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LAKELAND BANCORP INC - Quarter Report: 2012 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, 2012

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 25, 2012 there were 29,692,241 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, 2012 (unaudited) and December 31, 2011      3   
 

Consolidated Statements of Income - Unaudited Three Months and Nine Months Ended September  30, 2012 and 2011

     4   
 

Consolidated Statements of Comprehensive Income - Unaudited Three Months and Nine Months Ended September 30, 2012 and 2011

     5   
 

Consolidated Statements of Changes in Stockholders’ Equity - Unaudited Nine Months Ended September 30, 2012

     6   
  Consolidated Statements of Cash Flows - Unaudited Nine Months Ended September 30, 2012 and 2011      7   
  Notes to Consolidated Financial Statements (unaudited)      8   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      30   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      46   

Item 4.

  Controls and Procedures      46   

Part II Other Information

  

Item 1.

  Legal Proceedings      48   

Item 1A.

  Risk Factors      48   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      48   

Item 3.

  Defaults Upon Senior Securities      48   

Item 4.

  Mine Safety Disclosures      48   

Item 5.

  Other Information      48   

Item 6.

  Exhibits      48   

Signatures

     49   

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, 2012
(unaudited)
    December 31,
2011
 
     (dollars in thousands except share and per share amounts)  

ASSETS:

    

Cash

   $ 95,702      $ 60,688   

Interest-bearing deposits due from banks

     7,349        11,870   
  

 

 

   

 

 

 

Total cash and cash equivalents

     103,051        72,558   

Investment securities available for sale, at fair value

     419,449        463,611   

Investment securities held to maturity; fair value of $99,237 at September 30, 2012 and $74,274 at December 31, 2011

     95,996        71,700   

Federal Home Loan Bank Stock, at cost

     5,849        8,333   

Loans, net of deferred costs

     2,064,779        2,041,575   

Less: allowance for loan and lease losses

     28,669        28,416   
  

 

 

   

 

 

 

Net loans

     2,036,110        2,013,159   

Premises and equipment, net

     33,237        27,917   

Accrued interest receivable

     8,065        8,369   

Goodwill

     87,111        87,111   

Bank owned life insurance

     45,773        44,760   

Other assets

     25,006        28,432   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 2,859,647      $ 2,825,950   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Noninterest bearing

   $ 485,256      $ 449,560   

Savings and interest-bearing transaction accounts

     1,535,422        1,440,541   

Time deposits under $100 thousand

     196,939        211,797   

Time deposits $100 thousand and over

     123,491        147,755   
  

 

 

   

 

 

 

Total deposits

     2,341,108        2,249,653   

Federal funds purchased and securities sold under agreements to repurchase

     54,581        72,131   

Other borrowings

     95,000        155,000   

Subordinated debentures

     77,322        77,322   

Other liabilities

     14,092        12,061   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     2,582,103        2,566,167   
  

 

 

   

 

 

 

Commitments and contingencies

    

STOCKHOLDERS’ EQUITY

    

Preferred stock, Series A, no par value, $1,000 liquidation value, authorized 1,000,000 shares; issued 0 shares at September 30, 2012 and 19,000 shares at December 31, 2011

     —          18,480   

Common stock, no par value; authorized shares, 40,000,000; issued 29,941,967 shares at September 30, 2012 and 27,275,480 shares at December 31, 2011

     303,719        270,044   

Accumulated deficit

     (27,895     (26,061

Treasury stock, at cost, 251,425 shares at September 30, 2012 and 439,340 at December 31, 2011

     (3,163     (5,551

Accumulated other comprehensive income

     4,883        2,871   
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     277,544        259,783   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,859,647      $ 2,825,950   
  

 

 

   

 

 

 

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED

 

     For the Three Months Ended September 30,      For the Nine Months Ended September 30,  
     2012      2011      2012      2011  
     (In thousands, except per share data)  

INTEREST INCOME

           

Loans, leases and fees

   $ 24,929       $ 25,999       $ 75,659       $ 78,784   

Federal funds sold and interest-bearing deposits with banks

     17         16         29         39   

Taxable investment securities and other

     2,121         2,773         6,668         8,448   

Tax-exempt investment securities

     428         500         1,371         1,506   
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL INTEREST INCOME

     27,495         29,288         83,727         88,777   
  

 

 

    

 

 

    

 

 

    

 

 

 

INTEREST EXPENSE

           

Deposits

     2,026         2,572         6,421         8,310   

Federal funds purchased and securities sold under agreements to repurchase

     12         18         68         73   

Other borrowings

     1,802         2,347         5,889         7,038   
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL INTEREST EXPENSE

     3,840         4,937         12,378         15,421   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

     23,655         24,351         71,349         73,356   

Provision for loan and lease losses

     3,350         4,058         11,783         14,391   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME AFTER

           

PROVISION FOR LOAN AND LEASE LOSSES

     20,305         20,293         59,566         58,965   

NONINTEREST INCOME

           

Service charges on deposit accounts

     2,757         2,623         7,914         7,672   

Commissions and fees

     1,162         915         3,401         2,787   

Gains on investment securities

     —           785         273         1,229   

Income on bank owned life insurance

     357         356         1,035         1,070   

Gains on leasing related assets

     100         117         403         810   

Other income

     264         299         442         467   
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL NONINTEREST INCOME

     4,640         5,095         13,468         14,035   
  

 

 

    

 

 

    

 

 

    

 

 

 

NONINTEREST EXPENSE

           

Salaries and employee benefits

     9,578         9,280         28,578         27,465   

Net occupancy expense

     1,807         1,692         5,131         5,205   

Furniture and equipment

     1,205         1,172         3,427         3,561   

Stationery, supplies and postage

     388         298         1,079         1,058   

Marketing expense

     718         612         1,646         1,846   

Core deposit intangible amortization

     —           46         —           577   

FDIC insurance expense

     519         636         1,620         2,178   

Collection expense

     58         70         231         195   

Legal expense

     135         457         880         1,163   

Expenses on other real estate owned and other repossessed assets

     13         336         89         808   

Long term debt prepayment fee

     —           800         —           800   

Other expenses

     2,547         2,641         7,032         6,942   
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL NONINTEREST EXPENSE

     16,968         18,040         49,713         51,798   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before provision for income taxes

     7,977         7,348         23,321         21,202   

Income tax expense

     2,488         2,242         7,408         6,467   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME

   $ 5,489       $ 5,106       $ 15,913       $ 14,735   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends on Preferred Stock and Accretion

     —           293         620         1,873   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income Available to Common Stockholders

   $ 5,489       $ 4,813       $ 15,293       $ 12,862   
  

 

 

    

 

 

    

 

 

    

 

 

 

PER SHARE OF COMMON STOCK

           

Basic earnings

   $ 0.20       $ 0.18       $ 0.56       $ 0.48   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings

   $ 0.20       $ 0.18       $ 0.56       $ 0.48   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends

   $ 0.06       $ 0.06       $ 0.18       $ 0.17   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED

 

     For the Three Months Ended September 30,      For the Nine Months Ended September 30,  
     2012      2011      2012      2011  
     (in thousands)      (in thousands)  

NET INCOME

   $ 5,489       $ 5,106       $ 15,913       $ 14,735   
  

 

 

    

 

 

    

 

 

    

 

 

 

OTHER COMPREHENSIVE INCOME, NET OF TAX:

           

Unrealized securities gains during period

     1,220         1,067         2,174         4,171   

Less: reclassification for gains included in net income

     0         509         177         799   

Change in pension liability, net

     5         5         15         15   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Comprehensive Income

     1,225         563         2,012         3,387   
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL COMPREHENSIVE INCOME

   $ 6,714       $ 5,669       $ 17,925       $ 18,122   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY - UNAUDITED

Nine Months Ended September 30, 2012

 

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

BALANCE January 1, 2012

     25,976,648       $ 270,044      $ 18,480      ($ 26,061   ($ 5,551   $ 2,871       $ 259,783   

Net Income

            15,913             15,913   

Other comprehensive income, net of tax

                2,012         2,012   

Preferred dividends

            (100          (100

Accretion of discount

          520        (520          —     

Stock based compensation

        559                 559   

Redemption of preferred stock

          (19,000            (19,000

Warrant repurchase

        (2,800              (2,800

Adjustment for stock dividend

     1,298,066         12,345          (12,345     —             —     

Stock issuance, net of expenses

     2,667,253         25,021                 25,021   

Issuance of restricted stock awards

        (1,153         1,153           —     

Issuance of stock to dividend reinvestment and stock purchase plan

        (315       (779     1,235           141   

Exercise of stock options, net of excess tax benefits

        18                 18   

Cash dividends, common stock

            (4,003          (4,003
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

BALANCE September 30, 2012 (UNAUDITED)

     29,941,967       $ 303,719      $ —        ($ 27,895   ($ 3,163   $ 4,883       $ 277,544   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

 

     For the Nine Months Ended
September 30,
 
     2012     2011  
     (dollars in thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 15,913      $ 14,735   

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

    

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

     4,616        4,161   

Depreciation and amortization

     2,229        2,962   

Provision for loan and lease losses

     11,783        14,391   

Gains on securities

     (273     (1,229

Gains on leases

     (365     (824

Losses (gains) on sales of other real estate and other repossessed assets

     (240     77   

Gains on sales of premises and equipment

     (2     (163

Stock-based compensation

     559        474   

Decrease in other assets

     1,131        2,643   

Increase in other liabilities

     2,171        2,326   
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     37,522        39,553   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Proceeds from repayments on and maturity of securities:

    

Available for sale

     87,327        115,072   

Held to maturity

     24,640        15,652   

Proceeds from sales of securities

    

Available for sale

     53,718        92,409   

Purchase of securities:

    

Available for sale

     (97,545     (169,123

Held to maturity

     (49,066     (15,299

Net decrease in Federal Home Loan Bank Stock

     2,484        3,555   

Proceeds from sales of leases

     —          16,433   

Net increase in loans and leases

     (35,403     (10,414

Proceeds from sales of other real estate and repossessed assets

     1,299        1,720   

Capital expenditures

     (7,549     (2,096

Proceeds from sales of bank premises and equipment

     2        321   
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

     (20,093     48,230   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net increase in deposits

     91,455        36,677   

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

     (17,550     1,052   

Proceeds from other borrowings

     280,000        —     

Repayments of other borrowings

     (340,000     (85,000

Redemption of preferred stock and common stock warrant

     (21,800     (20,000

Proceeds from issuance of common stock, net of expenses

     25,021        —     

Exercise of stock options

     —          72   

Excess tax benefits

     18        29   

Issuance of stock to dividend reinvestment and stock purchase plan

     141        175   

Dividends paid

     (4,221     (4,808
  

 

 

   

 

 

 

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

     13,064        (71,803
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     30,493        15,980   

Cash and cash equivalents, beginning of period

     72,558        49,278   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 103,051      $ 65,258   
  

 

 

   

 

 

 

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

 

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Table of Contents

Notes to Consolidated Financial Statements - (Unaudited)

Note 1. Significant Accounting Policies

Basis of Presentation.

