     443,156        3,107         2.80     456,735        3,775         3.31

Tax-exempt securities

     63,329        762         4.81     64,733        846         5.23

Federal funds sold (B)

     63,824        42         0.26     49,964        32         0.26

Total interest-earning assets

     2,546,557        31,581         4.93     2,554,132        33,286         5.18

Noninterest-earning assets:

              

Allowance for loan and lease losses

     (28,565          (26,419     

Other assets

     263,741                         243,645                    

TOTAL ASSETS

   $ 2,781,733                       $ 2,771,358                    

Liabilities and Stockholders’ Equity

              

Interest-bearing liabilities:

              

Savings accounts

   $ 319,438      $ 141         0.18   $ 306,449      $ 336         0.43

Interest-bearing transaction accounts

     1,082,769        1,859         0.68     928,082        2,222         0.95

Time deposits

     452,129        1,584         1.40     600,638        4,003         2.67

Borrowings

     282,386        2,740         3.88     327,607        3,407         4.16

Total interest-bearing liabilities

     2,136,722        6,324         1.18     2,162,776        9,968         1.84

Noninterest-bearing liabilities:

              

Demand deposits

     364,075             322,337        

Other liabilities

     12,641             18,957        

Stockholders’ equity

     268,295                         267,288                    

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,781,733                       $ 2,771,358                    

Net interest income/spread

       25,257         3.74       23,318         3.33

Tax equivalent basis adjustment

             267                         296            

NET INTEREST INCOME

           $ 24,990                       $ 23,022            

Net interest margin (C)

                      3.93                      3.62
  (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 $33.3 million in the third quarter of 2009 to $31.6 million in the third quarter of 2010, a decrease of $1.7 million, or 5%. The decrease in interest income was due to a 25 basis point decrease in the yield on interest earning assets, as a result of the declining rate environment. The yield on average loans and leases at 5.55% in the third quarter of 2010 was 18 basis points lower than the third quarter of 2009. The yield on average investment securities decreased by 49 basis points to 3.06% in the third quarter of 2010.

Total interest expense decreased from $10.0 million in the third quarter of 2009 to $6.3 million in the third quarter

 

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of 2010, a decrease of $3.6 million, or 37%. The cost of average interest-bearing liabilities decreased from 1.84% in 2009 to 1.18% in 2010. The decrease in yield was due to the declining rate environment along with a change in the mix of interest-bearing liabilities. Average rates paid on interest-bearing liabilities declined in all categories. Savings and interest-bearing transaction accounts as a percent of interest-bearing liabilities increased from 57% in the third quarter of 2009 to 66% in the third quarter of 2010. Time deposits as a percent of interest-bearing liabilities declined from 28% in the third quarter of 2009 to 21% in the third quarter of 2010 as customers preferred to keep their deposits in short-term transaction accounts in the current low rate environment. Average borrowings decreased from $327.6 million in 2009 to $282.4 million in 2010, as deposit growth outpaced loan and lease growth and because of prepayments of long-term debt since the third quarter of 2009. Savings and interest-bearing deposits typically pay lower rates than time deposits and long-term borrowings.

Provision for Loan and Lease Losses

In determining the provision for loan and lease losses, management considers national and local economic conditions; trends in the portfolio including orientation to specific loan types or industries; experience, ability and depth of lending management in relation to the complexity of the portfolio; adequacy and adherence to policies, procedures and practices; levels and trends in delinquencies, impaired loans and leases; net charge-offs, and the results of independent third party loan and lease review.

In the third quarter of 2010, a $4.9 million provision for loan and lease losses was recorded compared to a $4.7 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, value of the underlying assets and in the case of recourse transactions, the financial strength of the originator (servicer).

During the third quarter of 2010, the Company charged off loans of $5.9 million and recovered $497,000 in previously charged off loans and leases compared to $5.6 million and $667,000, respectively, during the same period in 2009. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income increased $2.5 million, or 71%, to $6.1 million in the third quarter of 2010 compared to the third quarter of 2009. The increase in noninterest income was due primarily to gains on sales of investments which totaled $1.7 million in the third quarter of 2010 compared to no gains or losses in the third quarter of 2009 and gains on leasing related assets, which were $312,000 in the third quarter of 2010 compared to losses of $709,000 in the third quarter of 2009. In the third quarter of 2010, our gains on leasing related assets includes gains from payoffs in excess of the lower of cost or market valuation and sales of held for sale leases, and gains on sales of other repossessed assets. In the third quarter of 2009, Lakeland recorded $792,000 in losses on sales of leases held for sale. Commissions and fees totaled $965,000 in the third quarter of 2010 and was $80,000 or 8% lower than the same period last year due primarily to reduced loan activity. Other income at $77,000 was $49,000 lower than the same period last year due primarily to losses on fixed assets relating to the implementation of the Company’s new logo and brand identity.

