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LAKELAND BANCORP INC - Quarter Report: 2012 March (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                                 March 31, 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         (I.R.S. Employer
      incorporation or organization)        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 April 30, 2012 there were 26,965,019 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 - March 31, 2012 (unaudited) and December 31, 2011      3   
  Consolidated Statements of Income - Unaudited Three Months ended March 31, 2012 and 2011      4   
  Consolidated Statements of Comprehensive Income - Unaudited Three Months ended March 31, 2012 and 2011      5   
  Consolidated Statements of Changes in Stockholders' Equity - Unaudited Three Months ended March 31, 2012      6   
  Consolidated Statements of Cash Flows - Unaudited Three Months ended March 31, 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      28   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      37   
Item 4.   Controls and Procedures      37   
                               Part II Other Information   
Item 1.   Legal Proceedings      39   
Item 1A.   Risk Factors      39   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      39   
Item 3.   Defaults Upon Senior Securities      39   
Item 4.   Mine Safety Disclosures      39   
Item 5.   Other Information      39   
Item 6.   Exhibits      39   

 

Signatures         40   
   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

 

    

 

March 31, 2012

(unaudited

  

      

 

December 31,

2011

  

  

 

 

ASSETS:

    

 

(dollars in thousands except share and

per share amounts)

  

  

Cash

     $79,877           $60,688   

Interest-bearing deposits due from banks

     6,944           11,870   

 

 

Total cash and cash equivalents

     86,821           72,558   

Investment securities available for sale

     446,113           463,611   

Investment securities held to maturity; fair value of $71,601 in 2012 and $74,274 in 2011

     69,231           71,700   

Federal Home Loan Bank Stock

     7,417           8,333   

Loans, net of deferred costs

     2,073,466           2,041,575   

Less: allowance for loan and lease losses

     28,700           28,416   

 

 

Net loans

     2,044,766           2,013,159   

Premises and equipment, net

     29,108           27,917   

Accrued interest receivable

     8,503           8,369   

Goodwill

     87,111           87,111   

Bank owned life insurance

     45,099           44,760   

Other assets

     28,178           28,432   

 

 

TOTAL ASSETS

     $2,852,347           $2,825,950   

 

 

LIABILITIES

       

Deposits:

       

Noninterest bearing

     $476,349           $449,560   

Savings and interest-bearing transaction accounts

     1,473,051           1,440,541   

Time deposits under $100 thousand

     206,766           211,797   

Time deposits $100 thousand and over

     131,962           147,755   

 

 

Total deposits

     2,288,128           2,249,653   

Federal funds purchased and securities sold under agreements to repurchase

     96,453           72,131   

Other borrowings

     135,000           155,000   

Subordinated debentures

     77,322           77,322   

Other liabilities

     13,489           12,061   

 

 

TOTAL LIABILITIES

     2,610,392           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 March 31, 2012 and 19,000 shares at December 31, 2011

     ---           18,480   

Common stock, no par value; authorized shares, 40,000,000; issued 27,275,480 shares at March 31, 2012 and December 31, 2011

     278,509           270,044   

Accumulated deficit

     (35,593        (26,061

Treasury stock, at cost, 312,654 shares at March 31, 2012 and 439,340 at December 31, 2011

     (3,947        (5,551

Accumulated other comprehensive income

     2,986           2,871   

 

 

TOTAL STOCKHOLDERS’ EQUITY

     241,955           259,783   

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

     $2,852,347           $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 March 31,  
     2012         2011   

 

 
     (In thousands, except per share data)   

INTEREST INCOME

     

Loans, leases and fees

     $25,458         $26,665   

Federal funds sold and interest-bearing deposits with banks

     6         12   

Taxable investment securities and other

     2,340         2,713   

Tax-exempt investment securities

     490         499   

 

 

TOTAL INTEREST INCOME

     28,294         29,889   

 

 

INTEREST EXPENSE

     

Deposits

     2,256         2,931   

Federal funds purchased and securities sold under agreements to repurchase

     28         27   

Other borrowings

     2,064         2,347   

 

 

TOTAL INTEREST EXPENSE

     4,348         5,305   

 

 

NET INTEREST INCOME

     23,946         24,584   

Provision for loan and lease losses

     4,556         4,927   

 

 

NET INTEREST INCOME AFTER

     

PROVISION FOR LOAN AND LEASE LOSSES

     19,390         19,657   

NONINTEREST INCOME

     

Service charges on deposit accounts

     2,447         2,478   

Commissions and fees

     980         832   

Gains on investment securities

     32         ---   

Income on bank owned life insurance

     339         355   

Gains on leasing related assets

     184         463   

Other income

     75         102   

 

 

TOTAL NONINTEREST INCOME

     4,057         4,230   

 

 

NONINTEREST EXPENSE

     

Salaries and employee benefits

     9,435         8,986   

Net occupancy expense

     1,688         1,911   

Furniture and equipment

     1,083         1,164   

Stationery, supplies and postage

     336         365   

Marketing expense

     470         615   

Core deposit intangible amortization

     ---         265   

FDIC insurance expense

     555         947   

Collection expense

     139         65   

Legal expense

     399         295   

Expenses on other real estate owned and other repossessed assets

     38         272   

Other expenses

     2,132         2,141   

 

 

TOTAL NONINTEREST EXPENSE

     16,275         17,026   

 

 

Income before provision for income taxes

     7,172         6,861   

Income tax expense

     2,201         2,090   

 

 

NET INCOME

     $4,971         $4,771   

 

 

Dividends on Preferred Stock and Accretion

     620         1,286   

 

 

Net Income Available to Common Stockholders

     $4,351         $3,485   

 

 

PER SHARE OF COMMON STOCK

     

Basic earnings

     $0.16         $0.13   

 

 

Diluted earnings

     $0.16         $0.13   

 

 

Dividends

     $0.06         $0.06   

 

 

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

     

 

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Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME-UNAUDITED

 

     For the three months ended March 31,  
     2012         2011   

 

 
             (in thousands)   

NET INCOME

     $4,971         $4,771   

 

 

OTHER COMPREHENSIVE INCOME NET OF TAX:

