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

Form 10-Q
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended                                     June 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 July 30, 2010 there were 24,036,709 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 - June 30, 2010 (unaudited) and December 31, 2009

   1
 

Consolidated Statements of Operations - Unaudited Three Months and Six Months ended  June 30, 2010 and 2009

   2
 

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income - Unaudited Six Months ended June 30, 2010 and 2009

   3
 

Consolidated Statements of Cash Flows - Unaudited Six Months ended June 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

   16
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

   28
Item 4.  

Controls and Procedures

   29
  Part II    Other Information   
Item 1.  

Legal Proceedings

   30
Item 1A.  

Risk Factors

   30
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

   30
Item 3.  

Defaults Upon Senior Securities

   30
Item 4.  

Reserved

   30
Item 5.  

Other Information

   30
Item 6.  

Exhibits

   30
Signatures    31
  The Securities and Exchange Commission maintains a web site which contains reports, proxy and information statements and other information relating to registrants that file electronically at the address: http:/ / www.sec.gov.   


Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

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

Cash

   $51,543         $31,869   

Federal funds sold and Interest-bearing deposits due from banks

   1,416         26,794   
   

Total cash and cash equivalents

   52,959         58,663   

Investment securities available for sale, at fair value

   439,968         375,530   

Investment securities held to maturity; fair value of $75,134
in 2010 and $84,389 in 2009

   72,186         81,821   

Loans and leases, net of deferred costs

   1,992,256         2,009,721   

Leases held for sale

   3,233         7,314   

Less: allowance for loan and lease losses

   27,728         25,563   
   

Net loans

   1,967,761         1,991,472   

Premises and equipment - net

   28,082         29,196   

Accrued interest receivable

   8,874         8,943   

Goodwill

   87,111         87,111   

Other identifiable intangible assets, net

   1,109         1,640   

Bank owned life insurance

   42,491         41,720   

Other assets

   38,016         47,872   
   

TOTAL ASSETS

   $2,738,557         $2,723,968   
   

LIABILITIES

                 

Deposits:

       

Noninterest bearing

   $358,054         $323,175   

Savings and interest-bearing transaction accounts

   1,352,373         1,368,272   

Time deposits under $100 thousand

   266,891         283,512   

Time deposits $100 thousand and over

   192,827         182,228   
   

Total deposits

   2,170,145         2,157,187   

Federal funds purchased and securities sold under
agreements to repurchase

   54,176         63,672   

Long-term debt

   145,900         145,900   

Subordinated debentures

   77,322         77,322   

Other liabilities

   13,152         11,901   
   

TOTAL LIABILITIES

   2,460,695         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
59,000 shares at June 30, 2010 and December 31, 2009

   56,350         56,023   

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

   258,567         259,521   

Accumulated deficit

   (29,841      (34,961

Treasury stock, at cost, 713,171 shares at June 30, 2010 and 868,428 at December 31, 2009

   (9,845      (11,940

Accumulated other comprehensive income (loss)

   2,631         (657
   

TOTAL STOCKHOLDERS’ EQUITY

   277,862         267,986   
   

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $2,738,557         $2,723,968   
   

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

     For the three months
ended June 30,
    For the six months
ended June 30,
 
      2010    2009     2010    2009  
   (In thousands, except per share data)   

INTEREST INCOME

          

Loans, leases and fees

   $28,049    $29,156      $56,301    $59,298   

Federal funds sold and interest-bearing deposits with banks

   40    31      68    57   

Taxable investment securities

   3,009    3,372      5,992    6,791   

Tax-exempt investment securities

   497    594      1,017    1,163   
   

TOTAL INTEREST INCOME

   31,595    33,153      63,378    67,309   
   

INTEREST EXPENSE

          

Deposits

   3,868    7,149      8,273    14,908   

Federal funds purchased and securities sold under agreements to repurchase

   31    29      68    67   

Long-term debt

   2,767    3,492      5,521    6,959   
   

TOTAL INTEREST EXPENSE

   6,666    10,670      13,862    21,934   
   

NET INTEREST INCOME

   24,929    22,483      49,516    45,375   

Provision for loan and lease losses

   5,001    34,083      9,880    40,459   
   

NET INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN AND LEASE LOSSES

   19,928    (11,600   39,636    4,916   

NONINTEREST INCOME

          

Service charges on deposit accounts

   2,500    2,699      4,948    5,366   

Commissions and fees

   833    873      1,718    1,696   

Gains (losses) on investment securities

   0    (532   1    353   

Income on bank owned life insurance

   385    818      771    1,149   

Gains (losses) on leasing related assets

   555    (529   859    (344

Other income

   280    82      365    164   
   

TOTAL NONINTEREST INCOME

   4,553    3,411      8,662    8,384   
   

NONINTEREST EXPENSE

          

Salaries and employee benefits

   8,996    8,739      17,899    17,322   

Net occupancy expense

   1,636    1,597      3,431    3,471   

Furniture and equipment

   1,221    1,220      2,391    2,484   

Stationery, supplies and postage

   386    401      812    821   

Marketing expense

   648    784      1,202    1,341   

Core deposit intangible amortization

   266    266      531    531   

FDIC insurance expense

   964    2,416      1,897    3,316   

Collection expense

   159    377      307    882   

Legal expense

   423    192      764    301   

Other real estate and repossessed asset expense

   198    665      235    785   

Other expenses

   2,210    2,997      4,418    5,151   
   

TOTAL NONINTEREST EXPENSE

   17,107    19,654      33,887    36,405   
   

Income (loss) before provision for income taxes

   7,374    (27,843   14,411    (23,105

Income tax expense (benefit)

   2,621    (15,121   5,092    (13,558
   

NET INCOME (LOSS)

   $4,753    ($12,722   $9,319    ($9,547
   

Dividends on Preferred Stock and Accretion

   904    885      1,802    1,424   
   

Net Income (Loss) Available to Common Stockholders

   $3,849    ($13,607   $7,517    ($10,971
   

PER SHARE OF COMMON STOCK

          

Basic earnings (loss)

   $0.16    ($0.58   $0.31    $(0.46
   

Diluted earnings (loss)