Noninterest Expense

Noninterest expense totaling $19.0 million increased $1.9 million in the third quarter of 2010 from the third quarter of 2009. Included in noninterest expense in the third quarter of 2010 was a $1.8 million fee on the prepayment of $30.0 million in long-term debt, at an average rate of 5.02%. Salary and benefit expense increased by $528,000 or 6% to $9.1 million due primarily to normal salary increases and increases in hospital and medical benefit expenses. Stationary, supplies and postage at $360,000 in the third quarter decreased $34,000 from the third quarter of 2009 due primarily to improved management of expenses and a reduction in postage as a result of the implementation of electronic statement delivery. Marketing expense at $511,000 decreased $156,000, or 23%, due primarily to the timing of media expenses. Collection expense at $188,000 and other real estate and repossessed asset expense at $119,000 decreased $217,000, or 54%, and $14,000, or 11%, respectively, due to decreased leasing related expenses. Legal expense at $411,000 increased $58,000 in the third quarter of 2010 compared to the same period in 2009 as a result of increased workout expenses related to non-

 

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performing loans and leases. Other expenses at $2.4 million was $135,000 higher than the same period last year due primarily to losses incurred as a result of fraudulent debit card activity totaling $119,000. The Company’s efficiency ratio, a non-GAAP financial measure, was 56.40% in the third quarter of 2010, compared to 62.07% for the same period last year. The Company uses this ratio because it believes that the ratio provides a good comparison of period-to-period performance and because the ratio is widely accepted in the banking industry. The following table shows the calculation of the efficiency ratio:

 

     For the three months ended
September 30,
 
     2010     2009  
   
     (dollars in thousands)  

Calculation of efficiency ratio

    

Total non-interest expense

   $ 18,951      $ 17,077   

Less:

    

Amortization of core deposit intangibles

     (265     (265

Other real estate owned and other repossessed asset expense

     (119     (133

Long-term debt prepayment fee

     (1,835       
   

Non-interest expense, as adjusted

   $ 16,732      $ 16,679   
   

Net interest income

   $ 24,990      $ 23,022   

Noninterest income

     6,089        3,554   
   

Total revenue

     31,079        26,576   

Plus: Tax-equivalent adjustment on municipal securities

     267        296   

Less: gains on investment securities

     (1,681       
   

Total revenue, as adjusted

   $ 29,665      $ 26,872   
   

Efficiency ratio

     56.40     62.07
   

Income Taxes

The Company’s effective tax rate was 33.0% in the third quarter of 2010, compared to 57.9% in the third quarter of 2009.

(Year-to-Date 2010 Compared to Year-to-Date 2009)

Net Income (Loss)

Net income for the first nine months of 2010 was $14.2 million, compared to net loss of ($7.5) million for the same period in 2009. Net income available to common shareholders was $10.8 million in the first nine months of 2010 compared to losses of ($9.8) million in the first nine months of 2009. Diluted earnings per share was $0.45 for the first nine months of 2010, compared to a loss per share of ($0.42) in the first nine months of 2009. The increase in net income results from the decrease in the provision for loan and lease losses from $45.2 million in the first nine months of 2009 to $14.7 million in the first nine months of 2010.

Net Interest Income

Net interest income on a tax equivalent basis for the first nine months of 2010 was $75.3 million, a $6.0 million or 9% increase from the $69.3 million earned in the first nine months of 2009. The net interest margin increased from 3.68% in

 

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the first nine months of 2009 to 3.96% in the first nine months of 2010, primarily as a result of a 74 basis point reduction in the cost of interest-bearing liabilities, which was partially offset by a 36 basis point decline in the yield on interest-earning 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%.

