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LAKELAND BANCORP INC - Quarter Report: 2011 September (Form 10-Q)

Form 10-Q
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended                                 September 30, 2011

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  x    No  ¨    

 

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

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

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

Yes  ¨    No  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

As of October 31, 2011 there were 25,528,766 outstanding shares of Common Stock, no par value.


Table of Contents

LAKELAND BANCORP, INC.

Form 10-Q Index

 

         PAGE  
  Part I     Financial Information   
Item 1.   Financial Statements:   
  Consolidated Balance Sheets - September 30, 2011 (unaudited) and December 31, 2010      3   
  Consolidated Statements of Income - Unaudited Three Months and Nine Months ended September 30, 2011 and 2010      4   
  Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income - Unaudited Nine Months ended September 30, 2011      5   
  Consolidated Statements of Cash Flows - Unaudited Nine Months ended September 30, 2011 and 2010      6   
  Notes to Consolidated Financial Statements (unaudited)      7   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      25   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      38   
Item 4.   Controls and Procedures      38   
  Part II     Other Information   
Item 1.   Legal Proceedings      40   
Item 1A.   Risk Factors      40   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      40   
Item 3.   Defaults Upon Senior Securities      40   
Item 4.   Reserved      40   
Item 5.   Other Information      40   
Item 6.   Exhibits      40   
Signatures      41   
  The Securities and Exchange Commission maintains a web site which contains reports, proxy and information statements and other information relating to registrants that file electronically at the address: http:/ / www.sec.gov.   

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

     

September 30, 2011

(unaudited)

         

December 31,

2010

 
ASSETS:      (dollars in thousands)   

Cash

     $44,424           $26,063   

Interest-bearing deposits due from banks

     20,834           23,215   

 

 

Total cash and cash equivalents

     65,258           49,278   

Investment securities available for sale

     448,885           487,107   

Investment securities held to maturity; fair value of $68,656 in 2011 and $68,815 in 2010

     66,134           66,573   

Leases held for sale

               1,517   

Loans, net of deferred costs

     1,992,775           2,013,100   

Less: allowance for loan and lease losses

     28,024           27,331   

 

 

Net loans

     1,964,751           1,987,286   

Premises and equipment, net

     27,311           27,554   

Accrued interest receivable

     8,128           8,849   

Goodwill

     87,111           87,111   

Other identifiable intangible assets, net

               578   

Bank owned life insurance

     44,354           43,284   

Other assets

     29,836           35,054   

 

 

TOTAL ASSETS

     $2,741,768           $2,792,674   

 

 

LIABILITIES

       

Deposits:

       

Noninterest bearing

     $424,789           $383,877   

Savings and interest-bearing transaction accounts

     1,411,058           1,399,163   

Time deposits under $100 thousand

     222,337           241,911   

Time deposits $100 thousand and over

     174,381           170,938   

 

 

Total deposits

     2,232,565           2,195,889   

Federal funds purchased and securities sold under agreements to repurchase

     53,175           52,123   

Other borrowings

     110,000           195,000   

Subordinated debentures

     77,322           77,322   

Other liabilities

     13,808           11,631   

 

 

TOTAL LIABILITIES

     2,486,870           2,531,965   

 

 

Commitments and contingencies

       

STOCKHOLDERS’ EQUITY

       

Preferred stock, Series A, no par value, $1,000 liquidation value, authorized 1,000,000 shares; issued 19,000 shares at September 30, 2011 and 39,000 shares at December 31, 2010

     18,424           37,474   

Common stock, no par value; authorized shares, 40,000,000; issued 25,976,648 shares at September 30, 2011 and 25,977,592 shares at December 31, 2010

     270,068           271,595   

Accumulated deficit

     (29,351        (38,004

Treasury stock, at cost, 448,984 shares at September 30, 2011 and 655,768 at December 31, 2010

     (5,957        (8,683

Accumulated other comprehensive gain (loss)

     1,714           (1,673

 

 

TOTAL STOCKHOLDERS’ EQUITY

     254,898           260,709   

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

     $2,741,768           $2,792,674   

 

 

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

 

      For the three months ended
September 30,
      

For the nine months ended

September 30,

 
     2011      2010        2011      2010  
     (In thousands, except per share data)  

INTEREST INCOME

             

Loans, leases and fees

     $25,999         $27,670           $78,784         $83,971   

Federal funds sold and interest-bearing deposits with banks

     16         42           39         110   

Taxable investment securities

     2,773         3,107           8,448         9,099   

Tax-exempt investment securities

     500         495           1,506         1,512   

 

 

TOTAL INTEREST INCOME

     29,288         31,314           88,777         94,692   

 

 

INTEREST EXPENSE

             

Deposits

     2,572         3,584           8,310         11,857   

Federal funds purchased and securities sold under agreements to repurchase

     18         27           73         95   

Other borrowings

     2,347         2,713           7,038         8,234   

 

 

TOTAL INTEREST EXPENSE

     4,937         6,324           15,421         20,186   

 

 

NET INTEREST INCOME

     24,351         24,990           73,356         74,506   

Provision for loan and lease losses

     4,058         4,857           14,391         14,737   

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES

     20,293         20,133           58,965         59,769   

NONINTEREST INCOME

             

Service charges on deposit accounts

     2,623         2,678           7,672         7,626   

Commissions and fees

     915         965           2,787         2,683   

Gains on investment securities

     785         1,681           1,229         1,682   

Income on bank owned life insurance

     356         376           1,070         1,147   

Gains on leasing related assets

     117         312           810         1,171   

Other income

     299         77           467         442   

 

 

TOTAL NONINTEREST INCOME

     5,095         6,089           14,035         14,751   

 

 

NONINTEREST EXPENSE

             

Salaries and employee benefits

     9,280         9,073           27,465         26,972   

Net occupancy expense

     1,692         1,594           5,205         5,025   

Furniture and equipment

     1,172         1,270           3,561         3,661   

Stationery, supplies and postage

     298         360           1,058         1,172   

Marketing expense

     612         511           1,846         1,713   

Core deposit intangible amortization

     46         265           577         796   

FDIC insurance expense

     636         937           2,178         2,834   

Collection expense

     70         188           195         495   

Legal expense

     457         411           1,163         1,175   

Expenses on other real estate owned and other repossessed assets

     336         119           808         354   

Long term debt prepayment fee

     800         1,835           800         1,835   

Other expenses

     2,641         2,388           6,942         6,806   

 

 

TOTAL NONINTEREST EXPENSE

     18,040         18,951           51,798         52,838   

 

 

Income before provision for income taxes

     7,348         7,271           21,202         21,682   

Income tax expense

     2,242         2,399           6,467         7,491   

 

 

NET INCOME

     $5,106         $4,872           $14,735         $14,191   

 

 

Dividends on Preferred Stock and Accretion

     293         1,589           1,873         3,391   

 

 

Net Income Available to Common Stockholders

     $4,813         $3,283           $12,862         $10,800   

 

 

PER SHARE OF COMMON STOCK

             

Basic earnings

     $0.19         $0.13           $0.50         $0.43   

 

 

Diluted earnings

     $0.19         $0.13           $0.50         $0.43   

 

 

Dividends

     $0.06         $0.05           $0.18         $0.14   

 

 

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

 

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Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months ended September 30, 2011

 

                           

Accumulated

Other

Comprehensive

Income (Loss)

       
    Common stock    

Series A

Preferred

Stock

                     
   

Number of

Shares

   

Amount

     

Accumulated

deficit

   

Treasury

Stock

     

Total

 

 

 
    (dollars in thousands)  

BALANCE DECEMBER 31, 2010

    25,977,592      $ 271,595        $37,474        ($38,004     ($8,683     ($1,673   $ 260,709   

Comprehensive income:

             

Net Income

                         14,735                      14,735   

Other comprehensive income, net of tax

                                       3,387        3,387   
             

 

 

 

Total
comprehensive
income

                18,122   
             

 

 

 

Preferred dividends

                         (923                   (923

Accretion of discount

                  950        (950                     

Stock based compensation

           474                                    474   

Redemption of preferred stock

                  (20,000                          (20,000

Adjustment for stock dividend

    (944     (309            309                        

Issuance of restricted stock awards

           (1,262                   1,262                 

Issuance of stock to dividend reinvestment and stock purchase plan

           (375            (757     1,308               176   

Exercise of stock options, net of excess tax benefits

           (55                   156               101   

Cash dividends, common stock

                         (3,761                   (3,761

 

 

BALANCE September 30, 2011 (UNAUDITED)

    25,976,648      $ 270,068        $18,424        ($29,351     ($5,957     $1,714      $ 254,898   

 

 

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     For the nine months ended
September 30,
 
      2011              2010  

CASH FLOWS FROM OPERATING ACTIVITIES

     (dollars in thousands)   

Net income

     $14,735              $14,191   

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

          

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

     4,161              2,828   

Depreciation and amortization

     2,962              3,103   

Provision for loan and lease losses

     14,391              14,737   

Gains on securities

     (1,229           (1,682

Gains on leases

     (824           (635

Losses (gains) on sales of other assets

     77              (536

Gains on sales of premises and equipment

     (163           (82

Stock-based compensation

     474              402   

Decrease in other assets

     2,643              7,947   

Increase in other liabilities

     2,325              559   

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     39,552              40,832   

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

          

Proceeds from repayments on and maturity of securities:

          

Available for sale

     118,627              121,476   

Held to maturity

     15,652              21,016   

Proceeds from sales of securities

          

Available for sale

     92,409              72,747   

Purchase of securities:

          

Available for sale

     (169,123           (252,937

Held to maturity

     (15,299           (10,296

Proceeds from sales of leases

     16,433              931   

Net (increase) decrease in loans and leases

     (10,414           14,240   

Proceeds from sales of other repossessed assets

     1,720              3,026   

Capital expenditures

     (2,096           (1,093

Proceeds from sales of bank premises and equipment

     321              273   

 

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

     48,230              (30,617

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

          

Net increase in deposits

     36,677              77,585   

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

     1,052              4,776   

Repayments of other borrowings

     (85,000           (30,000

Redemption of preferred stock

     (20,000           (20,000

Exercise of stock options

     72              463   

Excess tax benefits

     29              8   

Issuance of stock to dividend reinvestment and stock purchase plan

     176              43   

Dividends paid

     (4,808           (5,158

 

 

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

     (71,802           27,717   

 

 

Net increase cash and cash equivalents

     15,980              37,932   

Cash and cash equivalents, beginning of year

     49,278              58,663   

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

     $65,258              $96,595   

 

 

The accompanying notes are an integral part of these consolidated 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 the fair statement of the results of the interim periods presented. The results of operations for the quarter and nine month period presented do not necessarily indicate the results that the Company will achieve for all of 2011. You should read these interim financial statements in conjunction with the audited 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, 2010.