     

Unrealized securities gains during period

     131         876   

Less: reclassification for gains included in net income

     21         ---   

Change in pension liability, net

     5         4   

 

 

Other Comprehensive Income

     115         880   

 

 

TOTAL COMPREHENSIVE INCOME

     $5,086         $5,651   

 

 

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

     

 

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Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY - UNAUDITED

Three Months ended March 31, 2012

 

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

BALANCE January 1, 2012

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

Net Income

            4,971             4,971   

Other comprehensive income, net of tax

  

             115         115   

Preferred dividends

            (100          (100

Accretion of discount

          520        (520          ---   

Stock based compensation

        178                 178   

Redemption of preferred stock

          (19,000            (19,000

Warrant Repurchase

        (2,800              (2,800

Adjustment for stock dividend

     1,298,832         12,345          (12,345          ---   

Issuance of restricted stock awards

        (1,153         1,153           ---   

Issuance of stock to dividend reinvestment
and stock purchase plan

        (123       (251     451           77   

Exercise of stock options, net of excess
tax benefits

        18                 18   

Cash dividends, common stock

                              (1,287                      (1,287

BALANCE March 31, 2012

     27,275,480         $278,509        $0        ($35,593     ($3,947     $2,986         $241,955   

(UNAUDITED)

                                                          

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

  

 

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Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

 

     For the three months ended  
     March 31,  
      2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES

     (dollars in thousands)   

Net income

     $4,971        $4,771   

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

    

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

     1,803        1,514   

Depreciation and amortization

     715        1,010   

Provision for loan and lease losses

     4,556        4,927   

Gains on securities

     (32     ---   

Gains on leases

     ---        (382

Gains on sales of other assets

     (27     (35

Stock-based compensation

     178        155   

(Increase) decrease in other assets

     (144     1,737   

Increase in other liabilities

     1,555        2,791   

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     13,575        16,488   

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Proceeds from repayments on and maturity of securities:

    

Available for sale

     36,189        46,649   

Held to maturity

     8,030        3,166   

Proceeds from sales of securities

    

Available for sale

     16,540        ---   

Purchase of securities:

    

Available for sale

     (36,483     (32,196

Held to maturity

     (5,607     (6,701

Net decrease in Federal Home Loan Bank Stock

     916        2,911   

Proceeds from sales of leases

     ---        16,433   

Net (increase) decrease in loans and leases

     (36,731     15,843   

Proceeds from sales of other repossessed assets

     154        769   

Capital expenditures

     (1,906     (991

 

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

     (18,898     45,883   

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net increase in deposits

     38,475        42,623   

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

     24,322        (5,741

Proceeds from other borrowings

     130,000        15,000   

Repayments of other borrowings

     (150,000     (80,000

Redemption of preferred stock and common stock warrant

     (21,800     (20,000

Exercise of stock options

     ---        57   

Excess tax benefits

     18        16   

Issuance of stock to dividend reinvestment and stock purchase plan

     77        148   

Dividends paid

     (1,506     (1,790

 

 

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

     19,586        (49,687

 

 

Net increase in cash and cash equivalents

     14,263        12,684   

Cash and cash equivalents, beginning of period

     72,558        49,278   

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

     $86,821        $61,962   

 

 

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

 

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Notes to Consolidated Financial Statements – (Unaudited)

Note 1. Significant Accounting Policies

Basis of Presentation.

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

The Company’s unaudited interim financial statements reflect all adjustments, such as normal recurring accruals that are, in the opinion of management, necessary for the fair statement of the results of the interim periods presented. The results of operations for the quarter 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 $178,000 and $155,000 was recognized for the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, there was unrecognized compensation cost of $1.8 million related to unvested restricted stock; that cost is expected to be recognized over a weighted average period of approximately 3.3 years. Unrecognized compensation expense related to unvested stock options was approximately $38,000 as of March 31, 2012 and is expected to be recognized over a period of 2.2 years.

In the first three 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 three 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 three 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

     - - -            
  

 

 

 

Outstanding, March 31, 2012

     598,477         $12.57         2.84         $31,825   
  

 

 

 

Options exercisable at

March 31, 2012

     576,427         $12.70         2.66         $12,676   
  

 

 

 

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

There were no options exercised in the first quarter of 2012. The aggregate intrinsic value of options exercised during the three months ended March 31, 2011 was $41,000. Exercise of stock options during the first three months of 2011 resulted in cash receipts of $57,000.

Information regarding the Company’s restricted stock (all unvested) and changes during the three months ended March 31, 2012 is as follows:

 

     Number of
shares
   

Weighted

average

price

 
  

 

 

 

Outstanding, January 1, 2012

     172,772      $ 8.96   

Granted

     91,269        9.50   

Vested

     (20,552     6.82   

Forfeited

     (277     9.07   
  

 

 

 

Outstanding, March 31, 2012

     243,212      $ 9.34   
  

 

 

 

 

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Note 3. Comprehensive Income

The components of other comprehensive income are as follows:

 

    March 31, 2012            March 31, 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

    $194        ($63     $131         $1,364        ($488     $876   

Less reclassification adjustment for net gains arising during the period

    32        (11     21         ---        ---        ---   
 

 

 

    

 

 

 

Net unrealized gains (losses)

    $162        ($52     $110         $1,364        ($488     $876   

Change in minimum pension liability

    8        (3     5         7        (3     4   
 

 

 

    

 

 

 

Other comprehensive income (loss), net

    $170        ($55     $115         $1,371        ($491     $880   
 

 

 

    

 

 

 

 

Note 4. Statement of Cash Flow Information, Supplemental Information

 

     For the three months ended  
     March 31,  
     2012      2011  
  

 

 

 

Supplemental schedule of noncash investing and financing activities:

     (in thousands)   

Cash paid during the period for income taxes

     $517         $569   

Cash paid during the period for interest

     4,406         5,301   

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

     259         871   

Transfer of leases held for sale to leases held for investment

     0         1,517   

 

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Note 5. Earnings Per Share

All weighted average, actual share and per share information set forth in this quarterly report on Form 10-Q for the three months ended March 31, 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
March 31,
 