CONSOLIDATED STATISTICS ON A TAX EQUIVALENT BASIS

 

     For the nine months ended,
September 30, 2010
    For the nine months ended,
September 30, 2009
 
      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)

   $ 1,994,922      $ 83,971         5.63   $ 2,010,594      $ 87,931         5.85

Taxable investment securities

     423,589        9,099         2.86     392,892        10,566         3.59

Tax-exempt securities

     62,221        2,326         4.98     66,103        2,635         5.32

Federal funds sold (B)

     60,122        110         0.24     46,097        89         0.26
   

Total interest-earning assets

     2,540,854        95,506         5.02     2,515,686        101,221         5.38

Noninterest-earning assets:

              

Allowance for loan and lease losses

     (27,474          (25,234     

Other assets

     255,146             228,751        
   

TOTAL ASSETS

   $ 2,768,526           $ 2,719,203        
   

Liabilities and Stockholders’ Equity

              

Interest-bearing liabilities:

              

Savings accounts

   $ 318,078      $ 476         0.20   $ 302,376      $ 1,300         0.57

Interest-bearing transaction accounts

     1,069,720        6,215         0.78     870,424        6,766         1.04

Time deposits

     467,052        5,166         1.47     620,001        13,403         2.88

Borrowings

     280,942        8,329         3.95     333,835        10,433         4.17
   

Total interest-bearing liabilities

     2,135,792        20,186         1.26     2,126,636        31,902         2.00
   

Noninterest-bearing liabilities:

              

Demand deposits

     348,527             308,878        

Other liabilities

     12,591             17,048        

Stockholders’ equity

     271,616             266,641        
   

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $  2,768,526           $  2,719,203        
   

Net interest income/spread

       75,320         3.76       69,319         3.38

Tax equivalent basis adjustment

       814             922      
   

NET INTEREST INCOME

     $ 74,506           $ 68,397      
   

Net interest margin (C)

          3.96          3.68
   
  (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 $101.2 million in the first nine months of 2009 to $95.5 million in 2010, a decrease of $5.7 million, or 6%. The decrease in interest income was due primarily to a 36 basis point decrease in the average yield earned on interest earning assets, which resulted from the decline in rates along with a lower percentage of earning assets being deployed in loans and leases. Average loans and leases totaling $1.99 billion in the first nine months of 2010 decreased $15.7 million from the first nine months of 2009 resulting primarily from a decline in the Company’s lease portfolio. Average investment securities totaling $485.8 million in the first nine months of 2010 increased $26.8 million. Loans and leases typically earn higher yields than investment securities.

Total interest expense decreased from $31.9 million in the first nine months of 2009 to $20.2 million in the first nine months of 2010, a decrease of $11.7 million, or 37%. Average interest-bearing liabilities increased $9.2 million, but the cost of those liabilities decreased from 2.00% in 2009 to 1.26% in 2010 for the same reasons as discussed in the quarterly

 

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comparison. Average deposits increased from $2.10 billion in the first nine months of 2009 to $2.20 billion in the first nine months of 2010, an increase of $101.7 million, or 5%. Average borrowings decreased from $333.8 million in 2009 to $280.9 million in 2010 due to the same reasons discussed above in the quarterly comparison.

Provision for Loan and Lease Losses

The provision for loan and lease losses decreased from $45.2 million for the first nine months of 2009 to $14.7 million for the first nine months of 2010. In 2009, the Company had a $45.2 million loan and lease loss provision which resulted from continued charge-offs in the Company’s leasing portfolio, increases in non-performing loans in its commercial portfolio and the Company’s decision to reduce the exposure in its leasing portfolio by designating certain lease pools as held for sale. The Company’s decision to sell designated lease pools resulted in mark-to-market adjustments totaling $22.1 million as well as additional net charge-offs in the leasing portfolio of $19.3 million in the first nine months of 2009.

During the first nine months of 2010, the Company charged off loans and leases of $14.9 million and recovered $1.8 million in previously charged off loans and leases compared to $47.8 million and $1.7 million, respectively, during the same period in 2009. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income increased $2.8 million to $14.8 million for the first nine months of 2010 compared to the first nine months of 2009. Service charges on deposits decreased $508,000, or 6% to $7.6 million due primarily to reduced overdraft fees collected. Gains on investment securities were $1.7 million for the first nine months of 2010, compared to $353,000 for the first nine months of 2009, while gains on leasing related assets totaled $1.2 million compared to losses of $1.1 million in 2009. Income on bank owned life insurance decreased $326,000 to $1.1 million as the Company received insurance proceeds of $486,000 on a bank owned life insurance policy in the second quarter of 2009. Other income increased $151,000 to $442,000 for the first nine months of 2010 compared to the same period in 2009 due primarily to a gain of $181,000 recorded on the sale of a former branch office building