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

The Company evaluated its September 30, 2011 consolidated financial statements for subsequent events through the date the financial statements were issued. The Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements.

Note 2. Stock-Based Compensation

Share-based compensation expense of $474,000 and $402,000 was recognized for the nine months ended September 30, 2011 and 2010, respectively. As of September 30, 2011, there was unrecognized compensation cost of $1.2 million related to unvested restricted stock; that cost is expected to be recognized over a weighted average period of approximately 2.8 years. Unrecognized compensation expense related to unvested stock options was approximately $55,000 as of September 30, 2011 and is expected to be recognized over a period of 1.4 years.

In the first nine months of 2011, the Company granted 95,345 shares of restricted stock at a fair value of $9.87 per share under the Company’s 2009 equity compensation program. These shares vest over a five year period. Compensation expense on these shares is expected to average approximately $188,000 per year for the next five years. In the first nine months of 2010, the Company granted 36,357 shares of restricted stock at a fair value of $6.84 per share under the 2009 program. Compensation expense on these shares is expected to average approximately $50,000 per year over a five year period.

There were no grants of stock options in the first nine months of 2011.

In the first nine months of 2010, the Company granted options to purchase 26,250 shares to a new non-employee director of the Company at an exercise price of $8.64 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 $3.31. The expected compensation expense to be recorded over the vesting period is $87,000, with approximately $46,000 remaining to be expensed.

 

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Option activity under the Company’s stock option plans is as follows:

 

       Number
of shares
   

Weighted
average

exercise

price

    

Weighted
average
remaining
contractual
term

( in years)

     Aggregate
intrinsic
value
 
  

 

 

 

Outstanding, January 1, 2011

     721,123        $12.77            $158,349   

Issued

                    

Exercised

     (20,023     5.82         

Forfeited

     (12,084     13.42         
  

 

 

 

Outstanding, September 30, 2011

     689,016        $12.97         2.80         $0   
  

 

 

 

Options exercisable at
September 30, 2011

     667,051        $13.07         2.63         $0   
  

 

 

 

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 first nine months of 2011 and the exercise price, multiplied by the number of in-the-money options).

The aggregate intrinsic value of options exercised during the nine months ended September 30, 2011 and 2010 was $78,000 and $106,000, respectively. Exercise of stock options during the first nine months of 2011 and 2010 resulted in cash receipts of $72,000 and $463,000, respectively.

Information regarding the Company’s restricted stock (all unvested) and changes during the nine months ended September 30, 2011 is as follows:

 

     Number of
shares
    Weighted
average
price
 
  

 

 

 

Outstanding, January 1, 2011

     101,314        $9.62   

Granted

     95,345        9.87   

Vested

     (4,737     9.03   

Forfeited

     (1,489     9.64   
  

 

 

 

Outstanding, September 30, 2011

     190,433        $9.76   
  

 

 

 

 

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Note 3. Comprehensive Income

The components of other comprehensive income are as follows:

 

     September 30, 2011      September 30, 2010  
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

     $1,701         ($634     $1,067         $721        ($278     $443   

Less reclassification adjustment for net gains arising during the period

     785         (276     509         1,681        (602     1,079   
  

 

 

 

Net unrealized gains (losses)

     $916         ($358     $558         ($960     $324        ($636

Change in minimum pension liability

     8         (3     5         8        (3     5   
  

 

 

 

Other comprehensive income (loss), net

     $924         ($361     $563         ($952     $321        ($631
  

 

 

 

For the nine months ended:

    
 
Before
tax amount
  
  
    

 

Tax Benefit

(Expense

  

   
 
Net of
tax amount
  
  
    
 
Before
tax amount
  
  
   

 

Tax Benefit

(Expense

  

   
 
Net of
tax amount
  
  
  

 

 

 
     (in thousands)      (in thousands)  

Net unrealized gains on available for sale securities

              

Net unrealized holding gains arising during period

     $6,568         ($2,397     $4,171         $5,892        ($2,170     $3,722   

Less reclassification adjustment for net gains arising during the period

     1,229         (430     799         1,682        (602     1,080   
  

 

 

 

Net unrealized gains

     $5,339         ($1,967     $3,372         $4,210        ($1,568     $2,642   

Change in minimum pension liability

     23         (8     15         23        (8     15   
  

 

 

 

Other comprehensive income, net

     $5,362         ($1,975     $3,387         $4,233        ($1,576     $2,657   
  

 

 

 

Note 4. Statement of Cash Flow Information, Supplemental Information

 

     For the nine months ended
September 30,
 
     2011      2010  
  

 

 

 
     (in thousands)   

Supplemental schedule of noncash investing and financing activities:

  

Cash paid during the period for income taxes

     $6,084         $3,073   

Cash paid during the period for interest

     15,609         20,637   

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

     1,547         2,371   

Transfer of leases held for sale to leases held for investment

     1,517         1,888   

 

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Note 5. Earnings Per Share

All weighted average, actual share and per share information set forth in this quarterly report on Form 10-Q for the three and nine months ended September 30, 2010 have been adjusted retroactively for the effects of the stock dividend granted on February 16, 2011. The following schedule shows the Company’s earnings per share for the periods presented:

 

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

(In thousands, except per share data)

     2011         2010         2011         2010   
  

 

 

 

Net income available to common shareholders

     $4,813         $3,283         $12,862         $10,800   

Less: earnings allocated to participating securities

     36         17         95         37   
  

 

 

 

Net income allocated to common shareholders

     $4,777         $3,266         $12,767         $10,763   
  

 

 

 

Weighted average number of common shares outstanding - basic (1)

     25,322         25,117         25,288         25,074   

Share-based plans (1)

     48         39         122         26   
  

 

 

 

Weighted average number of common shares - diluted (1)

     25,370         25,156         25,410         25,100   

Basic earnings per share

     $0.19         $0.13         $0.50         $0.43   
  

 

 

 

Diluted earnings per share

     $0.19         $0.13         $0.50         $0.43   

 

 
(1) Adjusted for 5% stock dividend granted February 16, 2011 to shareholders of record January 31, 2011.

Options to purchase 689,016 shares of common stock at a weighted average price of $12.97 per share and a warrant to purchase 997,049 shares of common stock at a price of $8.88 per share were outstanding and were not included in the computation of diluted earnings per share for the quarter ended September 30, 2011 because the exercise price was greater than the average market price. Options to purchase 702,167 shares of common stock at a weighted average price of $12.97 per share, a warrant to purchase 997,049 shares of common stock at a price of $8.88 per share, and 2,362 shares of restricted stock at a weighted average price of $10.06 per share were outstanding and were not included in the computation of diluted earnings per share for the quarter ended September 30, 2010 because the exercise price was greater than the average market price.

Options to purchase 689,016 shares of common stock at a weighted average price of $12.97 per share were outstanding and were not included in the computation of diluted earnings per share for the nine months ended September 30, 2011 because the exercise price was greater than the average market price. Options to purchase 702,167 shares of common stock at a weighted average price of $12.97 per share, a warrant to purchase 997,049 shares of common stock at a price of $8.88 per share, and 2,362 shares of restricted stock at a weighted average price of $10.06 per share were outstanding and were not included in the computation of diluted earnings per share for the nine months ended September 30, 2010 because the exercise price and the grant-date price were greater than the average market price.

 

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Table of Contents

Note 6. Investment Securities

 

AVAILABLE FOR SALE   September 30, 2011     December 31, 2010  

 

 
(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

    $23,785        $10        $(11     $23,784        $107,870        $294        $(867     $107,297   

Mortgage-backed securities

    350,150        4,032        (791     353,391        306,882        2,536        (3,566     305,852   

Obligations of states and political subdivisions

    29,623        1,259        (1     30,881        27,567        357        (375     27,549   

Other debt securities

    21,008        85        (1,247     19,846        22,582        102        (811     21,873   

Equity securities

    20,753        453        (223     20,983        23,979        559        (2     24,536   

 

 
    $445,319        $5,839        $(2,273     $448,885        $488,880        $3,848        $(5,621     $487,107   

 

 
HELD TO MATURITY   September 30, 2011     December 31, 2010  

 

 
(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

    $4,999        $93        $—        $5,092        $4,996        $229        $—        $5,225   

Mortgage-backed securities

    19,475        1,206               20,681        20,774        1,105               21,879   

Obligations of states and political subdivisions

    40,099        1,260        (11     41,348        39,235        956        (84     40,107   

Other debt securities

    1,561        80        (106     1,535        1,568        40        (4     1,604   

 

 
    $66,134        $2,639        $(117     $68,656        $66,573        $2,330        $(88     $68,815   

 

 

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

 

     September 30, 2011  

 

 
     Available for Sale      Held to Maturity  
  

 

 

    

 

 

 
      Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due in one year or less

     $16,181         $16,202         $18,365         $18,513   

Due after one year through five years

     38,459         38,270         16,017         16,660   

Due after five years through ten years

     16,122         16,855         10,581         11,065   

Due after ten years

     3,654         3,184         1,696         1,737   

 

 
     74,416         74,511         46,659         47,975   

Mortgage-backed securities

     350,150         353,391         19,475         20,681   

Equity securities

     20,753         20,983                   

 

 

Total securities

     $445,319         $448,885         $66,134         $68,656   

 

 

 

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

 

     For the three months ended
September 30,
    For the nine months ended
September 30,
 
     2011      2010     2011     2010  
  

 

 

 

Sale proceeds

     $52,481         $72,747        $92,409        $72,747   

Gross gains

     785         1,691        1,285        1,692   

Gross losses

             (10     (56     (10

Other than temporary impairment

                             

Securities with a carrying value of approximately $302.9 million and $340.6 million at September 30, 2011 and December 31, 2010, respectively, were pledged to secure public deposits and for other purposes required by applicable laws and regulations.

