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LAKELAND BANCORP INC - Quarter Report: 2013 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, 2013

OR

 

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

For the transition period from              to             

Commission file number 000-17820

 

 

LAKELAND BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

New Jersey   22-2953275

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

250 Oak Ridge Road,

Oak Ridge, New Jersey

  07438
(Address of principal executive offices)   (Zip Code)

(973) 697-2000

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report.)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, any Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

As of April 26, 2013 there were 29,864,460 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, 2013 (unaudited) and December 31, 2012      3   
  Consolidated Statements of Income —Unaudited Three Months Ended March 31, 2013 and 2012      4   
  Consolidated Statements of Comprehensive Income—Unaudited Three Months Ended March 31, 2013 and 2012      5   
  Consolidated Statements of Changes in Stockholders’ Equity—Unaudited Three Months Ended March 31, 2013      6   
  Consolidated Statements of Cash Flows—Unaudited Three Months Ended March 31, 2013 and 2012      7   
  Notes to Consolidated Financial Statements (unaudited)      8   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      32   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      44   
Item 4.   Controls and Procedures      45   
  Part II Other Information   
Item 1.   Legal Proceedings      46   
Item 1A.   Risk Factors      46   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      46   
Item 3.   Defaults Upon Senior Securities      46   
Item 4.   Mine Safety Disclosures      46   
Item 5.   Other Information      46   
Item 6.   Exhibits      46   
Signatures      48   
  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, 2013
(unaudited)
    December 31,
2012
 
     (dollars in thousands except
share and per share amounts)
 

ASSETS:

    

Cash

   $ 88,744      $ 100,926   

Interest-bearing deposits due from banks

     8,322        6,619   
  

 

 

   

 

 

 

Total cash and cash equivalents

     97,066        107,545   

Investment securities available for sale, at fair value

     370,234        393,710   

Investment securities held to maturity; fair value of $98,827 at March 31, 2013 and $99,784 at December 31, 2012

     96,864        96,925   

Federal Home Loan Bank Stock, at cost

     5,381        5,382   

Loans, net of deferred costs (fees)

     2,170,743        2,146,843   

Less: allowance for loan and lease losses

     29,623        28,931   
  

 

 

   

 

 

 

Net loans

     2,141,120        2,117,912   

Premises and equipment, net

     32,722        33,280   

Accrued interest receivable

     7,743        7,643   

Goodwill

     87,111        87,111   

Bank owned life insurance

     46,456        46,143   

Other assets

     23,272        23,052   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 2,907,969      $ 2,918,703   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Noninterest bearing

   $ 521,045      $ 498,066   

Savings and interest-bearing transaction accounts

     1,566,421        1,569,139   

Time deposits under $100 thousand

     184,356        188,278   

Time deposits $100 thousand and over

     116,853        115,514   
  

 

 

   

 

 

 

Total deposits

     2,388,675        2,370,997   

Federal funds purchased and securities sold under agreements to repurchase

     94,315        117,289   

Other borrowings

     75,000        85,000   

Subordinated debentures

     51,548        51,548   

Other liabilities

     14,554        13,002   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     2,624,092        2,637,836   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Common stock, no par value; authorized shares, 40,000,000; issued 29,941,967 shares at March 31, 2013 and December 31, 2012

     302,660        303,794   

Accumulated deficit

     (21,117     (24,145

Treasury stock, at cost, 82,685 shares at March 31, 2013 and 216,077 at December 31, 2012

     (1,029     (2,718

Accumulated other comprehensive income

     3,363        3,936   
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     283,877        280,867   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,907,969      $ 2,918,703   
  

 

 

   

 

 

 

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,  
     2013      2012  
     (In thousands, except per share data)  

INTEREST INCOME

     

Loans, leases and fees

   $ 24,407       $ 25,458   

Federal funds sold and interest-bearing deposits with banks

     13         6   

Taxable investment securities and other

     1,719         2,340   

Tax-exempt investment securities

     430         490   
  

 

 

    

 

 

 

TOTAL INTEREST INCOME

     26,569         28,294   
  

 

 

    

 

 

 

INTEREST EXPENSE

     

Deposits

     1,662         2,256   

Federal funds purchased and securities sold under agreements to repurchase

     9         28   

Other borrowings

     962         2,064   
  

 

 

    

 

 

 

TOTAL INTEREST EXPENSE

     2,633         4,348   
  

 

 

    

 

 

 

NET INTEREST INCOME

     23,936         23,946   

Provision for loan and lease losses

     3,183         4,556   
  

 

 

    

 

 

 

NET INTEREST INCOME AFTER

     

PROVISION FOR LOAN AND LEASE LOSSES

     20,753         19,390   

NONINTEREST INCOME

     

Service charges on deposit accounts

     2,522         2,447   

Commissions and fees

     1,213         980   

Gains on investment securities

     505         32   

Income on bank owned life insurance

     313         339   

Other income

     498         259   
  

 

 

    

 

 

 

TOTAL NONINTEREST INCOME

     5,051         4,057   
  

 

 

    

 

 

 

NONINTEREST EXPENSE

     

Salaries and employee benefits

     9,953         9,435   

Net occupancy expense

     1,974         1,688   

Furniture and equipment

     1,405         1,083   

Stationery, supplies and postage

     370         336   

Marketing expense

     288         470   

FDIC insurance expense

     513         555   

Legal expense

     242         399   

Expenses on other real estate owned and other repossessed assets

     19         38   

Long term debt prepayment fee

     526         —     

Merger related expenses

     631         —     

Other expenses

     2,306         2,271   
  

 

 

    

 

 

 

TOTAL NONINTEREST EXPENSE

     18,227         16,275   
  

 

 

    

 

 

 

Income before provision for income taxes

     7,577         7,172   

Income tax expense

     2,469         2,201   
  

 

 

    

 

 

 

NET INCOME

   $ 5,108       $ 4,971   
  

 

 

    

 

 

 

Dividends on Preferred Stock and Accretion

     —           620   
  

 

 

    

 

 

 

Net Income Available to Common Stockholders

   $ 5,108       $ 4,351   
  

 

 

    

 

 

 

PER SHARE OF COMMON STOCK

     

Basic earnings

   $ 0.17       $ 0.16   
  

 

 

    

 

 

 

Diluted earnings

   $ 0.17       $ 0.16   
  

 

 

    

 

 

 

Dividends

   $ 0.07       $ 0.06   
  

 

 

    

 

 

 

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME—UNAUDITED

 

     For the Three Months Ended March 31,  
     2013     2012  
     (in thousands)  

NET INCOME

   $ 5,108      $ 4,971   
  

 

 

   

 

 

 

OTHER COMPREHENSIVE INCOME, NET OF TAX:

    

Unrealized securities gains (losses) during period

     (251     131   

Less: reclassification for gains included in net income

     328        21   

Change in pension liability, net

     6        5   
  

 

 

   

 

 

 

Other Comprehensive Income (Loss)

     (573     115   
  

 

 

   

 

 

 

TOTAL COMPREHENSIVE INCOME

   $ 4,535      $ 5,086   
  

 

 

   

 

 

 

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY—UNAUDITED

Three Months Ended March 31, 2013

 

    

 

Common stock

    Accumulated
deficit
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income
    Total  
     Number of
Shares
     Amount          
     (dollars in thousands)  

BALANCE January 1, 2013

     29,941,967       $ 303,794      ($ 24,145   ($ 2,718   $ 3,936      $ 280,867   

Net Income

     —           —          5,108        —          —          5,108   

Other comprehensive loss, net of tax

     —           —          —          —          (573     (573

Stock based compensation

     —           185        —          —          —          185   

Issuance of restricted stock awards

     —           (1,240     —          1,240        —          —     

Issuance of stock to dividend reinvestment and stock purchase plan

     —           (106     (299     449        —          44   

Exercise of stock options, net of excess tax benefits

     —           27        —          —          —          27   

Cash dividends, common stock

     —           —          (1,781     —          —          (1,781
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE March 31, 2013 (UNAUDITED)

     29,941,967       $ 302,660      ($ 21,117   ($ 1,029   $ 3,363      $ 283,877   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS—UNAUDITED

 

     For the Three Months Ended
March 31,
 
     2013     2012  
     (dollars in thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES

  

Net income

   $ 5,108      $ 4,971   

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

    

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

     1,501        1,803   

Depreciation and amortization

     860        715   

Provision for loan and lease losses

     3,183        4,556   

Gains on securities

     (505     (32

Gains on sales of other real estate and other repossessed assets

     (29     (27

Gains on sales of premises and equipment

     (68     —     

Stock-based compensation

     185        178   

Increase in other assets

     (109     (144

Increase in other liabilities

     1,558        1,555   
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     11,684        13,575   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Proceeds from repayments on and maturity of securities:

    

Available for sale

     20,608        36,189   

Held to maturity

     2,543        8,030   

Proceeds from sales of securities

    

Available for sale

     53,670        16,540   

Purchase of securities:

    

Available for sale

     (52,239     (36,483

Held to maturity

     (2,609     (5,607

Net decrease in Federal Home Loan Bank Stock

     1        916   

Net increase in loans and leases

     (27,428     (36,731

Proceeds from sales of other real estate and repossessed assets

     531        154   

Capital expenditures

     (696     (1,906

Proceeds from sales of bank premises and equipment

     462        —     
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (5,157     (18,898
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net increase in deposits

     17,678        38,475   

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

     (22,974     24,322   

Proceeds from other borrowings

     —          130,000   

Repayments of other borrowings

     (10,000     (150,000

Redemption of preferred stock and common stock warrant

     —          (21,800

Excess tax benefits

     27        18   

Issuance of stock to dividend reinvestment and stock purchase plan

     44        77   

Dividends paid

     (1,781     (1,506
  

 

 

   

 

 

 

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

     (17,006     19,586   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (10,479     14,263   

Cash and cash equivalents, beginning of period

     107,545        72,558   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 97,066      $ 86,821   
  

 

 

   

 

 

 

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

 

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Table of Contents

Notes to Consolidated Financial Statements—(Unaudited)

Note 1. Significant Accounting Policies

Basis of Presentation.

