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LAKELAND BANCORP INC - Quarter Report: 2017 September (Form 10-Q)

Form 10-Q
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended                                              September 30, 2017

                                                                 OR

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

For the transition period from                      to                     

Commission file number                     000-17820

LAKELAND BANCORP, INC.

(Exact name of registrant as specified in its charter)

                               New Jersey                                                                                                   22-2953275

 

                  (State or other  jurisdiction of                                                                            (I.R.S. Employer

                    incorporation  or organization)                                                                        Identification No.)

                         250 Oak Ridge Road, Oak Ridge, New Jersey                                                                         07438

 

                            (Address of principal executive offices)                                              (Zip Code)

(973) 697-2000

 

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed

since last report.)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act: (Check one):

Large accelerated filer [  ]    Accelerated filer [X]    Non-accelerated filer [  ]  Smaller reporting company [  ]  Emerging growth company [  ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [  ]

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

As of October 27, 2017, there were 47,352,661 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 as of September  30, 2017 (unaudited) and December 31, 2016

     3  
 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)

     4  
 

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)

     5  
 

Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2017 and 2016 (unaudited)

     6  
 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited)

     7  
 

Notes to Consolidated Financial Statements

     9  

Item 2.

 

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

     40  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     54  

Item 4.

 

Controls and Procedures

     56  
 

Part II.     Other Information

  

Item 1.

 

Legal Proceedings

     57  

Item 1A.    

 

Risk Factors

     57  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     57  

Item 3.

 

Defaults Upon Senior Securities

     57  

Item 4.

 

Mine Safety Disclosures

     57  

Item 5.

 

Other Information

     57  

Item 6.

 

Exhibits

     57  

Signatures

     58  

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

     September 30, 2017
(unaudited)
     December 31, 2016  
     (dollars in thousands)  

ASSETS

     

Cash

   $ 178,905      $ 169,149  

Interest-bearing deposits due from banks

     24,012        6,652  
  

 

 

    

 

 

 

Total cash and cash equivalents

     202,917        175,801  

Investment securities available for sale, at fair value

     647,292        606,704  

Investment securities held to maturity; fair value of $135,085 at September 30, 2017 and $146,990 at December 31, 2016

     135,021        147,614  

Federal Home Loan Bank and other membership bank stock, at cost

     12,783        15,099  

Loans, net of deferred costs (fees)

     4,089,173        3,870,598  

Less: allowance for loan and lease losses

     33,925        31,245  
  

 

 

    

 

 

 

Net loans

     4,055,248        3,839,353  

Loans held for sale

     2,221        1,742  

Premises and equipment, net

     49,699        52,236  

Accrued interest receivable

     13,592        12,557  

Goodwill

     136,433        135,747  

Other identifiable intangible assets

     2,526        3,344  

Bank owned life insurance

     106,831        72,384  

Other assets

     34,918        30,550  
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 5,399,481      $ 5,093,131  
  

 

 

    

 

 

 

LIABILITIES

     

Deposits:

     

Noninterest-bearing

   $ 955,444      $ 927,270  

Savings and interest-bearing transaction accounts

     2,681,512        2,620,657  

Time deposits $250 thousand and under

     549,893        404,680  

Time deposits over $250 thousand

     170,147        140,228  
  

 

 

    

 

 

 

Total deposits

     4,356,996        4,092,835  

Federal funds purchased and securities sold under agreements to repurchase

     133,960        56,354  

Other borrowings

     196,539        260,866  

Subordinated debentures

     104,872        104,784  

Other liabilities

     30,033        28,248  
  

 

 

    

 

 

 

TOTAL LIABILITIES

     4,822,400        4,543,087  
  

 

 

    

 

 

 

STOCKHOLDERS’ EQUITY

     

Common stock, no par value; authorized shares, 70,000,000; issued 47,352,714 shares at September 30, 2017 and 47,222,914 shares at December 31, 2016

     512,383        510,861  

Retained earnings

     63,917        38,590  

Accumulated other comprehensive income

     781        593  
  

 

 

    

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     577,081        550,044  
  

 

 

    

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 5,399,481      $ 5,093,131  
  

 

 

    

 

 

 

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

     For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
     2017      2016     2017      2016  
     (in thousands, except per share data)     (in thousands, except per share data)  

INTEREST INCOME

          

Loans, leases and fees

   $ 44,302      $ 39,766     $ 127,453      $ 109,687  

Federal funds sold and interest-bearing deposits with banks

     210        142       618        341  

Taxable investment securities and other

     3,720        2,627       11,137        8,285  

Tax-exempt investment securities

     503        470       1,535        1,300  
  

 

 

    

 

 

   

 

 

    

 

 

 

TOTAL INTEREST INCOME

     48,735        43,005       140,743        119,613  
  

 

 

    

 

 

   

 

 

    

 

 

 

INTEREST EXPENSE

          

Deposits

     4,443        2,886       11,561        7,495  

Federal funds purchased and securities sold under agreements to repurchase

     52        19       160        66  

Other borrowings

     2,125        1,582       6,163        4,582  
  

 

 

    

 

 

   

 

 

    

 

 

 

TOTAL INTEREST EXPENSE

     6,620        4,487       17,884        12,143  
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INTEREST INCOME

     42,115        38,518       122,859        107,470  

Provision for loan and lease losses

     1,827        1,763       4,872        3,848  
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES

     40,288        36,755       117,987        103,622  

NONINTEREST INCOME

          

Service charges on deposit accounts

     2,797        2,615       7,926        7,580  

Commissions and fees

     1,258        1,182       3,549        3,260  

Gains on sales of investment securities

     —          —         2,524        370  

Gains on sales of loans

     478        753       1,347        1,598  

Income on bank owned life insurance

     624        1,303       1,550        2,125  

Other income

     297        564       2,763        1,236  
  

 

 

    

 

 

   

 

 

    

 

 

 

TOTAL NONINTEREST INCOME

     5,454        6,417       19,659        16,169  
  

 

 

    

 

 

   

 

 

    

 

 

 

NONINTEREST EXPENSE

          

Salaries and employee benefits

     15,100        14,626       45,613        41,802  

Net occupancy expense

     2,327        2,372       7,670        7,401  

Furniture and equipment

     2,073        1,876       6,166        5,904  

Stationery, supplies and postage

     404        412       1,419        1,271  

Marketing expense

     442        429       1,351        1,123  

FDIC insurance expense

     430        715       1,173        1,986  

Data processing expense

     441        518       1,496        1,497  

Telecommunications expense

     380        479       1,156        1,289  

ATM and debit card expense

     546        420       1,504        1,149  

Expenses (income) on other real estate owned and other repossessed assets

     67        (32     108        33  

Long-term debt prepayment fee

     —          —         2,828        —    

Merger related expenses

     —          1,697       —          4,103  

Core deposit intangible amortization

     104        201       489        532  

Other expenses

     2,535        2,293       7,712        7,055  
  

 

 

    

 

 

   

 

 

    

 

 

 

TOTAL NONINTEREST EXPENSE

     24,849        26,006       78,685        75,145  
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before income tax expense

     20,893        17,166       58,961        44,646  

Income tax expense

     7,170        5,839       19,556        15,081  
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INCOME

   $ 13,723      $ 11,327     $ 39,405      $ 29,565  
  

 

 

    

 

 

   

 

 

    

 

 

 

PER SHARE OF COMMON STOCK

          