   $0.16    ($0.58   $0.31    $(0.46
   

Dividends

   $0.05    $0.10      $0.10    $0.20   
   

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Six Months ended June 30, 2010

 

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

BALANCE DECEMBER 31, 2009

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

Comprehensive income:

              

Net Income

                  9,319                9,319   

Other comprehensive income, net of tax

                            3,288      3,288   
                  

Total comprehensive income

               12,607   
                  

Preferred dividends

                  (1,475             (1,475

Accretion of discount

             327      (327               

Stock based compensation

        277                          277   

Issuance of restricted stock awards

        (476             476             

Issuance of stock to dividend reinvestment and stock purchase plan

        (286        (415   731           30   

Exercise of stock options, net of excess tax benefits

        (469             888           419   

Cash dividends, common stock

                  (1,982             (1,982
   

BALANCE June 30, 2010 (UNAUDITED)

   24,740,564      $258,567      $56,350      ($29,841   ($9,845   $2,631      $277,862   
   
Six Months ended June 30, 2009           
             Accumulated     
   Common stock      Series A          Other     
     Number of
Shares
  
  
  Amount      Preferred
Stock
  
  
  Accumulated
deficit
  
  
  Treasury
Stock
  
  
  Comprehensive
Loss
  
  
  Total   
   (dollars in thousands)   

BALANCE DECEMBER 31, 2008

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

Comprehensive loss:

              

Net loss

                  (9,547             (9,547

Other comprehensive income, net of tax

                            380      380   
                  

Total comprehensive loss

               (9,167
                  

Preferred Stock issued

             58,838                     58,838   

Preferred dividends

                  (1,189             (1,189

Accretion of discount

             235      (235               

Common stock warrant

        3,345      (3,345                    

Stock based compensation

        216                          216   

Issuance of restricted stock awards

        (199             199             

Issuance of stock to dividend reinvestment

and stock purchase plan

        (598        (843   1,441             

Exercise of stock options, net of excess tax benefits

        (7             14           7   

Cash dividends, common stock

                  (3,903             (3,903
   

BALANCE June 30, 2009 (UNAUDITED)

   24,740,564      $259,808      $55,728      ($34,963   ($12,842   ($1,988   $265,743   
   

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     For the six months ended
June 30,
 
      2010           2009  
     (dollars in thousands)   

CASH FLOWS FROM OPERATING ACTIVITIES

       

Net income (loss)

   $9,319         $(9,547

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

       

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

   2,115         1,386   

Depreciation and amortization

   2,065         2,186   

Provision for loan and lease losses

   9,880         40,459   

Gains on securities

   (1      (353

Gains on held for sale leases

   (309        

(Gains) losses on sales of other assets

   (426      590   

Gains on sales of premises and equipment

   (178        

Writedown of other repossessed assets

           780   

Stock-based compensation

   277         216   

(Increase) decrease in other assets

   6,670         (19,677

Increase in other liabilities

   1,269         9,780   
   

NET CASH PROVIDED BY OPERATING ACTIVITIES

   30,681         25,820   
   

CASH FLOWS FROM INVESTING ACTIVITIES

       

Proceeds from repayments on and maturity of securities:

       

Available for sale

   75,773         57,791   

Held to maturity

   14,794         15,602   

Proceeds from sales of securities:

       

Available for sale

           25,778   

Purchase of securities:

       

Available for sale

   (136,795      (207,312

Held to maturity

   (5,255      (8,995

Proceeds from sales of leases

       

Held for sale

   399         26,872   

Net (increase) decrease in loans and leases

   12,270         (17,709

Proceeds on sales of other repossessed assets

   2,216         4,377   

Capital expenditures

   (514      (1,934

Proceeds on sales of bank premises and equipment

   273           
   

NET CASH USED IN INVESTING ACTIVITIES

   (36,839      (105,530
   

CASH FLOWS FROM FINANCING ACTIVITIES

       

Net increase in deposits

   12,958         32,912   

Decrease in federal funds purchased and securities sold under agreements to repurchase

   (9,496      (14,366

Proceeds on issuance of preferred stock, net of costs

           58,838   

Exercise of stock options

   416         6   

Excess tax benefits

   3         1   

Issuance of stock to dividend reinvestment and stock purchase plan

   30           

Dividends paid

   (3,457      (4,714
   

NET CASH PROVIDED BY FINANCING ACTIVITIES

   454         72,677   
   

Net decrease in cash and cash equivalents

   (5,704      (7,033

Cash and cash equivalents, beginning of year

   58,663         49,776   
   

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $52,959         $42,743   
   

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 June 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.

Certain reclassifications have been made in the prior period consolidated financial statements to conform to the 2010 presentation.

Note 2. Stock-Based Compensation

Share-based compensation expense of $277,000 and $216,000 was recognized for the six months ended June 30, 2010 and 2009, respectively. As of June 30, 2010, there was unrecognized compensation cost of $983,000 related to unvested restricted stock; that cost is expected to be recognized over a weighted average period of approximately 2.6 years. Unrecognized compensation expense related to unvested stock options was approximately $114,000 as of June 30, 2010 and is expected to be recognized over a period of 2.3 years.

In the first half 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 six 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 half of 2010, the Company granted options to purchase 25,000 shares 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 six months of 2009.

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

 

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Table of Contents
       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

   (79,459   6.68      

Forfeited

   (6,867   14.28      

Expired

   (15,720   6.67      
    

Outstanding, June 30, 2010

   738,427      $12.99    3.72    $113,817
    

Options exercisable
at June 30, 2010

   697,736      $13.12    3.43    $113,776
    

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 second 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 six months ended June 30, 2010 and 2009 was $83,000 and $1,000, respectively. Exercise of stock options during the first six months of 2010 and 2009 resulted in cash receipts of $416,000 and $6,000, respectively.