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

The Company’s unaudited interim financial statements reflect all adjustments, such as normal recurring accruals that are, in the opinion of management, necessary for the fair presentation of the results of the interim periods. The results of operations for the quarter presented do not necessarily indicate the results that the Company will achieve for all of 2013. 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, 2012.

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.

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 dividends.

Certain reclassifications have been made to prior period financial statements to conform to the 2013 presentation.

Note 2. Stock-Based Compensation

Share-based compensation expense of $185,000 and $178,000 was recognized for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, there was unrecognized compensation cost of $2.0 million related to unvested restricted stock; that cost is expected to be recognized over a weighted average period of approximately 3.1 years. Unrecognized compensation expense related to unvested stock options was approximately $20,000 as of March 31, 2013 and is expected to be recognized over a period of 1.2 years.

In the first three months of 2013, the Company granted 99,182 shares of restricted stock at a grant date fair value of $9.82 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 $195,000 per year for the next five 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 2009 program. Compensation expense on these shares is expected to average approximately $173,000 per year over a five year period.

There were no grants of stock options in the first three months of 2013 and 2012.

 

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Table of Contents

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, 2013

     475,697      $ 12.31          $ 53,853   

Issued

     —          —           

Exercised

     —          —           

Forfeited

     (3,757     12.91         
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding, March 31, 2013

     471,940      $ 12.31         2.28       $ 44,753   
  

 

 

   

 

 

    

 

 

    

 

 

 

Options exercisable at March 31, 2013

     460,914      $ 12.41         2.16       $ 26,791   
  

 

 

   

 

 

    

 

 

    

 

 

 

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 2013 and the exercise price, multiplied by the number of in-the-money options).

There were no options exercised in the first three months of 2013 and 2012.

Information regarding the Company’s restricted stock (all unvested) and changes during the three months ended March 31, 2013 is as follows:

 

     Number of
shares
    Weighted
average
price
 

Outstanding, January 1, 2013

     222,556      $ 9.15   

Granted

     99,182        9.82   

Vested

     (64,680     8.59   

Forfeited

     (1,909     9.18   
  

 

 

   

 

 

 

Outstanding, March 31, 2013

     255,149      $ 9.55   
  

 

 

   

 

 

 

 

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Note 3. Comprehensive Income

The components of other comprehensive income are as follows:

 

     March 31, 2013     March 31, 2012  
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 (losses) arising during period

   ($ 414   $ 163      ($ 251   $ 194       ($ 63   $ 131   

Less reclassification adjustment for net gains arising during the period

     505        (177     328        32         (11     21   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net unrealized gains (losses)

   ($ 919   $ 340      ($ 579   $ 162       ($ 52   $ 110   

Change in minimum pension liability

     8        (2     6        8         (3     5   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss), net

   ($ 911   $ 338      ($ 573   $ 170       ($ 55   $ 115   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

The following table shows the changes in the balances of each of the components of other comprehensive income for the periods presented:

Changes in Accumulated Other Comprehensive Income by Component (a)

 

   

For the Three Months Ended

March 31, 2013

   

For the Three Months Ended

March 31, 2012

 
    Unrealized Gains
and Losses on
Available-for-sale
Securities
    Pension Items     Total     Unrealized Gains
and Losses on
Available-for-sale
Securities
    Pension Items     Total  
    (in thousands)  

Beginning Balance

  $ 4,553      ($ 617   $ 3,936      $ 3,506      ($ 635   $ 2,871   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before classifications

    (251     6        (245     131        5        136   

Amounts reclassified from accumulated other comprehensive income

    328        0        328        21        0        21   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

    (579     6        (573     110        5        115   

Ending balance

  $ 3,974      ($ 611   $ 3,363      $ 3,616      ($ 630   $ 2,986   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) All amounts are net of tax.

 

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Note 4. Statement of Cash Flow Information, Supplemental Information

 

     For the Three Months Ended
March 31,
 
     2013      2012  
     (in thousands)  

Supplemental schedule of noncash investing and financing activities:

     

Cash paid during the period for income taxes

   $ 99       $ 517   

Cash paid during the period for interest

     2,676         4,406   

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

     688         259   

Note 5. Earnings Per Share

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)    2013      2012  

Net income available to common shareholders

   $ 5,108       $ 4,351   

Less: earnings allocated to participating securities

     29         36   
  

 

 

    

 

 

 

Net income allocated to common shareholders

   $ 5,079       $ 4,315   
  

 

 

    

 

 

 

Weighted average number of common shares outstanding—basic

     29,563         26,700   

Share-based plans

     62         47   
  

 

 

    

 

 

 

Weighted average number of common shares—diluted

     29,625         26,747   
  

 

 

    

 

 

 

Basic earnings per share

   $ 0.17       $ 0.16   
  

 

 

    

 

 

 

Diluted earnings per share

   $ 0.17       $ 0.16   
  

 

 

    

 

 

 

Options to purchase 444,375 shares of common stock at a weighted average price of $12.56 per share were outstanding and were not included in the computation of diluted earnings per share for the quarter ended March 31, 2013 because the exercise price was greater than the average market price. Options to purchase 570,914 shares of common stock at a weighted average price of $12.79 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.

 

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Note 6. Investment Securities

 

AVAILABLE FOR SALE    March 31, 2013      December 31, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value      Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  
     (in thousands)      (in thousands)  

U.S. treasury and U.S. government agencies

   $ 61,191       $ 251       $ (61   $ 61,381       $ 86,002       $ 577       $ (8   $ 86,571   

Mortgage-backed securities, residential

     237,700         4,747         (1,124     241,323         235,052         5,086         (579     239,559   

Obligations of states and political subdivisions

     36,379         1,660         (123     37,916         36,848         1,832         (60     38,620   

Other debt securities

     13,570         255         (214     13,611         13,576         189         (321     13,444   

Equity securities

     15,065         1,021         (83     16,003         14,984         608         (76     15,516   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 363,905       $ 7,934       $ (1,605   $ 370,234       $ 386,462       $ 8,292       $ (1,044   $ 393,710   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

HELD TO MATURITY

   March 31, 2013      December 31, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value      Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  
     (in thousands)      (in thousands)  

U.S. government agencies

   $ 16,056       $ 343       $ —        $ 16,399       $ 16,089       $ 385       $ —        $ 16,474   

Mortgage-backed securities, residential

     37,996         949         (301     38,644         39,065         1,313         (27     40,351   

Mortgage-backed securities, multifamily

     1,406         —           (38     1,368         1,421         —           (13     1,408   

Obligations of states and political subdivisions

     39,859         952         (147     40,664         38,801         1,068         (68     39,801   

Other debt securities

     1,547         205         —          1,752         1,549         201         —          1,750   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 96,864       $ 2,449       $ (486   $ 98,827       $ 96,925       $ 2,967       $ (108   $ 99,784   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

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, 2013  
     Available for Sale      Held to Maturity  
     Amortized
Cost
     Fair Value      Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ 2,451       $ 2,463       $ 14,330       $ 14,359   

Due after one year through five years

     37,156         37,850         13,449         14,079   

Due after five years through ten years

     68,370         69,622         26,444         27,218   

Due after ten years

     3,163         2,973         3,239         3,159   
  

 

 

    

 

 

    

 

 

    

 

 

 
     111,140         112,908         57,462         58,815   

Mortgage-backed securities

     237,700         241,323         39,402         40,012   

Equity securities

     15,065         16,003         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 363,905       $ 370,234       $ 96,864       $ 98,827   
  

 

 

    

 

 

    

 

 

    

 

 

 

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,
 
     2013     2012  

Sale proceeds

   $ 53,670      $ 16,540   

Gross gains

     508        99   

Gross losses

     (3     (67

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 $315.5 million and $328.4 million at March 31, 2013 and December 31, 2012, respectively, were pledged to secure public deposits and for other purposes required by applicable laws and regulations.

 

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Table of Contents

The following table indicates the length of time individual securities have been in a continuous unrealized loss position at March 31, 2013 and December 31, 2012:

 

March 31, 2013    Less than 12 months      12 months or longer      Total  
AVAILABLE FOR SALE    Fair value      Unrealized
Losses
     Fair value      Unrealized
Losses
     Number of
securities
     Fair value      Unrealized
Losses
 
     (dollars in thousands)  

U.S. government agencies

   $ 21,783       $ 61       $ —         $ —           4       $ 21,783       $ 61   

Mortgage-backed securities, residential

     61,294         1,118         2,025         6         14         63,319         1,124   

Obligations of states and political subdivisions

     4,466         83         909         40         11         5,375         123   

Other debt securities

     —           —           5,766         214         2         5,766         214   

Equity securities

     4,656         83         —           —           2         4,656         83   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 92,199       $ 1,345       $ 8,700       $ 260         33       $ 100,899       $ 1,605   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY

                    

Mortgage-backed securities, residential

   $ 15,228       $ 301       $ —         $ —           5       $ 15,228       $ 301   

Mortgage-backed securities, multifamily

     1,406         38         —           —           1         1,406         38   

Obligations of states and political subdivisions

     5,203         142         371         5         13         5,574         147   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 21,837       $ 481       $ 371       $ 5         19       $ 22,208       $ 486   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2012    Less than 12 months      12 months or longer      Total  
AVAILABLE FOR SALE    Fair value      Unrealized
Losses
     Fair value      Unrealized
Losses
     Number of
securities
     Fair value      Unrealized
Losses
 
     (dollars in thousands)  

U.S. government agencies

   $ 3,992       $ 8       $ —         $ —           1       $ 3,992       $ 8   

Mortgage-backed securities, residential

     30,359         572         3,239         7         10         33,598         579   

Obligations of states and political subdivisions

     2,825         60         —           —           7         2,825         60   

Other debt securities

     —           —           5,661         321         2         5,661         321   

Equity securities

     4,621         76         —           —           2         4,621         76   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 41,797       $ 716       $ 8,900       $ 328         22       $ 50,697       $ 1,044   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY

                    

Mortgage-backed securities, residential

   $ 1,239       $ 27       $ —         $ —           1       $ 1,239       $ 27   

Mortgage-backed securities, multifamily

     1,408         13         —           —           1         1,408         13   

Obligations of states and political subdivisions

     3,705         63         371         5         10         4,076         68   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,352       $ 103       $ 371       $ 5         12       $ 6,723       $ 108   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Management has evaluated the securities in the above table and has concluded that none of the securities with unrealized losses have impairments that are other-than-temporary. All investment securities are evaluated on a periodic basis to determine if factors are identified that would require further analysis. In evaluating the Company’s securities, management considers the following items:

 

   

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

 

   

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

 

   

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

 

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Table of Contents

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

As of March 31, 2013, the equity securities include investments in other financial institutions for market appreciation purposes. Those equities had a net amortized cost of $2.1 million and a market value of $2.8 million as of March 31, 2012.