Basic earnings

   $ 0.29      $ 0.25     $ 0.82      $ 0.69  
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted earnings

   $ 0.29      $ 0.25     $ 0.82      $ 0.69  
  

 

 

    

 

 

   

 

 

    

 

 

 

Dividends

   $ 0.100      $ 0.095     $ 0.295      $ 0.275  
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

     For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
     2017      2016     2017     2016  
     (in thousands)     (in thousands)  

NET INCOME

   $ 13,723      $ 11,327     $ 39,405     $ 29,565  

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

         

Unrealized gains (losses) on securities available for sale

     170        (502     1,933       5,352  

Reclassification for securities gains included in net income

     —          —         (1,640     (233

Unrealized gains (losses) on derivatives

     2        174       (105     48  

Change in pension liability, net

     —          (2     —         42  
  

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     172        (330     188       5,209  
  

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL COMPREHENSIVE INCOME

   $ 13,895      $ 10,997     $ 39,593     $ 34,774  
  

 

 

    

 

 

   

 

 

   

 

 

 

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)

For the Nine Months Ended September 30, 2017 and 2016

 

                 Accumulated         
                 Other         
     Common     Retained     Comprehensive         
     Stock     Earnings     Income      Total  
     (in thousands)  

At January 1, 2016

   $ 386,287     $ 13,079     $ 1,150      $ 400,516  

Net income

     —         29,565       —          29,565  

Other comprehensive income, net of tax

     —         —         5,209        5,209  

Stock based compensation

     1,494       —         —          1,494  

Issuance of stock for Pascack acquisition

     37,221       —         —          37,221  

Issuance of stock for Harmony acquisition

     36,654       —         —          36,654  

Issuance of stock

     10       —         —          10  

Retirement of restricted stock

     (206     —         —          (206

Cash dividends, common stock

     —         (11,741     —          (11,741
  

 

 

   

 

 

   

 

 

    

 

 

 

At September 30, 2016

   $ 461,460     $ 30,903     $ 6,359      $ 498,722  
  

 

 

   

 

 

   

 

 

    

 

 

 

At January 1, 2017

   $ 510,861     $ 38,590     $ 593      $ 550,044  

Net income

     —         39,405       —          39,405  

Other comprehensive income, net of tax

     —         —         188        188  

Stock based compensation

     1,982       —         —          1,982  

Exercise of stock options

     313       —         —          313  

Retirement of restricted stock

     (773     —         —          (773

Cash dividends, common stock

     —         (14,078     —          (14,078
  

 

 

   

 

 

   

 

 

    

 

 

 

At September 30, 2017

   $ 512,383     $ 63,917     $ 781      $ 577,081  
  

 

 

   

 

 

   

 

 

    

 

 

 

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     For the Nine Months Ended September 30,  
     2017     2016  
     (in thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 39,405     $ 29,565  

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

    

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

     3,763       3,351  

Depreciation and amortization

     3,272       2,885  

Amortization of intangible assets

     489       532  

Provision for loan and lease losses

     4,872       3,848  

Loans originated for sale

     (42,575     (61,566

Proceeds from sales of loans held for sale

     43,444       60,707  

Gains on sales of securities

     (2,524     (370

Gains on proceeds from bank owned life insurance policies

     (45     (864

Gains on sales of loans held for sale

     (1,347     (1,598

Gains on other real estate and other repossessed assets

     (527     (254

(Gains) losses on sales of premises and equipment

     (850     117  

Long-term debt prepayment penalty

     2,828       —    

Stock-based compensation

     1,982       1,494  

Excess tax benefits

     582       —    

Increase in other assets

     (5,780     (8,194

Increase in other liabilities

     198       7,869  
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     47,187       37,522  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Net cash acquired in acquisitions

     —         68,751  

Proceeds from repayments and maturities of available for sale securities

     68,852       58,911  

Proceeds from repayments and maturities of held to maturity securities

     33,345       24,369  

Proceeds from sales of available for sale securities

     4,500       15,654  

Purchase of available for sale securities

     (113,770     (87,767

Purchase of held to maturity securities

     (21,157     (49,022

Purchase of bank owned life insurance

     (33,000     —    

Death benefit proceeds from bank owned life insurance policy

     148       2,129  

Proceeds from redemptions of Federal Home Loan Bank stock

     11,942       2,207  

Purchases of Federal Home Loan Bank stock

     (9,626     (953

Net increase in loans and leases

     (226,022     (254,307

Proceeds from sales of other real estate and repossessed assets

     3,972       2,051  

Proceeds from dispositions and sales of premises and equipment

     1,638       15  

Purchases of premises and equipment

     (2,070     (2,851
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (281,248     (220,813
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase in deposits

     264,654       364,141  

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

     77,606       (121,534

Proceeds from other borrowings

     276,212       14,921  

Repayments of other borrowings

     (342,757     (59,000

Net proceeds from issuance of subordinated debt

     —         73,558  

Exercise of stock options

     313       —    

Issuance of stock

     —         10  

Retirement of restricted stock

     (773     (206

Dividends paid

     (14,078     (11,741
  

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

     261,177       260,149  
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     27,116       76,858  

Cash and cash equivalents, beginning of period

     175,801       118,493  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 202,917     $ 195,351  
  

 

 

   

 

 

 

 

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Table of Contents
     For the Nine Months Ended September 30,  
     2017      2016  
     (in thousands)  

Supplemental schedule of non-cash investing and

     

financing activities:

     

Cash paid during the period for income taxes

   $ 18,908      $ 15,168  

Cash paid during the period for interest

     18,649        11,957  

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

     3,542        2,732  

Acquisitions:

     

Non-cash assets acquired:

     

Federal Home Loan Bank stock

     —          3,742  

Investment securities held for maturity

     —          10,810  

Investment securities available for sale

     —          7,474  

Loans, including loans held for sale

     —          579,300  

Goodwill and other intangible assets, net

     —          29,348  

Other assets

     —          32,353  

Total non-cash assets acquired

     —          663,027  

Liabilities assumed:

     

Deposits

     —          (582,526

Other borrowings

     —          (66,622

Other liabilities

     —          (8,755

Total liabilities assumed

     —          (657,903

Common stock issued and fair value of stock options
converted to Lakeland Bancorp stock options

     —          73,874  

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

This quarterly report presents the consolidated financial statements of Lakeland Bancorp, Inc. and its subsidiaries, including Lakeland Bank (“Lakeland”) and the Bank’s wholly owned subsidiaries (collectively, the “Company”). 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 nine months ended September 30, 2017 do not necessarily indicate the results that the Company will achieve for all of 2017.

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. These unaudited interim financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes that are presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

NOTE 2 – ACQUISITIONS

Harmony Bank

On July 1, 2016, the Company completed its acquisition of Harmony Bank (“Harmony”), a bank with three branches located in Ocean County, NJ. Effective upon the opening of business on July 1, 2016, Harmony was merged into Lakeland Bank. This merger allowed the Company to expand its presence to Ocean County. The merger agreement provided that shareholders of Harmony would receive 1.25 shares of the Company common stock for each share of Harmony Bank common stock that they owned at the effective time of the merger. The Company issued an aggregate of 3,201,109 shares of its common stock in the merger. Outstanding Harmony stock options were paid out in cash at the difference between $14.31 (Lakeland’s closing stock price on July 1, 2016 of $11.45 multiplied by 1.25) and the average strike price of $9.07 for a total cash payment of $869,000.