The following table indicates the length of time individual securities have been in a continuous unrealized loss position at September 30, 2011 and December 31, 2010:

 

September 30, 2011   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

    $6,990        $11        $ —        $ —        2        $6,990        $11   

Mortgage-backed securities

    96,642        758        5,606        33        27        102,248        791   

Obligations of states and political subdivisions

    402        1        20               2        422        1   

Other debt securities

                  5,706        1,247        3        5,706        1,247   

Equity securities

    1,102        223                      6        1,102        223   
      $105,136        $993        $11,332        $1,280        40        $116,468        $2,273   
                                                         

HELD TO MATURITY

                 

Obligations of states and political subdivisions

    $83        $3        $414        $8        3        $497        $11   

Corporate debt securities

    928        106                      2        928        106   
      $1,011        $109        $414        $8        5        $1,425        $117   
                                                         

 

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Table of Contents
December 31, 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

    $60,037        $867        $ —        $ —        13        $60,037        $867   

Mortgage-backed securities

    143,693        3,535        5,323        31        36        149,016        3,566   

Obligations of states and political subdivisions

    11,404        374        40        1        27        11,444        375   

Other debt securities

    4,962        38        6,182        773        4        11,144        811   

Equity securities

                  1        2        1        1        2   
      $220,096        $4,814        $11,546        $807        81        $231,642        $5,621   
                                                         

HELD TO MATURITY

                 
     

Obligations of states and political subdivisions

    $2,699        $76        $415        $8        8        $3,114        $84   

Other debt securities

    529        4                      1        529        4   
      $3,228        $80        $415        $8        9        $3,643        $88   
                                                         

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

Note 7. Loans and Leases.

The following sets forth the composition of Lakeland’s loan and lease portfolio as of September 30, 2011 and December 31, 2010:

 

    

September 30,

2011

         

December 31,

2010

 

 

 
     (in thousands)  

Commercial, secured by real estate

     $993,024            $970,240   

Commercial, industrial and other

     195,121            194,259   

Leases

     36,178            65,640   

Leases held for sale, at fair value

                1,517   

Real estate-residential mortgage

     392,454            403,561   

Real estate-construction

     70,985            70,775   

Home equity and consumer

     304,112            306,322   

 

 

Total loans

     1,991,874            2,012,314   

 

 

Plus: deferred costs

     901            2,303   

 

 

Loans, net of deferred costs

     $1,992,775            $2,014,617   

 

 

 

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Non-accrual and Past Due Loans

The following schedule sets forth certain information regarding the Company’s non-accrual loans and leases, its other real estate owned and other repossessed assets, its loans and leases past due 90 days or more and still accruing and its accruing troubled debt restructurings:

 

(in thousands)    September 30,
2011
    December 31,
2010
 

 

 

Commercial, secured by real estate

     $18,141        $12,905   

Commercial, industrial and other

     4,414        1,702   

Leases, including leases held for sale

     4,670        6,277   

Real estate - residential mortgage

     12,503        12,834   

Real estate - construction

     12,831        6,321   

Home equity and consumer

     3,840        2,930   
  

 

 

 

Total non-accrual loans and leases

     $56,399        $42,969   

Other real estate and other repossessed assets

     1,342        1,592   
  

 

 

 

TOTAL NON-PERFORMING ASSETS

     $57,741        $44,561   
  

 

 

 

Non-performing assets as a percent of total assets

     2.11     1.60
  

 

 

 

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

     $1,304        $1,218   
  

 

 

 

Troubled debt restructurings, still accruing

     $6,075        $9,073   
  

 

 

 

Non-accrual loans included $4.1 million and $3.6 million of troubled debt restructurings as of September 30, 2011 and December 31, 2010, respectively.

An age analysis of past due loans, segregated by class of loans as of September 30, 2011 and December 31, 2010, are as follows:

 

September 30, 2011   30-59 Days
Past Due
    60-89 Days
Past Due
    Greater
Than
89 Days
    Total
Past Due
    Current     Total Loans
and Leases
   

Recorded

Investment greater

than 89 Days and
still accruing

 
    (in thousands)  

Commercial, secured by real estate

  $ 6,159      $ 4,932      $ 18,466      $ 29,557      $ 963,467      $ 993,024      $ 325   

Commercial, industrial and other

    854        1,139        4,414        6,407        188,714        195,121          

Leases

    402        332        4,672        5,406        30,772        36,178        2   

Real estate-residential mortgage

    4,959        1,034        12,823        18,816        373,638        392,454        320   

Real estate-construction

           908        12,831        13,739        57,246        70,985          

Home equity and consumer

    1,973        423        4,497        6,893        297,219        304,112        657   
 

 

 

 
  $ 14,347      $ 8,768      $ 57,703      $ 80,818      $ 1,911,056      $ 1,991,874      $ 1,304   
 

 

 

 

December 31, 2010

             

Commercial, secured by real estate

  $ 4,387      $ 2,856      $ 13,557      $ 20,800      $ 949,440      $ 970,240      $ 651   

Commercial, industrial and other

    175        83        1,703        1,961        192,298        194,259        2   

Leases, including leases held for sale

    20,919        427        6,293        27,639        39,518        67,157        16   

Real estate-residential mortgage

    4,867        1,574        13,176        19,617        383,944        403,561        343   

Real estate-construction

    450               6,321        6,771        64,004        70,775          

Home equity and consumer

    3,459        842        3,137        7,438        298,884        306,322        206   
 

 

 

 
  $ 34,257      $ 5,782      $ 44,187      $ 84,226      $ 1,928,088      $ 2,012,314      $ 1,218   
 

 

 

 

 

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Table of Contents

Impaired Loans

Impaired loans as of September 30, 2011 and December 31, 2010 are as follows:

 

September 30, 2011

   Recorded
Investment in
Impaired loans
     Contractual
Unpaid
Principal
Balance
     Specific
Allowance
     Interest
Income
Recognized
     Average
Investment in
Impaired
loans
 
     (in thousands)  

Loans without specific allowance:

              

Commercial, secured by real estate

   $ 18,858       $ 23,984       $       $ 237       $ 16,379   

Commercial, industrial and other

     4,103         8,185                         2,634   

Leases

                                       

Real estate-residential mortgage

     415         415                 22         585   

Real estate-construction

     12,587         15,771                 14         10,671   

Home equity and consumer

     400         485                 1         82   

Loans with specific allowance:

              

Commercial, secured by real estate

     4,453         5,465         472         11         3,829   

Commercial, industrial and other

     313         389         63                 563   

Leases

                                       

Real estate-residential mortgage

     501         509         75         13         501   

Real estate-construction

     244         518         24                 300   

Home equity and consumer

     157         157         24         28         910   

Total:

              

Commercial, secured by real estate

   $ 23,311       $ 29,449       $ 472       $ 248       $ 20,208   

Commercial, industrial and other

     4,416         8,574         63                 3,197   

Leases, including leases held for sale

                                       

Real estate-residential mortgage

     916         924         75         35         1,086   

Real estate-construction

     12,831         16,289         24         14         10,971   

Home equity and consumer

     557         642         24         29         992   
  

 

 

 
   $ 42,031       $ 55,878       $ 658       $ 326       $ 36,454   
  

 

 

 

 

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Table of Contents

December 31, 2010

   Recorded
Investment in
Impaired
loans
     Contractual
Unpaid
Principal
Balance
     Specific
Allowance
     Interest
Income
Recognized
     Average
Investment in
Impaired
loans
 
     (in thousands)  

Loans without specific allowance:

              

Commercial, secured by real estate

   $ 14,176       $ 19,083       $       $ 206       $ 11,551   

Commercial, industrial and other

     513         530                         375   

Leases, including leases held for sale

                                       

Real estate-residential mortgage

     969         969                 30         776   

Real estate-construction

     7,302         8,330                 9         3,195   

Home equity and consumer

                                     123   

Loans with specific allowance:

              

Commercial, secured by real estate

     3,992         5,191         403         6         11,180   

Commercial, industrial and other

     1,243         1,400         511         2         2,485   

Leases, including leases held for sale

     91         91         49                 114   

Real estate-residential mortgage

     397         397         60         6         347   

Real estate-construction

     69         309         7                 1,005   

Home equity and consumer

     1,249         1,249         103         41         529   

Total:

              

Commercial, secured by real estate

   $ 18,168       $ 24,274       $ 403       $ 212       $ 22,731   

Commercial, industrial and other

     1,756         1,930         511         2         2,860   

Leases, including leases held for sale

     91         91         49                 114   

Real estate-residential mortgage

     1,366         1,366         60         36         1,123   

Real estate-construction

     7,371         8,639         7         9         4,200   

Home equity and consumer

     1,249         1,249         103         41         652   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 30,001       $ 37,549       $ 1,133       $ 300       $ 31,680   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The average recorded investment in impaired loans and leases for the first nine months of 2010 was $31.0 million and the income recognized, primarily on a cash basis, on impaired loans during the first nine months of 2010 was $294,000. Interest that would have been accrued on impaired loans and leases during the first nine months of 2011 and 2010 had the loans been performing under original terms would have been $2.2 million and $1.9 million, respectively.