As of March 31, 2013, equity securities also included $13.1 million in investment funds that do not have a quoted market price but use net asset value per share or its equivalent to measure fair value.

The funds include $2.9 million in funds that are primarily invested in community development loans that are guaranteed by the Small Business Administration (SBA). Because the funds are primarily guaranteed by the federal government there are minimal changes in market value between accounting periods. These funds can be redeemed within 60 days notice at the net asset value less unpaid management fees with the approval of the fund manager. As of March 31, 2013, the net amortized cost equaled the market value of the investment. There are no unfunded commitments related to this investment.

The funds also include $10.3 million in funds that are invested in government guaranteed loans, mortgage-backed securities, small business loans and other instruments supporting affordable housing and economic development. The Company may redeem these funds at the net asset value calculated at the end of the current business day less any unpaid management fees. As of March 31, 2013, the amortized cost of these securities was $10.1 million and the fair value was $10.3 million. There are no restrictions on redemptions for the holdings in these investments other than the notice required by the fund manager. There are no unfunded commitments related to this investment.

Note 7. Loans and Leases.

The following sets forth the composition of Lakeland’s loan and lease portfolio as of March 31, 2013 and December 31, 2012:

 

     March 31,
2013
    December 31,
2012
 
     (in thousands)  

Commercial, secured by real estate

   $ 1,168,873      $ 1,125,137   

Commercial, industrial and other

     211,078        216,129   

Leases

     28,190        26,781   

Real estate-residential mortgage

     412,006        423,262   

Real estate-construction

     45,594        46,272   

Home equity and consumer

     305,715        309,626   
  

 

 

   

 

 

 

Total loans

     2,171,456        2,147,207   
  

 

 

   

 

 

 

Plus: deferred fees

     (713     (364
  

 

 

   

 

 

 

Loans, net of deferred fees

   $ 2,170,743      $ 2,146,843   
  

 

 

   

 

 

 

At March 31, 2013 and December 31, 2012, home equity and consumer loans included overdraft deposit balances of $336,000 and $532,000, respectively. At March 31, 2013 and December 31, 2012, the Company had $296.8 million and $203.1 million in residential loans pledged for potential borrowings at the Federal Home Loan Bank of New York (FHLB).

 

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Table of Contents

Non-Performing Assets and Past Due Loans

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

 

(in thousands)

   March 31,
2013
     December 31,
2012
 

Commercial, secured by real estate

   $ 8,962       $ 10,511   

Commercial, industrial and other

     1,203         1,476   

Leases

     —           32   

Real estate—residential mortgage

     8,481         8,733   

Real estate—construction

     3,560         4,031   

Home equity and consumer

     2,838         3,197   
  

 

 

    

 

 

 

Total non-accrual loans and leases

   $ 25,044       $ 27,980   

Other real estate and other repossessed assets

     715         529   
  

 

 

    

 

 

 

TOTAL NON-PERFORMING ASSETS

   $ 25,759       $ 28,509   
  

 

 

    

 

 

 

Troubled debt restructurings, still accruing

   $ 9,012       $ 7,336   
  

 

 

    

 

 

 

Non-accrual loans included $3.2 million and $3.4 million of troubled debt restructurings as of March 31, 2013 and December 31, 2012, respectively.

An age analysis of past due loans, segregated by class of loans as of March 31, 2013 and December 31, 2012, is as follows:

 

      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)  

March 31, 2013

                    

Commercial, secured by real estate

   $ 4,527       $ 214       $ 9,257       $ 13,998       $ 1,154,875       $ 1,168,873       $ 295   

Commercial, industrial and other

     420         20         1,222         1,662         209,416         211,078         19   

Leases

     78         14         —           92         28,098         28,190         —     

Real estate—residential mortgage

     3,694         165         9,856         13,715         398,291         412,006         1,375   

Real estate—construction

     48         —           3,560         3,608         41,986         45,594         —     

Home equity and consumer

     1,955         381         2,901         5,237         300,478         305,715         63   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,722       $ 794       $ 26,796       $ 38,312       $ 2,133,144       $ 2,171,456       $ 1,752   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

                    

Commercial, secured by real estate

   $ 3,831       $ 2,308       $ 10,511       $ 16,650       $ 1,108,487       $ 1,125,137       $ —     

Commercial, industrial and other

     400         171         1,476         2,047         214,082         216,129         —     

Leases

     367         36         32         435         26,346         26,781         —     

Real estate—residential mortgage

     2,370         821         10,012         13,203         410,059         423,262         1,279   

Real estate—construction

     1,100         —           4,031         5,131         41,141         46,272         —     

Home equity and consumer

     2,479         363         3,355         6,197         303,429         309,626         158   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,547       $ 3,699       $ 29,417       $ 43,663       $ 2,103,544       $ 2,147,207       $ 1,437   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

Impaired Loans

Impaired loans as of March 31, 2013, March 31, 2012 and December 31, 2012 are as follows:

 

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

March 31, 2013

              

Loans without specific allowance:

              

Commercial, secured by real estate

   $ 17,275       $ 29,572       $ —         $ 125       $ 16,995   

Commercial, industrial and other

     4,860         4,937         —           48         4,858   

Real estate-residential mortgage

     355         355         —           —           357   

Real estate-construction

     3,413         4,826         —           —           3,672   

Home equity and consumer

     369         369         —           —           369   

Loans with specific allowance:

              

Commercial, secured by real estate

     2,632         3,175         279         14         2,694   

Commercial, industrial and other

     535         594         148         1         736   

Real estate-residential mortgage

     288         288         43         —           288   

Real estate-construction

     146         534         15         —           146   

Home equity and consumer

     970         970         146         14         970   

Total:

              

Commercial, secured by real estate

   $ 19,907       $ 32,747       $ 279       $ 139       $ 19,689   

Commercial, industrial and other

     5,395         5,531         148         49         5,594   

Real estate—residential mortgage

     643         643         43         —           645   

Real estate-construction

     3,559         5,360         15         —           3,818   

Home equity and consumer

     1,339         1,339         146         14         1,339   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 30,843       $ 45,620       $ 631       $ 202       $ 31,085   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

 

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

March 31, 2012

              

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   

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   

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   

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

 

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

December 31, 2012

              

Loans without specific allowance:

              

Commercial, secured by real estate

   $ 16,458       $ 21,665       $ —         $ 495       $ 18,301   

Commercial, industrial and other

     4,896         4,932         —           116         3,838   

Real estate-residential mortgage

     360         360         —           6         385   

Real estate-construction

     3,332         4,433         —           —           5,533   

Home equity and consumer

     369         369         —           1         360   

Loans with specific allowance:

              

Commercial, secured by real estate

     3,346         4,088         368         46         3,825   

Commercial, industrial and other

     808         871         219         1         769   

Real estate-residential mortgage

     288         288         43         4         374   

Real estate-construction

     698         1,085         97         —           1,445   

Home equity and consumer

     976         976         146         55         934   

Total:

              

Commercial, secured by real estate

   $ 19,804       $ 25,753       $ 368       $ 541       $ 22,126   

Commercial, industrial and other

     5,704         5,803         219         117         4,607   

Real estate—residential mortgage

     648         648         43         10         759   

Real estate-construction

     4,030         5,518         97         —           6,978   

Home equity and consumer

     1,345         1,345         146         56         1,294   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 31,531       $ 39,067       $ 873       $ 724       $ 35,764   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest that would have been accrued on impaired loans during the first three months of 2013 and 2012 had the loans been performing under original terms would have been $621,000 and $812,000, respectively. Interest that would have accrued for the year ended December 31, 2012 was $2.8 million.