Noninterest Expense

For the first nine months of 2010, noninterest expense was $52.8 million, compared to $53.5 million in 2009, a decrease of $643,000, or 1%. Included in noninterest expenses in the first nine months of 2010 was the $1.8 million fee on the prepayment of long-term debt as previously mentioned in the quarterly comparison. FDIC insurance expense at $2.8 million decreased by $1.7 million, as the Company paid an industry-wide special FDIC assessment in the second quarter of 2009 of $1.2 million. Marketing expense at $1.7 million decreased $295,000, or 15%, due to the same reasons discussed in the quarterly comparison. Collection expense at $495,000 and other real estate and repossessed asset expense at $354,000 decreased $792,000, or 62%, and $563,000, or 61%, respectively, due to decreased leasing related expenses. Legal expense at $1.2 million increased $521,000 in the first nine months of 2010 compared to the same period in 2009 due to the same reasons discussed in the quarterly comparison. Other expenses decreased by $598,000 to $6.8 million in the first nine months of 2010 primarily as a result of a $704,000 expense that the Company recorded in the first nine months of 2009 relating to the pretax payout to beneficiaries of the previously mentioned life insurance proceeds. The Company’s efficiency ratio was 56.40% in the first nine months of 2010, compared to 63.99% for the same period last year. The following table shows the calculation of the efficiency ratio:

 

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     For the nine months ended
September 30,
 
     2010     2009  
   
     (dollars in thousands)  

Calculation of efficiency ratio

    

Total non-interest expense

   $ 52,838      $ 53,481   

Less:

    

Amortization of core deposit intangibles

     (796     (796

Other real estate owned and other repossessed asset expense

     (354     (917

Long-term debt prepayment fee

     (1,835       
   

Non-interest expense, as adjusted

   $ 49,853      $ 51,768   
   

Net interest income

   $ 74,506      $ 68,397   

Noninterest income

     14,751        11,937   
   

Total revenue

     89,257        80,334   

Plus: Tax-equivalent adjustment on municipal securities

     814        922   

Less: gains on investment securities

     (1,682     (353
   

Total revenue, as adjusted

   $ 88,389      $ 80,903   
   

Efficiency ratio

     56.40     63.99
   

Income Taxes

The effective tax rate for the first nine months of 2010 was 34.5% compared to 58.9% for the first nine months of 2009. The Company’s effective tax rate was 58.9% 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. Tax advantaged income includes tax-exempt securities income and income on bank owned life insurance policies.

Financial Condition

The Company’s total assets increased $45.5 million from $2.72 billion at December 31, 2009, to $2.77 billion at September 30, 2010. Declines in loans and leases were offset by increases in investment securities. Total deposits increased 4%, with non-interest bearing transaction accounts increasing 17%. In the third quarter of 2010, the Company prepaid $30.0 million of its Federal Home Loan Bank debt that had an average rate of 5.02% and incurred a prepayment penalty of $1.8 million. At the same time the Company also sold $71.1 million in investment securities for a gain of $1.7 million.

Loans and Leases

Gross loans and leases, including leases held for sale, at $1.98 billion decreased by $30.0 million from December 31, 2009. The decrease in gross loans and leases is primarily due to leases decreasing $41.0 million, or 34%, from $120.5 million at December 31, 2009 to $79.5 million (including $2.0 million held for sale) on September 30, 2010. Excluding leases, loans increased $11.0 million from December 31, 2009, or 1%, due to low loan demand. Growth in mortgages of $23.7 million, or 6%, and in commercial loans secured by real estate of $30.0 million, or 3%, offset declines in construction loans of $38.8 million, or 33.2%, and in home equity and consumer installment loans of $8.5 million, or 3%. 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 restructured loans and leases and other real estate owned on the dates presented:

 

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(in thousands)           September 30,
2010
    September 30,
2009
    December 31,
2009
 
           