Credit Quality Indicators

The classes of loans and leases are determined by internal risk rating. Management closely and continually monitors the quality of its loans and leases and assesses the quantitative and qualitative risks arising from the credit quality of its loans and leases. It is the policy of Lakeland to require that a Credit Risk Rating be assigned to all commercial loans and loan commitments. The Credit Risk Rating System has been developed by management to provide a methodology to be used by Loan Officers, department heads and Senior Management in identifying various levels of credit risk that exist within Lakeland’s loan portfolios. The risk rating system assists Senior Management in evaluating Lakeland’s loan portfolio, analyzing trends, and determining the proper level of required reserves to be recommended to the Board. In assigning risk ratings, management considers, among other things, a borrower’s debt service coverage, earnings strength, loan to value ratios, industry conditions and economic conditions. Management categorizes loans and commitments into a one (1) to nine (9) numerical structure with rating 1 being the strongest rating and rating 9 being the weakest. Ratings 1 through 5W are considered ‘Pass’ ratings.

 

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Table of Contents

The following table shows the Company’s commercial loan portfolio as of September 30, 2011 and December 31, 2010, by the risk ratings discussed above (in thousands):

 

September 30 2011    Commercial,      Commercial,         
     secured by      industrial      Real estate-  
Risk Rating    real estate      and other      construction  

1

   $       $       $   

2

             11,393           

3

     27,212         15,670         10,156   

4

     298,079         41,716         13,355   

5

     543,547         90,035         29,774   

5W - Watch

     43,435         8,102         434   

6 - Other Assets Especially Mentioned

     36,930         16,567         597   

7 - Substandard

     43,650         11,638         16,358   

8 - Doubtful

     171                 311   

9 - Loss

                       
  

 

 

 

Total

   $ 993,024       $ 195,121       $ 70,985   
  

 

 

 
December 31, 2010    Commercial,      Commercial,         
     secured by      industrial      Real estate-  
Risk Rating    real estate      and other      construction  

1

   $       $ 9       $   

2

             4,454           

3

     30,704         14,279           

4

     280,478         41,018         10,317   

5

     495,798         102,217         35,627   

5W - Watch

     61,383         14,925         1,908   

6 - Other Assets Especially Mentioned

     48,382         6,593         17,361   

7 - Substandard

     53,291         10,205         5,562   

8 - Doubtful

     204         559           

9 - Loss

                       
  

 

 

 

Total

   $ 970,240       $ 194,259       $ 70,775   
  

 

 

 

The risk rating tables above do not include consumer or residential loans or leases because they are evaluated on their payment performance status.

 

17


Table of Contents

Allowance for Loan and Lease Losses

The following table details activity in the allowance for loan and lease losses by portfolio segment and the related recorded investment in loans and leases:

 

Nine Months ended
September 30, 2011
Allowance for Loan and
Lease Losses:
   Commercial,
secured by
real estate
    Commercial,
industrial
and other
    Leases     Real estate-
residential
mortgage
    Real estate-
construction
    Home
equity and
consumer
    Total  
  

 

 

 
     (in thousands)        

Beginning Balance

   $ 11,366      $ 5,113      $ 3,477      $ 2,628      $ 2,176      $ 2,571      $ 27,331   

Charge-offs

     (4,380     (5,188     (2,333     (617     (2,966     (1,614     ($17,098

Recoveries

     1,863        177        1,039        31        13        277      $ 3,400   

Provision

     6,266        5,391        (718     260        1,860        1,332      $ 14,391   
  

 

 

 

Ending Balance

   $ 15,115      $ 5,493      $ 1,465      $ 2,302      $ 1,083      $ 2,566      $ 28,024   
  

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 472      $ 63      $      $ 75      $ 24      $ 24      $ 658   

Ending Balance: Collectively evaluated for impairment

     14,643        5,430        1,465        2,227        1,059        2,542      $ 27,366   
  

 

 

 

Ending Balance

   $ 15,115      $ 5,493      $ 1,465      $ 2,302      $ 1,083      $ 2,566      $ 28,024   
  

 

 

 

Loans and Leases:

              

Ending Balance: Individually evaluated for impairment

   $ 23,311      $ 4,416      $      $ 916      $ 12,831      $ 557      $ 42,031   

Ending Balance: Collectively evaluated for impairment

     969,713        190,705        36,178        391,538        58,154        303,555      $ 1,949,843   
  

 

 

 

Ending Balance

   $ 993,024      $ 195,121      $ 36,178      $ 392,454      $ 70,985      $ 304,112      $ 1,991,874   
  

 

 

 

 

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Year ended
December 31, 2010
Allowance for Loan and

Lease Losses:

   Commercial,
secured by
real estate
    Commercial,
industrial
and other
    Leases     Real estate-
residential
mortgage
    Real estate-
construction
    Home
equity and
consumer
    Total  
  

 

 

 
     (in thousands)        

Beginning Balance

   $ 9,285      $ 4,647      $ 4,308      $ 1,286      $ 3,198      $ 2,839      $ 25,563   

Charge-offs

     (7,510     (3,298     (4,307     (397     (1,756     (2,250     ($19,518

Recoveries

     134        62        1,391        7               411      $ 2,005   

Provision

     9,457        3,702        2,085        1,732        734        1,571      $ 19,281   
  

 

 

 

Ending Balance

   $ 11,366      $ 5,113      $ 3,477      $ 2,628      $ 2,176      $ 2,571      $ 27,331   
  

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 403      $ 511      $ 49      $ 60      $ 7      $ 103      $ 1,133   

Ending Balance: Collectively evaluated for impairment

     10,963        4,602        3,428        2,568        2,169        2,468      $ 26,198   
  

 

 

 

Ending Balance

   $ 11,366      $ 5,113      $ 3,477      $ 2,628      $ 2,176      $ 2,571      $ 27,331   
  

 

 

 

Loans and Leases:

              

Ending Balance: Individually evaluated for impairment

   $ 18,168      $ 1,756      $ 91      $ 1,366      $ 7,371      $ 1,249      $ 30,001   

Ending Balance: Collectively evaluated for impairment

     952,072        192,503        65,549        402,195        63,404        305,073      $ 1,980,796   
  

 

 

 

Ending Balance(1)

   $ 970,240      $ 194,259      $ 65,640      $ 403,561      $ 70,775      $ 306,322      $ 2,010,797   
  

 

 

 

 

(1) Excludes leases held for sale and deferred costs

Troubled Debt Restructurings

Troubled debt restructurings are those loans where significant concessions have been made due to borrowers’ financial difficulties. Restructured loans typically involve a modification of terms such as a reduction of the stated interest rate, a moratorium of principal payments and/or an extension of the maturity date at a stated interest rate lower than the current market rate of a new loan with similar risk.

 

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Table of Contents

The following table summarizes, as of September 30, 2011, loans that have been restructured during the periods presented:

 

     For the three months ended
September 30, 2011
     For the nine months ended
September 30, 2011
 
            Pre-      Post-             Pre-      Post-  
            Modification      Modification             Modification      Modification  
            Outstanding      Outstanding             Outstanding      Outstanding  
     Number of      Recorded      Recorded      Number of      Recorded      Recorded  
     Contracts      Investment      Investment      Contracts      Investment      Investment  
     (Dollars in thousands)      (Dollars in thousands)  

Troubled Debt Restructurings:

                 

Commercial, secured by real estate

     1       $ 195       $ 195         7       $ 3,188       $ 2,827   

Commercial, industrial and other

                                               

Leases

                                               

Real estate-residential mortgage

                             1         415         415   

Real estate-construction

                                               

Home equity and consumer

                                               
  

 

 

 
     1       $ 195       $ 195         8       $ 3,603       $ 3,242   
  

 

 

 

The following table summarizes as of September 30, 2011, loans that were restructured within the last 12 months that have subsequently defaulted:

 

     Number of
Contracts
     Recorded
Investment
 
     (Dollars in thousands)  

Defaulted Troubled Debt Restructurings:

     

Commercial, secured by real estate

     4       $ 1,550   

Commercial, industrial and other

               

Leases

               

Real estate-residential mortgage

     1         173   

Real estate-construction

               

Home equity and consumer

     1         400   
  

 

 

 
     6       $ 2,123   
  

 

 

 

Leases

Lakeland had no leases held for sale as of September 30, 2011, compared to $1.5 million as of December 31, 2010. Management recorded 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 quarter of 2011, management reclassified $1.5 million of leases held for sale as held for investment because management’s intent regarding these leases had changed. The following table shows the components of gains on leasing related assets for the periods presented:

 

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Table of Contents
    For the three months ended
September 30,
    For the nine months ended
September 30,
 
    2011     2010     2011     2010  
 

 

 

 
    (in thousands)     (in thousands)  

Gains (losses) on sales of leases

    $ —        ($45     $143        ($18

Realized gains on paid off leases

    125        246        681        653   

(Losses) gains on other repossessed assets

    (8     111        (14     536   
 

 

 

 

Total gains on leasing related assets

    $117        $312        $810        $1,171   
 

 

 

 

Other Real Estate and Other Repossessed Assets

At September 30, 2011, the Company had other repossessed assets and other real estate owned of $243,000 and $1.1 million, respectively. At December 31, 2010, the Company had other repossessed assets and other real estate owned of $558,000 and $1.0 million, respectively.