Credit Quality Indicators

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

 

19


Table of Contents

The following table shows the Company’s commercial loan portfolio as of March 31, 2013 and December 31, 2012, by the risk ratings discussed above (in thousands):

March 31, 2013

 

      Commercial,
secured by

real estate
     Commercial,
industrial

and other
     Real estate-
construction
 

Risk Rating

        

1

   $ —         $ 955       $ —     

2

     —           12,909         —     

3

     44,222         15,272         —     

4

     380,135         58,487         875   

5

     634,304         84,622         34,344   

5W—Watch

     28,378         8,099         —     

6—Other Assets Especially Mentioned

     36,294         9,351         3,097   

7—Substandard

     45,458         21,383         7,278   

8—Doubtful

     82         —           —     

9—Loss

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,168,873       $ 211,078       $ 45,594   
  

 

 

    

 

 

    

 

 

 

December 31, 2012

 

      Commercial,
secured by

real estate
     Commercial,
industrial

and other
     Real estate-
construction
 

Risk Rating

        

1

   $ —         $ 996       $ —     

2

     —           12,899         —     

3

     44,448         15,676         —     

4

     350,145         62,676         795   

5

     623,912         88,033         34,682   

5W - Watch

     43,515         13,261         —     

6 - Other Assets Especially Mentioned

     21,132         2,845         6,535   

7 - Substandard

     41,817         19,743         4,260   

8 - Doubtful

     168         —           —     

9 - Loss

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,125,137       $ 216,129       $ 46,272   
  

 

 

    

 

 

    

 

 

 

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, 2013 and the year ended December 31, 2012:

 

Three Months Ended March 31, 2013

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

   $ 16,258      $ 5,103      $ 578      $ 3,568      $ 587      $ 2,837      $ 28,931   

Charge-offs

     (749     (177     (112     (565     (652     (455   ($ 2,710

Recoveries

     44        30        88        1        7        49      $ 219   

Provision

     868        288        (72     824        1,304        (29   $ 3,183   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 16,421      $ 5,244      $ 482      $ 3,828      $ 1,246      $ 2,402      $ 29,623   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 279      $ 148      $ 0      $ 43      $ 15      $ 146      $ 631   

Ending Balance: Collectively evaluated for impairment

     16,142        5,096        482        3,785        1,231        2,256        28,992   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 16,421      $ 5,244      $ 482      $ 3,828      $ 1,246      $ 2,402      $ 29,623   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and Leases:

              

Ending Balance: Individually evaluated for impairment

   $ 19,907      $ 5,395      $ 0      $ 643      $ 3,559      $ 1,339      $ 30,843   

Ending Balance: Collectively evaluated for impairment

     1,148,966        205,683        28,190        411,363        42,035        304,376        2,140,613   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance (1)

   $ 1,168,873      $ 211,078      $ 28,190      $ 412,006      $ 45,594      $ 305,715      $ 2,171,456   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Excludes deferred fees

 

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Table of Contents

 

Year Ended December 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

     (7,287     (949     (999     (1,822     (2,888     (2,074   ($ 16,019

Recoveries

     280        428        504        66        43        306      $ 1,627   

Provision

     6,647        2,147        385        2,247        2,008        1,473      $ 14,907   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 16,258      $ 5,103      $ 578      $ 3,568      $ 587      $ 2,837      $ 28,931   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually evaluated for impairment

   $ 368      $ 219      $ —        $ 43      $ 97      $ 146      $ 873   

Ending Balance: Collectively evaluated for impairment

     15,890        4,884        578        3,525        490        2,691      $ 28,058   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 16,258      $ 5,103      $ 578      $ 3,568      $ 587      $ 2,837      $ 28,931   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and Leases:

              

Ending Balance: Individually evaluated for impairment

   $ 19,804      $ 5,704      $ —        $ 648      $ 4,030      $ 1,345      $ 31,531   

Ending Balance: Collectively evaluated for impairment

     1,105,333        210,425        26,781        422,614        42,242        308,281      $ 2,115,676   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance(1)

   $ 1,125,137      $ 216,129      $ 26,781      $ 423,262      $ 46,272      $ 309,626      $ 2,147,207   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Excludes deferred fees

Lakeland also maintains a reserve for unfunded lending commitments which are included in other liabilities. This reserve was $973,000 and $1,108,000 at March 31, 2013 and December 31, 2012, respectively. The Company analyzes the adequacy of the reserve for unfunded lending commitments in conjunction with its analysis of the adequacy of the allowance for loan and lease losses. For more information on this analysis, see “Risk Elements” in Management’s Discussion and Analysis.

Troubled Debt Restructurings

Troubled debt restructurings are those loans where concessions have been made due to borrowers’ financial difficulties. Restructured loans typically involve a modification of terms such as a reduction of the stated interest rate, a moratorium of principal payments and/or an extension of the maturity date at a stated interest rate lower than the current market rate of a new loan with similar risk. The Company considers the potential losses on these loans as well as the remainder of its impaired loans while considering the adequacy of the allowance for loan and lease losses.

 

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Table of Contents

The following table summarizes loans that have been restructured during the three months ended March 31, 2013 and 2012:

 

     For the Three Months Ended      For the Three Months Ended  
     March 31, 2013      March 31, 2012  
     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

     4       $ 2,000       $ 2,000         3       $ 529       $ 528   

Commercial, industrial and other

     —           —           —           —           —           —     

Leases

     —           —           —           —           —           —     

Real estate—residential mortgage

     —           —           —           —           —           —     

Real estate—construction

     —           —           —           —           —           —     

Home equity and consumer

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     4       $ 2,000       $ 2,000         3       $ 529       $ 528   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes as of March 31, 2013 and 2012, loans that were restructured within the last 12 months that have subsequently defaulted:

 

     For the Three Months Ended  
     March 31, 2013      March 31, 2012  
     Number of
Contracts
     Recorded
Investment
     Number of
Contracts
     Recorded
Investment
 
     (Dollars in thousands)      (Dollars in thousands)  

Defaulted Troubled Debt Restructurings:

           

Commercial, secured by real estate

     4       $ 731         4       $ 1,484   

Commercial, industrial and other

     —           —           —           —     

Leases

     —           —           —           —     

Real estate—residential mortgage

     —           —           3         706   

Real estate—construction

     —           —           —           —     

Home equity and consumer

     —           —           1         350   
  

 

 

    

 

 

    

 

 

    

 

 

 
     4       $ 731         8       $ 2,540   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Leases

Lakeland had no leases held for sale as of March 31, 2013 and December 31, 2012. The following table shows the components of gains on leasing related assets for the periods presented:

 

     For the Three Months Ended
March 31,
 
     2013      2012  
     (in thousands)  

Gains on sales of leases

   $ —         $ —     

Realized gains on paid off leases

     19         157   

Gains on other repossessed assets

     11         27   
  

 

 

    

 

 

 

Total gains on leasing related assets

   $ 30       $ 184   
  

 

 

    

 

 

 

Other Real Estate and Other Repossessed Assets

At March 31, 2013, the Company had other repossessed assets and other real estate owned of $147,000 and $568,000, respectively. At December 31, 2012, the Company had other repossessed assets and other real estate owned of $77,000 and $452,000, 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,
 
     2013     2012  
     (in thousands)  

Interest cost

   $ 22      $ 22   

Expected return on plan assets

     (18     (19

Amortization of unrecognized net actuarial loss

     21        18   
  

 

 

   

 

 

 

Net periodic benefit expense

   $ 25      $ 21   
  

 

 

   

 

 

 

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,
 
     2013      2012  
     (in thousands)  

Service cost

   $ 7       $ 8   

Interest cost

     9         10   

Amortization of prior service cost

     3         3   

Amortization of unrecognized net actuarial loss

     2         3   
  

 

 

    

 

 

 

Net periodic benefit expense

   $ 21       $ 24   
  

 

 

    

 

 

 

The Company made contributions of $75,000 and $88,000 to the plan during the three month periods ended March 31, 2013 and 2012, respectively. The Company does not expect to make any more contributions for the remainder of 2013.

 

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Table of Contents

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

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. U.S. GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest level priority to unobservable inputs (level 3 measurements). The following describes the three levels of fair value hierarchy:

Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities; includes U.S. Treasury Notes, and other U.S. Government Agency securities that actively trade in over-the-counter markets; equity securities and mutual funds that actively trade in over-the-counter markets.

Level 2 – quoted prices for similar assets or liabilities in active markets; or quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability including yield curves, volatilities, and prepayment speeds.

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

The Company’s assets that are measured at fair value on a recurring basis are its available for sale investment securities. The Company obtains fair values on its securities using information from a third party servicer. If quoted prices for securities are available in an active market, those securities are classified as Level 1 securities. The Company has a U.S. Treasury Note and certain equity securities that are classified as Level 1 securities. Level 2 securities were primarily comprised of U.S. Agency bonds, residential mortgage-backed securities, obligations of state and political subdivisions and corporate securities. Fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, bids and offers. On a quarterly basis, the Company reviews the pricing information received from the Company’s third party pricing service. This review includes a comparison to non-binding third-party quotes. As a result of our review, we did not have any adjustments to prices from our third party servicer.

The following table sets forth the Company’s financial assets that were accounted for at fair value on a recurring basis as of the periods presented by level within the fair value hierarchy.