Commercial secured by real estate

      $ 20,766      $ 27,988      $ 25,798   

Commercial and Industrial

        2,641        2,590        2,047   

Leases

        5,453        4,624        3,511   

Home equity and consumer

        2,653        1,760        1,890   

Real estate—mortgage

        11,960        5,212        5,465   
           

Total Non-accrual loans and leases

      $ 43,473      $ 42,174      $ 38,711   

Other real estate and other repossessed assets

        1,745        1,157        1,864   
           

TOTAL NON-PERFORMING ASSETS

      $ 45,218      $ 43,331      $ 40,575   
           

Non-performing assets as a percent of total assets

        1.63     1.56     1.49
           

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

      $ 263      $ 2,261      $ 1,437   
           

Troubled debt restructurings, still accruing

      $ 6,406      $ 2,562      $ 3,432   
           

Non-performing assets increased from $40.6 million on December 31, 2009, or 1.49% of total assets, to $45.2 million, or 1.63% of total assets, on September 30, 2010. Declines in commercial non-accruals were offset by increases in non-accruals in leases and residential mortgages. Leases on non-accrual increased $1.9 million from December 31, 2009 to $5.5 million on September 30, 2010. Non-accrual leases includes $3.7 million related to one lessee who has named the Company and other unrelated parties in a complaint in connection with the leases. For more information, see Legal Proceedings in Part II Item 1 of this Quarterly Report on Form 10-Q. Residential mortgages on non-accrual increased $6.5 million from December 31, 2009 to $12.0 million on September 30, 2010 resulting from deterioration in the economy and the continuing high unemployment rate in the Company’s market area. Commercial loan non-accruals at September 30, 2010 included 4 loan relationships with balances over $1.0 million, totaling $6.7 million, and 7 loan relationships between $500,000 and $1.0 million, totaling $5.3 million.

Loans and leases past due ninety days or more and still accruing at September 30, 2010 decreased $1.2 million to $263,000 from $1.4 million on December 31, 2009. 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, 2010, the Company had $6.4 million in loans that were troubled debt restructurings and still accruing interest income. Troubled debt restructurings are those loans where the Company has granted concessions to the borrower in payment terms, either in rate or in term, as a result of the financial condition of the borrower. The increase in restructured loans compared to prior periods results from a deteriorating economy impacting commercial real estate values and continuing high unemployment.

On September 30, 2010, the Company had $29.8 million in impaired loans and leases (consisting primarily of non-accrual loans and leases) compared to $31.4 million at year-end 2009. 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 and is based on the fair value of the underlying collateral for the remaining loans and leases. Based on such evaluation, $1.6 million has been allocated as a portion of the allowance for loan and lease losses for impairment at September 30, 2010. At September 30, 2010, the Company also had $33.3 million in loans and leases that were rated substandard that were not classified as non-performing or impaired.

There were no loans and leases at September 30, 2010, other than those designated non-performing, impaired or substandard, where the Company was aware of any credit conditions of any borrowers or obligors that would indicate a strong possibility of the borrowers not complying with present terms and conditions of repayment and which may result in such loans and leases being included as non-accrual, past due or renegotiated at a future date. The following table sets forth for the periods presented, the historical relationships among the allowance for loan and lease losses, the provision for loan and lease losses, the amount of loans and leases charged-off and the amount of loan and lease recoveries:

 

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(dollars in thousands)    Nine months
ended
September 30,
2010
    Nine months
ended
September 30,
2009
    Year ended
December 31,
2009
 
        

Balance of the allowance at the beginning of the year

   $ 25,563      $ 25,053      $ 25,053   
        

Loans and leases charged off:

      

Commercial secured by real estate

     7,267        872        2,724   

Commercial and Industrial

     2,275        2,064        2,632   

Leases

     3,236        20,706        22,972   

Charge down of leases held for sale(1)

            22,122        22,122   

Home Equity and consumer

     1,911        1,866        2,499   

Real estate—mortgage

     188        189        433   
        

Total loans charged off

     14,877        47,819        53,382   
        

Recoveries:

      

Commercial secured by real estate

     126        61        135   

Commercial and Industrial

     11        93        134   

Leases

     1,283        1,413        1,777   

Home Equity and consumer

     369        171        231   

Real estate—mortgage

     6                 
        

Total Recoveries

     1,795        1,738        2,277   
        

Net charge-offs:

     13,082        46,081        51,105   

Provision for loan and lease losses

     14,737        45,177        51,615   
        

Ending balance

   $ 27,218      $ 24,149      $ 25,563   
        

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

      

including charge down of leases held for sale

     0.88     3.06     2.55

excluding charge down of leases held for sale

     0.88     1.59     1.44

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

     1.37     1.23     1.27

(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 consultants.

 

   

The establishment of reserves for pools of homogeneous types of loans and leases not subject to specific review, including non-performing 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

 

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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.