This quarterly report presents the consolidated financial statements of Lakeland Bancorp, Inc. (the Company) and its subsidiary, Lakeland Bank (Lakeland). The accounting and reporting policies of the Company 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 presented do not necessarily indicate the results that the Company will achieve for all of 2012. 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, 2011.

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.

On March 19, 2012, the Company’s Board of Directors authorized a 5% stock dividend which was distributed on April 16, 2012 to holders of record as of March 30, 2012. All weighted average, actual share and per share information set forth in this Quarterly Report on Form 10-Q have been adjusted retroactively for the effects of the stock dividend.

Certain reclassifications have been made to prior period financial statements to conform to the 2012 presentation.

Note 2. Stock-Based Compensation

Share-based compensation expense of $559,000 and $474,000 was recognized for the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012, there was unrecognized compensation cost of $1.4 million related to unvested restricted stock; that cost is expected to be recognized over a weighted average period of approximately 3.1 years. Unrecognized compensation expense related to unvested stock options was approximately $29,000 as of September 30, 2012 and is expected to be recognized over a period of 1.7 years.

In the first nine months of 2012, the Company granted 91,269 shares of restricted stock at a grant date fair value of $9.50 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 $173,000 per year for the next five years. In the first nine months of 2011, the Company granted 100,112 shares of restricted stock at a grant date fair value of $9.40 per share under the 2009 program. Compensation expense on these shares is expected to average approximately $188,000 per year over a five year period.

There were no grants of stock options in the first nine months of 2012 and 2011.

 

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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, 2012

     598,477      $ 12.57          $ —     

Issued

     —          —           

Exercised

     —          —           

Forfeited

     (1,693     12.87         
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding, September 30, 2012

     596,784      $ 12.57         2.34       $ 58,539   
  

 

 

   

 

 

    

 

 

    

 

 

 

Options exercisable at September 30, 2012

     585,630      $ 12.66         2.24       $ 35,045   
  

 

 

   

 

 

    

 

 

    

 

 

 

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 2012 and the exercise price, multiplied by the number of in-the-money options).

There were no options exercised in the first nine months of 2012. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2011 was $78,000. Exercise of stock options during the first nine months of 2011 resulted in cash receipts of $72,000.

Information regarding the Company’s restricted stock (all unvested) and changes during the nine months ended September 30, 2012 is as follows:

 

     Number of
shares
    Weighted
average
price
 

Outstanding, January 1, 2012

     172,772      $ 8.96   

Granted

     91,269        9.50   

Vested

     (21,655     6.96   

Forfeited

     (1,106     9.29   
  

 

 

   

 

 

 

Outstanding, September 30, 2012

     241,280      $ 9.34   
  

 

 

   

 

 

 

 

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Table of Contents

Note 3. Comprehensive Income

The components of other comprehensive income are as follows:

 

     September 30, 2012     September 30, 2011  
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

   $ 1,933       ($ 713   $ 1,220      $ 1,701       ($ 634   $ 1,067   

Less reclassification adjustment for net gains arising during the period

     0         (0     (0     785         (276     509   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net unrealized gains

   $ 1,933       ($ 713   $ 1,220      $ 916       ($ 358   $ 558   

Change in minimum pension liability

     8         (3     5        8         (3     5   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income, net

   $ 1,941       ($ 716   $ 1,225      $ 924       ($ 361   $ 563   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
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

   $ 3,441       ($ 1,267   $ 2,174      $ 6,568       ($ 2,397   $ 4,171   

Less reclassification adjustment for net gains arising during the period

     273         (96     177        1,229         (430     799   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net unrealized gains

   $ 3,168       ($ 1,171   $ 1,997      $ 5,339       ($ 1,967   $ 3,372   

Change in minimum pension liability

     23         (8     15        23         (8     15   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income, net

   $ 3,191       ($ 1,179   $ 2,012      $ 5,362       ($ 1,975   $ 3,387   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Note 4. Statement of Cash Flow Information, Supplemental Information

 

     For the Nine Months Ended
September 30,
 
     2012      2011  
     (in thousands)  

Supplemental schedule of noncash investing and financing activities:

     

Cash paid during the period for income taxes

   $ 6,467       $ 6,084   

Cash paid during the period for interest

     12,504         15,609   

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

     651         1,547   

Transfer of leases held for sale to leases held for investment

     —           1,517   

 

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Table of Contents

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 nine months ended September 30, 2012 and 2011 have been adjusted retroactively for the effects of the stock dividend distributed on April 16, 2012. 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)    2012      2011      2012      2011  

Net income available to common shareholders

   $ 5,489       $ 4,813       $ 15,293       $ 12,862   

Less: earnings allocated to participating securities

     49         36         134         95   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocated to common shareholders

   $ 5,440       $ 4,777       $ 15,159       $ 12,767   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     27,550         26,588         26,998         26,552   

Share-based plans (1)

     92         50         67         129   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares - diluted (1)

     27,642         26,638         27,065         26,681   

Basic earnings per share

   $ 0.20       $ 0.18       $ 0.56       $ 0.48   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 0.20       $ 0.18       $ 0.56       $ 0.48   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Adjusted for 5% stock dividend distributed April 16, 2012 to shareholders of record on March 30, 2012.

Options to purchase 569,222 shares of common stock at a weighted average price of $12.79 per share were outstanding and were not included in the computation of diluted earnings per share for the quarter ended September 30, 2012 because the exercise price was greater than the average market price. Options to purchase 723,467 shares of common stock at a weighted average price of $12.35 per share and a warrant to purchase 1,046,901 shares of common stock at a price of $8.45 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 569,222 shares of common stock at a weighted average price of $12.79 per share were outstanding and were not included in the computation of diluted earnings per share for the nine months ended September 30, 2012 because the exercise price was greater than the average market price. Options to purchase 723,467 shares of common stock at a weighted average price of $12.35 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.

 

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Table of Contents

Note 6. Investment Securities

 

AVAILABLE FOR SALE    September 30, 2012      December 31, 2011  
(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

   $ 51,449       $ 507       $ —        $ 51,956       $ 43,463       $ 140       $ —        $ 43,603   

Mortgage-backed securities - residential

     291,186         6,025         (222     296,989         344,938         5,014         (428     349,524   

Obligations of states and political subdivisions

     35,606         1,925         (42     37,489         34,102         1,875         (9     35,968   

Other debt securities

     17,585         247         (411     17,421         20,965         72         (1,320     19,717   

Equity securities

     14,855         762         (23     15,594         14,543         306         (50     14,799   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 410,681       $ 9,466       $ (698   $ 419,449       $ 458,011       $ 7,407       $ (1,807   $ 463,611   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
HELD TO MATURITY    September 30, 2012      December 31, 2011  
(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

   $ 16,123       $ 391       $ —        $ 16,514       $ 9,005       $ 134       $ —        $ 9,139   

Mortgage-backed securities - residential

     39,554         1,509         —          41,063         20,577         1,148         (1     21,724   

Obligations of states and political subdivisions

     38,768         1,151         (20     39,899         40,559         1,305         (9     41,855   

Other debt securities

     1,551         210         —          1,761         1,559         72         (75     1,556   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 95,996       $ 3,261       $ (20   $ 99,237       $ 71,700       $ 2,659       $ (85   $ 74,274   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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, 2012  
     Available for Sale      Held to Maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ 5,430       $ 5,446       $ 15,077       $ 15,131   

Due after one year through five years

     40,630         41,300         12,488         13,115   

Due after five years through ten years

     55,477         57,190         26,227         27,261   

Due after ten years

     3,103         2,930         2,650         2,667   
  

 

 

    

 

 

    

 

 

    

 

 

 
     104,640         106,866         56,442         58,174   

Mortgage-backed securities - residential

     291,186         296,989         39,554         41,063   

Equity securities

     14,855         15,594         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 410,681       $ 419,449       $ 95,996       $ 99,237   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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,
 
     2012      2011      2012     2011  

Sale proceeds

   $ —         $ 52,481       $ 53,718      $ 92,409   

Gross gains

     —           785         584        1,285   

Gross losses

     —           —           (311     (56

Other than temporary impairment

     —           —           —          —     

Gains or losses on sales of investment securities are based on the net proceeds and the adjusted carrying amount of the securities sold using the specific identification method.

Securities with a carrying value of approximately $347.7 million and $343.7 million at September 30, 2012 and December 31, 2011, 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, 2012 and December 31, 2011:

 

September 30, 2012

   Less than 12 months      12 months or longer      Total  
   Fair value      Unrealized
Losses
     Fair value      Unrealized
Losses
     Number of
securities
     Fair value      Unrealized
Losses
 
     (dollars in thousands)  

AVAILABLE FOR SALE

                    

Mortgage-backed securities - residential

   $ 17,208       $ 188       $ 8,036       $ 34         8       $ 25,244       $ 222   

Obligations of states and political subdivisions

     1,733         42         —           —           5         1,733         42   

Other debt securities

     —           —           5,572         411         2         5,572         411   

Equity securities

     236         23         —           —           2         236         23   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 19,177       $ 253       $ 13,608       $ 445         17       $ 32,785       $ 698   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY

                    

Obligations of states and political subdivisions

   $ 2,776       $ 14       $ 395       $ 6         8       $ 3,171       $ 20   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,776       $ 14       $ 395       $ 6         8       $ 3,171       $ 20   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
      Less than 12 months      12 months or longer      Total  

December 31, 2011

   Fair value      Unrealized
Losses
     Fair value      Unrealized
Losses
     Number of
securities
     Fair value      Unrealized
Losses
 
     (dollars in thousands)  

AVAILABLE FOR SALE

                    

U.S. government agencies

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

Mortgage-backed securities - residential

     81,067         398         9,201         30         23         90,268         428   

Obligations of states and political subdivisions

     2,171         9         20         —           5         2,191         9   

Other debt securities

     467         12         5,645         1,308         4         6,112         1,320   

Equity securities

     5,043         50         —           —           4         5,043         50   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 88,748       $ 469       $ 14,866       $ 1,338         36       $ 103,614       $ 1,807   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY

                    

Mortgage-backed securities - residential

   $ 1,513       $ 1       $ —         $ —           1       $ 1,513       $ 1   

Obligations of states and political subdivisions

     790         2         395         7         4         1,185         9   

Other debt securities

     957         75         —           —           2         957         75   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,260       $ 78       $ 395       $ 7         7       $ 3,655       $ 85   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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. 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.