 

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Table of Contents

During the three months ended March 31, 2013, 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:

 

      Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total
Fair Value
 
     (in thousands)  

March 31, 2013

           

Assets:

     

Investment securities, available for sale

           

U.S. treasury and government agencies

   $ 3,494       $ 57,887       $ —         $ 61,381   

Mortgage backed securities

     —           241,323         —           241,323   

Obligations of states and political subdivisions

     —           37,916         —           37,916   

Corporate debt securities

     —           13,611         —           13,611   

Equity securities

     2,414         13,589         —           16,003   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 5,908       $ 364,326       $ —         $ 370,234   

Other Assets (a)

   $ —         $ 404       $ —         $ 404   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 5,908       $ 364,730       $ —         $ 370,638   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Liabilities (a)

   $ —         $ 404       $ —         $ 404   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ —           404       $ —           404   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

           

Assets:

           

Investment securities, available for sale

           

U.S. treasury and government agencies

   $ 3,493       $ 83,078       $ —         $ 86,571   

Mortgage backed securities

     —           239,559         —           239,559   

Obligations of states and political subdivisions

     —           38,620         —           38,620   

Corporate debt securities

     —           13,444         —           13,444   

Equity securities

     2,010         13,506         —           15,516   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

     5,503         388,207         —           393,710   

Other Assets (a)

     —           195         —           195   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 5,503       $ 388,402       $ —         $ 393,905   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Liabilities (a)

   $ —         $ 195       $ —         $ 195   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ —         $ 195       $ —         $ 195   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Non-hedging interest rate derivatives

 

26


Table of Contents

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

 

      Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total
Fair Value
 
     (in thousands)  

March 31, 2013

           

Assets:

     

Impaired Loans and Leases

   $ —         $ —         $ 30,843       $ 30,843   

Other real estate owned and other repossessed assets

     —           —           715         715   

December 31, 2012

           

Assets:

           

Impaired Loans and Leases

     —           —         $ 31,531       $ 31,531   

Other real estate owned and other repossessed assets

     —           —           529         529   

Impaired loans 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 dependent, fair value is generally measured based on the value of the collateral securing these loans and leases and is classified at a level 3 in the fair value hierarchy. Collateral may be real estate, accounts receivable, inventory, equipment and/or other business assets. The value of the real estate is assessed based on appraisals by qualified third party licensed appraisers. The appraisers may use the sales comparison approach or 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 are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

Other real estate owned (OREO) and other repossessed assets, representing property acquired through foreclosure, are carried at fair value less estimated disposal costs of the acquired property. Fair value on other real estate owned is based on the appraised value of the collateral using the sales comparison approach or 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 recognized valuation resources.

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, 2013 and December 31, 2012 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.

 

27


Table of Contents

The fair value of Investment Securities Held to Maturity was measured using information from the same third-party servicer used for Investment Securities Available for Sale using the same methodologies discussed above. Investment Securities Held to Maturity includes $12.4 million in short-term municipal bond anticipation notes that are non-rated and do not have an active secondary market or information readily available on standard financial systems. As a result, the securities are classified as Level 3 securities. These are investments in municipalities in the Company’s market area, and management performs a credit analysis on the municipality before investing in these securities.

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

The net loan portfolio at March 31, 2013 and December 31, 2012 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 based on the present value of discounted cash flows 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 is based on bid/ask prices from brokers for similar types of instruments.

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.

 

28


Table of Contents

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, 2013 and December 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)
 
     (in thousands)                       

March 31, 2013

        

Financial Instruments—Assets

        

Investment securities held to maturity

   $ 96,864       $ 98,827       $ —         $ 86,390       $ 12,437   

Federal Home Loan Bank Stock

     5,381         5,381         —           5,381         —     

Loans and leases

     2,170,743         2,176,887         —           —           2,176,887   

Financial Instruments—Liabilities

              

Certificates of Deposit

     301,209         302,437         —           302,437         —     

Other borrowings

     75,000         80,511         —           80,511         —     

Subordinated debentures

     51,548         34,434         —           —           34,434   

Commitments:

              

Standby letters of credit

     —           2         —           —           2   

December 31, 2012

              

Financial Assets:

              

Investment securities held to maturity

   $ 96,925       $ 99,784       $ —         $ 87,336       $ 12,448   

Federal Home Loan Bank Stock

     5,382         5,382         —           5,382         —     

Loans and leases

     2,146,843         2,154,507         —           —           2,154,507   

Financial Liabilities:

              

Certificates of Deposit

     303,792         305,398         —           305,398         —     

Other borrowings

     85,000         91,325         —           91,325         —     

Subordinated debentures

     51,548         33,403         —           —           33,403   

Commitments:

              

Standby letters of credit

     —           4         —           —           4   

Note 11. Derivatives

The Company is a party to interest rate derivatives that are not designated as hedging instruments. These derivatives relate to interest rate swaps that the Company enters into with customers to allow customers to convert variable rate loans to a fixed rate. The Company pays interest to the customer at a floating rate on the notional amount and receives interest from the customer at a fixed rate for the same notional amount. At the same time the interest rate swap is entered into with the customer, an offsetting interest rate swap is entered into with another financial institution. The Company pays the other financial institution interest at the same fixed rate on the same notional amount as the swap entered into with the customer, and receives interest from the financial institution for the same floating rate on the same notional amount. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss of given default for all counterparties. As of March 31, 2013 and December 31, 2012, the Company had $493,000 and $497,000, respectively, in securities pledged for collateral on its interest rate swaps with the financial institution.

 

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The following table presents summary information regarding these derivatives for the periods presented:

March 31, 2013

 

     Notional Amount     Average Maturity     

Weighted Average

Rate Fixed

   

Weighted Average

Variable Rate

     Fair Value  

3rd party interest rate swaps

   $ 24,396        8.2         4.040     1 Mo Libor + 2.31       $ 404   

Customer interest rate swaps

     (24,396     8.2         4.040     1 Mo Libor + 2.31         (404
December 31, 2012             
     Notional Amount     Average Maturity      Weighted Average
Rate Fixed
    Weighted Average
Variable Rate
     Fair Value  

3rd party interest rate swaps

   $ 6,400        10.1         4.625     1 Mo Libor + 2.61       $ 195   

Customer interest rate swaps

     (6,400     10.1         4.625     1 Mo Libor + 2.61       ($ 195

The following shows the Company’s transactions that are subject to an enforceable master netting arrangement or other such similar agreements for the periods presented:

March 31, 2013

 

Offsetting of Financial Assets and Derivative Assets                       

Gross Amounts not Offset in

the Balance Sheet

        
     Gross Amounts
of Recognized
Assets
     Gross Amounts
Offset in the
Balance Sheet
    Net Amounts
of Assets
Presented in the
Balance Sheet
     Financial
Instruments
     Cash Collateral
Received
     Net Amount  
     (in thousands)  

Description

                

Third party interest rate swaps

   $ 24,396       ($ 23,992   $ 404       $ 0       $ 0       $ 404   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,396       ($ 23,992   $ 404       $ 0       $ 0       $ 404   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
Offsetting of Financial Liabilities and Derivative Liabilities                        Gross Amounts not Offset in
the Balance Sheet
        
     Gross Amounts
of Recognized
Liabilities
     Gross Amounts
Offset in the
Balance Sheet
    Net Amounts
of Liabilities
Presented in the
Balance Sheet
     Financial
Instruments
     Cash Collateral
Received
     Net Amount  
     (in thousands)  

Description

                

Customer interest rate swaps

   $ 24,396       ($ 23,992   $ 404       $ 0       $ 0       $ 404   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,396       ($ 23,992   $ 404       $ 0       $ 0       $ 404   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

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December 31, 2012

 

Offsetting of Financial Assets and Derivative Assets                       

Gross Amounts not Offset in

the Balance Sheet

        
     Gross Amounts
of Recognized
Assets
     Gross Amounts
Offset in the
Balance Sheet
    Net Amounts
of Assets
Presented in the
Balance Sheet
     Financial
Instruments
     Cash Collateral
Received
     Net Amount  
     (in thousands)  

Description

  

Third party interest rate swaps

   $ 6,400       ($ 6,205   $ 195       $ 0       $ 0       $ 195   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,400       ($ 6,205   $ 195       $ 0       $ 0       $ 195   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
Offsetting of Financial Liabilities and Derivative Liabilities                       

Gross Amounts not Offset in

the Balance Sheet

        
     Gross Amounts
of Recognized
Liabilities
     Gross Amounts
Offset in the
Balance Sheet
    Net Amounts
of Liabilities
Presented in the
Balance Sheet
     Financial
Instruments
     Cash Collateral
Received
     Net Amount  
     (in thousands)  

Description

  

Customer interest rate swaps

   $ 6,400       ($ 6,205   $ 195       $ 0       $ 0       $ 195   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,400       ($ 6,205   $ 195       $ 0       $ 0       $ 195   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Note 12. Preferred Stock

On February 8, 2012, the Company redeemed its remaining 19,000 shares of its Fixed Rate Cumulative Preferred Stock, Series A originally issued to the U.S. Department of the Treasury under the Troubled Asset Relief Program Capital Purchase Program (“CPP”). The Company paid to the Treasury $19.2 million, which included $19.0 million of principal and $219,000 in accrued and unpaid dividends, on February 8, 2012. As a result of the early payment, the Company also accelerated the accretion of $501,000 of the preferred stock discount.

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

Note 13. Common Stock

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

Note 14. Acquisitions

Note 14. Acquisitions

On January 28, 2013, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Somerset Hills Bancorp, pursuant to which Somerset Hills Bancorp will merge with and into the Company. The Merger Agreement provides that the shareholders of Somerset Hills Bancorp will receive, at their election, for each outstanding share of Somerset Hills Bancorp common stock that they own at the effective time of the merger, either 1.1962 shares of Lakeland Bancorp common stock or $12.00 in cash, subject to proration as described in the Merger Agreement, so that 90% of the aggregate merger consideration will be shares of Lakeland Bancorp common stock and 10% will be cash. Lakeland Bancorp expects to issue an aggregate of 5,780,883 shares of its common stock in the merger, and will also assume outstanding Somerset Hills Bancorp stock options (which will be converted into options to purchase Lakeland Bancorp common stock). The transaction is valued at approximately $64.4 million in the aggregate (excluding the assumption of stock options), or $12.00 per share. As of December 31, 2012, Somerset Hills Bancorp had consolidated total assets, total loans, total deposits and total stockholders’ equity of $368.9 million, $241.9 million, $320.2 million and $41.8 million, respectively. Somerset Hills Bancorp had net income of $3.4 million for the year ended December 31, 2012.

 

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The transaction has been approved by the board of directors of each of Lakeland Bancorp and Somerset Hills Bancorp. On May 6, 2013, the Company was informed by the New Jersey Department of Banking, and Insurance that it had approved the proposed merger of Somerset Hills Bancorp with and into the Company and the merger of the bank subsidiaries. On May 8, 2013, the shareholders of Somerset Hills Bancorp voted to approve the merger and the shareholders of the Company voted to approve the issuance of the shares of the Company’s common stock to be issued in the merger. Subject to additional required regulatory approval and other customary closing conditions, the Company anticipates completing the merger in the second or third quarter of 2013.