Information regarding the Company’s restricted stock (all unvested) and changes during the six months ended June 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

   (3,451     9.26  

Forfeited

   (806     10.85  
      

Outstanding, June 30, 2010

   127,260      $ 10.75  
      

 

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Note 3. Comprehensive Income

The components of other comprehensive income are as follows:

 

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

Net unrealized gains on available for sale securities

             

Net unrealized holding gains arising during period

  $3,097   ($1,139   $1,958     $1,974      ($768   $1,206   

Less reclassification adjustment for net losses arising during the period

             (532   168      (364
           

Net unrealized gains

  $3,097   ($1,139   $1,958     $2,506      ($936   $1,570   

Change in minimum pension liability

  7   (2   5     8      (3   5   
           

Other comprehensive income, net

  $3,104   ($1,141   $1,963     $2,514      ($939   $1,575   
           
For the six months ended:   Before
  tax amount
  Tax Benefit
(Expense)
    Net of
tax amount
      Before
tax amount
    Tax Benefit
(Expense)
    Net of
tax amount
 
           
    (in thousands)       (in thousands)  

Net unrealized gains on available for sale securities

             

Net unrealized holding gains arising during period

  $5,171   ($1,892   $3,279     $995      ($396   $599   

Less reclassification adjustment for net gains arising during the period

  1        1     353      (124   229   
           

Net unrealized gains

  $5,170   ($1,892   $3,278     $642      ($272   $370   

Change in minimum pension liability

  15   (5   10     16      (6   10   
           

Other comprehensive income, net

  $5,185   ($1,897   $3,288     $658      ($278   $380   
           

Note 4. Statement of Cash Flow Information, Supplemental Information

 

     For the six months ended
June 30,
     2010    2009
    
     (in thousands)

Supplemental schedule of noncash investing and financing activities:

     

Cash paid during the period for income taxes

   $1,048    $2,813

Cash paid during the period for interest

   13,987    21,934

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

   1,202    2,811

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

      66,100

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
June 30,
    For the six months ended
June 30,
 
(In thousands except per share data)    2010    2009     2010    2009  
      

Net income (loss) available to common shareholders

   $3,849    $(13,607   $7,517    $(10,971

Less: earnings allocated to participating securities

   20         40      
            

Net income allocated to common shareholders

   3,829    (13,607   7,477    (10,971
            

Weighted average number of common shares outstanding - basic

   23,888    23,656      23,859    23,629   

Share-based plans

   76    0      20    0   
            

Weighted average number of common shares diluted

   23,964    23,656      23,879    23,629   

Basic earnings (loss) per share

   $0.16    $(0.58   $0.31    $(0.46
         

Diluted earnings (loss) per share

   $0.16    $(0.58   $0.31    $(0.46
         

Options to purchase 668,732 shares of common stock at a weighted average price of $13.62 per share were outstanding and were not included in the computation of diluted earnings per share for the quarter ended June 30, 2010 because the exercise price was greater than the average market price. Options to purchase 852,459 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 128,408 shares of restricted stock at a weighted average price of $12.16 per share were outstanding and were not included in the computation of diluted earnings per share for the quarter ended June 30, 2009 due to the net loss recorded.

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 14,282 shares of restricted stock at a weighted average price of $11.91 per share were outstanding and were not included in the computation of diluted earnings per share for the six months ended June 30, 2010 because the exercise price and the grant-date price were greater than the average market price. Options to purchase 852,459 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 128,408 shares of restricted stock at a weighted average price of $12.16 per share were outstanding and were not included in the computation of diluted earnings per share for the six months ended June 30, 2009 due to the net loss recorded.

 

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Table of Contents

Note 6. Investment Securities

 

AVAILABLE FOR SALE   June 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

  $92,797   $626   $ —      $93,423      $81,678   $74   $(271   $81,481

Mortgage-backed securities

  276,307   5,097   (191   281,213      243,118   2,304   (594   244,828

Obligations of states and political subdivisions

  20,914   459   (13   21,360      14,666   369   (33   15,002

Other debt securities

  23,131   114   (1,054   22,191      14,981   41   (1,701   13,321

Other equity securities

  21,669   370   (258   21,781      21,107   197   (406   20,898
 
  $434,818   $6,666   $(1,516   $439,968      $375,550   $2,985   $(3,005   $375,530
 
HELD TO MATURITY   June 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

  $4,995   $307   $ —      $5,302      $4,994   $307   $ —      $5,301

Mortgage-backed securities

  24,883   1,310     26,193      27,837   951   (19   28,769

Obligations of states and political subdivisions

  40,735   1,336   (26   42,045      47,412   1,383   (33   48,762

Other debt securities

  1,573   38   (17   1,594      1,578   3   (24   1,557
 
  $72,186   $2,991   $(43   $75,134      $81,821   $2,644   $(76   $84,389
 

The following table shows maturities of 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):

 

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

Due in one year or less

   $3,967    $3,979    $7,795    $7,848

Due after one year through five years

   92,279    93,113    24,891    26,053

Due after five years through ten years

   32,504    32,282    13,310    13,688

Due after ten years

   8,092    7,600    1,307    1,352
   136,842    136,974    47,303    48,941

Mortgage-backed securities

   276,307    281,213    24,883    26,193

Other equity securities

   21,669    21,781      

Total securities

   $434,818    $439,968    $72,186    $75,134
 

 

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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
June 30,
    For the six months ended
June 30,
 
     2010    2009     2010    2009  
            

Sale proceeds

   $ —    $ —      $ —    $25,778   

Gross gains

           1    993   

Gross losses

              (108

Other than temporary impairment

      (532      (532

Securities with a carrying value of approximately $364.8 million and $331.7 million at June 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 June 30, 2010 and December 31, 2009:

 

June 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

   $0    $0    $ —    $ —      0    $0    $0

Mortgage-backed securities

   $25,947    129    10,651    62      14    36,598    191

Obligations of states and political subdivisions

   3,026    13    40    0      6    3,066    13

Corporate debt securities

   0       10,901    1,054      4    10,901    1,054

Equity securities

   351    143    583    115      4    934    258
 
     $29,324    $285    $22,175    $1,231      28    $51,499    $1,516
 

HELD TO MATURITY

                       
     

U.S. government agencies

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

Mortgage-backed securities

         7         1    7   

Obligations of states and political subdivisions

         1,094    26      3    1,094    26

Other debt securities

         518    17      1    518    17
 
     $0    $0    $1,619    $43      5    $1,619    $43
 
                   
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

   0    0    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

   0    0    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
 

 

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Management has evaluated the securities in the above table and has concluded that none of the securities with 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 analysis. 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.