(In thousands, except per share data)    2012      2011  
  

 

 

 

Net income available to common shareholders

     $4,351         $3,485   

Less: earnings allocated to participating securities

     36         24   
  

 

 

 

Net income allocated to common shareholders

     $4,315         $3,461   
  

 

 

 

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

     26,700         26,511   

Share-based plans (1)

     47         140   
  

 

 

 

Weighted average number of common shares - diluted (1)

     26,747         26,651   

Basic earnings per share

     $0.16         $0.13   
  

 

 

 

Diluted earnings per share

     $0.16         $0.13   
  

 

 

 

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

     

Options to purchase 570,914 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 March 31, 2012 because the exercise price was greater than the average market price. Options to purchase 737,275 shares of common stock at a weighted average price of $12.35 per share and 65,137 shares of restricted stock at a weighted average price of $9.44 per share were outstanding and were not included in the computation of diluted earnings per share for the quarter ended March 31, 2011 because the exercise price and the grant-date price were greater than the average market price.

 

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Note 6. Investment Securities

 

AVAILABLE FOR SALE

     March 31, 2012                          December 31, 2011
                Gross         Gross                          Gross         Gross       
       Amortized         Unrealized         Unrealized        Fair         Amortized         Unrealized         Unrealized      Fair

(in thousands)

     Cost         Gains         Losses        Value         Cost         Gains         Losses      Value

 

     

U.S. government agencies

     $38,172         $67         $(69     $38,170         $43,463         $140         ---      $43,603

Mortgage-backed securities

     335,628         5,129         (650     340,107         344,938         5,014         (428   349,524

Obligations of states and political subdivisions

     34,326         1,607         (82     35,851         34,102         1,875         (9   35,968

Other debt securities

     17,551         175         (950     16,776         20,965         72         (1,320   19,717

Equity securities

     14,674         549         (14     15,209         14,543         306         (50   14,799

 

       $440,351         $7,527         $(1,765     $446,113         $458,011         $7,407         $(1,807   $463,611

 

HELD TO MATURITY

     March 31, 2012                          December 31, 2011
          Gross         Gross                Gross         Gross       
       Amortized         Unrealized         Unrealized        Fair         Amortized         Unrealized         Unrealized      Fair

(in thousands)

     Cost         Gains         Losses        Value         Cost         Gains         Losses      Value

 

     

U.S. government agencies

     $13,998         $57         $(64     $13,991         $9,005         $134         $---      $9,139

Mortgage-backed securities

     19,138         1,097         (3     20,232         20,577         1,148         (1   21,724

Obligations of states and political subdivisions

     34,539         1,196         (31     35,704         40,559         1,305         (9   41,855

Other debt securities

     1,556         118         ---        1,674         1,559         72         (75   1,556

 

       $69,231         $2,468         $(98     $71,601         $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):

 

     March 31, 2012  

 

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

 

 

Due in one year or less

   $ 5,975       $ 6,021       $ 13,542       $ 13,599   

Due after one year through five years

     43,598         43,764         14,738         15,390   

Due after five years through ten years

     35,333         36,323         18,646         19,181   

Due after ten years

     5,143         4,689         3,167         3,199   

 

 
     90,049         90,797         50,093         51,369   

Mortgage-backed securities

     335,628         340,107         19,138         20,232   

Equity securities

     14,674         15,209         ---         ---   

 

 

Total securities

   $ 440,351       $ 446,113       $ 69,231       $ 71,601   

 

 

 

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

 

     For the three months ended  
     March 31,  
     2012        2011   
  

 

 

 

Sale proceeds

     $16,540        $---   

Gross gains

     99        ---   

Gross losses

     (67     ---   

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 $325.3 million and $343.7 million at March 31, 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 March 31, 2012 and December 31, 2011:

 

March 31, 2012    Less than 12 months      12 months or longer              Total
          Unrealized            Unrealized         Number of          Unrealized

AVAILABLE FOR SALE

     Fair value         Losses         Fair value         Losses         securities         Fair value       Losses
             (dollars in thousands)              

U.S. government agencies

     $9,928         $69         $---         $---         2         $9,928       $69

Mortgage-backed securities

     66,019         635         4,108         15         17         70,127       650

Obligations of states and political subdivisions

     1,971         82         ---         ---         5         1,971       82

Other debt securities

     590         10         6,012         940         4         6,602       950

Equity securities

     4,312         14         ---         ---         1         4,312       14

 

       $82,820         $810         $10,120         $955         29         $92,940       $1,765

 

     

HELD TO MATURITY

                        
     

U.S. government agencies

     $4,928         $64         $---         $---         1         $4,928       $64

Mortgage-backed securities

     1,501         3         ---         ---         1         $1,501       $3

Obligations of states and political subdivisions

     675         24         395         7         4         1,070       31

 

       $7,104         $91         $395         $7         6         $7,499       $98

 

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Table of Contents
December 31, 2011    Less than 12 months      12 months or longer              Total
          Unrealized            Unrealized         Number of          Unrealized

AVAILABLE FOR SALE

     Fair value         Losses         Fair value         Losses         securities         Fair value       Losses
             (dollars in thousands)              

U.S. government agencies

     $---         $---         $---         $---         0         $---       $---

Mortgage-backed securities

     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

     $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. In its evaluation, management considered the credit rating on the securities and the results of discounted cash flow analyses. All investment securities are evaluated on a periodic basis to determine if factors are identified that would require further analysis. In evaluating the Company’s securities, management considers the following items:

 

   

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

   

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

   

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

   

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

Note 7. Loans and Leases.