Note 8. Employee Benefit Plans

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

 

    For the three months ended
September 30,
    For the nine months ended
September 30,
 
    2011     2010     2011     2010  
 

 

 

 
    (in thousands)     (in thousands)  

Interest cost

    $24        $24        $72        $72   

Expected return on plan assets

    (23     (21     (67     (60

Amortization of unrecognized net actuarial loss

    12        14        36        41   
 

 

 

 

Net periodic benefit expense

    $13        $17        $41        $53   
 

 

 

 

Note 9. Directors’ Retirement Plan

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

 

    For the three months ended
September 30,
    For the nine months ended
September 30,
 
    2011     2010     2011     2010  
 

 

 

 
    (in thousands)     (in thousands)  

Service cost

    $6        $6        $18        $20   

Interest cost

    12        13        36        38   

Amortization of prior service cost

    4        8        12        23   

Amortization of unrecognized net actuarial loss

    1        2        5        6   
 

 

 

 

Net periodic benefit expense

    $23        $29        $71        $87   
 

 

 

 

The Company made contributions of $88,000 and $80,000 to the plan during the nine months ended September 30, 2011 and 2010, respectively. The Company does not expect to make any more contributions for the remainder of 2011.

 

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Table of Contents

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.

Level 2 – quoted prices for similar assets or liabilities in active markets; or quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability.

Level 3 – unobservable inputs for the asset or liability that reflect the Company’s own assumptions about assumptions that market participants would use in the pricing of the asset or liability and that are consequently not based on market activity but upon particular valuation techniques.

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

The following table sets forth the Company’s financial assets that were accounted for at fair value on a recurring basis as of the periods presented by level within the fair value hierarchy. The Company had no liabilities accounted for at fair value as of September 30, 2011 or December 31, 2010. During the nine months ended September 30, 2011, the Company did not make any 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:

 

September 30, 2011    Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
    

Significant

Other

Observable

Inputs

(Level 2)

    

Significant

Unobservable

Inputs

(Level 3)

    

Total

Fair

Value

 
  

 

 

 
Assets:    (in thousands)  

Investment securities, available for sale

           

US government agencies

     $ —         $23,784         $ —         $23,784   

Mortgage backed securities

             353,391                 353,391   

Obligations of states and political subdivisions

             30,881                 30,881   

Corporate debt securities

             19,846                 19,846   

Equity securities

     1,694         19,289                 20,983   
  

 

 

 

Total securities available for sale

     $1,694         $447,191         $ —         $448,885   

December 31, 2010

           

Assets:

           

Investment securities, available for sale

           

US government agencies

     $ —         $107,297         $ —         $107,297   

Mortgage backed securities

             305,852                 305,852   

Obligations of states and political subdivisions

             27,549                 27,549   

Corporate debt securities

             21,873                 21,873   

Equity securities

     2,090         22,446                 24,536   
  

 

 

 

Total securities available for sale

     $2,090         $485,017         $ —         $487,107   

 

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Table of Contents

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

 

September 30, 2011    Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
    

Significant

Other

Observable

Inputs

(Level 2)

    

Significant

Unobservable

Inputs

(Level 3)

    

Total

Fair Value

 
  

 

 

 
Assets:    (in thousands)  

Impaired Loans and Leases

   $  —       $  —       $ 42,031       $ 42,031   

Other real estate owned and other repossessed assets

                     1,342         1,342   

December 31, 2010

           
Assets:                            

Impaired Loans and Leases

                   $ 30,001       $ 30,001   

Other real estate owned and other repossessed assets

                     1,592         1,592   

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

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

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

Estimated fair values have been determined by the Company using the best available data and an estimation methodology suitable for each category of financial instruments. The estimation methodologies used, the estimated fair values, and recorded book balances at September 30, 2011 and December 31, 2010 are outlined below.

The net loan portfolio at September 30, 2011 and December 31, 2010 has been valued using a present value discounted cash flow where market prices were not available. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk. The carrying value of accrued interest approximates fair value.

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

 

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Table of Contents

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

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

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

 

     September 30,      December 31,  
     2011      2010  
      Carrying
Value
     Estimated
fair value
     Carrying
Value
     Estimated
fair value
 

Financial Assets:

     (in thousands)   

Cash and cash equivalents

     $65,258         $65,258         $49,278         $49,278   

Investment securities available for sale

     448,885         448,885         487,107         487,107   

Investment securities held to maturity

     66,134         68,656         66,573         68,815   

Loans, including leases held for sale

     1,992,775         1,993,842         2,014,617         2,008,192   

Financial Liabilities:

           

Deposits

     2,232,565         2,235,777         2,195,889         2,199,018   

Federal funds purchased and securities sold under agreements to repurchase

     53,175         53,175         52,123         52,123   

Other borrowings

     110,000         120,697         195,000         209,631   

Subordinated debentures

     77,322         78,039         77,322         78,707   

Commitments:

           

Standby letters of credit

             94                 78   

Note 11. Preferred Stock

On March 16, 2011, the Company redeemed 20,000 shares 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 (“CPP”). The Company paid to the Treasury $20.1 million, which included $20.0 million of principal and $86,000 in accrued and unpaid dividends, on March 16, 2011. As a result of the early payment, the Company also accelerated the accretion of $745,000 of the preferred stock discount during the nine months ended September 30, 2011. The warrant previously issued to the Treasury to purchase 997,049 shares of common stock at an exercise price of $8.88, subject to anti-dilution adjustments, remains outstanding.

Note 12. Recent Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board (the “FASB”) issued accounting guidance that modifies Step One of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step Two of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This guidance was effective for interim and annual reporting periods beginning on or after December 15, 2010 and did not have a significant impact on the Company’s financial statements.

 

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Table of Contents

In April 2011, the FASB issued accounting guidance to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The purpose of this guidance is to eliminate diversity in practice and provide greater comparability between companies’ financial statements. This guidance is effective for interim and annual reporting periods beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. Adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

In May 2011, the FASB and the International Accounting Standards Board (the “IASB”) issued new accounting guidance on fair value measurement and disclosure requirements. This guidance is the result of work by the FASB and IASB to develop common requirements for measuring fair value and disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). As a result, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The guidance is effective during interim and annual periods beginning after December 15, 2011. The guidance is to be applied prospectively, and early application by public entities is not permitted. Adoption of the guidance is not expected to have a significant impact on the Company’s financial statements.

In June 2011, the FASB issued accounting guidance updating the requirements regarding the presentation of comprehensive income to increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS. Under the new guidance, the components of net income and the components of other comprehensive income can be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present components of other comprehensive income as part of the changes in stockholders’ equity. This amendment will be applied prospectively and the amendments are effective for fiscal years and interim periods beginning after December 15, 2011. Early adoption is permitted. Adoption of the guidance is not expected to have a significant impact on the Company’s financial statements.

In September 2011, the FASB issued accounting guidance related to the annual testing of goodwill for impairment. Under the new guidance, an entity has the option to first determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. If, however, the entity concludes otherwise, then it is required to perform the first step of the two-step impairment test and then performing the second test, if required. This amendment is effective for annual and interim goodwill impairment tests performed for the fiscal years beginning after December 15, 2011. Early adoption is permitted.

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, 2010.

Statements Regarding Forward Looking Information

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

In addition to the risk factors disclosed elsewhere in this document, the following factors, among others, could cause the Company’s actual results to differ materially and adversely from such forward-looking statements: changes in the financial services industry and the U.S. and global capital markets, changes in economic conditions nationally, regionally and in the Company’s markets, the nature and timing of actions of the Federal Reserve Board and other regulators, the nature and timing of legislation affecting the financial services industry 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

 

25


Table of Contents

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 NJ Investment Corp., Lakeland Investment Corp., Lakeland Equity, Inc., and Lakeland Preferred Equity, Inc. All intercompany balances and transactions have been eliminated. Lakeland Preferred Equity, Inc. is a Real Estate Investment Trust formed by Lakeland in the fourth quarter of 2010.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also affect reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. There have been no material changes in the Company’s critical accounting policies, judgments and estimates, including assumptions or estimation techniques utilized, as compared to those disclosed in the Company’s most recent Annual Report on Form 10-K.

The Company tests goodwill for impairment annually or when circumstances indicate a potential for impairment at the reporting unit level. The Company has determined that it has one reporting unit, Community Banking. The Company analyzes goodwill using various methodologies including an income approach and a market approach. The income approach calculates cash flows to a potential acquirer based on the anticipated financial results assuming a change in control transaction. The market approach includes a comparison of pricing multiples in recent acquisitions of similar companies and applies these multiples to the Company. The Company tested the goodwill as of November 30, 2010 and determined that it is not impaired. There were no triggering events since November 30, 2010 that would cause the Company to do an interim valuation.

Results of Operations

(Third Quarter 2011 Compared to Third Quarter 2010)

Net Income

Net income for the third quarter of 2011 was $5.1 million, compared to net income of $4.9 million for the same period in 2010. Net income available to common shareholders was $4.8 million compared to $3.3 million for the same period last year. Dividends on preferred stock and accretion decreased to $293,000 for the third quarter of 2011 from $1.6 million for the same period last year. The lower dividends and accretion reflect a total of $40.0 million in repayments to the U.S. Department of the Treasury to repurchase preferred stock under the CPP. Diluted earnings per share was $0.19 for the third quarter of 2011, compared to diluted earnings per share of $0.13 for the same period last year. During the third quarter of 2010 the Company repaid $20.0 million in preferred stock to the U.S. Department of the Treasury under the CPP. In doing so, a non-cash charge of $898,000 was recorded, reflecting the acceleration of the preferred stock discount accretion. The non-cash charge affected diluted earnings per share in the third quarter of 2010 by $0.04.