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.

 

     

June 30,

2010

        

December 31,

2009

     (in thousands)

Commercial loans secured by real estate

   $936,049       $918,517

Commercial and Industrial loans

   174,899       168,450

Leases

   87,936       113,160

Leases held for sale, at fair value

   3,233       7,314

Real estate-construction

   96,171       116,997

Real estate-mortgage

   389,205       374,091

Home Equity and consumer installment

   305,355       315,598
 

Total loans

   1,992,848       2,014,127
 

Plus: deferred costs

   2,641       2,908
 

Loans net of deferred costs

   $1,995,489       $2,017,035
 

Loans are considered impaired when, based on current information and events, it is probable that Lakeland will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is measured based on the present value of expected 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 June 30, 2010, December 31, 2009 and June 30, 2009:

 

Date    Investment    Valuation Allowance    Average Recorded
Investment
Year-to-date

June 30, 2010

   $32.3 million    $4.2 million    $32.0 million

December 31, 2009

   $31.4 million    $3.7 million    $25.2 million

June 30, 2009

   $27.0 million    $4.6 million    $19.9 million

 

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Interest received on impaired loans and leases may be recorded as interest income. However, if management is not reasonably certain that an impaired loan will be repaid in full, or if a specific time frame to resolve full collection cannot yet be reasonably determined, all payments received are recorded as reductions of principal. At June 30, 2010 and December 31, 2009, the Company had $15.0 million and $14.6 million, respectively, in impaired loans and leases for which there was no related allowance for loan losses. Lakeland recognized interest on impaired loans and leases of $133,000 and $4,000 in the first six months of 2010 and 2009, respectively. Interest that would have accrued had the loans and leases performed under original terms would have been $1.3 million for the first six months of 2010 and 2009.

Lakeland had leases held for sale with a fair market value of $3.2 million as of June 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 types of collateral and other characteristics. During the first half of 2010, the Company sold leases held for sale with a carrying value of $373,000 for $400,000 and recorded a net gain of $27,000. 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 $2.1 million in payments on held for sale leases. 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

June 30,

   

For the six months ended

June 30,

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

Gains on sales of held for sale leases

   $17    $ —      $27    $ —   

Mark-to-market adjustment on held for sale leases

   186         282      

Realized gains on paid off held for sale leases

   85         125      

Gains on other repossessed assets

   267    (585   425    (585
   

Total gain (loss) on held for sale leasing assets

   $555    ($585   $859    ($585
   

Note 8. Employee Benefit Plans

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

 

    

For the three months ended

June 30,

   

For the six months ended

June 30,

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

Interest cost

   $24      $24      $48      $47   

Expected return on plan assets

   (19   (13   (39   (25

Amortization of unrecognized net actuarial loss

   13      18      27      36   
            

Net periodic benefit expense

   $18      $29      $36      $58   
            

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

June 30,

  

For the six months ended

June 30,

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

Service cost

   $7    $7    $14    $13

Interest cost

   13    12    25    25

Amortization of prior service cost

   7    8    15    16

Amortization of unrecognized net actuarial loss

   2    3    4    6
         

Net periodic benefit expense

   $29    $30    $58    $60
         

 

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Table of Contents

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

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 quoted in active markets and 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 US 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 as of June 30, 2010 by level within the fair value hierarchy. The Company had no liabilities accounted for at fair value as of June 30, 2010. During the six months ended June 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

June 30,

2010

    

Assets:

           

Investment securities, available for sale

           

US government agencies

   $ —    $93,423    $ —    $93,423

Mortgage backed securities

      281,213       281,213

Obligations of states and political subdivisions

      21,360       21,360

Corporate debt securities

      22,191       22,191

Other equity securities

   1,756    20,025       21,781
    

Total securities available for sale

   $1,756    $438,212    $ —    $439,968

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

 

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Table of Contents
(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

June 30,

2010

    

Assets:

           

Leases held for sale

   $ —    $ —    $3,233    $3,233

Impaired Loans and Leases

         32,307    32,307

Other real estate owned and other repossessed assets

         1,277    1,277

Land held for sale

         914    914

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, is 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 June 30, 2010 and December 31, 2009 are outlined below.

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

The net loan portfolio at June 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.

 

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Table of Contents

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 counter parties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counter parties at the reporting date.

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

 

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

Financial Assets:

   (in thousands)

Cash and cash equivalents

   $52,959    $52,959    $58,663    $58,663

Investment securities available for sale

   439,968    439,968    375,530    375,530

Investment securities held to maturity

   72,186    75,134    81,821    84,389

Loans, including leases held for sale

   1,995,489    2,001,633    2,017,035    2,015,268

Financial Liabilities:

           

Deposits

   2,170,145    2,174,119    2,157,187    2,160,445

Federal funds purchased and securities sold under agreements to repurchase

   54,176    54,176    63,672    63,672

Long-term debt

   145,900    162,090    145,900    161,023

Subordinated debentures

   77,322    79,364    77,322    81,503

Commitments:

           

Standby letters of credit

      73       20

Note 11. Recent Accounting Pronouncements

On June 12, 2009, 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 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

 

15


Table of Contents

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.

Note 12. Subsequent Event

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 will accelerate the accretion of $898,000 of discount. The following are the actual capital ratios for the Company and Lakeland as of June 30, 2010 and the pro forma ratios assuming the redemption of the preferred stock as of that date:

 

     Tier 1 Capital
to Total Average
Assets Ratio
June 30, 2010
  Tier 1 Capital
to Risk-Weighted
Assets Ratio
June 30, 2010
  Total Capital
to Risk-Weighted
Assets Ratio
June 30, 2010
    

Actual Capital Ratios:

      

The Company

   9.77%   13.24%   14.49%

Lakeland Bank

   9.32%   12.64%   13.89%

Pro-forma Capital Ratios:

      

The Company

   9.09%   12.25%   13.51%

Lakeland Bank

   8.61%   11.62%   12.87%

“Well capitalized” institution under FDIC

      

Regulations

   5.00%   6.00%   10.00%

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

 

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the Company’s actual results to differ materially and adversely from such forward-looking statements: changes in the financial services industry and the U.S. and global capital markets, changes in economic conditions nationally, regionally and in the Company’s markets, the nature and timing of actions of the Federal Reserve Board and other regulators, the nature and timing of legislation affecting the financial services industry-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 accounts for income taxes under the liability method of accounting for income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement and tax return purposes are the allowance for loan and lease losses, deferred loan fees, deferred compensation, valuation reserves on leases held for sale and securities available for sale. The Company evaluates the realizability of its deferred tax assets by examining its earnings history and projected future earnings and by assessing whether it is more likely than not that carryforwards would not be realized. Because the majority of the Company’s deferred tax assets have no expiration date, because of the Company’s earnings history, and because of the projections of future earnings, the Company’s management believes that it is more likely than not that all of the Company’s deferred tax assets will be realized.