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

 

     March 31,          December 31,
     2012         2011

 

     (in thousands)

Commercial, secured by real estate

   $ 1,042,595         $1,012,982

Commercial, industrial and other

     219,270         209,915

Leases

     26,214         28,879

Real estate-residential mortgage

     412,027         406,222

Real estate-construction

     71,447         79,138

Home equity and consumer

     301,974         304,190

 

Total loans

     2,073,527         2,041,326

 

Plus: deferred costs

     (61      249

 

Loans, net of deferred costs

   $ 2,073,466         $2,041,575

 

 

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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:

 

     March 31,         December 31,   

(in thousands)

     2012         2011   

Commercial, secured by real estate

     $12,617         $16,578   

Commercial, industrial and other

     5,611         4,608   

Leases

     621         575   

Real estate—residential mortgage

     9,943         11,610   

Real estate—construction

     10,502         12,393   

Home equity and consumer

     2,725         3,252   
  

 

 

 

Total non-accrual loans and leases

     $42,019         $49,016   

Other real estate and other repossessed assets

     1,314         1,182   
  

 

 

 

TOTAL NON-PERFORMING ASSETS

     $43,333         $50,198   
  

 

 

 

Troubled debt restructurings, still accruing

     $8,744         $8,856   
  

 

 

 

Non-accrual loans included $4.3 million and $4.6 million of troubled debt restructurings as of March 31, 2012 and December 31, 2011, respectively.

An age analysis of past due loans, segregated by class of loans as of March 31, 2012 and December 31, 2011, are as follows:

 

March 31, 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    $ 3,018       $ 2,343       $ 13,349       $ 18,710       $ 1,023,885       $ 1,042,595       $ 732   
Commercial, industrial and other      735         460         5,711         6,906         212,364         219,270         100   
Leases      304         143         621         1,068         25,146         26,214         -     
Real estate—residential mortgage      1,942         604         11,136         13,682         398,345         412,027         1,193   
Real estate—construction      100         -           10,502         10,602         60,845         71,447         -     
Home equity and consumer      2,682         484         3,043         6,209         295,765         301,974         318   
  

 

 

 
   $ 8,781       $ 4,034       $ 44,362       $ 57,177       $ 2,016,350       $ 2,073,527       $ 2,343   
  

 

 

 

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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Impaired Loans

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

 

March 31, 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

     $16,795         $22,849         $-            $103         $17,684   

Commercial, industrial and other

     4,887         9,056         -            -             4,180   

Leases

     -             -             -            -             -       

Real estate-residential mortgage

     377         377         -            6         378   

Real estate-construction

     10,013         14,488         -            -             11,051   

Home equity and consumer

     350         350         -            -             312   

Loans with specific allowance:

             

Commercial, secured by real estate

     3,556         5,874         355        10         4,040   

Commercial, industrial and other

     776         889         221        -             516   

Leases

     -             -               -             -       

Real estate-residential mortgage

     329         337         49        4         482   

Real estate-construction

     489         1,429         49        -             522   

Home equity and consumer

     958         958         144        12         958   

Total:

             

Commercial, secured by real estate

     $20,351         $28,723         $355        $113         $21,724   

Commercial, industrial and other

     5,663         9,945         221        -             4,696   

Leases

     -             -             -            -             -       

Real estate--residential mortgage

     706         714         49        10         860   

Real estate-construction

     10,502         15,917         49        -             11,573   

Home equity and consumer

     1,308         1,308         144        12         1,270   
  

 

 

 
     $38,530         $56,607         $818        $135         $40,123   
  

 

 

 

 

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Table of Contents
March 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

     $11,177         $13,682         $-            $41         $11,435   

Commercial, industrial and other

     -             2              54   

Leases

     -             27         -            -             1   

Real estate-residential mortgage

     415         415         -            -             5   

Real estate-construction

     13,793         17,257         -            11         7,393   

Home equity and consumer

     610         610         -            5         610   

Loans with specific allowance:

             

Commercial, secured by real estate

     7,377         8,431         889        24         5,931   

Commercial, industrial and other

     974         1,115         465        1         1,314   

Leases

     62         64         47        -             61   

Real estate-residential mortgage

     397         397         60        4         397   

Real estate-construction

     36         100         4        -             36   

Home equity and consumer

     636         639         100        8         636   

Total:

             

Commercial, secured by real estate

     $18,554         $22,113         $889        $65         $17,366   

Commercial, industrial and other

     974         1,117         465        1         1,368   

Leases, including leases held for sale

     62         91         47        -             62   

Real estate--residential mortgage

     812         812         60        4         402   

Real estate-construction

     13,829         17,357         4        11         7,429   

Home equity and consumer

     1,246         1,249         100        13         1,246   
  

 

 

 
     $35,477         $42,739         $1,565        $94         $27,873   
  

 

 

 

 

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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 three months of 2012 and 2011 had the loans been performing under original terms would have been $812,000 and $567,000, 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 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.

 

18


Table of Contents

The following table shows the Company’s commercial loan portfolio as of March 31, 2012 and December 31, 2011, by the risk ratings discussed above (in thousands):

 

March 31, 2012   

Commercial,

secured by

real estate

    

Commercial,

industrial

and other

    

Real estate-

construction

 
          
Risk Rating         

 

 

1

     $---           $---           $---     

2

     ---           11,408         ---     

3

     28,611         18,123         11,175   

4

     313,276         57,842         5,964   

5

     603,080         99,939         38,740   

5W - Watch

     23,483         5,469         199   

6 - Other Assets Especially Mentioned

     29,118         7,741         2,085   

7 - Substandard

     44,856         18,748         13,039   

8 - Doubtful

     171         ---           245   

9 - Loss

     ---           ---           ---     
  

 

 

 

Total

     $1,042,595         $219,270         $71,447   
  

 

 

 

 

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 three months ended March 31, 2012 and the year ended December 31, 2011:

 

Three Months ended March 31, 2012
Allowance for Loan and Lease
Losses:
   Commercial,
secured by
real estate
    Commercial,
industrial
and other
    Leases     Real estate-
residential
mortgage
    Real estate-
construction
    Home
equity and
consumer
    Total  
  

 

 

 
     (in thousands)   

Beginning Balance

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

Charge-offs

     (2,090     (149     (168     (357     (1,526     (717     ($5,007

Recoveries

     39        179        378        12        27        100        $735   

Provision

     2,891        195        (542     499        1,386        127        $4,556   
  

 

 

 

Ending Balance

     $17,458        $3,702        $356        $3,231        $1,311        $2,642        $28,700   
  

 

 

 