The allowance for loan and lease losses as a percent of total loans increased to 1.37% of total loans on September 30, 2010, compared to 1.27% as of December 31, 2009 as a result of the increase in non-performing loans. Management believes, based on appraisals and estimated selling costs, that its non-performing loans and leases are adequately secured and reserves on these loans are adequate.

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, 2010. 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 the Notes to Consolidated Financial Statements contained in this Form 10-Q. Total investment securities increased from $457.4 million on December 31, 2009 to $508.6 million on September 30, 2010, an increase of $51.3 million, or 11%, which resulted from increased liquidity due to increased deposits and a decline in loans and leases.

Deposits

Total deposits increased from $2.16 billion on December 31, 2009 to $2.23 billion on September 30, 2010, an increase of $77.6 million, or 4%. Noninterest bearing deposits increased $56.5 million, or 17%, to $379.6 million, resulting primarily from an increase in commercial noninterest bearing deposits while time deposits decreased $23.7 million or 5% to $442.1 million.

Liquidity

Liquidity relates to the Company’s ability to meet the borrowing and cash withdrawal requirements of its customers, to meet current and planned expenditures and to satisfy its debt obligations. Lakeland funds its liquidity needs through its net income, through generating deposits, through sales of its available for sale securities, through loan repayments, and through use of overnight credit lines. Lakeland can also generate funds by utilizing long-term debt or securities sold through agreements to repurchase that would be collateralized by security or mortgage collateral. Management and the Board monitor the Company’s liquidity through the Asset Liability Management Committee (the “ALCO”) which monitors the Company’s compliance to certain regulatory ratios and various other liquidity guidelines.

The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statement for the nine months ended September 30, 2010 follows.

Cash and cash equivalents, totaling $96.6 million on September 30, 2010, increased $37.9 million from December 31, 2009. Operating activities provided $40.8 million in net cash. Investing activities used $30.6 million in net cash, primarily reflecting the purchase of securities. Financing activities provided $27.7 million in net cash, reflecting the increase in deposits of $77.6 million, partially offset by a decline in long term debt of $30.0 million, the redemption of $20.0 million in preferred stock and dividends paid of $5.2 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.

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of September 30, 2010. Interest on subordinated debentures and long-term borrowed funds is calculated based on current contractual interest rates.

 

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(dollars in thousands)    Total      Within
one year
     After one
but within
three years
     After three
but within
five years
    

After

five
years

 

Minimum annual rentals or noncancellable operating leases

     $14,616         $1,802         $3,116         $3,712         $5,986   

Benefit plan commitments

     5,165         185         370         335         4,275   

Remaining contractual maturities of time deposits

     442,084         320,663         99,794         20,415         1,212   

Subordinated debentures

     77,322                                 77,322   

Loan commitments

     471,205         431,955         20,310         2,922         16,018   

Long-term debt

     115,900         900         30,000         40,000         45,000   

Interest on long-term debt*

     140,959         10,800         19,836         15,724         94,599   

Series A Preferred Stock

     39,000                                 39,000   

Interest on Series A Preferred Stock

     24,152         1,950         3,900         6,436         11,866   

Standby letters of credit

     8,667         7,729         722         21         195   
        

Total

   $ 1,339,070       $ 775,984       $ 178,048       $ 89,565       $ 295,473   
        

*Includes interest on long-term debt and subordinated debentures at a weighted rate of 4.76%.

Capital Resources

Stockholders’ equity decreased from $268.0 million on December 31, 2009 to $260.7 million on September 30, 2010, a decrease of $7.3 million, or 3%. Book value per common share increased to $9.28 on September 30, 2010 from $8.88 on December 31, 2009. The decrease in stockholders’ equity from December 31, 2009 to September 30, 2010 was primarily due to the $20.0 million redemption of preferred stock, payment of cash dividends of $3.0 million on common stock and $2.0 million on preferred stock. This was partially offset by $14.2 million in net income and a $2.7 million increase in accumulated other comprehensive income relating to an increase in market value in the Company’s available for sale securities portfolio.