If the above factors indicate that additional analysis is required, management will consider the results of discounted cash flow analysis.

As of September 30, 2012, equity securities included $13.2 million in investment funds that do not have a quoted market price but use net asset value per share or its equivalent to measure fair value.

The funds include $2.9 million in funds that are primarily invested in community development loans that are guaranteed by the Small Business Administration (SBA). Because the funds are primarily guaranteed by the federal government there are minimal changes in market value between accounting periods. These funds can be redeemed within 60 days notice at the net asset value less unpaid management fees with the approval of the fund manager. As of September 30, 2012, the net amortized cost equaled the market value of the investment. There are no unfunded commitments related to this investment.

The funds also include $10.3 million in funds that are invested in government guaranteed loans, mortgage-backed securities, small business loans and other instruments supporting affordable housing and economic development. The Company may redeem these funds at the net asset value calculated at the end of the current business day less any unpaid management fees. As of September 30, 2012, the amortized cost of these securities was $10.0 million and the fair value was $10.3 million. There are no restrictions on redemptions for the holdings in these investments other than the notice required by the fund manager. There are no unfunded commitments related to this investment.

 

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Table of Contents

Note 7. Loans and Leases.

The following sets forth the composition of Lakeland’s loan and lease portfolio as of September 30, 2012 and December 31, 2011:

 

     September 30,
2012
    December 31,
2011
 
     (in thousands)  

Commercial, secured by real estate

   $ 1,058,747      $ 1,012,982   

Commercial, industrial and other

     201,308        209,915   

Leases

     26,548        28,879   

Real estate-residential mortgage

     419,685        406,222   

Real estate-construction

     49,160        79,138   

Home equity and consumer

     309,465        304,190   
  

 

 

   

 

 

 

Total loans

     2,064,913        2,041,326   
  

 

 

   

 

 

 

Plus: deferred costs, net of fees

     (134     249   
  

 

 

   

 

 

 

Loans, net of deferred costs

   $ 2,064,779      $ 2,041,575   
  

 

 

   

 

 

 

Non-Performing Assets and Past Due Loans

The following schedule sets forth certain information regarding the Company’s non-performing assets and its accruing troubled debt restructurings:

 

(in thousands)

   September 30,
2012
     December 31,
2011
 

Commercial, secured by real estate

   $ 10,114       $ 16,578   

Commercial, industrial and other

     1,533         4,608   

Leases

     294         575   

Real estate - residential mortgage

     9,235         11,610   

Real estate - construction

     4,097         12,393   

Home equity and consumer

     3,104         3,252   
  

 

 

    

 

 

 

Total non-accrual loans and leases

   $ 28,377       $ 49,016   

Other real estate and other repossessed assets

     774         1,182   
  

 

 

    

 

 

 

TOTAL NON-PERFORMING ASSETS

   $ 29,151       $ 50,198   
  

 

 

    

 

 

 

Troubled debt restructurings, still accruing

   $ 10,937       $ 8,856   
  

 

 

    

 

 

 

Non-accrual loans included $3.5 million and $4.6 million of troubled debt restructurings as of September 30, 2012 and December 31, 2011, respectively.

 

15


Table of Contents

An age analysis of past due loans, segregated by class of loans as of September 30, 2012 and December 31, 2011, is as follows:

 

September 30, 2012

   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

   $ 10,773       $ 3,199       $ 10,518       $ 24,490       $ 1,034,257       $ 1,058,747       $ 404   

Commercial, industrial and other

     1,121         482         1,534         3,137         198,171         201,308         1   

Leases

     78         58         294         430         26,118         26,548         —     

Real estate - residential mortgage

     2,611         785         10,558         13,954         405,731         419,685         1,323   

Real estate - construction

     552         1,100         4,097         5,749         43,411         49,160         —     

Home equity and consumer

     2,588         367         3,204         6,159         303,306         309,465         100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 17,723       $ 5,991       $ 30,205       $ 53,919       $ 2,010,994       $ 2,064,913       $ 1,828   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                                                

Commercial, secured by real estate

   $ 3,638       $ 1,731       $ 16,578       $ 21,947       $ 991,035       $ 1,012,982       $ —     

Commercial, industrial and other

     512         49         4,608         5,169         204,746         209,915         —     

Leases

     397         164         575         1,136         27,743         28,879         —     

Real estate - residential mortgage

     3,059         1,235         12,818         17,112         389,110         406,222         1,208   

Real estate - construction

     —           —           12,393         12,393         66,745         79,138         —     

Home equity and consumer

     2,350         448         3,411         6,209         297,981         304,190         159   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 9,956       $ 3,627       $ 50,383       $ 63,966       $ 1,977,360       $ 2,041,326       $ 1,367   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Impaired Loans

Impaired loans as of September 30, 2012, September 30, 2011 and December 31, 2011 are as follows:

 

September 30, 2012

   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

   $ 14,263       $ 18,253       $ —         $ 260       $ 15,605   

Commercial, industrial and other

     4,927         4,938         —           67         3,555   

Leases

     —           —           —           —           —     

Real estate - residential mortgage

     366         366         —           6         386   

Real estate - construction

     3,977         4,606         —           —           7,611   

Home equity and consumer

     350         350         —           —           337   

Loans with specific allowance:

              

Commercial, secured by real estate

     3,127         3,895         313         45         4,389   

Commercial, industrial and other

     787         902         216         —           641   

Leases

     —           —           —           —           —     

Real estate - residential mortgage

     288         288         43         4         384   

Real estate - construction

     120         997         12         —           331   

Home equity and consumer

     946         946         142         36         946   

Total:

              

Commercial, secured by real estate

   $ 17,390       $ 22,148       $ 313       $ 305       $ 19,994   

Commercial, industrial and other

     5,714         5,840         216         67         4,196   

Leases

     —           —           —           —           —     

Real estate - residential mortgage

     654         654         43         10         770   

Real estate - construction

     4,097         5,603         12         —           7,942   

Home equity and consumer

     1,296         1,296         142         36         1,283   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 29,151       $ 35,541       $ 726       $ 418       $ 34,185   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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       $ —         $ 252       $ 16,441   

Commercial, industrial and other

     4,103         8,185         —           —           2,883   

Leases

     —           —           —           —           —     

Real estate - residential mortgage

     415         415         —           7         260   

Real estate - construction

     12,587         15,771         —           14         10,935   

Home equity and consumer

     400         485         —           1         19   

Loans with specific allowance:

              

Commercial, secured by real estate

     4,453         5,465         472         24         4,395   

Commercial, industrial and other

     313         389         63         8         496   

Leases

     —           —           —           —           —     

Real estate - residential mortgage

     501         509         75         —           —     

Real estate - construction

     244         518         24         —           36   

Home equity and consumer

     157         157         24         20         753   

Total:

              

Commercial, secured by real estate

   $ 23,311       $ 29,449       $ 472       $ 276       $ 20,836   

Commercial, industrial and other

     4,416         8,574         63         8         3,379   

Leases

     —           —           —           —           —     

Real estate - residential mortgage

     916         924         75         7         260   

Real estate - construction

     12,831         16,289         24         14         10,971   

Home equity and consumer

     557         642         24         21         772   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 42,031       $ 55,878       $ 658       $ 326       $ 36,218   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

December 31, 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

   $ 19,648       $ 24,922       $ —         $ 332       $ 14,792   

Commercial, industrial and other

     4,074         8,155         —           —           3,445   

Leases

     —           —           —           —           —     

Real estate - residential mortgage

     415         415         —           29         542   

Real estate - construction

     12,400         16,353         —           14         11,231   

Home equity and consumer

     400         485         —           1         14   

Loans with specific allowance:

              

Commercial, secured by real estate

     3,920         6,421         392         18         6,209   

Commercial, industrial and other

     534         647         172         —           768   

Leases

     —           —           —           —           —     

Real estate - residential mortgage

     561         570         75         19         332   

Real estate - construction

     244         518         24         —           333   

Home equity and consumer

     949         963         142         34         800   

Total:

              

Commercial, secured by real estate

   $ 23,568       $ 31,343       $ 392       $ 350       $ 21,001   

Commercial, industrial and other

     4,608         8,802         172         —           4,213   

Leases

     —           —           —           —           —     

Real estate - residential mortgage

     976         985         75         48         874   

Real estate - construction

     12,644         16,871         24         14         11,564   

Home equity and consumer

     1,349         1,448         142         35         814   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 43,145       $ 59,449       $ 805       $ 447       $ 38,466   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest that would have been accrued on impaired loans and leases during the first nine months of 2012 and 2011 had the loans been performing under original terms would have been $2.1 million and $2.2 million, respectively. Interest that would have accrued for the year ended December 31, 2011 was $2.9 million.