During the second quarter of 2017, the Company revised the estimate of the fair value of the acquired assets as of the acquisition date. This adjustment related to the fair market value of certain loans and the valuation of core deposit intangible which resulted in an increase of $685,000 to goodwill.

The acquisition was accounted for under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed in the acquisition were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition, including the use of a third party valuation specialist. The following table summarizes the estimated fair value of the acquired assets and liabilities assumed at the date of acquisition for Harmony, net of cash consideration paid.

 

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     On July 1,
2016
 
     (in thousands)  

Cash and cash equivalents

   $ 27,809  

Securities available for sale

     7,474  

Securities held to maturity

     6,885  

Federal Home Loan Bank stock

     780  

Loans

     259,985  

Premises and equipment

     3,125  

Goodwill

     11,147  

Identifiable intangible assets

     1,088  

Accrued interest receivable and other assets

     8,146  
  

 

 

 

Total assets acquired

     326,439  
  

 

 

 

Deposits

     (278,060

Other borrowings

     (9,314

Other liabilities

     (2,411
  

 

 

 

Total liabilities assumed

     (289,785
  

 

 

 

Net assets acquired

   $ 36,654  
  

 

 

 

Loans acquired in the Harmony acquisition were recorded at fair value, and there was no carryover related allowance for loan and lease losses. The fair values of loans acquired from Harmony were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted for estimated future credit losses and the rate of prepayments. Projected cash flows were then discounted to present value using a risk-adjusted market rate for similar loans.

The following is a summary of the loans accounted for in accordance with ASC 310-30 that were acquired in the Harmony acquisition as of the closing date.

 

     Acquired
Credit
Impaired
Loans
 
     (in thousands)  

Contractually required principal and interest at acquisition

   $ 1,264  

Contractual cash flows not expected to be collected (non-accretable difference)

     398  
  

 

 

 

Expected cash flows at acquisition

     866  

Interest component of expected cash flows (accretable difference)

     97  
  

 

 

 

Fair value of acquired loans

   $ 769  
  

 

 

 

The core deposit intangible totaled $691,000 and is being amortized over its estimated useful life of approximately 10 years using an accelerated method. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes.

The fair values of deposit liabilities with no stated maturities such as checking, money market and savings accounts, were assumed to equal the carrying amounts since these deposits are payable on demand. The fair values of certificates of deposits and IRAs represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit.

 

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Pascack Bancorp

On January 7, 2016, the Company completed its acquisition of Pascack Bancorp, Inc. (“Pascack”), a bank holding company headquartered in Waldwick, New Jersey. Pascack was the parent of Pascack Community Bank which operated 8 branches in Bergen and Essex Counties in New Jersey. This acquisition enabled the Company to broaden its presence in Bergen and Essex counties. Effective as of the close of business on January 7, 2016, Pascack merged into the Company, and Pascack Community Bank merged into Lakeland Bank. The merger agreement provided that the shareholders of Pascack would receive, at their election, for each outstanding share of Pascack common stock that they own at the effective time of the merger, either 0.9576 shares of Lakeland Bancorp common stock or $11.35 in cash, subject to proration as described in the merger agreement, so that 90% of the aggregate merger consideration was shares of Lakeland Bancorp common stock and 10% was cash. Lakeland Bancorp issued 3,314,284 shares of its common stock in the merger and paid approximately $4.5 million in cash including the cash paid in connection with the cancellation of Pascack stock options. Outstanding Pascack stock options were paid out in cash at the difference between $11.35 and an average strike price of $7.37 for a total cash payment of $122,000.

The acquisition was accounted for under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed in the acquisition were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition, including the use of a third party valuation specialist. The following table summarizes the estimated fair value of the acquired assets and liabilities assumed at the date of acquisition for Pascack, net of cash consideration paid.

 

     On January 7,
2016
 
     (in thousands)  

Cash and cash equivalents

   $ 40,942  

Securities held to maturity

     3,925  

Federal Home Loan Bank stock

     2,962  

Loans

     319,575  

Premises and equipment

     14,438  

Goodwill

     15,311  

Identifiable intangible assets

     1,514  

Accrued interest receivable and other assets

     6,672  
  

 

 

 

Total assets acquired

     405,339  
  

 

 

 

Deposits

     (304,466

Other borrowings

     (57,308

Other liabilities

     (6,344
  

 

 

 

Total liabilities assumed

     (368,118
  

 

 

 

Net assets acquired

   $ 37,221  
  

 

 

 

Loans acquired in the Pascack acquisition were recorded at fair value, and there was no carryover related allowance for loan and lease losses. The fair values of loans acquired from Pascack were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted for estimated future credit losses and the rate of prepayments. Projected cash flows were then discounted to present value using a risk-adjusted market rate for similar loans.

 

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The following is a summary of the loans accounted for in accordance with ASC 310-30 that were acquired in the Pascack acquisition as of the closing date.

 

     Acquired
Credit
Impaired
Loans
 
     (in thousands)  

Contractually required principal and interest at acquisition

   $ 4,932  

Contractual cash flows not expected to be collected (non-accretable difference)

     4,030  
  

 

 

 

Expected cash flows at acquisition

     902  

Interest component of expected cash flows (accretable difference)

     85  
  

 

 

 

Fair value of acquired loans

   $ 817  
  

 

 

 

The core deposit intangible totaled $1.5 million and is being amortized over its estimated useful life of approximately 10 years using an accelerated method. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes.

The fair values of deposit liabilities with no stated maturities such as checking, money market and savings accounts, were assumed to equal the carrying amounts since these deposits are payable on demand. The fair values of certificates of deposits and IRAs represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit.

Direct costs related to the Pascack and Harmony acquisitions were expensed as incurred. During the quarter and the nine months ended September 30, 2016, the Company incurred $1.7 million and $4.1 million, respectively, of merger and acquisition integration-related expenses, which have been separately stated in the Company’s consolidated statements of income.

 

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NOTE 3 – EARNINGS PER SHARE

The following schedule shows the Company’s earnings per share calculations for the periods presented:

 

     For the Three Months Ended September 30,      For the Nine Months Ended September 30,  
     2017      2016      2017      2016  
     (in thousands, except per share data)      (in thousands, except per share data)  

Net income available to common shareholders

   $ 13,723      $ 11,327      $ 39,405      $ 29,565  

Less: earnings allocated to participating securities

     122        114        362        275  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocated to common shareholders

   $ 13,601      $ 11,213      $ 39,043      $ 29,290  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding - basic

     47,466        44,439        47,429        42,211  

Share-based plans

     226        220        231        179  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding -diluted

     47,692        44,659        47,660        42,390  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.29      $ 0.25      $ 0.82      $ 0.69  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 0.29      $ 0.25      $ 0.82      $ 0.69  
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no antidilutive options to purchase common stock excluded from the computation for the three and nine months ended September 30, 2017 and 2016.