Ending Balance: Individually evaluated for impairment

     $355        $221        $---        $49        $49        $144        $818   

Ending Balance: Collectively evaluated for impairment

     17,103        3,481        356        3,182        1,262        2,498        $27,882   
  

 

 

 

Ending Balance

     $17,458        $3,702        $356        $3,231        $1,311        $2,642        $28,700   
  

 

 

 

Loans and Leases:

              

Ending Balance: Individually evaluated for impairment

     $20,351        $5,663        $---        $706        $10,502        $1,308        $38,530   

Ending Balance: Collectively evaluated for impairment

     1,022,244        213,607        26,214        411,321        60,945        300,666        $2,034,997   
  

 

 

 

Ending Balance (1)

     $1,042,595        $219,270        $26,214        $412,027        $71,447        $301,974        $2,073,527   
  

 

 

 

(1) Excludes deferred costs

              

 

20


Table of Contents

Year ended December 31, 2011

Allowance for Loan and Lease
Losses:

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

 

 

 
     (in thousands)   

Beginning Balance

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

Charge-offs

     (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 $960,000 and $1,015,000 at March 31, 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 significant concessions have been made due to borrowers’ financial difficulties. Restructured loans typically involve a modification of terms such as a reduction of the stated interest rate, a moratorium of principal payments and/or an extension of the maturity date at a stated interest rate lower than the current market rate of a new loan with similar risk. 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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The following table summarizes loans that have been restructured during the periods presented:

 

     For the three months ended      For the three months ended  
     March 31, 2012      March 31, 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         $529         $528         1         $596         $596   

Commercial, industrial and other

     ---         ---         ---         ---         ---         ---   

Leases

     ---         ---         ---         ---         ---         ---   

Real estate--residential mortgage

     ---         ---         ---         ---         ---         ---   

Real estate--construction

     ---         ---         ---         ---         ---         ---   

Home equity and consumer

     ---         ---         ---         ---         ---         ---   
  

 

 

 
     3         $529         $528         1         $596         $596   
  

 

 

 

The following table summarizes as of March 31, 2012, loans that were restructured within the last 12 months that have subsequently defaulted:

 

     Number of      Recorded  
     Contracts      Investment  
     (Dollars in thousands)   

Defaulted Troubled Debt Restructurings:

     

Commercial, secured by real estate

     4         $1,484   

Commercial, industrial and other

     ---         ---   

Leases

     ---         ---   

Real estate--residential mortgage

     3         706   

Real estate--construction

     ---         ---   

Home equity and consumer

     1         350   
  

 

 

 
     8         $2,540   
  

 

 

 

Leases

Lakeland had no leases held for sale as of March 31, 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  
     March 31,   
     2012         2011   
  

 

 

 
     (in thousands)   

Gains on sales of leases

     $---         $143   

Realized gains on paid off leases

     157         239   

Gains on other repossessed assets

     27         81   
  

 

 

 

Total gains on leasing related assets

     $184         $463   
  

 

 

 

 

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Other Real Estate and Other Repossessed Assets

At March 31, 2012, the Company had other repossessed assets and other real estate owned of $125,000 and $1.2 million, 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  
     March 31,   
     2012        2011   
  

 

 

 
     (in thousands)   

Interest cost

     $22        $24   

Expected return on plan assets

     (19     (22

Amortization of unrecognized net actuarial loss

     18        12   
  

 

 

 

Net periodic benefit expense

     $21        $14   
  

 

 

 

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  
     March 31,   
     2012         2011   
  

 

 

 
     (in thousands)   

Service cost

     $8         $6   

Interest cost

     10         12   

Amortization of prior service cost

     3         4   

Amortization of unrecognized net actuarial loss

     3         2   
  

 

 

 

Net periodic benefit expense

     $24         $24   
  

 

 

 

The Company made contributions of $88,000 and $63,000 to the plan during the three months ended March 31, 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.

 

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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, 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 March 31, 2012 or December 31, 2011. During the three months ended March 31, 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:

 

March 31, 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
 
  

 

 

 

Assets:

     (in thousands)   

Investment securities, available for sale

           

US government agencies

     $---         $38,170         $---         $38,170   

Mortgage backed securities

     ---         340,107         ---         340,107   

Obligations of states and political subdivisions

     ---         35,851         ---         35,851   

Corporate debt securities

     ---         16,776         ---         16,776   

Equity securities

     1,968         13,241         ---         15,209   
  

 

 

 

Total securities available for sale

     $1,968         $444,145         $---         $446,113   

December 31, 2011

           

Assets:

           

Investment securities, available for sale

           

US government agencies

     $---         $43,603         $---         $43,603   

Mortgage backed securities

     ---         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:

 

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Table of Contents
March 31, 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

 
  

 

 

 

Assets:

        (in thousands)      

Impaired Loans and Leases

     $---         $---         $38,530         $38,530   

Other real estate owned and other repossessed assets

     ---         ---         1,314         1,314   
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 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 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 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 March 31, 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

 

25


Table of Contents

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 other investments are recorded at cost or par value and are 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 March 31, 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 March 31, 2012 is based on bid/ask prices from brokers for similar types of instruments based on updated accounting guidance on fair value measurement. 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.

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 March 31, 2012 and December 31, 2011:

 

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Table of Contents
March 31, 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)

 

 

 

Financial Instruments - Assets

     (in thousands)            

Investment securities held to maturity

     $69,231         $71,601         $---         $71,601         $---   

Federal Home Loan Bank Stock

     $7,417         $7,417         ---         7,417         ---   

Loans and leases

     2,073,466         2,075,409         ---         ---         2,075,409   

Financial Instruments - Liabilities

              

Certificates of Deposit

     338,728         341,173         ---         341,173         ---   

Other borrowings

     135,000         144,240         ---         144,240         ---   

Subordinated debentures

     77,322         77,990         ---         ---         42,939   

Commitments:

              

Standby letters of credit

     ---         28         ---         ---         28   
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 $8.46 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.

Note 12. 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

 

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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. Early adoption is permitted. 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.

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

 

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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.