Credit Quality Indicators

The classes of loans 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 commercial 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, 2012 and December 31, 2011, by the risk ratings discussed above (in thousands):

 

September 30, 2012

   Commercial,
secured by
real estate
     Commercial,
industrial
and other
     Real estate -
construction
 

Risk Rating

        

1

   $ —         $ 996       $ —     

2

     —           11,472         —     

3

     39,417         17,662         —     

4

     309,519         55,617         7,865   

5

     618,742         85,324         29,589   

5W - Watch

     24,734         6,591         300   

6 - Other Assets Especially Mentioned

     22,656         5,360         6,528   

7 - Substandard

     43,509         18,286         4,758   

8 - Doubtful

     170         —           120   

9 - Loss

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,058,747       $ 201,308       $ 49,160   
  

 

 

    

 

 

    

 

 

 

 

December 31, 2011

   Commercial,
secured by
real estate
     Commercial,
industrial
and other
     Real estate -
construction
 

Risk Rating

        

1

   $ —         $ —         $ —     

2

     —           11,323         —     

3

     26,085         17,658         11,175   

4

     301,490         48,835         14,185   

5

     575,061         95,040         36,088   

5W - Watch

     31,648         9,346         198   

6 - Other Assets Especially Mentioned

     30,666         11,708         2,315   

7 - Substandard

     47,861         16,005         14,866   

8 - Doubtful

     171         —           311   

9 - Loss

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,012,982       $ 209,915       $ 79,138   
  

 

 

    

 

 

    

 

 

 

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

 

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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 for the nine months ended September 30, 2012 and the year ended December 31, 2011:

 

Nine Months Ended September 30, 2012    Commercial,
secured by
real estate
    Commercial,
industrial
and other
    Leases     Real estate -
residential
mortgage
    Real estate -
construction
    Home
equity and
consumer
    Total  
     (in thousands)  

Allowance for Loan and Lease Losses:

              

Beginning Balance

   $ 16,618      $ 3,477      $ 688      $ 3,077      $ 1,424      $ 3,132      $ 28,416   

Charge-offs

     (5,648     (841     (694     (1,436     (2,402     (1,705   ($ 12,726

Recoveries

     106        355        463        10        36        226      $ 1,196   

Provision

     5,937        287        (300     2,302        1,941        1,616      $ 11,783   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 17,013      $ 3,278      $ 157      $ 3,953      $ 999      $ 3,269      $ 28,669   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 313      $ 216      $ —        $ 43      $ 12      $ 142      $ 726   

Ending Balance: Collectively evaluated for impairment

     16,700        3,062        157        3,910        987        3,127      $ 27,943   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 17,013      $ 3,278      $ 157      $ 3,953      $ 999      $ 3,269      $ 28,669   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and Leases:

              

Ending Balance: Individually evaluated for impairment

   $ 17,390      $ 5,714      $ —        $ 654      $ 4,097      $ 1,296      $ 29,151   

Ending Balance: Collectively evaluated for impairment

     1,041,357        195,594        26,548        419,031        45,063        308,169      $ 2,035,762   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance (1)

   $ 1,058,747      $ 201,308      $ 26,548      $ 419,685      $ 49,160      $ 309,465      $ 2,064,913   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Excludes deferred costs

 

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Table of Contents
Year Ended December 31, 2011    Commercial,
secured by
real estate
    Commercial,
industrial
and other
    Leases     Real estate -
residential
mortgage
    Real estate -
construction
    Home
equity and
consumer
    Total  
     (in thousands)  

Allowance for Loan and Lease Losses:

              

Beginning Balance

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

Charge-offs

     (5,352     (5,249     (2,858     (1,772     (3,636     (3,010   ($ 21,877

Recoveries

     2,084        439        1,206        32        67        318      $ 4,146   

Provision

     8,520        3,174        (1,137     2,189        2,817        3,253      $ 18,816   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 16,618      $ 3,477      $ 688      $ 3,077      $ 1,424      $ 3,132      $ 28,416   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 392      $ 172      $ —        $ 75      $ 24      $ 142      $ 805   

Ending Balance: Collectively evaluated for impairment

     16,226        3,305        688        3,002        1,400        2,990      $ 27,611   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 16,618      $ 3,477      $ 688      $ 3,077      $ 1,424      $ 3,132      $ 28,416   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and Leases:

              

Ending Balance: Individually evaluated for impairment

   $ 23,568      $ 4,608      $ —        $ 976      $ 12,644      $ 1,349      $ 43,145   

Ending Balance: Collectively evaluated for impairment

     989,414        205,307        28,879        405,246        66,494        302,841      $ 1,998,181   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance (1)

   $ 1,012,982      $ 209,915      $ 28,879      $ 406,222      $ 79,138      $ 304,190      $ 2,041,326   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Excludes deferred costs

Lakeland also maintains a reserve for unfunded lending commitments which are included in other liabilities. This reserve was $1,232,000 and $1,015,000 at September 30, 2012 and December 31, 2011, respectively. The Company analyzes the adequacy of the reserve for unfunded lending commitments in conjunction with its analysis of the adequacy of the allowance for loan and lease losses. For more information on this analysis, see “Risk Elements” in Management’s Discussion and Analysis.

Troubled Debt Restructurings

Troubled debt restructurings are those loans where 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. The Company considers the potential losses on these loans as well as the remainder of its impaired loans while considering the adequacy of the allowance for loan and lease losses.

 

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Table of Contents

The following table summarizes loans that have been restructured during the three months ended September 30, 2012 and 2011:

 

     For the Three Months Ended
September 30, 2012
     For the Three Months Ended
September 30, 2011
 
     Number of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Number of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 
     (Dollars in thousands)      (Dollars in thousands)  

Troubled Debt Restructurings:

                 

Commercial, secured by real estate

     3         521         432         5         1,772         1,411   

Commercial, industrial and other

     2         56         52         —           —           —     

Leases

     —           —           —           —           —           —     

Real estate - residential mortgage

     —           —           —           —           —           —     

Real estate - construction

     —           —           —           —           —           —     

Home equity and consumer

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     5       $ 577       $ 484         5       $ 1,772       $ 1,411   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes loans that have been restructured during the nine months ended September 30, 2012 and 2011:

 

     For the Nine Months Ended
September 30, 2012
     For the Nine Months Ended
September 30, 2011
 
     Number of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Number of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 
     (Dollars in thousands)      (Dollars in thousands)  

Troubled Debt Restructurings:

                 

Commercial, secured by real estate

     8       $ 1,524       $ 1,407         7       $ 3,188       $ 2,827   

Commercial, industrial and other

     4         4,231         4,218         —           —           —     

Leases

     —           —           —           —           —           —     

Real estate - residential mortgage

     —           —           —           1         415         415   

Real estate - construction

     —           —           —           —           —           —     

Home equity and consumer

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     12       $ 5,755       $ 5,625         8       $ 3,603       $ 3,242   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table summarizes as of September 30, 2012, 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

     2       $ 267   

Commercial, industrial and other

     1         62   

Leases

     —           —     

Real estate - residential mortgage

     —           —     

Real estate - construction

     —           —     

Home equity and consumer

     —           —     
  

 

 

    

 

 

 
     3       $ 329   
  

 

 

    

 

 

 

Leases

Lakeland had no leases held for sale as of September 30, 2012 and December 31, 2011. The following table shows the components of gains on leasing related assets for the periods presented:

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2012      2011     2012      2011  
     (in thousands)     (in thousands)  

Gains on sales of leases

   $ —         $ —        $ —         $ 143   

Realized gains on paid off leases

     92         125        365         681   

Gains (losses) on other repossessed assets

     8         (8     38         (14
  

 

 

    

 

 

   

 

 

    

 

 

 

Total gains on leasing related assets

   $ 100       $ 117      $ 403       $ 810   
  

 

 

    

 

 

   

 

 

    

 

 

 

Other Real Estate and Other Repossessed Assets

At September 30, 2012, the Company had other repossessed assets and other real estate owned of $104,000 and $670,000, respectively. At December 31, 2011, the Company had other repossessed assets and other real estate owned of $236,000 and $946,000, 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,
 
     2012     2011     2012     2011  
     (in thousands)     (in thousands)  

Interest cost

   $ 22      $ 24      $ 65      $ 72   

Expected return on plan assets

     (19     (23     (57     (67

Amortization of unrecognized net actuarial loss

     18        12        54        36   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit expense

   $ 21      $ 13      $ 62      $ 41   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

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,
 
     2012      2011      2012      2011  
     (in thousands)      (in thousands)  

Service cost

   $ 8       $ 6       $ 23       $ 18   

Interest cost

     11         12         31         36   

Amortization of prior service cost

     3         4         10         12   

Amortization of unrecognized net actuarial loss

     3         1         9         5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit expense

   $ 25       $ 23       $ 73       $ 71   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company made contributions of $88,000 to the plan during each of the nine month periods ended September 30, 2012 and 2011, respectively. The Company does not expect to make any more contributions for the remainder of 2012.

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

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. 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; includes U.S. Treasury Notes, and other U.S. Government Agency securities that actively trade in over-the-counter markets; equity securities and mutual funds that actively trade in over-the-counter markets.

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 including yield curves, volatilities, and prepayment speeds.

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. 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. Level 2 securities were primarily comprised of U.S. Agency bonds, residential mortgage-backed securities, obligations of state and political subdivisions and corporate securities. Fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, bids and offers. On a quarterly basis, the Company reviews the pricing information received from the Company’s third party pricing service. This review includes a comparison to non-binding third-party quotes. As a result of our review, we did not have any adjustments to prices from our third party servicer.

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, 2012 or December 31, 2011. During the nine months ended September 30, 2012, 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:

 

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Table of Contents

 

September 30, 2012

   Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level  3)
     Total
Fair Value
 
            (in thousands)         

Assets:

           

Investment securities, available for sale

           

US government agencies

   $ —         $ 51,956       $ —         $ 51,956   

Mortgage backed securities - residential

     —           296,989         —           296,989   

Obligations of states and political subdivisions

     —           37,489         —           37,489   

Corporate debt securities

     —           17,421         —           17,421   

Equity securities

     2,017         13,577         —           15,594   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 2,017       $ 417,432       $ —         $ 419,449   

December 31, 2011

           

Assets:

           

Investment securities, available for sale

           

US government agencies

   $ —         $ 43,603       $ —         $ 43,603   

Mortgage backed securities - residential

     —           349,524         —           349,524   

Obligations of states and political subdivisions

     —           35,968         —           35,968   

Corporate debt securities

     —           19,717         —           19,717   

Equity securities

     1,732         13,067         —           14,799   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 1,732       $ 461,879       $ —         $ 463,611   

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, 2012

   Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level  3)
     Total
Fair Value
 
            (in thousands)         

Assets:

           

Impaired Loans and Leases

   $ —         $ —         $ 29,151       $ 29,151   

Other real estate owned and other repossessed assets

     —           —           774         774   

December 31, 2011

                           

Assets:

           

Impaired Loans and Leases

     —           —         $ 43,145       $ 43,145   

Other real estate owned and other repossessed assets

     —           —           1,182         1,182   

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 generally 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 appraisers may use the income approach to value the collateral using discount rates (with ranges of 5-11%) or capitalization rates (with ranges of 5-9%) to evaluate the property. The value of the equipment may be determined by an appraiser, if significant, inquiry through a

 

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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. Fair value on other real estate owned is based on the appraised value of the collateral using discount rates or capitalization rates similar to those used in impaired loan valuation. The fair value of other repossessed assets is estimated by inquiry through a recognized valuation resource.

Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Changes in economic conditions, locally or nationally, could impact the value of the estimated amounts of impaired loans, OREO and other repossessed assets.

Fair Value of Certain Financial Instruments

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. 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.

The estimation methodologies used, the estimated fair values, and recorded book balances at September 30, 2012 and December 31, 2011 are outlined below.