 

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NOTE 4 – INVESTMENT SECURITIES

 

     September 30, 2017      December 31, 2016  
            Gross      Gross                   Gross      Gross        
     Amortized      Unrealized      Unrealized     Fair      Amortized      Unrealized      Unrealized     Fair  
     Cost      Gains      Losses     Value      Cost      Gains      Losses     Value  
     (in thousands)      (in thousands)  

AVAILABLE FOR SALE

                     

U.S. Treasury and U.S. government agencies

   $ 142,423      $ 232      $ (824   $ 141,831      $ 118,537      $ 102      $ (1,280   $ 117,359  

Mortgage-backed securities, residential

     422,090        1,199        (3,320     419,969        406,851        1,174        (4,487     403,538  

Mortgage-backed securities, multifamily

     10,148        54        (36     10,166        10,192        30        (35     10,187  

Obligations of states and political subdivisions

     51,991        700        (277     52,414        48,868        391        (933     48,326  

Debt securities

     5,000        100        —         5,100        5,350        63        (1     5,412  

Equity securities

     15,460        2,738        (386     17,812        17,314        5,000        (432     21,882  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 647,112      $ 5,023      $ (4,843   $ 647,292      $ 607,112      $ 6,760      $ (7,168   $ 606,704  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     September 30, 2017      December 31, 2016  
            Gross      Gross                   Gross      Gross        
     Amortized      Unrealized      Unrealized     Fair      Amortized      Unrealized      Unrealized     Fair  
     Cost      Gains      Losses     Value      Cost      Gains      Losses     Value  
     (in thousands)      (in thousands)  

HELD TO MATURITY

                     

U.S. government agencies

   $ 33,449      $ 180      $ (274   $ 33,355      $ 33,553      $ 144      $ (430   $ 33,267  

Mortgage-backed securities, residential

     46,590        315        (569     46,336        38,706        369        (598     38,477  

Mortgage-backed securities, multifamily

     1,983        —          (13     1,970        2,059        —          (44     2,015  

Obligations of states and political subdivisions

     50,993        543        (144     51,392        71,284        269        (385     71,168  

Debt securities

     2,006        26        —         2,032        2,012        51        —         2,063  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 135,021      $ 1,064      $ (1,000   $ 135,085      $ 147,614      $ 833      $ (1,457   $ 146,990  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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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):

 

     Available for Sale      Held to Maturity  

September 30, 2017

   Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ 4,825      $ 4,862      $ 18,662      $ 18,699  

Due after one year through five years

     107,222        107,526        37,115        37,324  

Due after five years through ten years

     64,404        63,961        26,864        26,957  

Due after ten years

     22,963        22,996        3,807        3,799  
  

 

 

    

 

 

    

 

 

    

 

 

 
     199,414        199,345        86,448        86,779  

Mortgage-backed securities

     432,238        430,135        48,573        48,306  

Equity securities

     15,460        17,812        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 647,112      $ 647,292      $ 135,021      $ 135,085  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows proceeds from sales of securities and gross gains and losses on sales of securities for the periods indicated (in thousands):

 

     For the Three Months Ended September 30,      For the Nine Months Ended September 30,  
     2017      2016      2017      2016  

Sale proceeds

   $ —        $ —        $ 4,500      $ 15,654  

Gross gains

     —          —          2,539        370  

Gross losses

     —          —          (15      —    

There were no other-than-temporary impairments during the nine months ended September 30, 2017 or 2016.

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 $506.5 million and $443.4 million at September 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits and for other purposes required by applicable laws and regulations.

 

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The following table indicates the length of time individual securities have been in a continuous unrealized loss position for the periods presented:

 

     Less Than 12 Months      12 Months or Longer      Total  
            Unrealized             Unrealized      Number of             Unrealized  

September 30, 2017

   Fair Value      Losses      Fair Value      Losses      Securities      Fair Value      Losses  
                   (dollars in thousands)                       

AVAILABLE FOR SALE

                    

U.S. Treasury and U.S. government agencies

   $ 66,973      $ 273      $ 17,235      $ 551        16      $ 84,208      $ 824  

Mortgage-backed securities, residential

     198,410        1,658        85,011        1,662        85        283,421        3,320  

Mortgage-backed securities, multifamily

     5,131        36        —          —          1        5,131        36  

Obligations of states and political subdivisions

     2,805        13        12,936        264        27        15,741        277  

Equity securities

     —          —          9,669        386        2        9,669        386  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 273,319      $ 1,980      $ 124,851      $ 2,863        131      $ 398,170      $ 4,843  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY

                    

U.S. government agencies

   $ 5,419      $ 14      $ 6,768      $ 260        2      $ 12,187      $ 274  

Mortgage-backed securities, residential

     27,833        309        7,350        260        18        35,183        569  

Mortgage-backed securities, multifamily

     1,970        13        —          —          2        1,970        13  

Obligations of states and political subdivisions

     13,949        105        767        39        10        14,716        144  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 49,171      $ 441      $ 14,885      $ 559        32      $ 64,056      $ 1,000  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less Than 12 Months      12 Months or Longer      Total  
            Unrealized             Unrealized      Number of             Unrealized  

December 31, 2016

   Fair Value      Losses      Fair Value      Losses      Securities      Fair Value      Losses  
     (dollars in thousands)  

AVAILABLE FOR SALE

                    

U.S. Treasury and U.S. government agencies

   $ 94,153      $ 1,280      $ —        $ —          18      $ 94,153      $ 1,280  

Mortgage-backed securities, residential

     292,873        4,078        15,453        409        91        308,326        4,487  

Mortgage-backed securities, multifamily

     5,178        35        —          —          1        5,178        35  

Obligations of states and political subdivisions

     29,904        933        —          —          54        29,904        933  

Other debt securities

     350        1        —          —          1        350        1  

Equity securities

     6,030        94        4,720        338        2        10,750        432  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 428,488      $ 6,421      $ 20,173      $ 747        167      $ 448,661      $ 7,168  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY

                    

U.S. government agencies

   $ 17,147      $ 430      $ —        $ —          3      $ 17,147      $ 430  

Mortgage-backed securities, residential

     27,909        535        1,061        63        15        28,970        598  

Mortgage-backed securities, multifamily

     2,015        44        —          —          2        2,015        44  

Obligations of states and political subdivisions

     50,302        384        401        1        43        50,703        385  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 97,373      $ 1,393      $ 1,462      $ 64        63      $ 98,835      $ 1,457  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Management has evaluated the securities in the above table and has concluded that none of the securities are other-than-temporarily impaired. The fair values being below cost is due to interest rate movements and is deemed temporary. All investment securities are evaluated on a periodic basis to identify any factors that would require a 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 financial condition of the underlying issuer;
    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.

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

As of September 30, 2017, the equity securities include investments in other financial institutions for market appreciation purposes. These equities had a purchase price of $2.1 million and a market value of $4.9 million as of September 30, 2017.

As of September 30, 2017, the equity securities also included $12.9 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 investment funds include $9.7 million that are invested in government guaranteed loans, mortgage-backed securities, small business loans and other instruments supporting affordable housing and economic development. The Company may redeem these funds at the net asset value calculated at the end of the current business day less any unpaid management fees. As of September 30, 2017, the amortized cost of these securities was $10.1 million and the fair value was $9.7 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 these investments.

The investment funds also include $3.3 million 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 with 60 days notice at the net asset value less unpaid management fees with the approval of the fund manager. As of September 30, 2017, the net amortized cost equaled the market value of the investment. There are no unfunded commitments related to these investments.