Results of Operations

(First Quarter 2012 Compared to First Quarter 2011)

Net Income

Net income for the first quarter of 2012 was $5.0 million, compared to net income of $4.8 million for the same period in 2011. Net income available to common shareholders was $4.4 million compared to net income of $3.5 million for the same period last year. Diluted earnings per share was $0.16 for the first quarter of 2012, compared to diluted earnings per share of $0.13 for the same period last year. Dividends on preferred stock and accretion decreased to $620,000 from $1.3 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 quarter 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 quarter 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. The Company also repurchased the outstanding common stock warrant previously issued to the treasury for the purchase of 1,046,901 shares of its common stock, for $2.8 million, completing the Company’s participation in the Treasury’s CPP.

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 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-peforming loans decline, this could increase the net interest margin.

 

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Net interest income on a tax equivalent basis for the first quarter of 2012 was $24.2 million, compared to $24.9 million earned in the first quarter of 2011. The net interest margin decreased from 3.91% in the first quarter of 2011 to 3.76% in the first quarter of 2012, primarily as a result of a 31 basis point decline in the yield on interest-earning assets, which was partially offset by a 17 basis point reduction in the cost of interest-bearing liabilities. The net interest margin would have been 3.86% and 3.99% for the first 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 declined 13 basis points to 3.60%. 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 $48.0 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%.

 

     For the three months ended,      For the three months ended,  
     March 31, 2012      March 31, 2011  
    
 
Average
Balance
  
  
   
 
 
Interest
Income/
Expense
  
  
  
    
 
 
 
Average
rates
earned/
paid
  
  
  
  
    
 
Average
Balance
  
  
   
 
 
Interest
Income/
Expense
  
  
  
    
 
 
 
Average
rates
earned/
paid
  
  
  
  

 

 

Assets

     (dollars in thousands)   

Interest-earning assets:

               

Loans and leases (A)

   $ 2,050,093      $ 25,458         4.99%       $ 2,000,057      $ 26,665         5.41%   

Taxable investment securities and other

     447,252        2,340         2.09%         476,688        2,713         2.28%   

Tax-exempt securities

     72,787        754         4.14%         67,594        768         4.54%   

Federal funds sold (B)

     22,522        6         0.11%         32,896        12         0.15%   

 

 

Total interest-earning assets

     2,592,654        28,558         4.43%         2,577,235        30,158         4.74%   

Noninterest-earning assets:

               

Allowance for loan and lease losses

     (29,162           (28,874     

Other assets

     242,705              249,178        

 

 

TOTAL ASSETS

   $ 2,806,197            $ 2,797,539        

 

 

Liabilities and Stockholders’ Equity

               

Interest-bearing liabilities:

               

Savings accounts

   $ 338,221      $ 90         0.11%       $ 322,225      $ 127         0.16%   

Interest-bearing transaction accounts

     1,137,069        1,272         0.45%         1,093,625        1,505         0.56%   

Time deposits

     350,937        894         1.02%         413,481        1,299         1.26%   

Borrowings

     267,165        2,092         3.13%         294,106        2,374         3.23%   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     2,093,392        4,348         0.83%         2,123,437        5,305         1.00%   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Noninterest-bearing liabilities:

               

Demand deposits

     448,893              400,891        

Other liabilities

     13,236              13,063        

Stockholders’ equity

     250,676              260,148        

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,806,197            $ 2,797,539        

 

 

Net interest income/spread

       24,210         3.60%           24,853         3.73%   

Tax equivalent basis adjustment

       264              269      

 

 

NET INTEREST INCOME

     $ 23,946            $ 24,584      

 

 

Net interest margin (C)

          3.76%              3.91%   

 

 

(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 $30.2 million in the first quarter of 2011 to $28.6 million in the first quarter of 2012, a decrease of $1.6 million, or 5%. The decrease in interest income was due primarily to a 31 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 4.99% in the first quarter of 2012 was 42 basis points lower than the first quarter of 2011. The yield on average taxable and tax exempt investment securities decreased by 19 basis points and 40 basis points, respectively, compared to the first quarter of 2011. Average loans and leases at $2.05 billion increased $50.0 million from the first quarter of 2011, while average investment securities at $520.0 million decreased $24.2 million.

 

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Total interest expense decreased from $5.3 million in the first quarter of 2011 to $4.3 million in the first quarter of 2012, a decrease of $957,000, or 18%. The cost of average interest-bearing liabilities decreased from 1.00% in the first quarter of 2011 to 0.83% in 2012. The decrease in yield was due to the continuing low rate environment along with a $62.5 million reduction in higher yielding time deposits as customers preferred to keep their deposits in short-term transaction accounts. Average savings and interest-bearing transaction accounts increased by $16.0 million and $43.4 million, respectively, from the first quarter of 2011 to the first quarter of 2012. 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; net charge-offs, and the results of independent third party loan and lease review.

In the first quarter of 2012, a $4.6 million provision for loan and lease losses was recorded, which was $371,000 lower than the provision for the same period last year. During the first quarter of 2012, the Company charged off loans and leases of $5.0 million and recovered $735,000 in previously charged off loans and leases compared to $5.7 million and $1.6 million, respectively, during the same period in 2011. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income decreased $173,000, or 4%, to $4.1 million in the first quarter of 2012 compared to the first quarter of 2011. The decrease in noninterest income was due primarily to a decline in gains on leasing related assets from $463,000 in the first quarter of 2011 to $184,000 in the first quarter of 2012 as a result of the decline in the leasing portfolio. Income on bank owned life insurance at $339,000 decreased $16,000 from the first quarter 2011 due to a decline in rates for the underlying policies. Commissions and fees totaled $980,000 in the first quarter of 2012 and were $148,000 or 18% higher than the same period last year due primarily to increases in investment commission income.