Note 15. Recent Accounting Pronouncements

In February 2013, the FASB issued guidance relating to the reporting of amounts reclassified out of accumulated other comprehensive income. This guidance further updates guidance issued in 2011 increasing the prominence of items reported in other comprehensive income and facilitating the convergence of U.S. GAAP and International Financial Reporting Standards (“IFRS”). The guidance issued in 2013 requires an entity to provide information about the items reclassified out of other comprehensive income by component. This guidance is effective during interim and annual periods beginning after December 15, 2012, and is to be applied retrospectively. The Company adopted this guidance in the first quarter of 2013. Adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued accounting guidance regarding disclosures about offsetting assets and liabilities. The scope of this accounting guidance was further clarified by the FASB on January 1, 2013. This guidance affects all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with U.S. GAAP or (2) subject to an enforceable master netting arrangement or similar agreement. This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this guidance. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company adopted this guidance in the first quarter of 2013. Adoption of this guidance 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, 2012.

Statements Regarding Forward Looking Information

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

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

 

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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, competition, failure to obtain required regulatory approvals for the merger of Somerset Hills Bancorp into Lakeland Bancorp and for the merger of Somerset Hills Bank into Lakeland Bank, and the failure to realize anticipated efficiencies and synergies if the mergers are consummated.

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.

Management Overview

The three months ended March 31, 2013, represented a period of earnings improvement for the Company. As discussed in this Management’s Discussion and Analysis:

 

   

Net income available to common stockholders increased $757,000, or 17%, from the first quarter of 2012 to the same period in 2013.

 

   

Diluted earnings per share increased from $0.16 for the first quarter of 2012 to $0.17 for the first quarter of 2013.

 

   

Included in the 2013 first quarter earnings was $631,000 in expenses related to the proposed merger with Somerset Hills Bancorp. Exclusive of these expenses, EPS for the first quarter of 2013 was $0.19 per common share, a 19% increase over the EPS for the same period last year.

 

   

Non-performing assets declined for the sixth consecutive quarter. Non-performing assets have declined $2.8 million, or 10%, from $28.5 million reported at year end.

 

   

As a result of improving loan quality, the provision for loan and lease losses was reduced from $4.6 million in the first quarter of 2012 to $3.2 million in the first quarter of 2013.

 

   

The Company continues to experience pressure on its net interest margin from the continuing low interest rate environment. The net interest margin declined from 3.76% in the first quarter of 2012 to 3.71% in the first quarter of 2013.

 

   

Noninterest income has increased related to management’s efforts to increase fee income to offset declines in net interest income.

 

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Table of Contents

Results of Operations

(First Quarter 2013 Compared to First Quarter 2012)

Net Income

Net income for the first quarter of 2013 was $5.1 million, compared to net income of $5.0 million for the same period in 2012. Net income available to common stockholders was $5.1 million compared to net income available to common stockholders of $4.4 million for the first quarter of 2012. Because the Company repaid its remaining preferred stock to the U.S. Department of the Treasury under the CPP in the first quarter of 2012, the Company had no dividends or accretion on preferred stock in the first quarter of 2013 compared to $620,000 for the same period last year. Diluted earnings per share was $0.17 for the first quarter of 2013, compared to diluted earnings per share of $0.16 for the same period last year. Net interest income for the first quarter of 2013 was equivalent to the first quarter of 2012.

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

Net interest income on a tax equivalent basis for the first quarter of 2013 was $24.2 million, which equaled the first quarter of 2012. The net interest margin decreased from 3.76% in the first quarter of 2012 to 3.71% in the first quarter of 2013 primarily as a result of net interest income remaining the same while average interest earning assets increased $50.0 million during the same period. The net interest margin would have been 3.77% and 3.86% for the first quarter of 2013 and 2012, respectively, had the Company’s non-performing loans performed in accordance with their terms. Declines in interest income resulting from a 32 basis point decline in the yield on interest-earning assets were partially offset by a 32 basis point reduction in the cost of interest-bearing liabilities. The decline in the net interest margin resulting from a decline in rates was somewhat 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 $53.3 million. The components of net interest income will be discussed in greater detail below.

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

 

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CONSOLIDATED STATISTICS ON A TAX EQUIVALENT BASIS

 

    

For the Three Months Ended,

March 31, 2013

   

For the Three Months Ended,

March 31, 2012

 
     Average
Balance
    Interest
Income/
Expense
     Average
rates
earned/
paid
    Average
Balance
    Interest
Income/
Expense
     Average
rates
earned/
paid
 
     (dollars in thousands)  

Assets

  

Interest-earning assets:

              

Loans (A)

   $ 2,136,254      $ 24,407         4.63   $ 2,050,093      $ 25,458         4.99

Taxable investment securities and other

     404,582        1,719         1.70     447,252        2,340         2.09

Tax-exempt securities

     71,241        662         3.71     72,787        754         4.14

Federal funds sold (B)

     30,585        13         0.17     22,522        6         0.11
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     2,642,662        26,801         4.11     2,592,654        28,558         4.43

Noninterest-earning assets:

              

Allowance for loan and lease losses

     (29,485          (29,162     

Other assets

     254,833             242,705        
  

 

 

        

 

 

      

TOTAL ASSETS

   $ 2,868,010           $ 2,806,197        
  

 

 

        

 

 

      

Liabilities and Stockholders’ Equity

              

Interest-bearing liabilities:

              

Savings accounts

   $ 357,709      $ 66         0.07   $ 338,221      $ 90         0.11

Interest-bearing transaction accounts

     1,226,112        982         0.32     1,137,069        1,272         0.45

Time deposits

     302,159        614         0.81     350,937        894         1.02

Borrowings

     183,089        971         2.12     267,165        2,092         3.13
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     2,069,069        2,633         0.51     2,093,392        4,348         0.83
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest-bearing liabilities:

              

Demand deposits

     502,214             448,893        

Other liabilities

     13,931             13,236        

Stockholders’ equity

     282,796             250,676        
  

 

 

        

 

 

      

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,868,010           $ 2,806,197        
  

 

 

        

 

 

      

Net interest income/spread

       24,168         3.60       24,210         3.60

Tax equivalent basis adjustment

       232             264      
    

 

 

        

 

 

    

NET INTEREST INCOME

     $ 23,936           $ 23,946      
    

 

 

        

 

 

    

Net interest margin (C)

          3.71          3.76
       

 

 

        

 

 

 

 

(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 $28.6 million in the first quarter of 2012 to $26.8 million in the first quarter of 2013, a decrease of $1.8 million, or 6%. The decrease in interest income was primarily due to a 32 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 4.63% in the first quarter of 2013 was 36 basis points lower than the first quarter of 2012. The yield on average taxable and tax exempt investment securities decreased by 39 basis points and 43 basis points, respectively, compared to the first quarter of 2012. Average loans and leases at $2.14 billion increased $86.2 million from the first quarter of 2012, while average investment securities at $475.8 million decreased $44.2 million.

Total interest expense decreased from $4.3 million in the first quarter of 2012 to $2.6 million in the first quarter of 2013, a decrease of $1.7 million, or 39%. The cost of average interest-bearing liabilities decreased from 0.83% in the first quarter of 2012 to 0.51% in 2013. The decrease in yield was due primarily to a 101 basis point reduction in the cost of borrowings, an $84.1 million reduction in higher yielding borrowings, a $48.8 million reduction in higher yielding time deposits and the continuing low rate environment. From the first quarter of 2012 to the first quarter of 2013, average savings accounts and interest-bearing transaction accounts increased by $19.5 million and $89.0 million, respectively. Average rates paid on interest-bearing liabilities declined in all categories.

Provision for Loan and Lease Losses

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

 

 

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In the first quarter of 2013, a $3.2 million provision for loan and lease losses was recorded, which was $1.4 million lower than the provision for the same period last year. During the first quarter of 2013, the Company charged off loans and leases of $2.7 million and recovered $219,000 in previously charged off loans and leases compared to $5.0 million and $735,000, respectively, during the same period in 2012. The lower provision resulted from a decline in non-performing assets and from lower charge-offs during the quarter. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income increased $994,000, or 25%, to $5.1 million in the first quarter of 2013 compared to the first quarter of 2012 primarily due to gains on sales of investment securities, an increase in commissions and fees and an increase in other income. Gains on sales of investment securities was $505,000 during the first quarter of 2013 compared to $32,000 during the same period in 2012. Commissions and fees totaled $1.2 million in the first quarter of 2013 and were $233,000, or 24%, higher than the same period last year due primarily to increased investment commission income. Other income totaling $498,000 in the first quarter of 2013 was $239,000 higher than the same period in 2012 primarily due to $181,000 in income on loan swap transactions and $152,000 in gains on sales of residential mortgage loans. Income on bank owned life insurance at $313,000 declined $26,000 compared to the first quarter of 2012 due primarily to decreases in rates on the underlying policies.