NOTE 5 – LOANS, LEASES AND OTHER REAL ESTATE

The following sets forth the composition of the Company’s loan and lease portfolio:

 

     September 30,
2017
     December 31,
2016
 
     (in thousands)  

Commercial, secured by real estate

   $ 2,776,899      $ 2,556,601  

Commercial, industrial and other

     342,775        350,228  

Leases

     71,698        67,016  

Real estate - residential mortgage

     329,625        349,581  

Real estate - construction

     241,207        211,109  

Home equity and consumer

     330,689        339,360  
  

 

 

    

 

 

 

Total loans and leases

     4,092,893        3,873,895  
  

 

 

    

 

 

 

Less: deferred fees

     (3,720      (3,297
  

 

 

    

 

 

 

Loans and leases, net of deferred fees

   $ 4,089,173      $ 3,870,598  
  

 

 

    

 

 

 

 

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Table of Contents

At September 30, 2017 and December 31, 2016, home equity and consumer loans included overdraft deposit balances of $327,000 and $364,000, respectively. At September 30, 2017 and December 31, 2016, the Company had $1.0 billion and $942 million, respectively, in loans pledged for actual and potential borrowings at the Federal Home Loan Bank of New York (“FHLB”).

Purchased Credit Impaired Loans

The carrying value of loans acquired in the Pascack acquisition and accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” was $198,000 at September 30, 2017, which was $619,000 less than the balance at the time of acquisition on January 7, 2016. In first quarter 2017, one of the Pascack purchased credit impaired (“PCI”) loans totaling $127,000 experienced further credit deterioration and was fully charged off. In the second quarter of 2017, a loan with a net value of $218,000 was fully paid off. The carrying value of loans acquired in the Harmony acquisition was $524,000 at September 30, 2017 which was $245,000 less than the balance at acquisition date on July 1, 2016. In the second quarter of 2017, a loan with a net value of $247,000 was fully paid off.

The following table presents changes in the accretable yield for PCI loans:

 

     For the Three Months Ended      For the Nine Months Ended  
     September 30, 2017      September 30, 2016      September 30, 2017      September 30, 2016  
     (in thousands)      (in thousands)  

Balance, beginning of period

   $ 133      $ 65      $ 145      $ —    

Acquisitions

     —          97        —          182  

Accretion

     (40      (32      (138      (63

Net reclassification non-accretable difference

     35        —          121        11  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 128      $ 130      $ 128      $ 130  
  

 

 

    

 

 

    

 

 

    

 

 

 

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, excluding PCI loans:

 

     September 30,
2017
     December 31,
2016
 
     (in thousands)  

Commercial, secured by real estate

   $ 5,348      $ 10,413  

Commercial, industrial and other

     172        167  

Leases

     110        153  

Real estate - residential mortgage

     4,410        6,048  

Real estate - construction

     1,472        1,472  

Home equity and consumer

     2,033        2,151  
  

 

 

    

 

 

 

Total non-accrual loans and leases

   $ 13,545      $ 20,404  

Other real estate and other repossessed assets

     1,168        1,072  
  

 

 

    

 

 

 

TOTAL NON-PERFORMING ASSETS

   $ 14,713      $ 21,476  
  

 

 

    

 

 

 

Troubled debt restructurings, still accruing

   $ 11,279      $ 8,802  
  

 

 

    

 

 

 

Non-accrual loans included $2.4 million of troubled debt restructurings for each of the periods ended September 30, 2017 and December 31, 2016. At September 30, 2017 and December 31, 2016, the Company had $3.5 million and $3.7 million, respectively, in residential mortgages and consumer home equity loans that were in the process of foreclosure.

 

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An age analysis of past due loans, segregated by class of loans as of September 30, 2017 and December 31, 2016, is as follows:

 

                   Greater                           Recorded  
                   Than                    Total      Investment Greater  
     30-59 Days      60-89 Days      89 Days      Total             Loans      than 89 Days and  
     Past Due      Past Due      Past Due      Past Due      Current      and Leases      Still Accruing  
     (in thousands)  

September 30, 2017

                    

Commercial, secured by real estate

   $ 2,616      $ 678      $ 4,810      $ 8,104      $ 2,768,795      $ 2,776,899      $ —    

Commercial, industrial and other

     1,830        343        103        2,276        340,499        342,775        —    

Leases

     512        91        110        713        70,985        71,698        —    

Real estate - residential mortgage

     3,733        320        3,687        7,740        321,885        329,625        —    

Real estate - construction

     —          765        1,472        2,237        238,970        241,207        —    

Home equity and consumer

     841        411        1,544        2,796        327,893        330,689        9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 9,532      $ 2,608      $ 11,726      $ 23,866      $ 4,069,027      $ 4,092,893      $ 9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

                    

Commercial, secured by real estate

   $ 6,082      $ 1,234      $ 9,313      $ 16,629      $ 2,539,972      $ 2,556,601      $ —    

Commercial, industrial and other

     1,193        213        42        1,448        348,780        350,228        —    

Leases

     132        78        153        363        66,653        67,016        —    

Real estate - residential mortgage

     2,990        1,057        5,330        9,377        340,204        349,581        —    

Real estate - construction

     3,409        —          1,472        4,881        206,228        211,109        —    

Home equity and consumer

     1,260        129        2,049        3,438        335,922        339,360        10  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 15,066      $ 2,711      $ 18,359      $ 36,136      $ 3,837,759      $ 3,873,895      $ 10  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired Loans

The Company defines impaired loans as all non-accrual loans and leases with recorded investments of $500,000 or greater. Impaired loans also include all loans that have been modified in troubled debt restructurings. Impaired loans as of September 30, 2017 and December 31, 2016 are as follows:

 

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Table of Contents
            Contractual                       
     Recorded      Unpaid             Average      Interest  
     Investment in      Principal      Specific      Investment in      Income  

September 30, 2017

   Impaired Loans      Balance      Allowance      Impaired Loans      Recognized  
     (in thousands)  

Loans without specific allowance:

              

Commercial, secured by real estate

   $ 10,852      $ 11,125      $ —        $ 13,491      $ 259  

Commercial, industrial and other

     635        635        —          635        19  

Real estate - residential mortgage

     967        984        —          1,011        12  

Real estate - construction

     1,472        1,472        —          1,472        —    

Home equity and consumer

     —          —          —          —          —    

Loans with specific allowance:

              

Commercial, secured by real estate

     5,425        5,757        480        5,030        151  

Commercial, industrial and other

     169        169        10        328        12  

Real estate - residential mortgage

     992        1,125        5        1,006        22  

Real estate - construction

     —          —          —          —          —    

Home equity and consumer

     1,078        1,107        9        1,120        40  

Total:

              

Commercial, secured by real estate

   $ 16,277      $ 16,882      $ 480      $ 18,521      $ 410  

Commercial, industrial and other

     804        804        10        963        31  

Real estate - residential mortgage

     1,959        2,109        5        2,017        34  

Real estate - construction

     1,472        1,472        —          1,472        —    

Home equity and consumer

     1,078        1,107        9        1,120        40  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 21,590      $ 22,374      $ 504      $ 24,093      $ 515  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents
            Contractual                       
     Recorded      Unpaid             Average      Interest  
     Investment in      Principal      Specific      Investment in      Income  

December 31, 2016

   Impaired Loans      Balance      Allowance      Impaired Loans      Recognized  
     (in thousands)  

Loans without specific allowance:

              

Commercial, secured by real estate

   $ 12,764      $ 13,195        —        $ 13,631      $ 229  

Commercial, industrial and other

     603        603        —          1,109        24  

Leases

     —          —          —          —          —    

Real estate - residential mortgage

     1,880        3,146        —          2,430        16  

Real estate - construction

     1,471        1,471        —          12        —    

Home equity and consumer

     139        139        —          388        —    

Loans with specific allowance:

              

Commercial, secured by real estate

     5,860        6,142        392        6,549        273  

Commercial, industrial and other

     349        349        12        360        17  

Leases

     —          —          —          1        —    

Real estate - residential mortgage

     1,031        1,100        31        1,011        30  

Real estate - construction

     —          —          —          —          —    

Home equity and consumer

     1,188        1,211        94        1,184        59  

Total:

              

Commercial, secured by real estate

   $ 18,624      $ 19,337      $ 392      $ 20,180      $ 502  

Commercial, industrial and other

     952        952        12        1,469        41  

Leases

     —          —          —          1        —    

Real estate - residential mortgage

     2,911        4,246        31        3,441        46  

Real estate - construction

     1,471        1,471        —          12        —    

Home equity and consumer

     1,327        1,350        94        1,572        59  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 25,285      $ 27,356      $ 529      $ 26,675      $ 648  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized on impaired loans was $0.5 million for each of the nine months ended September 30, 2017 and 2016, respectively. Interest that would have been accrued on impaired loans during the first nine months of 2017 and 2016 had the loans been performing under original terms would have been $1.2 million and $1.1 million, respectively.