The Company evaluates tax positions that may be uncertain using a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Additional information regarding the Company’s uncertain tax positions is set forth in Note 9 to the Financial Statements of the Company’s Form 10-K for the year ended December 31, 2009.

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 half of 2010 that would cause the Company to do an interim valuation.

 

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Results of Operations

(Second Quarter 2010 Compared to Second Quarter 2009)

Net Income (Loss)

Net income for the second quarter of 2010 was $4.8 million, compared to a net loss of ($12.7) million for the same period in 2009. Net income available to common shareholders was $3.8 million compared to a net loss of ($13.6) million for the same period last year. Diluted earnings per share was $0.16 for the second quarter of 2010, compared to a loss of ($0.58) per share for the same period last year.

The second quarter 2009 results were negatively impacted by a loan and lease loss provision of $34.1 million compared to a provision of $5.0 million in the second quarter of 2010. The loan and lease loss provision in the second quarter of 2009 resulted from several factors including continued charge-offs in the Company’s leasing portfolio, increases in non-performing loans in its commercial loan portfolio and the Company’s decision to reduce the exposure in its leasing portfolio by designating certain lease pools as held for sale.

Net Interest Income

Net interest income on a tax equivalent basis for the second quarter of 2010 was $25.2 million, which was $2.4 million, or 10%, above the $22.8 million net interest income earned in the second quarter of 2009. The net interest margin increased from 3.63% in the second quarter of 2009 to 3.96% in the second quarter of 2010, primarily as a result of a 78 basis point reduction in the cost of interest-bearing liabilities, which was partially offset by a 32 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%.

 

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For the three months ended,

June 30, 2010

   

For the three months ended,

June 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)

   $ 1,999,494      $ 28,049    5.63   $ 2,020,379      $ 29,156    5.79

Taxable investment securities

     421,555        3,009    2.86     379,588        3,372    3.55

Tax-exempt securities

     60,831        765    5.03     68,669        914    5.32

Federal funds sold (B)

     68,263        40    0.23     48,118        31    0.26

Total interest-earning assets

     2,550,143        31,863    5.01     2,516,754        33,473    5.33

Noninterest-earning assets:

              

Allowance for loan and lease losses

     (27,450          (24,963     

Other assets

     249,031                     220,630                

TOTAL ASSETS

   $  2,771,724                   $  2,712,421                

Liabilities and Stockholders’ Equity

              

Interest-bearing liabilities:

              

Savings accounts

   $ 321,699      $ 149    0.19   $ 305,406      $ 433    0.57

Interest-bearing transaction accounts

     1,051,107        1,993    0.76     830,526        2,152    1.04

Time deposits

     477,542        1,726    1.45     641,993        4,564    2.84

Borrowings

     281,319        2,798    3.98     332,327        3,521    4.24

Total interest-bearing liabilities

     2,131,667        6,666    1.25     2,110,252        10,670    2.03

Noninterest-bearing liabilities:

              

Demand deposits

     351,970             309,548        

Other liabilities

     12,810             17,590        

Stockholders’ equity

     275,277                     275,602                

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,771,724                   $ 2,712,992                

Net interest income/spread

       25,197    3.76       22,803    3.30

Tax equivalent basis adjustment

             268                    320       

NET INTEREST INCOME

           $ 24,929                  $ 22,483       

Net interest margin (C)

                  3.96                  3.63
  (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 $33.5 million in the second quarter of 2009 to $31.9 million in the second quarter of 2010, a decrease of $1.6 million, or 5%. The decrease in interest income was due to a 32 basis point decrease in the yield on interest earning assets, as a result of the declining rate environment along with a lower percentage of earning assets being deployed in loans and leases. Average loans and leases totaling $2.0 billion in the second quarter of 2010 decreased $20.9 million compared to the second quarter of 2009, while average investment securities totaling $482.4 million in the second quarter of 2010 increased $34.1 million. Loans as a percent of interest earning assets declined from 80% in the second quarter of 2009 to 78% in the second quarter of 2010. Investments, including securities and federal funds sold, increased from 20% of interest earnings assets in the second quarter of 2009 to 22% in the second quarter of 2010. Loans and leases typically earn higher yields than investment securities.

Total interest expense decreased from $10.7 million in the second quarter of 2009 to $6.7 million in the second quarter of

2010, a decrease of $4.0 million, or 38%. Average interest-bearing liabilities increased $21.4 million, but the cost of those liabilities decreased from 2.03% in 2009 to 1.25% 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 54% in the second quarter of 2009 to 64% in the second quarter of 2010. Time deposits as a percent of interest-bearing liabilities declined from 30% in the second quarter of 2009 to 22% in the second 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 $332.3 million in 2009 to $281.3 million in 2010, as deposit growth outpaced loan and lease growth and because the Company prepaid $55.0 million of long-term debt in the fourth quarter of 2009.

 

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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 second quarter of 2010, a $5.0 million provision for loan and lease losses was recorded compared to a $34.1 million provision for the same period last year. The decline in the provision from the second quarter of 2009 resulted from a $31.2 million decline in net charge-offs and was based on management’s evaluation of the adequacy of the allowance for loan and lease losses. 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).

In the second quarter of 2009, the Company had a $34.1 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 $21.6 million as well as additional net charge-offs in the leasing portfolio of $12.2 million in the second quarter of 2009.