This summary, as well as the table below, excludes financial assets and liabilities for which carrying value approximates fair value. For financial assets, these include cash and cash equivalents. For financial liabilities, these include noninterest bearing demand deposits, savings and interest-bearing transaction accounts and federal funds sold and securities sold under agreements to repurchase. The estimated fair value of demand, savings and interest-bearing transaction accounts is the amount payable on demand at the reporting date. Carrying value is used because there is no stated maturity on these accounts, and the customer has the ability to withdraw the funds immediately. Also excluded from this summary and the following table are those financial instruments recorded at fair value on a recurring basis, as previously described.

The fair value of Investment Securities Held to Maturity was measured using information from the same third-party servicer used for Investment Securities Available for Sale using the same methodologies discussed above.

Federal Home Loan Bank of New York (FHLB) stock is an equity interest that can be sold to the issuing FHLB, to other FHLBs, or to other member banks at its par value. Because ownership of these securities is restricted, they do not have a readily determinable fair value. As such, the Company’s FHLB Stock is recorded at cost or par value and is evaluated for impairment each reporting period by considering the ultimate recoverability of the investment rather than temporary declines in value. The Company’s evaluation primarily includes an evaluation of liquidity, capitalization, operating performance, commitments, and regulatory or legislative events.

The net loan portfolio at September 30, 2012 and December 31, 2011 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.

For fixed maturity certificates of deposit, fair value was estimated using the rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.

The fair value of long-term debt is 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 value of subordinated debentures at September 30, 2012 is based on bid/ask prices from brokers for similar types of instruments based on updated accounting guidance on fair value measurement. The junior subordinated debentures issued to Lakeland Bancorp Capital Trust III for $25.8 million were redeemed on October 7, 2012. As a result, market value equals book value in the table below. For more information see Note 12 below. As of December 31, 2011, the fair value of the subordinated debentures was based on discounted cash flows using discount rates currently offered for similar borrowing arrangements.

 

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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 following table presents the carrying values, fair values and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2012 and December 31, 2011:

 

September 30, 2012

   Carrying
Value
     Fair Value      Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 
     (in thousands)                       

Financial Instruments - Assets

              

Investment securities held to maturity

   $ 95,996       $ 99,237       $ —         $ 99,237       $ —     

Federal Home Loan Bank Stock

     5,849         5,849         —           5,849         —     

Loans and leases

     2,064,779         2,074,032         —           —           2,074,032   

Financial Instruments - Liabilities

              

Certificates of Deposit

     320,430         322,461         —           322,461         —     

Other borrowings

     95,000         103,756         —           103,756         —     

Subordinated debentures

     77,322         56,599         —           —           56,599   

Commitments:

              

Standby letters of credit

     —           13         —           —           13   

December 31, 2011

                                  

Financial Assets:

              

Investment securities held to maturity

   $ 71,700       $ 74,274       $ —         $ 74,274       $ —     

Federal Home Loan Bank Stock

     8,333         8,333         —           8,333         —     

Loans and leases

     2,041,575         2,055,448         —           —           2,055,448   

Financial Liabilities:

              

Certificates of Deposit

     359,552         362,408         —           362,408         —     

Other borrowings

     155,000         165,821         —           165,821         —     

Subordinated debentures

     77,322         77,973         —           —           77,973   

Commitments:

              

Standby letters of credit

     —           71         —           —           71   

Note 11. Preferred Stock

On February 8, 2012, the Company redeemed its remaining 19,000 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 $19.2 million, which included $19.0 million of principal and $219,000 in accrued and unpaid dividends, on February 8, 2012. As a result of the early payment, the Company also accelerated the accretion of $501,000 of the preferred stock discount.

On February 29, 2012, the Company repurchased the outstanding common stock warrant previously issued to the treasury for the purchase of 1,046,901 shares of its common stock at an exercise price of $8.45 per share, for $2.8 million, completing the Company’s participation in the Treasury’s CPP. Upon repurchase, the common stock warrant had a carrying value of $3.3 million. The repurchase price of $2.8 million was recorded as a reduction to common stock on the statement of changes in stockholders’ equity.

 

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Note 12. Common Stock

On September 4, 2012, the Company issued and sold an aggregate of 2,667,253 shares of common stock at a price of $9.65 per share pursuant to a takedown off of the Company’s shelf registration statement. The Company received net proceeds of $25.0 million which it used to repay $25.8 million in junior subordinated debentures on October 7, 2012. The junior subordinated debentures had been issued by the Company to Lakeland Capital Trust III in December 2003, had a coupon rate of 7.535% at the time of redemption and were due on January 7, 2034. The capital and common securities issued by the Trust in December 2003 were also redeemed.

Note 13. Recent Accounting Pronouncements

In April 2011, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance regarding the reconsideration of effective control for repurchase agreements. This guidance modifies the criteria for determining when repurchase agreements would be accounted for as a secured borrowing rather than as a sale. Currently, an entity that maintains effective control over transferred financial assets must account for the transfer as a secured borrowing rather than as a sale. This guidance removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. The FASB believes that contractual rights and obligations determine effective control and that there does not need to be a requirement to assess the ability to exercise those rights. This guidance does not change the other existing criteria used in the assessment of effective control. The Company adopted the provisions of this guidance prospectively for transactions or modifications of existing transactions that occurred on or after January 1, 2012. As the Company accounted for all of its repurchase agreements as collateralized financing arrangements prior to the adoption of this guidance, the adoption had no impact on the Company’s consolidated 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 Company adopted this guidance in the first quarter of 2012. Adoption of this guidance did not have a significant impact on the Company’s consolidated 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. In December 2011, the FASB deferred certain aspects of this guidance related to the requirement to present items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income. The Company adopted this guidance during the first quarter of 2012. Adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements, but resulted in additional disclosure.

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 perform 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. The Company adopted this guidance for its goodwill review as of November 30, 2011. Adoption did not have a significant impact on the Company’s consolidated financial statements.

 

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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, 2011.

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, 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.

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.

 

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Management Overview

The quarter and nine months ended September 30, 2012, represented a period of earnings improvement for the Company. As discussed in this management discussion and analysis:

 

   

Net income available to common shareholders increased $676,000, or 14%, from the third quarter of 2011 to the same period in 2012. Net income available to common shareholders increased $2.4 million, or 19%, from the first nine months of 2011 to the first nine months of 2012.

 

   

Diluted earnings per share increased from $0.18 for the third quarter of 2011 to $0.20 for the third quarter of 2012. Diluted earnings per share increased from $0.48 for the first nine months for 2011 to $0.56 for the same period in 2012.

 

   

Non-performing assets declined for the fourth consecutive quarter. Non-performing assets have declined $21.0 million, or 42%, from $50.2 million reported at year end.

 

   

As a result of improving loan quality, the provision for loan and lease losses was reduced from $4.1 million in the third quarter of 2011 to $3.4 million in the third quarter of 2012.

 

   

The Company redeemed its remaining 19,000 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”). As a result of CPP repayments, dividends on preferred stock and accretion of the preferred stock discount declined from $1.9 million in the first nine months of 2011 to $620,000 in the first nine months of 2012. In 2012, the Company also repurchased the outstanding common stock warrant previously issued to the Treasury for a price of $2.8 million, completing the Company’s participation in the Treasury’s CPP.

 

   

In September 2012, the Company received $25.0 million in net proceeds from common stock offerings which allowed the Company to increase its tangible equity. On October 7, 2012 the Company redeemed $25.8 million in subordinated debentures that had a coupon rate of 7.535%.

 

   

The Company continues to experience downward pressure on its net interest margin from the continuing low interest rate environment. The net interest margin declined from 3.85% in the third quarter of 2011 to 3.66% in the third quarter of 2012. The Company expects that the redemption of its 7.535% subordinated debentures will positively contribute to its net interest margin.

 

   

Management continues to manage expenses in an effort to offset its lower net interest margins.

Results of Operations

(Third Quarter 2012 Compared to Third Quarter 2011)

Net Income

Net income for the third quarter of 2012 was $5.5 million, compared to net income of $5.1 million for the same period in 2011. Net income available to common shareholders was $5.5 million compared to net income available to common stockholders of $4.8 million for the third quarter of 2011. Diluted earnings per share was $0.20 for the third quarter of 2012, compared to diluted earnings per share of $0.18 for the same period last year. Net interest income declined $696,000 from the third quarter of 2011 to the third quarter of 2012 due to the continuing low interest rate environment. This decline was offset by declines in non-interest expense, the provision for loan and lease losses and dividends on preferred stock and accretion during that same time period.

Net Interest Income

Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. The Company’s net interest income is determined by: (i) the volume of interest-earning assets that it holds and

 

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the yields that it earns on those assets, and (ii) the volume of interest-bearing liabilities that it has assumed and the rates that it pays on those liabilities. Net interest income increases when the Company can use noninterest-bearing deposits to fund or support interest-earning assets. The Company’s net interest income is influenced by the current low interest rate environment. For information on how interest rate change can influence the Company’s net interest income, and how the Company manages it net interest income, please see “Quantitative and Qualitative Disclosures About Market Risk” in Item 3 of this Quarterly Report on Form 10-Q. The Company’s net interest margin can also be impacted by its level of non-performing loans. If non-performing loans decline, this could increase the net interest margin. On October 7, 2012, the Company redeemed $25.8 million in junior subordinated debentures which will positively impact its net interest margin.

Net interest income on a tax equivalent basis for the third quarter of 2012 was $23.9 million, compared to $24.6 million earned in the third quarter of 2011. The net interest margin decreased from 3.85% in the third quarter of 2011 to 3.66% in the third quarter of 2012, primarily as a result of a 38 basis point decline in the yield on interest-earning assets, which was partially offset by a 21 basis point reduction in the cost of interest-bearing liabilities. The net interest margin would have been 3.74% and 3.97% for the third quarter of 2012 and 2011, respectively, had the Company’s non-performing loans performed in accordance with their terms. The net interest spread, as a result of the low rate environment, declined 17 basis points to 3.51%. 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 bearing liabilities) resulting from an increase in average non-interest bearing deposits of $52.4 million. Also mitigating the decline in the net interest margin was a change in mix in interest-bearing deposits from time deposits to lower interest-bearing transaction accounts. The components of net interest income will be discussed in greater detail below.