Credit Quality Indicators

The class of loans is 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. Lakeland assigns a credit risk rating 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 commercial 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 commercial loans and commitments into a one (1) to nine (9) numerical structure with rating 1 being the strongest rating and rating 9 being the weakest. Ratings 1 through 5W are considered ‘Pass’ ratings.

 

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The following table shows the Company’s commercial loan portfolio as of September 30, 2017 and December 31, 2016, by the risk ratings discussed above (in thousands):

 

September 30, 2017

   Commercial,
Secured by
Real Estate
     Commercial,
Industrial
and Other
     Real Estate -
Construction
 

RISK RATING

        

1

   $ —        $ 422      $ —    

2

     —          27,151        —    

3

     81,240        37,590        —    

4

     822,168        87,799        11,770  

5

     1,764,207        165,864        225,286  

5W - Watch

     59,085        9,095        1,531  

6 - Other assets especially mentioned

     27,706        8,651        —    

7 - Substandard

     22,493        6,203        2,620  

8 - Doubtful

     —          —          —    

9 - Loss

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,776,899      $ 342,775      $ 241,207  
  

 

 

    

 

 

    

 

 

 

December 31, 2016

   Commercial,
Secured by
Real Estate
     Commercial,
Industrial
and Other
     Real Estate -
Construction
 

RISK RATING

        

1

   $ —        $ 1,449      $ —    

2

     —          26,743        —    

3

     82,102        36,644        —    

4

     729,281        135,702        28,177  

5

     1,615,331        129,366        175,595  

5W - Watch

     68,372        6,395        1,223  

6 - Other assets especially mentioned

     33,015        5,242        —    

7 - Substandard

     28,500        8,687        6,114  

8 - Doubtful

     —          —          —    

9 - Loss

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,556,601      $ 350,228      $ 211,109  
  

 

 

    

 

 

    

 

 

 

 

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

Allowance for Loan and Lease Losses

The Company continually evaluates, through its governance process, the development of the allowance for loan and lease losses methodology. During the third quarter of 2017, the Company refined and enhanced its quantitative framework by implementing a migration analysis to determine the historical loss factors. It also enhanced its qualitative framework to be responsive to the migration analysis. These enhancements are meant to increase the level of precision in the allowance for loan and lease losses and did not result in a change in the required allowance.

 

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The following table details activity in the allowance for loan and lease losses by portfolio segment for the three and nine months ended September 30, 2017 and 2016:

 

Three Months Ended September 30, 2017

   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

   $ 23,344     $ 1,688     $ 529     $ 1,754     $ 2,596     $ 2,912     $ 32,823  

Charge-offs

     (315     (196     (87     (98     —         (173     (869

Recoveries

     26       28       7       3       4       76       144  

Provision

     1,673       572       65       (90     (135     (258     1,827  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 24,728     $ 2,092     $ 514     $ 1,569     $ 2,465     $ 2,557     $ 33,925  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended September 30, 2016

   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

   $ 20,359     $ 2,212     $ 624     $ 2,164     $ 1,788     $ 3,520     $ 30,667  

Charge-offs

     (119     —         (44     (386     —         (724     (1,273

Recoveries

     131       30       4       1       —         46       212  

Provision

     996       (327     12       282       236       564       1,763  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 21,367     $ 1,915     $ 596     $ 2,061     $ 2,024     $ 3,406     $ 31,369  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2017

   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

   $ 21,223     $ 1,723     $ 548     $ 1,964     $ 2,352     $ 3,435       31,245  

Charge-offs

     (618     (430     (250     (408     (609     (784     (3,099

Recoveries

     390       150       39       3       24       301       907  

Provision

     3,733       649       177       10       698       (395     4,872  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 24,728     $ 2,092     $ 514     $ 1,569     $ 2,465     $ 2,557     $ 33,925  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2016

   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

   $ 20,223     $ 2,637     $ 460     $ 2,588     $ 1,591     $ 3,375     $ 30,874  

Charge-offs

     (393     (796     (319     (692     —         (1,661     (3,861

Recoveries

     212       106       26       5       —         159       508  

Provision

     1,325       (32     429       160       433       1,533       3,848  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 21,367     $ 1,915     $ 596     $ 2,061     $ 2,024     $ 3,406     $ 31,369  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Loans receivable summarized by portfolio segment and impairment method are as follows:

 

     Commercial,      Commercial,             Real Estate-             Home         
     Secured by      Industrial             Residential      Real Estate-      Equity and         
September 30, 2017    Real Estate      and Other      Leases      Mortgage      Construction      Consumer      Total  
     (in thousands)  

Ending Balance: Individually evaluated for impairment

   $ 16,277      $ 804      $ —        $ 1,959      $ 1,472      $ 1,078      $ 21,590  

Ending Balance: Collectively evaluated for impairment

     2,759,905        341,970        71,698        327,666        239,735        329,607        4,070,581  

Ending Balance: Loans acquired with deteriorated credit quality

     717        1        —          —          —          4        722  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance (1)

   $ 2,776,899      $ 342,775      $ 71,698      $ 329,625      $ 241,207      $ 330,689      $ 4,092,893  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Commercial,      Commercial,             Real Estate-             Home         
     Secured by      Industrial             Residential      Real Estate-      Equity and         
December 31, 2016    Real Estate      and Other      Leases      Mortgage      Construction      Consumer      Total  
     (in thousands)  

Ending Balance: Individually evaluated for impairment

   $ 18,624      $ 952      $ —        $ 2,911      $ 1,471      $ 1,327      $ 25,285  

Ending Balance: Collectively evaluated for impairment

     2,536,858        349,001        67,016        346,670        209,638        338,019        3,847,202  

Ending balance: Loans acquired with deteriorated credit quality

     1,119        275        —          —          —          14        1,408  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance (1)

   $ 2,556,601      $ 350,228      $ 67,016      $ 349,581      $ 211,109      $ 339,360      $ 3,873,895  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excludes deferred fees

 

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Table of Contents

The allowance for loan and lease losses is summarized by portfolio segment and impairment classification as follows:

 

     Commercial,      Commercial,             Real Estate-             Home         
     Secured by      Industrial             Residential      Real Estate-      Equity and         
September 30, 2017    Real Estate      and Other      Leases      Mortgage      Construction      Consumer      Total  
    

(in thousands)

 