Net Interest Income

Net interest income on a tax equivalent basis for the third quarter of 2011 was $24.6 million, compared to $25.3 million earned in the third quarter of 2010. The net interest margin decreased from 3.93% in the third quarter of 2010 to 3.85% in the third quarter of 2011, primarily as a result of a 30 basis point decline in the yield on interest-earning assets, which was partially offset by a 23 basis point reduction in the cost of interest-bearing liabilities. The net interest spread as a result declined six basis points to 3.68%. Although the net interest spread declined, the decline was mitigated by an increase in income earned on free funds (interest earning assets funded by non-interest

 

26


Table of Contents

bearing liabilities) resulting from an increase in average non-interest bearing deposits of $60.9 million. The components of net interest income will be discussed in greater detail below.

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

 

     For the three months ended,
September 30, 2011
    For the three months ended,
September 30, 2010
 
      Average
Balance
    Interest
Income/
Expense
     Average
rates
earned/
paid
    Average
Balance
    Interest
Income/
Expense
     Average
rates
earned/
paid
 
Assets    (dollars in thousands)  

Interest-earning assets:

              

Loans and leases (A)

   $ 1,982,637      $ 25,999         5.20   $ 1,976,248      $ 27,670         5.55

Taxable investment securities

     447,196        2,773         2.48     443,156        3,107         2.80

Tax-exempt securities

     70,998        769         4.33     63,329        762         4.81

Federal funds sold (B)

     36,453        16         0.18     63,824        42         0.26

Total interest-earning assets

     2,537,284        29,557         4.63     2,546,557        31,581         4.93

Noninterest-earning assets:

              

Allowance for loan and lease losses

     (29,132          (28,565     

Other assets

     254,153                         263,741                    

TOTAL ASSETS

   $ 2,762,305                       $ 2,781,733                    

Liabilities and Stockholders’ Equity

              

Interest-bearing liabilities:

              

Savings accounts

   $ 334,909      $ 105         0.12   $ 319,438      $ 141         0.18

Interest-bearing transaction accounts

     1,058,085        1,345         0.50     1,082,769        1,859         0.68

Time deposits

     397,029        1,122         1.13     452,129        1,584         1.40

Borrowings

     281,069        2,365         3.37     282,386        2,740         3.88

Total interest-bearing liabilities

     2,071,092        4,937         0.95     2,136,722        6,324         1.18

Noninterest-bearing liabilities:

              

Demand deposits

     424,938             364,075        

Other liabilities

     12,101             12,641        

Stockholders’ equity

     254,174                         268,295                    

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,762,305                       $ 2,781,733                    

Net interest income/spread

       24,620         3.68       25,257         3.74

Tax equivalent basis adjustment

             269                         267            

NET INTEREST INCOME

           $ 24,351                       $ 24,990            

Net interest margin (C)

                      3.85                      3.93
  (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 $31.6 million in the third quarter of 2010 to $29.6 million in the third quarter of 2011, a decrease of $2.0 million, or 6%. The decrease in interest income was due primarily to a 30 basis point decrease in the yield on interest earning assets, as a result of increased loan modifications and refinances along with lower yields on new loans and investments. The yield on average loans and leases at 5.20% in the third quarter of 2011 was 35 basis points lower than the third quarter of 2010. The yield on average taxable and tax exempt investment securities decreased by 32 basis points and 48 basis points, respectively, compared to the third quarter of 2010. Average loans and leases at $1.98 billion increased $6.4 million from the third quarter of 2010, while average investment securities at $518.2 million increased $11.7 million.

Total interest expense decreased from $6.3 million in the third quarter of 2010 to $4.9 million in the third quarter of 2011, a decrease of $1.4 million, or 22%. The cost of average interest-bearing liabilities decreased from 1.18% in the third quarter of 2010 to 0.95% in 2011. The decrease in yield was due to the continuing low rate environment along with a $55.1 million reduction in higher yielding time deposits as customers preferred to keep their deposits in short-term transaction accounts. Average rates paid on interest-bearing liabilities declined in all categories.

 

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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 third quarter of 2011, a $4.1 million provision for loan and lease losses was recorded, which was $799,000 lower than the provision for the same period last year. The Company also recorded a provision for unfunded lending commitments of $365,000 which is included in noninterest expense. During the third quarter of 2011, the Company charged off loans of $4.5 million and recovered $260,000 in previously charged off loans and leases compared to $5.9 million and $497,000, respectively, during the same period in 2010. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income decreased $994,000, or 16%, to $5.1 million in the third quarter of 2011 compared to the third quarter of 2010. The decrease in noninterest income was due primarily to gains on investment securities, which were $785,000 in the third quarter of 2011 compared to $1.7 million in the third quarter of 2010. Commissions and fees at $915,000 decreased by $50,000, or 5%, primarily due to a reduction in investment commission income and loan fees. Gains on leasing related assets at $117,000 decreased by $195,000, reflecting a smaller portfolio, while other income at $299,000 was $222,000 greater than the third quarter of 2010 as the Company recorded a gain of $173,000 on the sale of a branch office building in the third quarter of 2011. Income on bank owned life insurance at $356,000 was $20,000 less than the same period last year primarily as a result of decreases in rates for the underlying policies.

Noninterest Expense

Noninterest expense totaling $18.0 million decreased $911,000, or 5%, in the third quarter of 2011 from the third quarter of 2010. The decrease in noninterest expense in this quarter was due primarily to long term debt prepayment fees which totaled $800,000 in the third quarter of 2011 compared to $1.8 million in the third quarter of 2010. In the third quarter of 2011 $20.0 million in long-term debt at 4.10% was prepaid. FDIC insurance expense at $636,000 decreased $301,000 compared to the third quarter of 2010 as a result of changes made by the FDIC in the method of calculating assessment rates. Net occupancy expense at $1.7 million increased $98,000 compared to the third quarter of 2010 due primarily to increased lease expenses and real estate taxes, while furniture and equipment expense at $1.2 million decreased $98,000 due primarily to decreased equipment depreciation and service contract expenses. Stationery, supplies and postage at $298,000 decreased $62,000 or 17% primarily due to reduced postage expense as a result of the implementation of electronic statement delivery. Marketing expense totaling $612,000 increased $101,000 due primarily to the timing of media expenses. During the third quarter of 2011 the Company completed its core deposit intangible amortization, which resulted in a $219,000 decrease in that category. Collection expense totaling $70,000 in the third quarter of 2011 was $118,000 lower than the same period in 2010 due primarily to a reduction in leasing related costs, while legal expenses totaling $457,000 increased $45,000 due to increased workout expenses related to non-performing loans and leases. Expenses on other real estate owned and other repossessed assets were $217,000 greater than the same period in 2010 due primarily to a $180,000 write-down of an other real estate owned property. Other expenses at $2.6 million increased $253,000 due primarily to a $228,000 increase in the provision for unfunded lending commitments which totaled $365,000 in the third quarter of 2011 compared to $137,000 during the same period in 2010. The Company’s efficiency ratio, a non-GAAP financial measure, was 57.01% in the third quarter of 2011, compared to 55.94% for the same period last year due primarily to a reduction in interest income. 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 periods presented:

 

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For the three months ended
September 30,

 
     2011     2010  

 

 
     (dollars in thousands)  

Calculation of efficiency ratio

  

Total noninterest expense

   $ 18,040      $ 18,951   

Less:

    

Amortization of core deposit intangibles

     (46     (265

Other real estate owned and other repossessed asset expense

     (336     (119

Long term debt prepayment fee

     (800     (1,835

Provision for unfunded lending commitments

     (365     (137

Noninterest expense, as adjusted

   $ 16,493      $ 16,595   

Net interest income

   $ 24,351      $ 24,990   

Noninterest income

     5,095        6,089   

Total revenue

     29,446        31,079   

Plus: Tax-equivalent adjustment on municipal securities

     269        267   

Less: gains on investment securities

     (785     (1,681

Total revenue, as adjusted

   $ 28,930      $ 29,665   

Efficiency ratio

     57.01     55.94

 

 

Income Taxes

The Company’s effective tax rate was 30.5% in the third quarter of 2011, compared to 33.0% in the third quarter of 2010. The decrease in the effective tax rate was driven by increased tax benefits attributable to the real estate investment trust (“REIT”) subsidiary established in December 2010.

Results of Operations

(Year to Date 2011 Compared to Year to Date 2010)

Net Income

Net income for the first nine months of 2011 was $14.7 million, compared to net income of $14.2 million for the same period in 2010. Net income available to common shareholders was $12.9 million compared to $10.8 million for the same period last year. Diluted earnings per share was $0.50 for the first nine months of 2011, compared to diluted earnings per share of $0.43 per share for the same period last year. Dividends on preferred stock and accretion declined from $3.4 million for the first nine months of 2010 to $1.9 million for the same period in 2011 reflecting repayments to the U.S. Department of the Treasury to repurchase preferred stock under the CPP. These repayments consisted of a $20.0 million repayment in August of 2010 and a $20.0 million repayment in March of 2011. Dividends on preferred stock and accretion in 2011 include a non-cash charge of $745,000 compared to a charge of $898,000 in 2010 reflecting the acceleration of the preferred stock discount accretion.

Net Interest Income

Net interest income on a tax equivalent basis for the first nine months of 2011 was $74.2 million, which was $1.2 million less than the $75.3 million earned in the first nine months of 2010. The net interest margin decreased from 3.96% in the first nine months of 2010 to 3.89% in the first nine months of 2011, primarily as a result a 33 basis point decline in the yield on interest-earning assets, which was partially offset by a 28 basis point reduction in the cost of interest-bearing liabilities. The net interest spread as a result declined 5 basis points to 3.71%. Although the net interest spread declined, the decline was mitigated by an increase in income earned on free funds resulting from an increase in average non-interest bearing deposits of $63.9 million. The components of net interest income will be discussed in greater detail below.