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

 

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     For the Three Months Ended,
September 30, 2012
    For the Three Months Ended,
September 30, 2011
 
     Average
Balance
    Interest
Income/
Expense
     Average
rates
earned/
paid
    Average
Balance
    Interest
Income/
Expense
     Average
rates
earned/
paid
 
     (dollars in thousands)  

Assets

              

Interest - earning assets:

              

Loans and leases (A)

   $ 2,062,928      $ 24,929         4.81   $ 1,982,637      $ 25,999         5.20

Taxable investment securities and other

     433,233        2,121         1.96     447,196        2,773         2.48

Tax-exempt securities

     68,629        658         3.84     70,998        769         4.33

Federal funds sold (B)

     33,271        17         0.20     36,453        16         0.18
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest - earning assets

     2,598,061        27,725         4.25     2,537,284        29,557         4.63

Noninterest - earning assets:

              

Allowance for loan and lease losses

     (28,515          (29,132     

Other assets

     258,339             254,153        
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL ASSETS

   $ 2,827,885           $ 2,762,305        
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Liabilities and Stockholders’ Equity

              

Interest - bearing liabilities:

              

Savings accounts

   $ 350,135      $ 92         0.10   $ 334,909      $ 105         0.12

Interest - bearing transaction accounts

     1,169,953        1,168         0.40     1,058,085        1,345         0.50

Time deposits

     324,355        766         0.94     397,029        1,122         1.13

Borrowings

     234,204        1,814         3.10     281,069        2,365         3.37
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest - bearing liabilities

     2,078,647        3,840         0.74     2,071,092        4,937         0.95
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest - bearing liabilities:

              

Demand deposits

     477,311             424,938        

Other liabilities

     14,370             12,101        

Stockholders’ equity

     257,557             254,174        
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,827,885           $ 2,762,305        
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income/spread

       23,885         3.51       24,620         3.68

Tax equivalent basis adjustment

       230             269      
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

NET INTEREST INCOME

     $ 23,655           $ 24,351      
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net interest margin (C)

          3.66          3.85
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(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 $29.6 million in the third quarter of 2011 to $27.7 million in the third quarter of 2012, a decrease of $1.8 million, or 6%. The decrease in interest income was due primarily to a 38 basis point decrease in the yield on interest earning assets, as a result of loans being refinanced at lower rates and lower yields on new loans and investments. The yield on average loans and leases at 4.81% in the third quarter of 2012 was 39 basis points lower than the third quarter of 2011. The yield on average taxable and tax exempt investment securities decreased by 52 basis points and 49 basis points, respectively, compared to the third quarter of 2011. Average loans and leases at $2.06 billion increased $80.3 million from the third quarter of 2011, while average investment securities at $501.9 million decreased $16.3 million.

Total interest expense decreased from $4.9 million in the third quarter of 2011 to $3.8 million in the third quarter of 2012, a decrease of $1.1 million, or 22%. The cost of average interest-bearing liabilities decreased from 0.95% in the third quarter of 2011 to 0.74% in 2012. The decrease in yield was due to the continuing low interest rate environment along with a $72.7 million reduction in higher yielding time deposits as customers preferred to keep their deposits in short-term transaction accounts. From the third quarter of 2011 to the third quarter of 2012, average savings and interest-bearing transaction accounts increased by $15.2 million and $111.9 million, respectively. Average rates paid on interest-bearing liabilities declined in all categories.

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 net charge-offs; and the results of independent third party loan and lease review.

 

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In the third quarter of 2012, a $3.4 million provision for loan and lease losses was recorded, which was $708,000 lower than the provision for the same period last year. During the third quarter of 2012, the Company charged off loans and leases of $3.4 million and recovered $180,000 in previously charged off loans and leases compared to $4.5 million and $260,000, respectively, during the same period in 2011. The lower provision resulted from a decline in non-performing assets and from lower charge-offs during the quarter. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income decreased $455,000, or 9%, to $4.6 million in the third quarter of 2012 compared to the third quarter of 2011 primarily due to gains on sales of investment securities which were $785,000 during the third quarter of 2011 compared to none during the same period in 2012. Service charges on deposit accounts at $2.8 million increased $134,000, or 5%, due primarily to the implementation of a new demand deposit pricing structure in the second quarter of 2012. Commissions and fees totaled $1.2 million in the third quarter of 2012 and were $247,000, or 27%, higher than the same period last year due primarily to an increase in loan fees. Gains on leasing related assets decreased $17,000 from the third quarter of 2011 to the third quarter of 2012. The decline in gains on leasing related assets reflects the reduction in the leasing portfolio.

Noninterest Expense

Noninterest expense totaling $17.0 million decreased $1.1 million in the third quarter of 2012 from the third quarter of 2011. Net occupancy expense at $1.8 million in the third quarter of 2012 increased $115,000 from the same period last year due primarily to expenses relating to the new operations and training center that was opened in the second quarter of 2012. Stationery, supplies and postage at $388,000 in the third quarter increased $90,000 primarily as a result of the opening of a new branch office and the new operations and training center. Marketing expense totaling $718,000 increased $106,000 compared to the third quarter of 2011 primarily due to expenses related to the previously mentioned branch opening. During the third quarter of 2011 the Company completed its core deposit intangible amortization, which resulted in a $46,000 decrease in that category in the third quarter of 2012 compared to the same period in 2011. Collection expense at $58,000 decreased $12,000 primarily as a result of reduced loan work out expenses, while legal expense at $135,000 decreased $322,000 partially due to a $150,000 recovery in the third quarter of 2012 of previously expensed legal fees. In the third quarter of 2011 long term debt prepayment fee was $800,000 compared to none in the third quarter of 2012. Other real estate and repossessed asset expense at $13,000 decreased $323,000. The Company’s efficiency ratio, a non-GAAP financial measure, was 58.91% in the third quarter of 2012, compared to 57.01% for the same period last year as a result of a decline in revenue, offset by continued management of expenses. 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,  
         2012             2011      
     (dollars in thousands)  

Calculation of efficiency ratio

    

Total noninterest expense

   $ 16,968      $ 18,040   

Less:

    

Amortization of core deposit intangibles

     —          (46

Other real estate owned and other repossessed asset expense

     (13     (336

Long term debt prepayment fee

     —          (800

Provision for unfunded lending commitments

     (150     (365
  

 

 

   

 

 

 

Noninterest expense, as adjusted

   $ 16,805      $ 16,493   
  

 

 

   

 

 

 

Net interest income

   $ 23,655      $ 24,351   

Noninterest income

     4,640        5,095   
  

 

 

   

 

 

 

Total revenue

     28,295        29,446   

Plus: Tax-equivalent adjustment on municipal securities

     230        269   

Less: gains on investment securities

     —          (785
  

 

 

   

 

 

 

Total revenue, as adjusted

   $ 28,525      $ 28,930   
  

 

 

   

 

 

 

Efficiency ratio

     58.91     57.01
  

 

 

   

 

 

 

Income Tax Expense

The effective tax rate increased from 30.5% in the third quarter of 2011 to 31.2% in the third quarter of 2012 as a result of increased earnings and because of a reduction of tax advantaged items as a percent of pre-tax income. Tax advantaged items include interest income on tax-exempt securities and income on bank owned life insurance.

(Year to Date 2012 Compared to Year to Date 2011)

Net Income

Net income for the first nine months of 2012 was $15.9 million, compared to net income of $14.7 million for the same period in 2011. Net income available to common shareholders was $15.3 million compared to net income available to common shareholders of $12.9 million for the same period last year. Diluted earnings per share was $0.56 for the first nine months of 2012, compared to diluted earnings per share of $0.48 for the same period last year. Dividends on preferred stock and accretion decreased to $620,000 in the first nine months of 2012 from $1.9 million for the same period last year. The lower dividends and accretion reflect repayments to the U.S. Department of the Treasury to repurchase preferred stock under the CPP. During the first nine months of 2012 the Company repaid the remaining $19.0 million in preferred stock to the U.S. Department of the Treasury, resulting in a non cash charge of $501,000, reflecting the acceleration of the preferred stock discount accretion. During the first nine months of 2011 the Company incurred a similar charge of $745,000, as $20.0 million in repayments to repurchase preferred stock were made during that period.

Net Interest Income

Net interest income on a tax equivalent basis for the first nine months of 2012 was $72.1 million, compared to $74.2 million earned in the first nine months of 2011. The net interest margin decreased from 3.89% in the first nine months of 2011 to 3.70% in the first nine months of 2012, primarily as a result of a 35 basis point decline in the yield on interest-earning assets, which was partially offset by a 19 basis point reduction in the cost of interest-bearing liabilities. The net

 

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interest margin would have been 3.82% and 4.00% for the first nine months of 2012 and 2011, respectively, had the Company’s non-performing loans performed in accordance with their terms. The net interest spread declined 16 basis points to 3.55% as a result of the low rate environment. 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 bearing liabilities) resulting from an increase in average non-interest bearing deposits of $54.3 million. Also mitigating the decline in the net interest margin was a change in mix in interest-bearing deposits from time deposits to lower interest-bearing transaction accounts. The components of net interest income will be discussed in greater detail below.

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

CONSOLIDATED STATISTICS ON A TAX EQUIVALENT BASIS

 

     For the Nine Months Ended,
September 30, 2012
    For the Nine Months Ended,
September 30, 2011
 
     Average
Balance
    Interest
Income/
Expense
     Average
rates
earned/
paid
    Average
Balance
    Interest
Income/
Expense
     Average
rates
earned/
paid
 
     (dollars in thousands)  

Assets

              

Interest - earning assets:

              

Loans (A)

   $ 2,063,609      $ 75,659         4.90   $ 1,988,585      $ 78,784         5.30

Taxable investment securities and other

     438,418        6,668         2.03     461,149        8,448         2.44

Tax - exempt securities

     69,836        2,109         4.03     69,929        2,317         4.42

Federal funds sold (B)

     27,300        29         0.14     32,481        39         0.16
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest - earning assets

     2,599,163        84,465         4.34     2,552,144        89,588         4.69

Noninterest - earning assets:

              

Allowance for loan and lease losses

     (29,077          (29,127     

Other assets

     248,240             250,841        
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL ASSETS

   $ 2,818,326           $ 2,773,858        
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Liabilities and Stockholders’ Equity

              

Interest - bearing liabilities:

              

Savings accounts

   $ 346,829      $ 274         0.11   $ 330,103      $ 361         0.15

Interest - bearing transaction accounts

     1,149,501        3,683         0.43     1,075,313        4,314         0.54

Time deposits

     335,947        2,464         0.98     407,182        3,635         1.19

Borrowings

     254,394        5,957         3.12     282,133        7,111         3.36
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest - bearing liabilities

     2,086,671        12,378         0.79     2,094,731        15,421         0.98
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest - bearing liabilities:

              

Demand deposits

     466,747             412,435        

Other liabilities

     13,723             12,455        

Stockholders’ equity

     251,185             254,237        
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,818,326           $ 2,773,858        
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income/spread

       72,087         3.55       74,167         3.71

Tax equivalent basis adjustment

       738             811      
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

NET INTEREST INCOME

     $ 71,349           $ 73,356      
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net interest margin (C)

          3.70          3.89
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(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 $89.6 million in the first nine months of 2011 to $84.5 million in the first nine months of 2012, a decrease of $5.1 million, or 6%. The decrease in interest income was due primarily to a 35 basis point decrease in the yield on interest earning assets for the same reasons discussed in the quarterly analysis. The yield on average loans and leases at 4.90% in the first nine months of 2012 was 40 basis points lower than the first nine months of 2011. The yield on average taxable and tax exempt investment securities decreased by 41 basis points and 39 basis points, respectively, compared to the first nine months of 2011. Average loans and leases at $2.06 billion increased $75.0 million from the first nine months of 2011, while average investment securities at $508.3 million decreased $22.8 million.