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, 2010, 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, 2010 are as follows:

 

Capital Ratios:    Tier 1 Capital
to Total Average
Assets Ratio
September 30,
2010
  Tier 1 Capital
to Risk-Weighted
Assets Ratio
September 30,
2010
  Total Capital
to Risk-Weighted
Assets Ratio
September 30,
2010

The Company

   9.14%   12.44%   13.69%

Lakeland Bank

   8.66%   11.80%   13.05%

“Well capitalized” institution under FDIC Regulations

   5.00%   6.00%   10.00%

Regulatory Developments

A wide range of regulatory initiatives directed at the financial services industry have been proposed in recent months. One of those initiatives, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes the new federal Bureau of Consumer Financial Protection (the “BCFP”), and will require the BCFP and other federal agencies to implement many new rules. At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting regulations will impact the Company’s business. However, compliance with these new laws and regulations will result in additional costs, which may

 

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adversely impact the Company’s results of operations, financial condition or liquidity.

In addition to the Dodd-Frank Act, the Basel Committee on Banking Supervision (the “Basel Committee”) released a comprehensive list of proposals for changes to capital, leverage, and liquidity requirements for banks in December 2009 (commonly referred to as “Basel III”). In July 2010, the Basel Committee announced the design for its capital and liquidity reform proposals.

In September 2010, the oversight body of the Basel Committee announced minimum capital ratios and transition periods providing: (i) the minimum requirement for the Tier 1 common equity ratio will be increased from the current 2.0% level to 4.5% (to be phased in by January 1, 2015); (ii) the minimum requirement for the Tier 1 capital ratio will be increased from the current 4.0% to 6.0% (to be phased in by January 1, 2015); (iii) an additional 2.5% of Tier 1 common equity to total risk-weighted assets (to be phased in between January 1, 2016 and January 1, 2019; and (iv) a minimum leverage ratio of 3.0% (to be tested starting January 1, 2013). The proposals also narrow the definition of capital, excluding instruments that no longer qualify as Tier 1 common equity as of January 1, 2013, and phasing out other instruments over several years. It is unclear how U.S. banking regulators will define “well-capitalized” in their implementation of Basel III.

The liquidity proposals under Basel III include: (i) a liquidity coverage ratio (to become effective January 1, 2015); (ii) a net stable funding ratio (to become effective January 1, 2018); and (iii) a set of monitoring tools for banks to report minimum types of information to their regulatory supervisors.

Many of the details of the new framework related to minimum capital levels and minimum liquidity requirements in the Basel Committee’s proposals will remain uncertain until the final release is issued later this year. Implementation of the final provisions of Basel III will require implementing regulations and guidelines by U.S. banking regulators. Implementation of these new capital and liquidity requirements has created significant uncertainty with respect to the future liquidity and capital requirements for financial institutions. Therefore, we are not able to predict at this time the content of liquidity and capital guidelines or regulations that may be adopted by regulatory agencies or the impact that any changes in regulation may have on the Company and the Bank.

Non-GAAP Financial Measures

Reported amounts are presented in accordance with U.S. GAAP. The Company’s management believes that the supplemental non-GAAP information, which consists of measurements and ratios based on tangible equity and tangible assets, is utilized by regulators and market analysts to evaluate a company’s financial condition and therefore, such information is useful to investors. These disclosures should not be viewed as a substitute for financial results determined in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies.

 

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(dollars in thousands, except per share amounts)    September 30,
2010
    December 31,
2009
 
   

Calculation of tangible book value per common share

    

Total common stockholders’ equity at end of period - GAAP

     $223,360        $211,963   

Less:

    

Goodwill

     87,111        87,111   

Other identifiable intangible assets, net

     843        1,640   
   

Total tangible common stockholders’ equity at end of period - Non- GAAP

     $135,406        $123,212   
   

Shares outstanding at end of period

     24,061        23,872   
   

Book value per share - GAAP

     $9.28        $8.88   
   

Tangible book value per share - Non-GAAP

     $5.63        $5.16   
   

Calculation of tangible common equity to tangible assets

    

Total tangible common stockholders’ equity at end of period - Non- GAAP

     $135,406        $123,212   
   

Total assets at end of period

     $2,769,471        $2,723,968   

Less:

    

Goodwill

     87,111        87,111   

Other identifiable intangible assets, net

     843        1,640   
   

Total tangible assets at end of period - Non-GAAP

     $2,681,517        $2,635,217   
   

Common equity to assets - GAAP

     8.07     7.78
   

Tangible common equity to tangible assets - Non-GAAP

     5.05     4.68
   

 

     For the three months ended,            For the nine months ended,  
     September 30,
2010
    September 30,
2009
           September 30,
2010
    September 30,
2009
 
                   

Calculation of return on average tangible common equity

           