 

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

 

CONSOLIDATED STATISTICS ON A TAX EQUIVALENT BASIS   
     For the nine months ended,
September 30, 2011
    For the nine months ended,
September 30, 2010
 
      Average
Balance
    Interest
Income/
Expense
     Average
rates
earned/
paid
    Average
Balance
    Interest
Income/
Expense
     Average
rates
earned/
paid
 
Assets    (dollars in thousands)  

Interest-earning assets:

              

Loans (A)

   $ 1,988,585      $ 78,784         5.30   $ 1,994,922      $ 83,971         5.63

Taxable investment securities

     461,149        8,448         2.44     423,589        9,099         2.86

Tax-exempt securities

     69,929        2,317         4.42     62,221        2,326         4.98

Federal funds sold (B)

     32,481        39         0.16     60,122        110         0.24

Total interest-earning assets

     2,552,144        89,588         4.69     2,540,854        95,506         5.02

Noninterest-earning assets:

              

Allowance for loan and lease losses

     (29,127          (27,474     

Other assets

     250,841                         255,146                    

TOTAL ASSETS

   $ 2,773,858           $ 2,768,526        

 

 

Liabilities and Stockholders’ Equity

              

Interest-bearing liabilities:

              

Savings accounts

   $ 330,103      $ 361         0.15   $ 318,078      $ 476         0.20

Interest-bearing transaction accounts

     1,075,313        4,314         0.54     1,069,720        6,215         0.78

Time deposits

     407,182        3,635         1.19     467,052        5,166         1.47

Borrowings

     282,133        7,111         3.36     280,942        8,329         3.95

Total interest-bearing liabilities

     2,094,731        15,421         0.98     2,135,792        20,186         1.26

Noninterest-bearing liabilities:

              

Demand deposits

     412,435             348,527        

Other liabilities

     12,455             12,591        

Stockholders’ equity

     254,237                         271,616                    

TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY

   $ 2,773,858           $ 2,768,526        

Net interest income/spread

       74,167         3.71       75,320         3.76

Tax equivalent basis adjustment

             811                         814            

NET INTEREST INCOME

     $ 73,356           $ 74,506      

 

 

Net interest margin (C)

          3.89          3.96

 

 
  (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 $95.5 million in the first nine months of 2010 to $89.6 million in the first nine months of 2011, a decrease of $5.9 million, or 6%. The decrease in interest income was due to a 33 basis point decrease in the yield on interest earning assets, as a result of lower yields on new loans and investments, along with a lower percentage of earning assets being deployed in loans and leases. The yield on average loans and leases at 5.30% in the first nine months of 2011 was 33 basis points lower than the same period in 2010. The yield on average taxable and tax exempt investment securities decreased by 42 basis points and 56 basis points, respectively, in the first nine months of 2011. Average loans and leases at $1.99 billion decreased $6.3 million from the first nine months of 2010, while average investment securities at $531.1 million increased $45.3 million. Loans and leases typically earn higher yields than investment securities.

Total interest expense decreased from $20.2 million in the first nine months of 2010 to $15.4 million in the first nine months of 2011, a decrease of $4.8 million, or 24%. Average interest-bearing liabilities decreased $41.1 million, while the cost of those liabilities decreased from 1.26% in 2010 to 0.98% in 2011 for the same reasons as discussed in the quarterly analysis. Average noninterest bearing deposits increased from $348.5 million in the first nine months of 2010 to $412.4 million in the first nine months of 2011, an increase of $63.9 million, or 18%, while average time deposits decreased $59.9 million, or 13% to $407.2 million.

 

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Provision for Loan and Lease Losses

In the first nine months of 2011, a $14.4 million provision for loan and lease losses was recorded, compared to $14.7 million for the same period last year. During the first nine months of 2011, the Company charged off loans of $17.1 million and recovered $3.4 million in previously charged off loans and leases compared to $14.9 million and $1.8 million, respectively, during the same period in 2010. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income decreased $716,000, or 5%, to $14.0 million in the first nine months of 2011 compared to the first nine months of 2010 due primarily to reductions in gains on investment securities and leasing related assets. In the first nine months of 2011, gains on investment securities totaled $1.2 million, which was a $453,000 reduction from the same period in 2010 and gains on leasing related assets at $810,000 for the first nine months of 2011 were $361,000 lower than the same period last year. Additionally, income on bank owned life insurance in the first nine months of 2011 totaling $1.1 million was $77,000 or 7% lower than the same period in 2010 for the same reasons discussed in the quarterly comparison.

Noninterest Expense

Noninterest expense totaling $51.8 million decreased $1.0 million or 2% in the first nine months of 2011 compared to the first nine months of 2010. Long term debt prepayment fees in the first nine months of 2011 were $800,000 compared to $1.8 million for the same period in 2010. FDIC insurance expense at $2.2 million and collection expenses at $195,000 were $656,000 and $300,000 lower, respectively, than the same period in 2010 due to the same reasons discussed in the quarterly comparison. Stationery, supplies and postage at $1.1 million in the first nine months of 2011 decreased $114,000 for the same reason discussed in the quarterly comparison. Core deposit intangible amortization at $577,000 was $219,000 less than the first nine months of 2010 due to the same reason discussed in the quarterly analysis, while other real estate and repossessed asset expense at $808,000 increased $454,000 as a result of increased expenses related to other real estate properties. Marketing expense totaling $1.8 million for the first nine months of 2011 was $133,000 or 8% higher than the same period in 2010 due to the same reasons mentioned in the quarterly analysis. The Company’s efficiency ratio, a non-GAAP financial measure, was 56.61% in the first nine months of 2011, compared to 56.13% for the same period last year reflecting continued management of expenses. The following table shows the calculation of the efficiency ratio for the periods presented:

 

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Table of Contents
     For the nine months ended
September 30,
 
      2011     2010  
     (dollars in thousands)  

Calculation of efficiency ratio

    

Total noninterest expense

   $ 51,798      $ 52,838   

Less:

    

Amortization of core deposit intangibles

     (577     (796

Other real estate owned and other repossessed asset expense

     (808     (354

Long-term debt prepayment fee

     (800     (1,835

Provision for unfunded lending commitments

     (378     (243

 

 

Noninterest expense, as adjusted

   $ 49,235      $ 49,610   

 

 

Net interest income

   $ 73,356      $ 74,506   

Noninterest income

     14,035        14,751   

 

 

Total revenue

     87,391        89,257   

Plus: Tax-equivalent adjustment on municipal securities

     811        814   

Less: gains on investment securities

     (1,229     (1,682

 

 

Total revenue, as adjusted

   $ 86,973      $ 88,389   

 

 

Efficiency ratio

     56.61     56.13

 

 

Income Taxes

The Company’s effective tax rate was 30.5% in the first nine months of 2011, compared to 34.5% in the first nine months of 2010. The decrease in the effective tax rate was driven by increased tax benefits attributable to the real estate investment trust (“REIT”) subsidiary established in December 2010.

Financial Condition

The Company’s total assets decreased $50.9 million from $2.79 billion at December 31, 2010, to $2.74 billion at September 30, 2011 due primarily to a 7% reduction in investment securities and a 1% reduction in total loans. Total deposits increased 2%, with non-interest bearing transaction accounts increasing 11%. The Company decreased other borrowings by $85.0 million or 44% since December 31, 2010.

Loans and Leases

Gross loans and leases, including leases held for sale, at $1.99 billion decreased by $20.4 million from December 31, 2010. The decrease in gross loans and leases is primarily due to leases at $36.2 million and residential mortgages at $392.5 million decreasing $31.0 million and $11.1 million, respectively. Commercial loans secured by real estate totaling $993.0 million at September 30, 2011 increased $22.8 million from year end 2010. 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

Non-performing assets increased from $44.6 million, or 1.60% of total assets, on December 31, 2010 to $57.7 million, or 2.11% of total assets, on September 30, 2011. The majority of the increase was in commercial loan and real estate construction loan non-accruals, which increased $7.9 million and $6.5 million, respectively from December 31, 2010. The increase in non-accruals resulted primarily from three loan relationships that became non-performing totaling $16.5 million. Leases on non-accrual decreased $1.6 million from December 31, 2010 to $4.7 million on September 30, 2011. Non-accrual leases include $4.0 million in net receivables related to one lessee who has named the Company and other unrelated parties in a

 

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complaint in connection with the leases. For more information, please see Legal Proceedings in Item 1 of Part II of this Quarterly Report on Form 10-Q. Commercial loan non-accruals at September 30, 2011 included eight loan relationships with balances over $1.0 million, totaling $23.8 million, and three loan relationships between $500,000 and $1.0 million, totaling $2.3 million.

Loans and leases past due ninety days or more and still accruing at September 30, 2011 increased $86,000 to $1.3 million from December 31, 2010. Loans and leases past due 90 days or more and still accruing are those loans and leases that are considered both well-secured and in process of collection.

On September 30, 2011, the Company had $6.1 million in loans that were troubled debt restructurings and still accruing interest income compared to $9.1 million on December 31, 2010. 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.

On September 30, 2011, the Company had $42.0 million in impaired loans and leases (consisting primarily of non-accrual and restructured loans and leases) compared to $30.0 million at year-end 2010. Impaired loans increased from year-end 2010 as a result of the increase in non-accrual commercial loans. For more information on these loans and leases see Note 7 in Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. The impairment of the loans and leases is measured using the present value of future cash flows on certain impaired loans and leases and is based on the fair value of the underlying collateral for the remaining loans and leases. Based on such evaluation, $658,000 has been allocated as a portion of the allowance for loan and lease losses for impairment at September 30, 2011. At September 30, 2011, the Company also had $34.4 million in loans and leases that were rated substandard that were not classified as non-performing or impaired compared to $47.0 million at December 31, 2010.