 

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Total interest expense decreased from $15.4 million in the first nine months of 2011 to $12.4 million in the first nine months of 2012, a decrease of $3.0 million, or 20%. The cost of average interest-bearing liabilities decreased from 0.98% in the first nine months of 2011 to 0.79% in 2012 for the same reasons discussed in the quarterly analysis. From the first nine months of 2011 to the first nine months of 2012, average savings and interest-bearing transaction accounts increased by $16.7 million and $74.2 million, respectively, while average time deposits decreased $71.2 million. Average rates paid on interest-bearing liabilities declined in all categories.

Provision for Loan and Lease Losses

In the first nine months of 2012, an $11.8 million provision for loan and lease losses was recorded, which was $2.6 million lower than the provision for the same period last year. During the first nine months of 2012, the Company charged off loans and leases of $12.7 million and recovered $1.2 million in previously charged off loans and leases compared to $17.1 million and $3.4 million, respectively, during the same period in 2011. During the second quarter of 2012, the Company sold a group of primarily non-performing loans with a net book value of $4.5 million and recorded a charge-off of $1.9 million. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income decreased $567,000, or 4%, to $13.5 million in the first nine months of 2012 compared to the first nine months of 2011. Gains on sales of investment securities and gains on leasing related assets decreased $956,000 and $407,000, respectively, from the first nine months of 2011 to the first nine months of 2012 for the same reasons discussed in the quarterly comparison. Commissions and fees totaled $3.4 million in the first nine months of 2012 and were $614,000 or 22% higher than the same period last year due to an increase in investment commission income and loan fees.

Noninterest Expense

Noninterest expense totaling $49.7 million decreased $2.1 million in the first nine months of 2012 from the first nine months of 2011. Marketing expense at $1.6 million for the first nine months of 2012 was $200,000 lower than the first nine months of 2011 due to the timing of media related expenses. Amortization of core deposit intangibles decreased $577,000 in the first nine months of 2012 compared to the same period in 2011 due to the same reason discussed in the quarterly comparison. FDIC insurance expense at $1.6 million decreased $558,000 compared to the first nine months of 2011 primarily as a result of changes made by the FDIC in the method of calculating assessment rates. Collection expense at $231,000 increased $36,000, while other real estate and repossessed asset expense at $89,000 and legal expense at $880,000 decreased $719,000 and $283,000, respectively. Long-term debt prepayment fee was $800,000 in the first nine months of 2011 compared to none in the same period of 2012. The Company’s efficiency ratio, a non-GAAP financial measure, was 57.93% in the first nine months of 2012, compared to 56.61% for the same period last year as a result of the same reasons discussed in the quarterly comparison. 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 Nine Months Ended September 30,  
     2012     2011  
     (dollars in thousands)  

Calculation of efficiency ratio

    

Total noninterest expense

   $ 49,713      $ 51,798   

Less:

    

Amortization of core deposit intangibles

     —          (577

Other real estate owned and other repossessed asset expense

     (89     (808

Long term debt prepayment fee

     —          (800

Provision for unfunded lending commitments

     (217     (378
  

 

 

   

 

 

 

Noninterest expense, as adjusted

   $ 49,407      $ 49,235   
  

 

 

   

 

 

 

Net interest income

   $ 71,349      $ 73,356   

Noninterest income

     13,468        14,035   
  

 

 

   

 

 

 

Total revenue

     84,817        87,391   

Plus: Tax-equivalent adjustment on municipal securities

     738        811   

Less: gains on investment securities

     (273     (1,229
  

 

 

   

 

 

 

Total revenue, as adjusted

   $ 85,282      $ 86,973   
  

 

 

   

 

 

 

Efficiency ratio

     57.93     56.61
  

 

 

   

 

 

 

Income Tax Expense

The effective tax rate increased from 30.5% in the first nine months of 2011 to 31.8% in the first nine months of 2012 for the same reasons discussed above in the quarterly comparison.

Aftermath of Hurricane Sandy

On October 29 and 30, 2012 the Northeast region and New Jersey experienced considerable damage from Hurricane Sandy. While most of Lakeland’s branches and facilities were closed for several days, as of November 6, 2012, 40 of our 46 branches were operational. To assist its customers in the aftermath of Hurricane Sandy, Lakeland waived overdraft fees and late fees on outstanding loans for a period of six days. The decision to waive fees is not expected to have a material financial impact on fourth quarter results of operations.

Financial Condition

The Company’s total assets increased $33.7 million from $2.83 billion at December 31, 2011, to $2.86 billion at September 30, 2012 due primarily to a $23.2 million increase in total loans and a $30.5 million increase in cash and cash equivalents. Total deposits increased $91.5 million, with non-interest-bearing transaction accounts increasing $35.7 million.

Loans and Leases

Gross loans and leases at $2.06 billion increased by $23.6 million from December 31, 2011. The increase in gross loans and leases is primarily due to commercial loans secured by real estate at $1.06 billion and residential mortgages at $419.7 million, which increased $45.8 million and $13.5 million, respectively. These increases were partially offset by a $30.0 million decrease in real estate construction loans. 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 decreased from $50.2 million, or 1.78% of total assets, on December 31, 2011 to $29.2 million, or 1.02% of total assets, on September 30, 2012. Non-performing assets decreased in all categories. Commercial secured by real estate; commercial, industrial and other; construction real estate and residential mortgages decreased $6.5 million, $3.1 million, $8.3 million and $2.4 million, respectively. Commercial loan non-accruals at September 30, 2012 included six loan relationships with balances over $1.0 million, totaling $8.2 million, and four loan relationships between $500,000 and $1.0 million, totaling $3.0 million.

 

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Loans and leases past due ninety days or more and still accruing at September 30, 2012 increased $461,000 to $1.8 million from December 31, 2011. 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, 2012, the Company had $10.9 million in loans that were troubled debt restructurings and still accruing interest income compared to $8.9 million on December 31, 2011. 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, 2012, the Company had $29.2 million in impaired loans and leases (consisting primarily of non-accrual and restructured loans and leases) compared to $43.1 million at year-end 2011. Impaired loans decreased from year-end 2011 primarily as a result of the decrease in non-accrual commercial loans secured by real estate and real estate construction loans. During the second quarter of 2012, the Company sold a group of primarily non-performing loans with a net book value of $4.5 million and recorded a charge-off of $1.9 million. For more information on impaired 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, $726,000 has been allocated as a portion of the allowance for loan and lease losses for impairment at September 30, 2012. At September 30, 2012, the Company also had $43.3 million in loans and leases that were rated substandard that were not classified as non-performing or impaired compared to $41.7 million at December 31, 2011.

There were no loans and leases at September 30, 2012, other than those designated non-performing, impaired or substandard, where the Company was aware of any credit conditions of any borrowers or obligors that would indicate a strong possibility of the borrowers not complying with present terms and conditions of repayment and which may result in such loans and leases being included as non-accrual, past due or renegotiated at a future date. The following table sets forth for the periods presented, the historical relationships among the allowance for loan and lease losses, the provision for loan and lease losses, the amount of loans and leases charged-off and the amount of loan and lease recoveries:

 

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(dollars in thousands)    Nine Months
Ended
September 30,
2012
    Nine Months
Ended
September 30,
2011
    Year
Ended
December  31,
2011
 

Balance of the allowance at the beginning of the year

   $ 28,416      $ 27,331      $ 27,331   
  

 

 

   

 

 

   

 

 

 

Loans and leases charged off:

      

Commercial, secured by real estate

     5,648        4,380        5,352   

Commercial, industrial and other

     841        5,188        5,249   

Leases

     694        2,333        2,858   

Real estate - mortgage

     1,436        617        1,772   

Real estate - construction

     2,402        2,966        3,636   

Home equity and consumer

     1,705        1,614        3,010   
  

 

 

   

 

 

   

 

 

 

Total loans charged off

     12,726        17,098        21,877   
  

 

 

   

 

 

   

 

 

 

Recoveries:

      

Commercial, secured by real estate

     106        1,876        2,084   

Commercial, industrial and other

     355        177        439   

Leases

     463        1,039        1,206   

Real estate - mortgage

     10        31        32   

Real estate - construction

     36        —          67   

Home equity and consumer

     226        277        318   
  

 

 

   

 

 

   

 

 

 

Total Recoveries

     1,196        3,400        4,146   
  

 

 

   

 

 

   

 

 

 

Net charge-offs:

     11,530        13,698        17,731   

Provision for loan and lease losses

     11,783        14,391        18,816   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 28,669      $ 28,024      $ 28,416   
  

 

 

   

 

 

   

 

 

 

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

     0.74     0.92     0.89

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

     1.39     1.41     1.39

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, leases, 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

 

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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.

While the overall balance of the allowance for loan losses remained substantially the same at September 30, 2012 as levels at December 31, 2011, the components of the allowance changed to reflect the changes both in the portfolios and in the levels of non-performing loans within the portfolio segments. The allowance for loan and leases losses for the leasing portfolio declined from $688,000 to $157,000 to reflect the continuing decline in the size of the portfolio and the decline in net charge-offs and non-performing loans in that portfolio. The decline in the allowance for the real estate-construction segment reflected both a decline in non-performing loans from $12.4 million at year-end 2011 to $4.1 million at September 30, 2012 as well as a decline in the overall portfolio from $79.1 million at year-end 2011 to $49.2 million at September 30, 2012. The allowance for loan and lease losses increased for both the commercial loans secured by real estate, and the residential mortgages because those were the areas where the Company experienced the most growth and because of continuing economic pressures on the real estate market in the Northeast.