Ending Balance: Individually evaluated for impairment

   $ 480      $ 10      $ —        $ 5      $ —        $ 9      $ 504  

Ending Balance: Collectively evaluated for impairment

     24,248        2,082        514        1,564        2,465        2,548        33,421  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 24,728      $ 2,092      $ 514      $ 1,569      $ 2,465      $ 2,557      $ 33,925  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Commercial,      Commercial,             Real Estate-             Home         
     Secured by      Industrial             Residential      Real Estate-      Equity and         
December 31, 2016    Real Estate      and Other      Leases      Mortgage      Construction      Consumer      Total  
    

(in thousands)

 

Ending Balance: Individually evaluated for impairment

   $ 392      $ 12      $  —        $ 31      $ —        $ 94      $ 529  

Ending Balance: Collectively evaluated for impairment

     20,831        1,711        548        1,933        2,352        3,341        30,716  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 21,223      $ 1,723      $ 548      $ 1,964      $ 2,352      $ 3,435      $ 31,245  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Lakeland also maintains a reserve for unfunded lending commitments which is included in other liabilities. This reserve was $2.5 million for each of the periods ended September 30, 2017 and December 31, 2016. The Company analyzes the adequacy of the reserve for unfunded lending commitments quarterly.

Troubled Debt Restructurings

Loans are classified as troubled debt restructured loans in cases where borrowers experience financial difficulties and Lakeland makes certain concessionary modifications to contractual terms. 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 and nine months ended September 30, 2017 and 2016:

 

     For the Three Months Ended      For the Three Months Ended  
     September 30, 2017      September 30, 2016  
            Pre-      Post-             Pre-      Post-  
            Modification      Modification             Modification      Modification  
            Outstanding      Outstanding             Outstanding      Outstanding  
     Number of      Recorded      Recorded      Number of      Recorded      Recorded  
     Contracts      Investment      Investment      Contracts      Investment      Investment  
     (dollars in thousands)  

Commercial, secured by real estate

     1      $ 473      $ 473        1      $ 303      $ 303  

Real estate - residential mortgage

     —          —          —          1        255        255  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     1      $ 473      $ 473        2      $ 558      $ 558  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     For the Nine Months Ended      For the Nine Months Ended  
     September 30, 2017      September 30, 2016  
            Pre-      Post-             Pre-      Post-  
            Modification      Modification             Modification      Modification  
            Outstanding      Outstanding             Outstanding      Outstanding  
     Number of      Recorded      Recorded      Number of      Recorded      Recorded  
     Contracts      Investment      Investment      Contracts      Investment      Investment  
     (dollars in thousands)  

Commercial, secured by real estate

     5      $ 3,511      $ 3,511      $ 1      $ 303      $ 303  

Commercial, industrial and other

     2        124        124        —          —          —    

Real estate - residential mortgage

     —          —          —          1        255        255  

Home equity and consumer

     —          —          —          3        285        285  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     7      $ 3,635      $ 3,635      $ 5      $ 843      $ 843  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes as of September 30, 2017 and 2016, loans that were restructured within the previous twelve months that have subsequently defaulted:

 

     September 30, 2017      September 30, 2016  
     Number of      Recorded      Number of      Recorded  
     Contracts      Investment      Contracts      Investment  
     (dollars in thousands)  

Real estate - residential mortgage

     —        $  —          1      $ 255  

Home equity and consumer

     —          —          1        162  
  

 

 

    

 

 

    

 

 

    

 

 

 
     —        $ —          2      $ 417  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Other Real Estate and Other Repossessed Assets

At September 30, 2017, the Company had other real estate owned and other repossessed assets of $1.2 million and $0, respectively. At December 31, 2016, the Company had other real estate owned and other repossessed assets of $1.1 million and $9,000, respectively. Included in other real estate owned was residential property acquired as a result of foreclosure proceedings totaling $1.0 million and $1.1 million that the Company held at the periods ended September 30, 2017 and December 31, 2016, respectively.

NOTE 6 – DERIVATIVES

Lakeland is a party to interest rate derivatives that are not designated as hedging instruments. Under a program, Lakeland executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Lakeland executes with a third party, such that Lakeland minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. 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 given default for all counterparties. Lakeland had $7.5 million in available for sale securities pledged for collateral on its interest rate swaps with the financial institution at each of September 30, 2017 and December 31, 2016.

In June 2016, the Company entered into two cash flow hedges in order to hedge the variable cash outflows associated with its subordinated debentures. The notional value of these hedges was $30.0 million. The Company’s objectives in using the cash flow hedge are to add stability to interest expense and to manage its exposure to interest rate movements. The Company used interest rate swaps designated as cash flow hedges which involved the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. In these particular hedges the Company is paying a third party an average of 1.10% in exchange for a payment at 3 month LIBOR. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the nine months ended September 30, 2017, the Company did not record any hedge ineffectiveness. The Company recognized $10,000 of accumulated other comprehensive income that was reclassified into interest expense for the first nine months of 2017.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s debt. During the next twelve months, the Company estimates that $71,000 will be reclassified as a decrease to interest expense should the rate environment remain the same.

The following table presents summary information regarding these derivatives for the periods presented (dollars in thousands):

 

September 30, 2017

   Notional Amount     Average
Maturity (Years)
     Weighted Average
Fixed Rate
    Weighted Average
Variable Rate
     Fair Value  

Classified in Other Assets:

            

3rd Party interest rate swaps

   $ 87,511       9.2        3.78     1 Mo. LIBOR + 2.12      $ 2,831  

Customer interest rate swaps

     98,223       11.1        4.64     1 Mo. LIBOR + 2.19        2,549  

Interest rate swap (cash flow hedge)

     30,000       3.8        1.10     3 Mo. LIBOR        871  

Classified in Other Liabilities:

            

Customer interest rate swaps

   $ 87,511       9.2        3.78     1 Mo. LIBOR + 2.12      $ (2,831

3rd Party interest rate swaps

     98,223       11.1        4.64     1 Mo. LIBOR + 2.19        (2,549

December 31, 2016

   Notional Amount     Average
Maturity (Years)
     Weighted Average
Fixed Rate
    Weighted Average
Variable Rate
     Fair Value  

Customer interest rate swaps

   $ 129,252       10.9        4.03     1 Mo. LIBOR + 2.10      $ (2,345

3rd party interest rate swaps

     (129,252     10.9        4.03     1 Mo. LIBOR + 2.10        2,345  

Interest rate swap (cash flow hedge)

     30,000       4.5        1.10     3 Mo. LIBOR        1,033  

 

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NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

The Company had goodwill of $136.4 million and $135.7 million for the periods ended September 30, 2017 and December 31, 2016, respectively. The Company reviews its goodwill and intangible assets annually, on November 30, or more frequently if conditions warrant, for impairment. In testing goodwill for impairment, the Company compares the estimated fair value of its reporting unit to its carrying amount, including goodwill. The Company has determined that it has one reporting unit, Community Banking.

The Company had core deposit intangible of $2.5 million and $3.3 million for the periods ended September 30, 2017 and December 31, 2016, respectively. The estimated future amortization expense for the remainder of 2017 and for each of the succeeding five years ended December 31 is as follows (dollars in thousands):

 

For the Year Ended

  

        2017

   $ 164  

        2018

     594  

        2019

     504  

        2020

     415  

        2021

     326  

        2022

     236  

NOTE 8 – BORROWINGS

Repurchase Agreements

At September 30, 2017, the Company had federal funds purchased and securities sold under agreements to repurchase of $102.9 million and $31.1 million, respectively. The securities sold under agreements to repurchase are overnight sweep arrangement accounts with our customers. The Company also had $20.0 million in long-term securities sold under agreements to repurchase included in other borrowings which mature within 1 year. As of September 30, 2017, the Company had $59.5 million in mortgage backed securities pledged for its securities sold under agreements to repurchase.