Noninterest Expense

Noninterest expense totaling $18.2 million increased $2.0 million in the first quarter of 2013 from the first quarter of 2012. In the first quarter of 2013 noninterest expense included $526,000 in long term debt prepayment fees and $631,000 in merger related expenses. Salary and employee benefits at $10.0 million increased by $518,000, or 5%, partially due to increased commission expenses. Net occupancy expense at $2.0 million in the first quarter of 2013 increased $286,000 from the same period last year due primarily to expenses relating to the new operations and training center and branch office opened in the second half of 2012 as well as increased snow removal expenses. Furniture and equipment at $1.4 million increased $322,000 from the same period last year due primarily to increased service contract expense, expenses relating to the new operations and training center and the opening of a branch office. Marketing expense totaling $288,000 decreased $182,000 compared to the first quarter of 2012 primarily due a reduction in advertising and the timing of marketing campaigns. FDIC insurance expense at $513,000 decreased $42,000 due primarily to lower assessment rates resulting from the reduction in nonperforming assets. Legal expense at $242,000 and other real estate and repossessed asset expense at $19,000 decreased $157,000 and $19,000, respectively, due primarily to the reduction in nonperforming assets. The Company’s efficiency ratio, a non-GAAP financial measure, was 59.85% in the first quarter of 2013, compared to 57.71% for the same period last year as a result of an increase in total noninterest expense. 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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Table of Contents
     For the Three Months Ended March 31,  
     2013     2012  
     (dollars in thousands)  

Calculation of efficiency ratio

    

Total noninterest expense

   $ 18,227      $ 16,275   

Less:

    

Other real estate owned and other repossessed asset expense

     (19     (38

Long term debt prepayment fee

     (526     —     

Merger related expenses

     (631     —     

Provision for unfunded lending commitments

     135        56   
  

 

 

   

 

 

 

Noninterest expense, as adjusted

   $ 17,186      $ 16,293   
  

 

 

   

 

 

 

Net interest income

   $ 23,936      $ 23,946   

Noninterest income

     5,051        4,057   
  

 

 

   

 

 

 

Total revenue

     28,987        28,003   

Plus: Tax-equivalent adjustment on municipal securities

     232        264   

Less: gains on sales of investment securities

     (505     (32
  

 

 

   

 

 

 

Total revenue, as adjusted

   $ 28,714      $ 28,235   
  

 

 

   

 

 

 

Efficiency ratio

     59.85     57.71
  

 

 

   

 

 

 

Income Tax Expense

The effective tax rate increased from 30.7% in the first quarter of 2012 to 32.6% in the first quarter of 2013 as a result of increased earnings and because of a reduction of tax advantaged items as a percent of pre-tax income. Tax advantaged items include interest income on tax-exempt securities and income on bank owned life insurance. Also contributing to the increase in the effective tax rate was the impact of non-deductible merger related expenses.

Financial Condition

The Company’s total assets decreased $10.7 million from $2.92 billion at December 31, 2012, to $2.91 billion at March 31, 2013. A $23.5 million reduction in investment securities and a $10.5 million reduction in total cash and cash equivalents was partially offset by a $24.2 million increase in total loans. Total deposits increased $17.7 million, with non-interest-bearing transaction accounts increasing $23.0 million.

Loans and Leases

Gross loans and leases at $2.17 billion increased by $24.2 million from December 31, 2012. The increase in gross loans and leases is primarily due to an increase in commercial loans secured by real estate of $43.7 million, partially offset by a reduction in residential mortgages of $11.3 million. 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.

 

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Risk Elements

Non-performing assets decreased from $28.5 million, or 0.98% of total assets, on December 31, 2012 to $25.8 million, or 0.89% of total assets, on March 31, 2013. Non-performing assets decreased in all categories. The largest declines in non-performing loans were in commercial loans secured by real estate and real estate construction loans which declined by $1.5 million and $471,000, respectively. Commercial loan non-accruals at March 31, 2013 included 4 loan relationships with balances over $1.0 million, totaling $5.1 million, and 5 loan relationships between $500,000 and $1.0 million, totaling $3.6 million.

There were $1.8 million in loans and leases past due ninety days or more and still accruing at March 31, 2013 compared to $1.4 million at December 31, 2012. 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, 2013, the Company had $9.0 million in loans that were troubled debt restructurings and still accruing interest income compared to $7.3 million on December 31, 2012. 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, 2013, the Company had $30.8 million in impaired loans (consisting primarily of non-accrual and restructured loans and leases) compared to $31.5 million at year-end 2012. For more information on impaired loans and leases see Note 7 in Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. The impairment of the loans and leases is measured using the present value of future cash flows on certain impaired loans and is based on the fair value of the underlying collateral for the remaining loans and leases. Based on such evaluation, $631,000 has been allocated as a portion of the allowance for loan and lease losses for impairment at March 31, 2013. At March 31, 2013, the Company also had $51.6 million in loans and leases that were rated substandard that were not classified as non-performing or impaired compared to $42.7 million at December 31, 2012.

There were no loans and leases at March 31, 2013, other than those designated non-performing, impaired or substandard, where the Company was aware of any credit conditions of any borrowers or obligors that would indicate a strong possibility of the borrowers not complying with present terms and conditions of repayment and which may result in such loans and leases being included as non-accrual, past due or renegotiated at a future date. The following table sets forth for the periods presented, the historical relationships among the allowance for loan and lease losses, the provision for loan and lease losses, the amount of loans and leases charged-off and the amount of loan and lease recoveries:

 

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Table of Contents
(dollars in thousands)    Three Months
Ended
March 31,
2013
    Three Months
Ended
March 31,
2012
    Year
Ended
December 31,
2012
 

Balance of the allowance at the beginning of the year

   $ 28,931      $ 28,416      $ 28,416   
  

 

 

   

 

 

   

 

 

 

Loans and leases charged off:

      

Commercial, secured by real estate

     749        2,090        7,287   

Commercial, industrial and other

     177        149        949   

Leases

     112        168        999   

Real estate—mortgage

     565        357        1,822   

Real estate-construction

     652        1,526        2,888   

Home equity and consumer

     455        717        2,074   
  

 

 

   

 

 

   

 

 

 

Total loans charged off

     2,710        5,007        16,019   
  

 

 

   

 

 

   

 

 

 

Recoveries:

      

Commercial, secured by real estate

     44        39        280   

Commercial, industrial and other

     30        179        428   

Leases

     88        378        504   

Real estate—mortgage

     1        12        66   

Real estate-construction

     7        27        43   

Home equity and consumer

     49        100        306   
  

 

 

   

 

 

   

 

 

 

Total Recoveries

     219        735        1,627   
  

 

 

   

 

 

   

 

 

 

Net charge-offs:

     2,491        4,272        14,392   

Provision for loan and lease losses

     3,183        4,556        14,907   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 29,623      $ 28,700      $ 28,931   
  

 

 

   

 

 

   

 

 

 

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

     0.47     0.83     0.69

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

     1.36     1.38     1.35

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

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

 

   

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

 

   

The establishment of reserves for pools of homogeneous types of loans and leases not subject to specific review, including impaired commercial loans under $250,000, leases, 1 – 4 family residential mortgages and consumer loans.

 

   

The establishment of reserve amounts for the non-classified loans and leases in each portfolio based upon the historical average loss experience of these portfolios and management’s evaluation of key factors described below.

Consideration is given to the results of ongoing credit quality monitoring processes, the adequacy and expertise of the Company’s lending staff, underwriting policies, loss histories, delinquency trends, and the cyclical nature of economic and business conditions. Since many of the Company’s loans depend on the sufficiency of collateral as a secondary means of repayment, any adverse trend in the real estate markets could affect underlying values available to protect the Company against loss.

 

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The overall balance of the allowance for loan losses increased $692,000 to $29.6 million at March 31, 2013 compared to December 31, 2012 reflecting an increase in the commercial loan portfolio and a $659,000 increase in the allowance for the real estate-construction segment. The increase in the allowance for the real estate-construction segment reflected a downgrade of a certain construction loan to substandard which requires a higher reserve.

Non-performing loans and leases decreased from $28.0 million on December 31, 2012 to $25.0 million on March 31, 2013. The allowance for loan and lease losses as a percent of total loans was 1.36% of total loans on March 31, 2013, compared to 1.35% as of December 31, 2012. Management believes, based on appraisals and estimated selling costs, that its non-performing loans and leases are adequately secured and reserves on these loans and leases are adequate. The preceding statement constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

Based upon the process employed and giving recognition to all accompanying factors related to the loan and lease portfolio, management considers the allowance for loan and lease losses to be adequate at March 31, 2013. 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 $490.6 million on December 31, 2012 to $467.1 million on March 31, 2013, a decrease of $23.5 million, or 5%.

Deposits

Total deposits increased from $2.37 billion on December 31, 2012 to $2.39 billion on March 31, 2013, an increase of $17.7 million, or 1%. Noninterest bearing deposits increased $23.0 million, or 5%, to $521.0 million, while savings and interest-bearing transaction accounts and time deposits decreased $2.7 million and $2.6 million, respectively. The increase in noninterest bearing deposits resulted primarily from an increase in commercial noninterest bearing deposits.

Liquidity

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

Lakeland funds loan demand and operation expenses from several sources:

 

   

Net income. Cash provided by operating activities was $11.7 million for the first three months of 2013 compared to $13.6 million for the same period in 2012.

 

   

Deposits. Lakeland can offer new products or change its rate structure in order to increase deposits. In the first three months of 2013, Lakeland generated $17.7 million in deposit growth.

 

   

Sales of securities and overnight funds. At March 31, 2013, the Company had $370.2 million in securities designated “available for sale.” Of these securities, $270.3 million were pledged to secure public deposits and for other purposes required by applicable laws and regulations.

 

   

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

 

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Overnight credit lines. As a member of the Federal Home Loan Bank of New York (FHLB), Lakeland has the ability to borrow overnight based on the market value of collateral pledged. Lakeland had no overnight borrowings from the FHLB on March 31, 2013. Lakeland also has overnight federal funds lines available for it to borrow up to $162.0 million. Lakeland had borrowings against these lines of $46.0 million at March 31, 2013. Lakeland may also borrow from the discount window of the Federal Reserve Bank of New York based on the market value of collateral pledged. Lakeland had no borrowings with the Federal Reserve Bank of New York as of March 31, 2013.

 

   

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

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

The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statement for the three months ended March 31, 2013 follows.