There were no loans and leases at September 30, 2011, other than those designated non-performing, impaired or substandard, where the Company was aware of any credit conditions of any borrowers or obligors that would indicate a strong possibility of the borrowers not complying with present terms and conditions of repayment and which may result in such loans and leases being included as non-accrual, past due or renegotiated at a future date. The following table sets forth for the periods presented, the historical relationships among the allowance for loan and lease losses, the provision for loan and lease losses, the amount of loans and leases charged-off and the amount of loan and lease recoveries:

 

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    Nine months
ended
September 30,
    Nine months
ended
September 30,
    Year ended
December 31,
 
(dollars in thousands)   2011     2010     2010  
 

 

 

 

Balance of the allowance at the beginning of the year

  $ 27,331      $ 25,563      $ 25,563   
 

 

 

 

Loans and leases charged off:

     

Commercial, secured by real estate (1)

    7,346        7,267        9,266   

Commercial, industrial and other

    5,188        2,275        3,298   

Leases

    2,333        3,236        4,307   

Real estate—mortgage

    617        188        397   

Home equity and consumer

    1,614        1,911        2,250   
 

 

 

 

Total loans charged off

    17,098        14,877        19,518   
 

 

 

 

Recoveries:

     

Commercial, secured by real estate (1)

    1,876        126        134   

Commercial, industrial and other

    177        11        62   

Leases

    1,039        1,283        1,391   

Real estate—mortgage

    31        6        7   

Home equity and consumer

    277        369        411   
 

 

 

 

Total Recoveries

    3,400        1,795        2,005   
 

 

 

 

Net charge-offs:

    13,698        13,082        17,513   

Provision for loan and lease losses

    14,391        14,737        19,281   
 

 

 

 

Ending balance

  $ 28,024      $ 27,218      $ 27,331   
 

 

 

 

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

    0.92     0.88     0.88

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

    1.41     1.37     1.36

(1) Includes construction real estate loans

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

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

 

   

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

 

   

The establishment of reserves for pools of homogeneous types of loans and leases not subject to specific review, including impaired 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.

 

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Table of Contents

While non-performing loans and leases increased from $43.0 million on December 31, 2010 to $56.4 million on September 30, 2011, the allowance for loan and lease losses as a percent of total loans increased to 1.41% of total loans on September 30, 2011, compared to 1.36% as of December 31, 2010. As discussed above, the increase in non-performing loans was related primarily to three loan relationships. 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. The preceding statement constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

Based upon the process employed and giving recognition to all accompanying factors related to the loan and lease portfolio, management considers the allowance for loan and lease losses to be adequate at September 30, 2011. 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 decreased from $553.7 million on December 31, 2010 to $515.0 million on September 30, 2011, a decrease of $38.7 million, or 7%.

Deposits

Total deposits increased from $2.20 billion on December 31, 2010 to $2.23 billion on September 30, 2011, an increase of $36.7 million, or 2%. Savings and interest-bearing transaction accounts totaling $1.41 billion increased $11.9 million from December 31, 2010, while time deposits totaling $396.7 million decreased $16.1 million. Noninterest bearing deposits increased $40.9 million, or 11%, to $424.8 million, resulting primarily from an increase in commercial noninterest bearing deposits.

Liquidity

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

The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statement for the nine months ended September 30, 2011 follows.

Cash and cash equivalents totaling $65.3 million on September 30, 2011, increased $16.0 million from December 31, 2010. Operating activities provided $39.6 million in net cash. Investing activities provided $48.2 million in net cash, primarily reflecting maturities, repayments and sales of securities. Financing activities used $71.8 million in net cash, reflecting repayments of $85.0 million in other borrowings and the redemption of $20.0 million in preferred stock, partially offset by $36.7 million in new deposits. The Company anticipates that it will have sufficient funds available to meet its current loan commitments and deposit maturities. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of September 30, 2011. Interest on subordinated debentures and long-term borrowed funds is calculated based on current contractual interest rates.

 

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

After

five
years

 

Minimum annual rentals or noncancellable operating leases

     $16,309         $1,860         $3,300         $2,727         $8,422   

Benefit plan commitments

     4,980         185         370         300         4,125   

Remaining contractual maturities of time deposits

     396,718         298,251         83,341         14,198         928   

Subordinated debentures

     77,322         —           —           —           77,322   

Loan commitments

     463,610         390,966         44,303         2,296         26,045   

Long-term debt

     110,000         15,000         10,000         40,000         45,000   

Interest on long-term debt*

     115,446         8,077         15,363         12,968         79,038   

Series A Preferred Stock

     19,000         —           —           —           19,000   

Interest on Series A Preferred Stock

     10,807         950         2,375         3,420         4,062   

Standby letters of credit

     9,957         8,522         1,218         137         80   
  

 

 

 

Total

     $1,224,149         $723,811         $160,270         $76,046         $264,022   
  

 

 

 

 

*Includes interest on long-term debt and subordinated debentures at a weighted rate of 4.36%.

Capital Resources

Total stockholders’ equity decreased from $260.7 million on December 31, 2010 to $254.9 million on September 30, 2011, a decrease of $5.8 million, or 2%. Book value per common share increased to $9.26 on September 30, 2011 from $8.82 on December 31, 2010. The decrease in stockholders’ equity from December 31, 2010 to September 30, 2011 was primarily due to the $20.0 million redemption of preferred stock and payment of cash dividends of $4.8 million. This was partially offset by $14.7 million in net income and a $3.4 million increase in accumulated other comprehensive income relating to an increase in market value in the Company’s available for sale securities portfolio.

The Company and Lakeland are subject to various regulatory capital requirements that are monitored by federal banking agencies. Failure to meet minimum capital requirements can lead to certain supervisory actions by regulators; any supervisory action could have a direct material adverse effect on the Company or Lakeland’s financial statements. Management believes, as of September 30, 2011, that the Company and Lakeland meet all capital adequacy requirements to which they are subject.

The capital ratios for the Company and Lakeland at September 30, 2011 are as follows:

 

     Tier 1 Capital   Tier 1 Capital   Total Capital
     to Total Average   to Risk-Weighted   to Risk-Weighted
     Assets Ratio   Assets Ratio   Assets Ratio
     September 30,   September 30,   September 30,
Capital Ratios:    2011   2011   2011

The Company

   8.29%   11.21%   13.46%

Lakeland Bank

   8.44%   11.42%   12.67%

“Well capitalized” institution under FDIC Regulations

   5.00%   6.00%   10.00%

 

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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.

 

(dollars in thousands, except per share amounts)    September 30,
2011
    December 31,
2010
 

 

 

Calculation of tangible book value per common share

    

Total common stockholders’ equity at end of period - GAAP

     $236,474        $223,235   

Less:

    

Goodwill

     87,111        87,111   

Other identifiable intangible assets, net

            578   

 

 

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

     $149,363        $135,546   

 

 

Shares outstanding at end of period

     25,528        25,322   

 

 

Book value per share - GAAP

     $9.26        $8.82   

 

 

Tangible book value per share - Non-GAAP

     $5.85        $5.35   

 

 

Calculation of tangible common equity to tangible assets

    

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

     $149,363        $135,546   

 

 

Total assets at end of period

     $2,741,768        $2,792,674   

Less:

    

Goodwill

     87,111        87,111   

Other identifiable intangible assets, net

            578   

 

 

Total tangible assets at end of period - Non-GAAP

     $2,654,657        $2,704,985   

 

 

Common equity to assets - GAAP

     8.62     7.99

 

 

Tangible common equity to tangible assets - Non-GAAP

     5.63     5.01

 

 

 

    For the three months ended,     For the nine months ended,  
   

September 30,

2011

   

September 30,

2010

   

September 30,

2011

   

September 30,

2010

 
 

 

 

 

Calculation of return on average tangible common equity

       

Net income - GAAP

    $5,106        $4,872        $14,735        $14,191   
 

 

 

 

Total average common stockholders’ equity

    $235,785        $223,941        $230,689        $219,431   

Less:

       

Average goodwill

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

Average other identifiable intangible assets, net

    15        990        221        1,254   
 

 

 

 

Total average tangible common stockholders’ equity - Non-GAAP

    $148,659        $135,840        $143,357        $131,066   
 

 

 

 

Return on average common stockholders’ equity - GAAP

    8.59     8.63     8.54     8.65
 

 

 

 

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

    13.63     14.23     13.74     14.48
 

 

 

 

 

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

The Company manages interest rate risk and market risk by identifying and quantifying interest rate risk exposures using simulation analysis 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 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 $95.8 milllion. The information provided for net interest income assumes that changes in interest rates of plus 200 basis points and minus 200 basis points change gradually in equal increments (“rate ramp”) over the twelve month period.

 

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

Asset/Liability Policy Limit

   -5.0%       -5.0%

September 30, 2011

   -3.0%   -1.2%   -2.0%   -2.7%

December 31, 2010

   -3.3%   -1.5%   -1.9%   -2.6%

The base case for the following table is an estimate of the Company’s net portfolio value for the periods presented using current discount rates, and assuming the Company’s interest-sensitive assets and liabilities remain at period-end levels. The net portfolio value at September 30, 2011 (the base case) was $323.6 million. The information provided for the net portfolio value assumes fluctuations or “rate shocks” of plus 200 basis points and minus 200 basis points for changes in interest rates as shown in the table below. Rate shocks assume that current interest rates change immediately.

 

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

Asset/Liability Policy Limit

   -25.0%       -25.0%

September 30, 2011

   -4.2%   1.0%   -6.6%   -13.6%

December 31, 2010

   -7.9%   -2.0%   -2.5%   -8.6%

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, 2010.

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

 

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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 quarter ended September 30, 2011 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

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, 2010.

 

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.
101.INS*    XBRL Instance Document
101.SCH*    XBRL Taxonomy Extension Schema Document
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document
  

 

  

*  Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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SIGNATURES

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

 

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

Date: November 9, 2011

 

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