Noninterest Expense

Noninterest expense totaling $16.3 million decreased $751,000 in the first quarter of 2012 from the first quarter of 2011. Net occupancy expense at $1.7 million decreased $223,000 compared to the first quarter of 2011 due primarily to decreased snow removal costs resulting from the mild winter. Furniture and equipment expense at $1.1 million in the first quarter of 2012 decreased $81,000 from the same period last year due primarily to a reduction in equipment service contract expense. Stationery, supplies and postage at $336,000 in the first quarter decreased $29,000 primarily as a result of a reduction in postage expense due to the implementation of electronic statement delivery. Marketing expense totaling $470,000 decreased $145,000, compared to the first quarter of 2011 due primarily to the timing of media expenses. During the third quarter of 2011 the Company completed its core deposit intangible amortization, which resulted in a $265,000 decrease in that category in the first quarter of 2012 compared to the same period in 2011. FDIC insurance expense at $555,000 decreased $392,000 compared to the first quarter of 2011 as a result of changes made by the FDIC in the method of calculating assessment rates. Salaries and employee benefits at $9.4 million increased $449,000 or 5% compared to the first quarter of 2011. Collection expense at $139,000 and legal expense at $399,000 increased $74,000 and $104,000, respectively, while other real estate and repossessed asset expense at $38,000 decreased $234,000. The Company’s efficiency ratio, a non-GAAP financial measure, was 57.7% in the first quarter of 2012, compared to 56.7% 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 March 31,  
     2012        2011   

 

 
     (dollars in thousands)   

Calculation of efficiency ratio

    

Total noninterest expense

     $16,275        $17,026   

Less:

    

Amortization of core deposit intangibles

     -          (265

Other real estate owned and other repossessed asset expense

     (38     (272

Provision for unfunded lending commitments

     56        4   

 

 

Noninterest expense, as adjusted

     $16,293        $16,493   

 

 

Net interest income

     $23,946        $24,584   

Noninterest income

     4,057        4,230   

 

 

Total revenue

     28,003        28,814   

Plus: Tax-equivalent adjustment on municipal securities

     264        269   

Less: gains on investment securities

     (32     -     

 

 

Total revenue, as adjusted

     $28,235        $29,083   

 

 

Efficiency ratio

     57.71     56.71

 

 

Financial Condition

The Company’s total assets increased $26.4 million from $2.83 billion at December 31, 2011, to $2.85 billion at March 31, 2012 due primarily to a $32.2 million increase in total loans. Total deposits increased $38.5 million, with non-interest bearing transaction accounts increasing $26.8 million.

Loans and Leases

Gross loans and leases at $2.07 billion increased by $32.2 million from December 31, 2011. The increase in gross loans and leases is primarily due to commercial loans secured by real estate at $1.04 billion and commercial, industrial and other loans at $219.3 million increasing $29.6 million and $9.4 million, respectively. These increases were partially offset by a $7.7 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 $43.3 million, or 1.52% of total assets, on March 31, 2012. The majority of the decrease was in commercial loans secured by real estate, which decreased $4.0 million from December 31, 2011. Residential mortgages and construction real estate decreased $1.7 million and $1.9 million, respectively, and were partially offset by a $1.0 million increase in commercial, industrial and other loans. Commercial loan non-accruals at March 31, 2012 included eight loan relationships with balances over $1.0 million, totaling $18.4 million, and five loan relationships between $500,000 and $1.0 million, totaling $3.6 million.

Loans and leases past due ninety days or more and still accruing at March 31, 2012 increased $976,000 to $2.3 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 March 31, 2012, the Company had $8.7 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 March 31, 2012, the Company had $38.5 million in impaired loans and leases (consisting primarily of non-accrual

 

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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. For more information on these loans and leases see Note 7 in Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. The impairment of the loans and leases is measured using the present value of future cash flows on certain impaired loans and leases and is based on the fair value of the underlying collateral for the remaining loans and leases. Based on such evaluation, $818,000 has been allocated as a portion of the allowance for loan and lease losses for impairment at March 31, 2012. At March 31, 2012, the Company also had $44.1 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 March 31, 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:

 

(dollars in thousands)    Three months
ended
March 31,
2012
    Three months
ended
March 31,
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

     2,090        523        5,352   

Commercial, industrial and other

     149        698        5,249   

Leases

     168        1,090        2,858   

Real estate--mortgage

     357        295        1,772   

Real estate-construction

     1,526        2,436        3,636   

Home equity and consumer

     717        633        3,010   
  

 

 

 

Total loans charged off

     5,007        5,675        21,877   
  

 

 

 

Recoveries:

      

Commercial, secured by real estate

     39        958        2,084   

Commercial, industrial and other

     179        100        439   

Leases

     378        503        1,206   

Real estate--mortgage

     12        1        32   

Real estate-construction

     27        ---        67   

Home equity and consumer

     100        47        318   
  

 

 

 

Total Recoveries

     735        1,609        4,146   
  

 

 

 

Net charge-offs:

     4,272        4,066        17,731   

Provision for loan and lease losses

     4,556        4,927        18,816   
  

 

 

 

Ending balance

     $28,700        $28,192        $28,416   
  

 

 

 

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

     0.83     0.81     0.89

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

     1.38     1.43     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

 

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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 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.

Non-performing loans and leases decreased from $49.0 million on December 31, 2011 to $42.0 million on March 31, 2012. The allowance for loan and lease losses as a percent of total loans was 1.38% at March 31, 2012, compared to 1.39% as of December 31, 2011. Management believes, based on appraisals and estimated selling costs, that its non-performing loans and leases are adequately secured and reserves on these loans are adequate. The preceding statement constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

Based upon the process employed and giving recognition to all accompanying factors related to the loan and lease portfolio, management considers the allowance for loan and lease losses to be adequate at March 31, 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 $515.3 million on March 31, 2012, a decrease of $20.0 million, or 4%.

Deposits

Total deposits increased from $2.25 billion on December 31, 2011 to $2.29 billion on March 31, 2012, an increase of $38.5 million, or 2%. Savings and interest-bearing transaction accounts totaling $1.47 billion increased $32.5 million from December 31, 2011, while time deposits totaling $338.7 million decreased $20.8 million. Noninterest bearing deposits increased $26.8 million, or 6%, to $476.3 million, resulting primarily from an increase in commercial noninterest bearing deposits.

Liquidity

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

The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statement for the three months ended March 31, 2012 follows.