Non-performing loans and leases decreased from $49.0 million on December 31, 2011 to $28.4 million on September 30, 2012. The allowance for loan and lease losses as a percent of total loans was 1.39% of total loans on September 30, 2012, compared to 1.39% as of December 31, 2011. The allowance for loan and lease losses as a percent of non-performing loans increased from 58% as of December 31, 2011 to 101% as of September 30, 2012. Management believes, based on appraisals and estimated selling costs, that its non-performing loans and leases are adequately secured and reserves on these loans and leases 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, 2012. 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 $535.3 million on December 31, 2011 to $515.4 million on September 30, 2012, a decrease of $19.9 million, or 4%.

Deposits

Total deposits increased from $2.25 billion on December 31, 2011 to $2.34 billion on September 30, 2012, an increase of $91.5 million, or 4%. Savings and interest-bearing transaction accounts totaling $1.54 billion increased $94.9 million from December 31, 2011, while time deposits totaling $320.4 million decreased $39.1 million. Noninterest bearing deposits increased $35.7 million, or 8%, to $485.3 million, resulting primarily from an increase in commercial noninterest bearing deposits.

Liquidity

“Liquidity” measures whether an entity has sufficient cash flow to meet its financial obligations and commitments on a timely basis. The Company is liquid when its subsidiary bank has the cash available to meet the borrowing and cash withdrawal requirements of customers and the Company can pay for current and planned expenditures and satisfy its debt obligations.

Lakeland funds loan demand and operation expenses from several sources:

 

   

Net income. Cash provided by operating activities was $37.5 million for the first nine months of 2012 compared to $39.6 million for the same period in 2011.

 

   

Deposits. Lakeland can offer new products or change its rate structure in order to increase deposits. In the first nine months of 2012, Lakeland generated $91.5 million in deposit growth.

 

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Sales of securities and overnight funds. At September 30, 2012, the Company had $419.4 million in securities designated “available for sale.”

 

   

Repayments on loans and leases can also be a source of liquidity to fund further loan growth.

 

   

Overnight credit lines. As a member of the Federal Home Loan Bank of New York (FHLB), Lakeland has the ability to borrow overnight based on the market value of collateral pledged. Lakeland had no overnight borrowings from the FHLB on September 30, 2012. Lakeland also has overnight federal funds lines available for it to borrow up to $162.0 million. Lakeland had borrowings against these lines of $9.0 million at September 30, 2012. Lakeland may also borrow from the discount window of the Federal Reserve Bank of New York based on the market value of collateral pledged. Lakeland had no borrowings with the Federal Reserve Bank of New York as of September 30, 2012.

 

   

Other borrowings. Lakeland can also generate funds by utilizing long-term debt or securities sold under agreements to repurchase that would be collateralized by security or mortgage collateral. At times the market values of securities collateralizing our securities sold under agreements to repurchase may decline due to changes in interest rates and may necessitate our lenders to issue a “margin call” which requires Lakeland to pledge additional collateral to meet that margin call.

Management and the Board monitor the Company’s liquidity through the asset/liability committee, which monitors the Company’s compliance with certain regulatory ratios and other various 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, 2012 follows.

Cash and cash equivalents totaling $103.1 million on September 30, 2012, increased $30.5 million from December 31, 2011. Operating activities provided $37.5 million in net cash. Investing activities used $20.1 million in net cash, primarily reflecting an increase in loans and leases. Financing activities provided $13.1 million in net cash, reflecting a net increase of $91.5 million in deposits partially offset by net repayments of $60.0 million in other borrowings, the redemption of $19.0 million in preferred stock and a $19 million decrease in federal funds purchased. The proceeds from the issuance of common stock also provided $25.0 million in funds. These funds were used on October 7, 2012 to redeem subordinated debentures of $25.8 million. The Company anticipates that it will have sufficient funds available to meet its current loan commitments and deposit maturities. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of September 30, 2012. 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 on noncancellable operating leases

   $ 20,701       $ 2,195       $ 4,233       $ 3,184       $ 11,089   

Benefit plan commitments

     4,795         185         335         345         3,930   

Remaining contractual maturities of time deposits

     320,430         238,823         70,636         10,096         875   

Subordinated debentures

     77,322         25,774         0         0         51,548   

Loan commitments

     467,372         397,922         44,850         564         24,036   

Long-term debt

     95,000         0         40,000         20,000         35,000   

Interest on long-term debt *

     44,811         4,720         8,563         6,637         24,891   

Standby letters of credit

     9,204         7,358         1,651         115         80   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,039,635       $ 676,977       $ 170,268       $ 40,941       $ 151,449   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Includes interest on long-term debt and subordinated debentures at a weighted rate of 3.83%.

Capital Resources

Total stockholders’ equity increased from $259.8 million on December 31, 2011 to $277.5 million on September 30, 2012, an increase of $17.8 million, or 7%. Book value per common share increased to $9.35 on September 30, 2012 from $8.99 on December 31, 2011. The increase in stockholders’ equity from December 31, 2011 to September 30, 2012 was primarily due to $15.9 million in net income and the company’s sale of an aggregate of 2,667,253 shares of common stock at $9.65 per share, which resulted in net proceeds of $25.0 million. Partially offsetting net income and the sale of common stock was the $19.0 million redemption of preferred stock, the warrant repurchase totaling $2.8 million and payment of dividends on common and preferred stock of $4.1 million.

The Company and Lakeland are subject to various regulatory capital requirements that are monitored by federal banking agencies. Failure to meet minimum capital requirements can lead to certain supervisory actions by regulators; any supervisory action could have a direct material adverse effect on the Company or Lakeland’s financial statements. Management believes, as of September 30, 2012, 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, 2012 are as follows:

 

Capital Ratios:    Tier 1 Capital
to Total Average
Assets Ratio
September 30, 2012
    Tier 1 Capital
to Risk-Weighted
Assets Ratio
September 30, 2012
    Total Capital
to Risk-Weighted
Assets Ratio
September 30, 2012
 

The Company

     9.05     12.24     14.14

The Company Proforma *

     8.61     11.65     12.90

Lakeland Bank

     8.02     10.84     12.09

“Well capitalized” institution under FDIC Regulations

     5.00     6.00     10.00

 

* Proforma numbers include the impact of the redemption of the subordinated debentures discussed in Note 12.

 

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In June 2012, the Board of Governors of the Federal Reserve Bank, the FDIC, and the OCC approved three notices of proposed rulemaking (NPRs) that would significantly revise the regulatory capital requirements, implement the Basel III capital reforms and incorporate various Dodd-Frank capital provisions. The Company is currently evaluating the effect these NPRs will have on the Company.

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,
2012
     December 31,
2011
 

Calculation of tangible book value per common share

     

Total common stockholders’ equity at end of period - GAAP

   $ 277,544       $ 241,303   

Less:

     

Goodwill

     87,111         87,111   
  

 

 

    

 

 

 

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

   $ 190,433       $ 154,192   
  

 

 

    

 

 

 

Shares outstanding at end of period (1)

     29,691         26,836   
  

 

 

    

 

 

 

Book value per share - GAAP (1)

   $ 9.35       $ 8.99   
  

 

 

    

 

 

 

Tangible book value per share - Non-GAAP (1)

   $ 6.41       $ 5.75   
  

 

 

    

 

 

 

 

(1) Adjusted for 5% stock dividend granted April 16, 2012 to shareholders of record March 30, 2012.

 

Calculation of tangible common equity to tangible assets

    

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

   $ 190,433      $ 154,192   
  

 

 

   

 

 

 

Total assets at end of period

   $ 2,859,647      $ 2,825,950   

Less:

    

Goodwill

     87,111        87,111   
  

 

 

   

 

 

 

Total tangible assets at end of period - Non-GAAP

   $ 2,772,536      $ 2,738,839   
  

 

 

   

 

 

 

Common equity to assets - GAAP

     9.71     8.54
  

 

 

   

 

 

 

Tangible common equity to tangible assets - Non-GAAP

     6.87     5.63
  

 

 

   

 

 

 

 

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Table of Contents
     For the three months ended,     For the nine months ended,  
     September 30,
2012
    September 30,
2011
    September 30,
2012
    September 30,
2011
 

Calculation of return on average tangible common equity

        

Net income - GAAP

   $ 5,489      $ 5,106      $ 15,913      $ 14,735   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total average common stockholders’ equity

   $ 257,557      $ 235,785      $ 248,622      $ 230,689   

Less:

        

Average goodwill

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

Average other identifiable intangible assets, net

     —          15        —          221   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total average tangible common stockholders’ equity - Non-GAAP

   $ 170,446      $ 148,659      $ 161,511      $ 143,357   
  

 

 

   

 

 

   

 

 

   

 

 

 

Return on average common stockholders’ equity - GAAP

     8.48     8.59     8.55     8.54
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     12.81     13.63     13.16     13.74
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
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 $95.0 million. The information provided for net interest income assumes that changes in interest rates of plus 200 basis points and minus 200 basis points change gradually in equal increments (“rate ramp”) over the twelve month period.

 

     Changes in interest rates  

Rate Ramp

   +200 bp     -200 bp  

Asset/Liability Policy Limit

     -5.0     -5.0

September 30, 2012

     -3.3     -3.8

December 31, 2011

     -4.0     -2.8

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, 2012 (the base case) was $337.6 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     -200 bp  

Asset/Liability Policy Limit

     -25.0     -25.0

September 30, 2012

     -7.9     -11.2

December 31, 2011

     -7.2     -12.9

The information set forth in the above tables is based on significant estimates and assumptions, and constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. For more information regarding the Company’s market risk and assumptions used in the Company’s simulation models, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

ITEM 4. Controls and Procedures

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

 

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(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, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II OTHER INFORMATION

Item 1. Legal Proceedings

There are no pending legal proceedings involving the Company or 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, 2011.

 

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    Not Applicable   

Item 3.

   Defaults Upon Senior Securities    Not Applicable   

Item 4.

   Mine Safety Disclosures    Not Applicable   

Item 5.

   Other Information    Not Applicable   

Item 6. Exhibits

 

31.1    Certification by Thomas J. Shara pursuant to Section 302 of the Sarbanes Oxley Act.
31.2    Certification by Joseph F. Hurley pursuant to Section 302 of the Sarbanes Oxley Act.
32.1    Certification by Thomas J. Shara and Joseph F. Hurley pursuant to Section 906 of the Sarbanes Oxley Act.
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, 2012

 

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