During the second quarter of 2010, the Company charged off loans of $4.9 million and recovered $763,000 in previously charged off loans and leases compared to $35.7 million and $390,000, 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 $1.1 million or 33% to $4.6 million in the second quarter of 2010 compared to the second quarter of 2009. Included in noninterest income for the second quarter of 2009 was a $532,000 other-than-temporary impairment loss that the Company recorded on equity securities in its investment portfolio. The remainder of the increase in noninterest income is due primarily to gains on leasing related assets, which were $555,000 in the second quarter of 2010 compared to losses of $529,000 in the second quarter of 2009. In the second quarter of 2010, our gains on leasing related assets includes gains from payoffs and sales of held for sale leases, and gains on sales of other repossessed assets. In the second quarter of 2009, we recorded $585,000 in losses on sales of leasing related other repossessed assets. Other income at $280,000 was $198,000 higher than the same period last year, as the Company recorded a gain of $181,000 on the sale of a former branch office building. Partially offsetting these positive variances was service charges on deposits at $2.5 million, which decreased by $199,000, or 7%, from 2009, due to reduced overdraft fees collected. Commissions and fees at $833,000, decreased by $40,000, or 5%, from 2009, primarily due to reduced loan fees. Additionally, income on bank owned life insurance at $385,000 decreased by $433,000 as the Company received insurance proceeds of $486,000 on a bank owned life insurance policy in the second quarter of 2009.

Noninterest Expense

Noninterest expense totaling $17.1 million decreased $2.5 million in the second quarter of 2010 from the second quarter of 2009. Marketing expense at $648,000 decreased $136,000, or 17%, due primarily to a reduction in media expenses. FDIC insurance expense at $964,000 decreased by $1.5 million, as the Company paid an industry-wide special FDIC assessment in the second quarter of 2009 of $1.2 million. Collection expense at $159,000 and other real estate and repossessed asset expense at $198,000 decreased $218,000, or 58%, and $467,000, or 70%, respectively, due to decreased leasing related expenses. Other real estate and other repossessed asset expense included write-downs of other repossessed assets of $661,000 in the second quarter of 2009. Legal expense at $423,000 increased $231,000 in the second quarter of 2010 compared to the same period in 2009 as a result of increased workout expenses related to non-performing loans and leases. Other expenses decreased by $787,000 to $2.2 million in the second quarter of 2010 primarily as a result of a $704,000 expense that the Company recorded in the second quarter of 2009 relating to the pretax payout to beneficiaries of the previously mentioned life insurance proceeds. The Company’s efficiency ratio, a non-GAAP financial measure, was

 

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55.9% in the second quarter of 2010, compared to 70.0% 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 June 30,  
      2010     2009  
     (dollars in thousands)  

Calculation of efficiency ratio

    

Total non-interest expense

   $17,107      $19,654   

Less:

    

Amortization of core deposit intangibles

   (266   (266

Other real estate owned and other repossessed asset expense

   (198   (665

Non-interest expense, as adjusted

   $16,643      $18,723   

Net interest income

   $24,929      $22,483   

Noninterest income

   4,553      3,411   

Total revenue

   29,482      25,894   

Plus: Tax-equivalent adjustment on municipal securities

   268      320   

Less: (gains) losses on investment securities

        532   

Total revenue, as adjusted

   $29,750      $26,746   

Efficiency ratio

   55.94   70.00

Income Taxes

The Company’s effective tax rate was 35.5% in the second quarter of 2010, compared to 54.3% in the second quarter of 2009. The Company’s effective tax rate was 54.3% in the second quarter 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.

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

Net Income (Loss)

Net income for the first half of 2010 was $9.3 million, compared to net loss of ($9.5) million for the same period in 2009. Diluted earnings per share was $0.31 for the first half of 2010, compared to a loss per share of ($0.46) in the first half of 2009. The increase in net income related to the decrease in the provision for loan and lease losses from $40.5 million in the first half of 2009 to $9.9 million in the first half of 2010.

Net Interest Income

Net interest income on a tax equivalent basis for the first half of 2010 was $50.1 million, a $4.1 million or 9% increase from the $46.0 million earned in the first half of 2009. The net interest margin increased from 3.72% in the first half of 2009 to 3.98 % in the first half of 2010, primarily as a result of a 79 basis point reduction in the cost of interest-bearing liabilities, which was partially offset by a 41 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

 

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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 six months ended,
June 30, 2010
    For the six months ended,
June 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)

   $  2,004,414      $  56,301    5.66   $  2,024,772      $  59,298    5.91

Taxable investment securities

     413,644        5,992    2.90     360,441        6,791    3.77

Tax-exempt securities

     61,657        1,565    5.08     66,800        1,789    5.36

Federal funds sold (B)

     58,240        68    0.23     44,132        57    0.26

Total interest-earning assets

     2,537,955        63,926    5.07     2,496,145        67,935    5.48

Noninterest-earning assets:

              

Allowance for loan and lease losses

     (26,920          (24,631     

Other assets

     250,778                     221,179                

TOTAL ASSETS

   $ 2,761,813                   $ 2,692,693                

Liabilities and Stockholders’ Equity

              

Interest-bearing liabilities:

              

Savings accounts

   $ 317,386      $ 335    0.21   $ 300,305      $ 964    0.65

Interest-bearing transaction accounts

     1,063,088        4,356    0.83     841,118        4,545    1.09

Time deposits

     474,636        3,582    1.51     629,843        9,399    2.98

Borrowings

     280,209        5,589    3.99     337,001        7,026    4.17

Total interest-bearing liabilities

     2,135,319        13,862    1.30     2,108,267        21,934    2.09

Noninterest-bearing liabilities:

              

Demand deposits

     340,624             302,037        

Other liabilities

     12,566             16,077        

Stockholders’ equity

     273,304                     266,312                

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,761,813                   $ 2,692,693                

Net interest income/spread

       50,064    3.77       46,001    3.40

Tax equivalent basis adjustment

             548                    626       

NET INTEREST INCOME

           $ 49,516                  $ 45,375       

Net interest margin (C)

                  3.98                  3.72
  (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 $67.9 million in the first half of 2009 to $63.9 million in 2010, a decrease of $4.0 million, or 6%. The decrease in interest income was due primarily to a 41 basis point decrease in the average yield earned on interest earning assets, which resulted from the decline in rates and the change in mix discussed previously in the comparison of the results of operations between the second quarter of 2010 and the second quarter of 2009.