Cash and cash equivalents totaling $97.1 million on March 31, 2013, decreased $10.5 million from December 31, 2012. Operating activities provided $11.7 million in net cash. Investing activities used $5.2 million in net cash, primarily reflecting an increase in loans and leases offset by declines in investment securities. Financing activities used $17.0 million in net cash, reflecting a $23.0 million decrease in federal funds purchased and securities sold under agreement to repurchase and repayments of $10.0 million in other borrowings, partially offset by a net increase of $17.7 million in deposits. The Company anticipates that it will have sufficient funds available to meet its current loan commitments and deposit maturities. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of March 31, 2013. 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 on noncancellable operating leases

   $ 19,790       $ 2,207       $ 4,059       $ 2,866       $ 10,658   

Benefit plan commitments

     4,685         185         300         390         3,810   

Remaining contractual maturities of time deposits

     301,209         224,435         61,127         14,824         823   

Subordinated debentures

     51,548         —           —           —           51,548   

Loan commitments

     458,151         378,714         53,223         868         25,346   

Other borrowings

     75,000         —           45,000         30,000         —     

Interest on other borrowings*

     40,622         3,588         7,185         6,186         23,663   

Standby letters of credit

     7,686         5,527         2,079         ——         80   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 958,691       $ 614,656       $ 172,973       $ 55,134       $ 115,928   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Includes interest on other borrowings and subordinated debentures at a weighted rate of 2.87%.

 

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Table of Contents

Capital Resources

Total stockholders’ equity increased from $280.9 million on December 31, 2012 to $283.9 million on March 31, 2013, an increase of $3.0 million, or 1%. Book value per common share increased to $9.51 on March 31, 2013 from $9.45 on December 31, 2012. The increase in stockholders’ equity from December 31, 2012 to March 31, 2013 was primarily due to $5.1 million in net income partially offset by the payment of dividends on common stock of $1.8 million.

The Company and Lakeland are subject to various regulatory capital requirements that are monitored by federal banking agencies. Failure to meet minimum capital requirements can lead to certain supervisory actions by regulators; any supervisory action could have a direct material adverse effect on the Company or Lakeland’s financial statements. Management believes, as of March 31, 2013, 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, 2013 are as follows:

 

     Tier 1 Capital
to Total  Average
Assets Ratio
March 31,
2013
    Tier 1 Capital
to  Risk-Weighted
Assets Ratio
March 31,
2013
    Total Capital
to  Risk-Weighted
Assets Ratio
March 31,
2013
 

Capital Ratios:

      

The Company

     8.77     11.59     12.84

Lakeland Bank

     8.10     10.70     11.95

“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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Table of Contents

(dollars in thousands, except per share amounts)

   March 31,
2013
     December 31,
2012
 

Calculation of tangible book value per common share

     

Total common stockholders’ equity at end of period—GAAP

   $ 283,877       $ 280,867   

Less:

     

Goodwill

     87,111         87,111   
  

 

 

    

 

 

 

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

   $ 196,766       $ 193,756   
  

 

 

    

 

 

 

Shares outstanding at end of period (1)

     29,859         29,726   
  

 

 

    

 

 

 

Book value per share—GAAP (1)

   $ 9.51       $ 9.45   
  

 

 

    

 

 

 

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

   $ 6.59       $ 6.52   
  

 

 

    

 

 

 

 

(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

   $ 196,766      $ 193,756   
  

 

 

   

 

 

 

Total assets at end of period

   $ 2,907,969      $ 2,918,703   

Less:

    

Goodwill

     87,111        87,111   
  

 

 

   

 

 

 

Total tangible assets at end of period—Non-GAAP

   $ 2,820,858      $ 2,831,592   
  

 

 

   

 

 

 

Common equity to assets—GAAP

     9.76     9.62
  

 

 

   

 

 

 

Tangible common equity to tangible assets—Non-GAAP

     6.98     6.84
  

 

 

   

 

 

 

 

     For the Three Months Ended,  
     March 31,
2013
    March 31,
2012
 

Calculation of return on average tangible common equity

    

Net income—GAAP

   $ 5,108      $ 4,971   
  

 

 

   

 

 

 

Total average common stockholders’ equity

   $ 282,796      $ 242,957   

Less:

    

Average goodwill

     87,111        87,111   

Average other identifiable intangible assets, net

     —          —     
  

 

 

   

 

 

 

Total average tangible common stockholders’ equity—Non-GAAP

   $ 195,685      $ 155,846   
  

 

 

   

 

 

 

Return on average common stockholders’ equity—GAAP

     7.33     8.23
  

 

 

   

 

 

 

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

     10.59     12.83
  

 

 

   

 

 

 

 

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Table of Contents
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

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

The starting point (or “base case”) for the following table is an estimate of the following year’s net interest income assuming that both interest rates and the Company’s interest-sensitive assets and liabilities remain at period-end levels. The net interest income estimated for the next twelve months (the base case) is $96.8 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     -200 bp  

Asset/Liability Policy Limit

     -5.0     -5.0

March 31, 2013

     -3.3     -2.1

December 31, 2012

     -4.9     -2.2

The Company’s review of interest rate risk also includes policy limits for net interest income changes in various “rate shock” scenarios. Rate shocks assume that current interest rates change immediately. The information provided for net interest income assumes fluctuations or “rate shocks” for changes in interest rates as shown in the table below.

 

     Changes in interest rates  

Rate Shock

   +400 bp     +300 bp     +200 bp     +100 bp     -100 bp     -200 bp     -300 bp     -400 bp  

Asset/Liability Policy Limit

     -20.0     -15.0     -10.0     -5.0     -5.0     -10.0     -15.0     -20.0

March 31, 2013

     -6.9     -4.9     -2.9     -1.0     -3.8     -4.3     -4.5     -4.5

December 31, 2012

     -8.7     -6.4     -4.2     -2.1     -4.1     -4.6     -4.6     -4.6

The base case for the following table is an estimate of the Company’s net portfolio value for the periods presented using current discount rates, and assuming the Company’s interest-sensitive assets and liabilities remain at period-end levels. The net portfolio value at March 31, 2013 (the base case) was $352.6 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

   +300 bp     +200 bp     +100 bp     -100 bp     -200 bp     -300 bp  

Asset/Liability Policy Limit

     -35.0     -25.0         -25.0     -35.0

March 31, 2013

     -16.1     -9.4     -3.6     -3.3     -7.0     -7.2

December 31, 2012

     -14.6     -7.4     -2.3     -5.1     -8.9     -7.8

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, 2012.

 

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Table of Contents
ITEM 4. Controls and Procedures

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

(b) Changes in internal controls over financial reporting. There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Table of Contents

PART II OTHER INFORMATION

 

Item 1. Legal Proceedings

On February 15, 2013, the Company was served with a Civil Action Summons and Class Action Complaint that was filed in the Superior Court of New Jersey, Chancery Division, Somerset County. The complaint states that the plaintiff is bringing the class action on behalf of the public stockholders of Somerset Hills Bancorp against the Board of Directors of Somerset Hills for their alleged breach of fiduciary duties arising out of the Agreement and Plan of Merger, dated as of January 28, 2013, by and between the Company and Somerset Hills Bancorp. The complaint alleges that the Company has aided and abetted the individual defendants in their alleged breaches of fiduciary duties.

On or about April 4, 2013, the Company and Somerset Hills Bancorp began mailing the definitive joint proxy statement and prospectus (the “Proxy Statement”) to their respective shareholders for their respective Annual Meetings of Shareholders scheduled for May 8, 2013. At Somerset Hill’s Annual Shareholders’ Meeting, shareholders will be asked, among other things, to approve the proposed merger agreement under which Somerset Hills would merge with and into the Company. At the Company’s Annual Shareholders’ Meeting, shareholders will be asked, among other things, to authorize the issuance of shares of the Company’s common stock to the shareholders of Somerset Hills upon consummation of the merger.

On March 27, 2013, the plaintiff filed an Amended Complaint, alleging, among other things, inadequate disclosure in the Proxy Statement. On April 26, 2013, the defendants entered into a Memorandum of Understanding with the lead plaintiff regarding settlement of the action. As part of the settlement, the Registrant agreed to make certain additional disclosures, which are contained in a Current Report on Form 8-K filed on April 29, 2013. The Memorandum of Understanding contemplates that the parties will enter into a stipulation of settlement, which will be subject to customary conditions, including the consummation of the merger and court approval following notice. In the event that the parties enter into a stipulation of settlement, a hearing will be scheduled at which the Court will consider the fairness, reasonableness and adequacy of the settlement which, if finally approved by the Court, will resolve all of the claims that were or could have been brought in the action being settled, including all claims relating to the merger, the merger agreement and any disclosures made in connection therewith. The Court will also need to approve the conditional certification of the class of plaintiffs at such hearing. In addition, in connection with the settlement, the parties contemplate that the lead plaintiff’s counsel will petition the Court for an award of attorneys’ fees and expenses to be paid by the Company and/or Somerset Hills. There can be no assurance that the parties will ultimately enter into a stipulation of settlement or that the Court will approve the settlement even if the parties were to enter into such a stipulation. In the event that neither of these occurs, the proposed settlement as contemplated by the Memorandum of Understanding may be terminated. The settlement will not affect the timing of consummation of the merger or the amount or nature of the merger consideration to be paid to the shareholders of the Company in the merger.

Other than as described above, there are no pending legal proceedings involving the Company or Lakeland other than those arising in the normal course of business. Management does not anticipate that the potential liability, if any, arising out of such legal proceedings will have a material effect on the financial condition or results of operations of the Company and Lakeland on a consolidated basis.

 

Item 1A. Risk Factors

There have been no material changes in risk factors from those disclosed under Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

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      

 

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Table of Contents
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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Table of Contents

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, 2013

 

48