Net income (loss) - GAAP

     $4,872        $2,011           $14,191        ($7,536
              

Total average common stockholders’ equity

     223,941        $211,501           $219,431        $218,288   

Less:

           

Average goodwill

     87,111        87,111           87,111        87,111   

Average other identifiable intangible assets, net

     990        2,052           1,254        2,315   
              

Total average tangible common stockholders’ equity - Non GAAP

     $135,840        $122,338           $131,066        $128,862   
              

Return on average common stockholders’ equity - GAAP

     8.63     3.77        8.65     -4.62
              

Return on average tangible common stockholders’ equity - Non-GAAP

     14.23     6.52        14.48     -7.82
              

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 and economic value at risk models. 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 income 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

 

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fair value of the net present value of assets, liabilities and off-balance-sheet items. Changes in estimates and assumptions made for interest rate sensitivity modeling could have a significant impact on projected results and conclusions. These assumptions could include prepayment rates, sensitivity of non-maturity deposits and other similar assumptions. Therefore, if our assumptions should change, this technique may not accurately reflect the impact of general interest rate movements on the Company’s net interest income or net portfolio value.

The starting point (or “base case”) for the following table is an estimate of the following year’s net interest income assuming that both interest rates and the Company’s interest-sensitive assets and liabilities remain at period-end levels. The net interest income estimated for the next twelve months (the base case) is $98.9 million. The information provided for net interest income assumes that changes in interest rates of plus 200 basis points and minus 200 basis points change gradually in equal increments (“rate ramp”) over the twelve month period.

 

     Changes in interest rates
Rate Ramp    +200 bp   +100 bp   -100 bp   -200 bp

Asset/Liability Policy Limit

   -5.0%       -5.0%

September 30, 2010

   -2.4%   -0.8%   -2.4%   -3.2%

December 31, 2009

   -3.0%   -1.4%   -1.8%   -2.7%

The base case for the following table is an estimate of the Company’s net portfolio value for the periods presented using current discount rates, and assuming the Company’s interest-sensitive assets and liabilities remain at period-end levels. The net portfolio value at September 30, 2010 (the base case) was $333.0 million. The information provided for the net portfolio value assumes fluctuations or “rate shocks” of plus 200 basis points and minus 200 basis points for changes in interest rates as shown in the table below. Rate shocks assume that current interest rates change immediately.

 

     Changes in interest rates
Rate Shock    +200 bp   +100 bp   -100 bp   -200 bp

Asset/Liability Policy Limit

   -25.0%       -25.0%

September 30, 2010

   -1.6%   1.7%   -7.4%   -15.4%

December 31, 2009

   -5.2%   -0.7%   -2.4%   -9.9%

The information set forth in the above tables 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, 2009.

ITEM 4. Controls and Procedures

(a)    Disclosure controls and procedures. As of the end of the Company’s most recently completed fiscal quarter 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

A complaint, dated February 24, 2010, was filed by the International Association of Machinists and Aerospace Workers, as plaintiff, against the Company and other unrelated parties in the Circuit Court of Maryland for Prince George’s County. The plaintiff alleges fraudulent conduct in connection with certain equipment leases it entered into by a vendor and lease broker not affiliated with the Company. Certain of these leases were subsequently assigned to Lakeland resulting in the plaintiff amending its complaint to include all parties that were assignees. The Company believes that the claims asserted against it are without merit.

Other than as described above, there are no pending legal proceedings involving the Company or Lakeland other than those arising in the normal course of business. Management does not anticipate that the potential liability, if any, arising out of such legal proceedings 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 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, 2009.

The recently enacted Dodd-Frank Act may adversely impact the Company’s results of operations, financial condition or liquidity.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), was signed into law by President Obama. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes the new federal Bureau of Consumer Financial Protection (the “BCFP”), and will require the BCFP and other federal agencies to implement many new and significant rules and regulations. At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting rules and regulations will impact the Company’s and Lakeland’s business. Compliance with these new laws and regulations will likely result in additional costs, and may adversely impact the Company’s results of operations, financial condition or liquidity.

The recent proposed changes by the Basel Committee may adversely impact the Company’s results of operations, financial condition or liquidity.

In September 2010, the Basel Committee on Banking Supervision announced proposed new requirements related to capital and liquidity. For further discussion on the proposed new requirements, see the “Regulatory Developments” section in The Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    Not Applicable
Item 3.    Defaults Upon Senior Securities    Not Applicable
Item 4.    Reserved   
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 8, 2010

 

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