Total interest expense decreased from $21.9 million in the first half of 2009 to $13.9 million in the first half of 2010, a decrease of $8.1 million, or 37%. Average interest-bearing liabilities increased $27.1 million, but the cost of those liabilities decreased from 2.09% in 2009 to 1.30% in 2010 for the same reasons as discussed in the quarterly analysis. Average deposits increased from $2.07 billion in the first half of 2009 to $2.20 billion in the first half of 2010, an increase of $122.4 million, or 6%. Average borrowings decreased from $337.0 million in 2009 to $280.2 million in 2010 due to the same reasons discussed above in the quarterly comparison.

 

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Provision for Loan and Lease Losses

The provision for loan and lease losses decreased from $40.5 million for the first half of 2009 to $9.9 million for the first half of 2010. During the first half of 2010, the Company charged off loans and leases of $9.0 million and recovered $1.3 million in previously charged off loans and leases compared to $42.2 million and $1.1 million, respectively, during the same period in 2009. The decrease in the provision for loan and lease losses resulted from the same reasons discussed in the quarterly analysis. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income increased $278,000 to $8.7 million for the first six months of 2010 compared to the first six months of 2009. Service charges on deposits decreased $418,000, or 8% to $4.9 million for the same reasons mentioned in the quarterly discussion. Gains on investment securities was $1,000 for the first six months of 2010, compared to $353,000 for the first six months of 2009, while gains on leasing related assets totaled $859,000 compared to losses of $344,000 in 2009. Income on bank owned life insurance decreased $378,000 to $771,000 and other income increased $201,000 to $365,000 for the same reasons mentioned in the quarterly discussion.

Noninterest Expense

For the first six months of 2010, noninterest expense was $33.9 million, compared to $36.4 million in 2009, a decrease of 7%. Noninterest expenses declined for the same reasons discussed in the quarterly comparison which included the $1.2 million special FDIC assessment and the $704,000 payout of bank owned life insurance proceeds. The Company’s efficiency ratio was 56.40% in the first half of 2010, compared to 64.94% for the same period last year. The following table shows the calculation of the efficiency ratio:

 

     For the six months ended June 30,  
      2010     2009  
     (dollars in thousands)  

Calculation of efficiency ratio

    

Total non-interest expense

   $33,887      $36,405   

Less:

    

Amortization of core deposit intangibles

   (531   (531

Other real estate owned and other repossessed asset expense

   (235   (785

Non-interest expense, as adjusted

   $33,121      $35,089   

Net interest income

   $49,516      $45,375   

Noninterest income

   8,662      8,384   

Total revenue

   58,178      53,759   

Plus: Tax-equivalent adjustment on municipal securities

   548      626   

Less: (gains) losses on investment securities

   (1   (353

Total revenue, as adjusted

   $58,725      $54,032   

Efficiency ratio

   56.40   64.94

Income Taxes

The effective tax rate for the first half of 2010 was 35.3% compared to 58.7% for the first half of 2009. The Company’s effective tax rate was 58.7% in the first half of 2009 because of its net loss and the impact that tax advantaged income had on the tax benefit of the loss.

 

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Financial Condition

The Company’s total assets increased $14.6 million from $2.72 billion at December 31, 2009, to $2.74 billion at June 30, 2010. Declines in loans and leases were offset by increases in investment securities. Although deposits increased by less than one percent, declines in time deposits and interest bearing transaction accounts were offset by an 11% increase in noninterest bearing transaction accounts.

Loans and Leases

Gross loans and leases, including leases held for sale, at $2.0 billion decreased by $21.3 million from December 31, 2009. The decrease in gross loans and leases is primarily due to leases decreasing $29.3 million, or 24%, from $120.5 million at December 31, 2009 to $91.2 million (including $3.2 million held for sale) on June 30, 2010. Excluding leases, loans increased $8.0 million from December 31, 2009, or less than 1%, due to low loan demand. 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:

 

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

Commercial secured by real estate

   $20,053      $19,648      $25,798   

Commercial and Industrial

   3,701      1,752      2,047   

Leases

   6,274      2,666      3,511   

Home equity and consumer

   2,436      1,535      1,890   

Real estate—mortgage

   8,576      2,909      5,465   
      

Total Non-accrual loans and leases

   $41,040      $28,510      $38,711   

Other real estate and other repossessed assets

   1,277      1,651      1,864   
      

TOTAL NON-PERFORMING ASSETS

   $42,317      $30,161      $40,575   
      

Non-performing assets as a percent of total assets

   1.55   1.11   1.49
      

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

   $578      $4,228      $1,437   
      

Troubled debt restructurings, still accruing

   $8,561           $3,432   
      

Non-performing assets increased from $40.6 million on December 31, 2009, or 1.49% of total assets, to $42.3 million, or 1.55% of total assets, on June 30, 2010. Declines in commercial non-accruals were offset by increases in non-accruals in leases and residential mortgages. Leases on non-accrual increased $2.8 million from December 31, 2009 to $6.3 million on June 30, 2010. The increase in leases includes $4.0 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 $3.1 million from December 31, 2009 to $8.6 million on June 30, 2010 resulting from deterioration in the economy and the increased unemployment rate. Commercial loan non-accruals at June 30, 2010 included three loan relationships with balances over $1.0 million, totaling $5.8 million, and nine loan relationships between $500,000 and $1.0 million, totaling $7.3 million.