Cash and cash equivalents totaling $86.8 million on March 31, 2012, increased $14.3 million from December 31, 2011. Operating activities provided $13.6 million in net cash. Investing activities used $18.9 million in net cash, primarily reflecting an increase in loans and leases. Financing activities provided $19.6 million in net cash, reflecting a net increase of $38.5 million in deposits and a $24.3 million increase in federal funds purchased and securities sold under agreements to repurchase, partially offset by net repayments of $20.0 million in other borrowings and the redemption of $19.0 million in preferred stock. 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

 

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outflows as of March 31, 2012. Interest on subordinated debentures and long-term borrowed funds is calculated based on current contractual interest rates.

 

(dollars in thousands)    Total      Within
one year
    

After one but
within three

years

    

After three

but within

five years

    

After

five years

 

Minimum annual rentals or noncancellable operating leases

     $20,016         $2,260         $4,022         $3,183         $10,551   

Benefit plan commitments

     4,870         185         335         300         4,050   

Remaining contractual maturities of time deposits

     338,728         243,235         79,545         15,086         862   

Subordinated debentures

     77,322         ---         ---         ---         77,322   

Loan commitments

     428,905         345,532         57,348         432         25,593   

Long-term debt

     135,000         40,000         40,000         10,000         45,000   

Interest on long-term debt*

     113,553         7,981         15,585         12,700         77,287   

Standby letters of credit

     15,528         7,245         8,048         155         80   
  

 

 

 

Total

     $1,133,922         $646,438         $204,883         $41,856         $240,745   
  

 

 

 

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

Capital Resources

Total stockholders’ equity decreased from $259.8 million on December 31, 2011 to $242.0 million on March 31, 2012, a decrease of $17.8 million, or 7%. Book value per common share decreased to $8.97 on March 31, 2012 from $8.99 on December 31, 2011. The decrease in stockholders’ equity from December 31, 2011 to March 31, 2012 was primarily due to 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 $1.5 million, partially offset by $5.0 million in net income.

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 March 31, 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 March 31, 2012 are as follows:

 

Capital Ratios:    Tier 1 Capital
to Total Average
Assets Ratio
March 31,

2012
   Tier 1 Capital
to Risk-Weighted
Assets Ratio
March 31,

2012
   Total Capital
to Risk-Weighted
Assets  Ratio
March 31,

2012

The Company

   7.46%    9.92%    12.37%

Lakeland Bank

   7.83%    10.41%    11.66%

“Well capitalized” institution under FDIC Regulations

   5.00%    6.00%    10.00%

Non-GAAP Financial Measures

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

 

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

 

 

Calculation of tangible book value per common share

     

Total common stockholders’ equity at end of period-GAAP

     $241,955         $241,303   

Less:

     

Goodwill

     87,111         87,111   

 

 

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

     $154,844         $154,192   

 

 

Shares outstanding at end of period (1)

     26,963         26,836   

 

 

Book value per share-GAAP (1)

     $8.97         $8.99   

 

 

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

     $5.74         $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

     $154,844         $154,192   

 

 

Total assets at end of period

     $2,852,347         $2,825,950   

Less:

     

Goodwill

     87,111         87,111   

 

 

Total tangible assets at end of period---Non-GAAP

     $2,765,236         $2,738,839   

 

 

Common equity to assets-GAAP

     8.48%         8.54%   

 

 

Tangible common equity to tangible assets-Non-GAAP

     5.60%         5.63%   

 

 

 

     For the three months ended,  
     March 31,      March 31,  
     2012      2011  
  

 

 

 

Calculation of return on average tangible common equity

     

Net income-GAAP

     $4,971         $4,771   

 

 

Total average common stockholders’ equity

     $242,957         $226,051   

Less:

     

Average goodwill

     87,111         87,111   

Average other identifiable intangible assets, net

     ---         460   

 

 

Total average tangible common stockholders’ equity-Non-GAAP

     $155,846         $138,480   

 

 

Return on average common stockholders’ equity-GAAP

     8.23%         8.56%   

 

 

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

     12.83%         13.97%   

 

 

 

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

The Company manages interest rate risk and market risk by identifying and quantifying interest rate risk exposures using simulation analysis and economic value at risk models. Net interest income simulation considers the relative sensitivities of the balance sheet including the effects of interest rate caps on adjustable rate mortgages and the relatively stable aspects of core deposits. As such, net interest income simulation is designed to address the probability of interest rate changes and the behavioral response of the balance sheet to those changes. Market Value of Portfolio Equity represents the fair value of the net present value of assets, liabilities and off-balance-sheet items. Changes in estimates and assumptions made for interest rate sensitivity modeling could have a significant impact on projected results and conclusions. These assumptions could include prepayment rates, sensitivity of non-maturity deposits and other similar assumptions. Therefore, if our assumptions should change, this technique may not accurately reflect the impact of general interest rate movements on the Company’s net interest income or net portfolio value.

The starting point (or “base case”) for the following table is an estimate of the following year’s net interest income assuming that both interest rates and the Company’s interest-sensitive assets and liabilities remain at period-end levels. The net interest income estimated for the next twelve months (the base case) is $97.8 million. The information provided for net interest income assumes that changes in interest rates of plus 200 basis points and minus 200 basis points change gradually in equal increments (“rate ramp”) over the twelve month period.

 

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

 

 

Asset/Liability Policy Limit

     -5.0%               -5.0%   

March 31, 2012

     -3.9%         -1.8%         -2.0%         -2.8%   

December 31, 2011

     -4.0%         -1.6%         -2.2%         -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 March 31, 2012 (the base case) was $309.6 million. The information provided for the net portfolio value assumes fluctuations or “rate shocks” of plus 200 basis points and minus 200 basis points for changes in interest rates as shown in the table below. Rate shocks assume that current interest rates change immediately.

 

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

 

 

Asset/Liability Policy Limit

     -25.0%               -25.0%   

March 31, 2012

     -9.6%         -1.6%         -4.9%         -11.2%   

December 31, 2011

     -7.2%         -0.7%         -6.4%         -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

 

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operating in an effective manner and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal controls over financial reporting. There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 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: May 10, 2012

 

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