Loans and leases past due ninety days or more and still accruing at June 30, 2010 decreased $859,000 to $578,000 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 June 30, 2010, the Company had $8.6 million in loans that were troubled debt restructurings and still accruing. 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 June 30, 2010, the Company had $32.3 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

 

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value of the underlying collateral for the remaining loans and leases. Based on such evaluation, $4.2 million has been allocated as a portion of the allowance for loan and lease losses for impairment at June 30, 2010. At June 30, 2010, the Company also had $33.5 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 June 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:

 

(dollars in thousands)    Six months
ended
June 30,
2010
    Six months
ended
June 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

   4,312      717      2,724   

Commercial and Industrial

   1,189      286      2,632   

Leases

   2,425      18,429      22,972   

Charge down of leases held for sale(1)

        21,580      22,122   

Home Equity and consumer

   1,007      1,141      2,499   

Real estate—mortgage

   80      50      433   
                  

Total loans charged off

   9,013      42,203      53,382   
                  

Recoveries:

      

Commercial secured by real estate

   108      1      135   

Commercial and Industrial

   2      35      134   

Leases

   934      918      1,777   

Home Equity and consumer

   249      116      231   

Real estate—mortgage

   5             
                  

Total Recoveries

   1,298      1,070      2,277   
                  

Net charge-offs:

   7,715      41,133      51,105   

Provision for loan and lease losses

   9,880      40,459      51,615   
                  

Ending balance

   $27,728      $24,379      $25,563   
                  

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

      

including charge down of leases held for sale

   0.78   4.10   2.55

excluding charge down of leases held for sale

   0.78   1.95   1.44

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

   1.39   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

 

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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 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 1.39% of total loans on June 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 June 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 $512.2 million on June 30, 2010, an increase of $54.8 million, or 12%, 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 $2.17 billion on June 30, 2010, an increase of $13.0 million, or less than 1%. Noninterest bearing deposits increased $34.9 million, or 11%, to $358.1 million, resulting from an increase in commercial noninterest bearing deposits, while savings and interest-bearing transaction accounts decreased $15.9 million, or 1%, resulting from a $47.7 million decrease in municipal deposits offset by increases in money market accounts and savings accounts of $18.2 million and $10.4 million, respectively.

Liquidity

Cash and cash equivalents, totaling $53.0 million on June 30, 2010, decreased $5.7 million from December 31, 2009. Operating activities provided $30.7 million in net cash. Investing activities used $36.8 million in net cash, primarily reflecting the purchase of securities. Financing activities provided $454,000 in net cash, reflecting the increase in deposits of $13.0 million, partially offset by a decline in short term borrowings of $9.5 million and dividends paid of $3.5 million. The Company anticipates that it will have sufficient funds available to meet its current loan commitments and deposit maturities. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. At June 30, 2010, the Company had outstanding loan origination commitments of $411.1 million. These commitments include $360.1 million that mature within one year; $30.5 million that mature after one but within three years; $4.0 million that mature after three but within five years and $16.5 million that mature after five years. The Company also had $8.4 million in letters of credit outstanding at June 30, 2010. This included $7.1 million that are maturing within one year, $1.2 million that mature after one but within three years; $22,000 that mature after three but within five years and $80,000 that mature after 5 years. Time deposits issued in amounts of $100,000 or more maturing within one year total $145.2 million.

 

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Capital Resources

Stockholders’ equity increased from $268.0 million on December 31, 2009 to $277.9 million on June 30, 2010, an increase of $9.9 million, or 4%. Book value per common share increased to $9.22 on June 30, 2010 from $8.88 on December 31, 2009. The increase in stockholders’ equity from December 31, 2009 to June 30, 2010 was due to $9.3 million in net income and a $3.2 million increase in accumulated other comprehensive income relating to an increase in market value in the Company’s available for sale securities portfolio, partially offset by the payment of cash dividends of $2.0 million on common stock and $1.5 million on preferred stock.

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 June 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 June 30, 2010 are as follows:

 

Capital Ratios:    Tier 1 Capital
to Total Average
Assets Ratio
June 30,

2010
  Tier 1 Capital
to Risk-Weighted
Assets Ratio
June 30,

2010
  Total Capital
to Risk-Weighted
Assets Ratio
June 30,

2010

The Company

   9.77%   13.24%   14.49%

Lakeland Bank

   9.32%   12.64%   13.89%

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

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)    June 30,
2010
    December 31,
2009
 
        

Calculation of tangible book value per common share

    

Total common stockholders’ equity at end of period—GAAP

   $ 221,512      $ 211,963   

Less:

    

Goodwill

     87,111        87,111   

Other identifiable intangible assets, net

     1,109        1,640   
   

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

   $ 133,292      $ 123,212   
   

Shares outstanding at end of period

     24,027        23,872   
   

Book value per share—GAAP

   $ 9.22      $ 8.88   
   

Tangible book value per share—Non-GAAP

   $ 5.55      $ 5.16   
   

Calculation of tangible common equity to tangible assets

    

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

   $ 133,292      $ 123,212   
   

Total assets at end of period

   $ 2,738,557      $ 2,723,968   

Less:

    

Goodwill

     87,111        87,111   

Other identifiable intangible assets, net

     1,109        1,640   
   

Total tangible assets at end of period—Non-GAAP

   $ 2,650,337      $ 2,635,217   
   

Common equity to assets—GAAP

     8.09     7.78
   

Tangible common equity to tangible assets—Non-GAAP

     5.03     4.68
   

 

     For the three months
ended,
    For the six months
ended,
 
        
     June 30,
2010
    June 30,
2009
    June 30,
2010
    June 30,
2009
 
        

Calculation of return on average tangible common equity

        

Net income (loss)—GAAP

   $ 4,753      $ (12,722   $ 9,319        ($9,547
        

Total average common stockholders’ equity

     219,028      $ 219,968      $ 217,138      $ 221,738   

Less:

        

Average goodwill

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

Average other identifiable intangible assets, net

     1,255        2,317        1,387        2,449   
        

Total average tangible common stockholders’ equity—Non GAAP

   $ 130,662      $ 130,540      $ 128,640      $ 132,178   
        

Return on average common stockholders’ equity—GAAP

     8.70     -23.20     8.65     -8.68
        

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

     14.59     -39.09     14.61     -14.56
        

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 fair value of the net present value of assets, liabilities and off-balance-sheet items. Changes in estimates and assumptions

 

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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 $100.6 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

June 30, 2010

   -2.5   -1.0   -2.3   -3.0

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 June 30, 2010 (the base case) was $367.8 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

June 30, 2010

   -2.9   0.5   -5.5   -13.7

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.

 

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: August 6, 2010

 

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