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.

Prepayment of Borrowings

In the first quarter of 2017, the Company repaid an aggregate of $20.0 million in long-term securities sold under agreements to repurchase and recorded $2.2 million in long-term debt prepayment fees. The Company also repaid an aggregate of $34.0 million in borrowings from the Federal Home Loan Bank of New York and recorded $638,000 in long-term debt prepayment fees.

NOTE 9 – SHARE-BASED COMPENSATION

The Company grants restricted stock, restricted stock units (“RSUs”) and stock options under the 2009 Equity Compensation Program. Share-based compensation expense of $2.0 million and $1.5 million was recognized for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, there was unrecognized compensation cost of $77,000 related to unvested restricted stock that is expected to be recognized over a weighted average period of approximately 0.34 years. Unrecognized compensation expense related to RSUs was approximately $2.1 million as of September 30, 2017, and that cost is expected to be recognized over a period of 1.34 years. There was no unrecognized compensation expense related to unvested stock options as of September 30, 2017.

In the first nine months of 2017, the Company granted 13,176 shares of restricted stock to non-employee directors at a grant date fair value of $18.20 per share under the 2009 Equity Compensation Program. The restricted stock vests one year from the date it was granted. Compensation expense on this restricted stock is expected to be $240,000 over a one year period. In the

 

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first nine months of 2016, the Company granted 23,952 shares of restricted stock to non-employee directors at a grant date fair value of $10.02 per share under the 2009 Equity Compensation Program. The restricted stock vested one year from the date it was granted. Compensation expense on this restricted stock was $240,000 over a one year period.

The following is a summary of the Company’s restricted stock activity during the nine months ended September 30, 2017:

 

            Weighted  
     Number of      Average  
     Shares      Price  

Outstanding, January 1, 2017

     42,875      $ 9.72  

Granted

     13,176        18.20  

Vested

     (32,904      9.79  

Forfeited

     (59      9.39  
  

 

 

    

 

 

 

Outstanding, September 30, 2017

     23,088      $ 14.46  
  

 

 

    

 

 

 

In the first nine months of 2017, the Company granted 130,523 RSUs to certain officers at a weighted average grant date fair value of $19.91 per share under the Company’s 2009 Equity Compensation Program. These units vest within a range of two to three years. A portion of these RSUs will vest subject to certain performance conditions in the restricted stock unit agreement. There are also certain provisions in the compensation program which state that if a recipient of the RSUs reaches a certain age and years of service, the person has effectively earned a portion of the RSUs at that time. Compensation expense on the restricted stock units issued in the first nine months of 2017 is expected to average approximately $866,000 per year over a three year period. In the first nine months of 2016, the Company granted 168,726 RSUs at a weighted average grant date fair value of $10.22 per share under the Company’s 2009 Equity Compensation Program. Compensation expense on these restricted stock units is expected to average approximately $575,000 per year over a three year period.

The following is a summary of the Company’s RSU activity during the nine months ended September 30, 2017:

 

            Weighted  
     Number of      Average  
     Shares      Price  

Outstanding, January 1, 2017

     302,344      $ 10.76  

Granted

     130,523        19.91  

Vested

     (148,585      13.01  

Forfeited

     (9,446      12.55  
  

 

 

    

 

 

 

Outstanding, September 30, 2017

     274,836      $ 13.83  
  

 

 

    

 

 

 

 

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There were no grants of stock options in the first nine months of 2017 or 2016. Option activity under the Company’s stock option plans is as follows:

 

                   Weighted         
                   Average         
            Weighted      Remaining         
            Average      Contractual      Aggregate  
     Number of      Exercise      Term      Intrinsic  
     Shares      Price      (in years)      Value  

Outstanding, January 1, 2017

     135,250      $ 8.79        4.18      $ 1,450,533  

Granted

     —          —          

Exercised

     (31,769      9.84        

Forfeited

     —          —          

Expired

     —          —          
  

 

 

          

Outstanding, September 30, 2017

     103,481      $ 8.47        4.52      $ 1,236,875  
  

 

 

          

Options exercisable at September 30, 2017

     103,481      $ 8.47        4.52      $ 1,236,875  
  

 

 

          

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

There were 31,769 stock options exercised during the first nine months of 2017. The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2017 was $318,000. Exercise of stock options during the first nine months of 2017 resulted in cash receipts of $313,000.

 

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NOTE 10 – COMPREHENSIVE INCOME

The components of other comprehensive income (loss) are as follows:

 

     September 30, 2017     September 30, 2016  
     Before     Tax Benefit     Net of     Before     Tax Benefit     Net of  
For the quarter ended:    Tax Amount     (Expense)     Tax Amount     Tax Amount     (Expense)     Tax Amount  
     (in thousands)     (in thousands)  

Net unrealized gains (losses) on available for sale securities

            

Net unrealized holding gains (losses) arising during period

   $ 267     $ (97   $ 170     $ (825   $ 323     $ (502

Reclassification adjustment for net losses arising during the period

     —         —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses)

     267       (97     170       (825     323       (502

Unrealized gains on derivatives

     3       (1     2       267       (93     174  

Change in minimum pension liability

     —         —         —         (2     —         (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net

   $ 270     $ (98   $ 172     $ (560   $ 230     $ (330
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Before     Tax Benefit     Net of     Before     Tax Benefit     Net of  
For the nine months ended:    Tax Amount     (Expense)     Tax Amount     Tax Amount     (Expense)     Tax Amount  
     (in thousands)     (in thousands)  

Net unrealized gains on available for sale securities

            

Net unrealized holding gains arising during period

   $ 3,112     $ (1,179   $ 1,933     $ 8,422     $ (3,070   $ 5,352  

Reclassification adjustment for net gains arising during the period

     (2,524     884       (1,640     (370     137       (233
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains

     588       (295     293       8,052       (2,933     5,119  

Unrealized gains (losses) on derivatives

     (162     57       (105     74       (26     48  

Change in minimum pension liability

     —         —         —         70       (28     42  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net

   $ 426     $ (238   $ 188     $ 8,196     $ (2,987   $ 5,209  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table shows the changes in the balances of each of the components of other comprehensive income for the periods presented, net of tax (in thousands):

 

     For the Three Months Ended September 30, 2017     For the Three Months Ended September 30, 2016  
     Unrealized                        Unrealized                    
     Gains on     Unrealized                  Gains on     Unrealized              
     Available for Sale     Gains                  Available for Sale     Gains (Losses)              
     Securities     on Derivatives     Pension Items      Total     Securities     on Derivatives     Pension Items     Total  

Beginning balance

   $ 6     $ 565     $ 38      $ 609     $ 6,775     $ (126   $ 40     $ 6,689  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income before classifications

     170       2       —          172       (502     174       (2     (330

Amounts reclassified from accumulated other comprehensive income

     —         —         —          —         —         —         —         —    
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     170       2       —          172       (502     174       (2     (330
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 176     $ 567     $ 38      $ 781     $ 6,273       48     $ 38     $ 6,359  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     For the Nine Months Ended September 30, 2017     For the Nine Months Ended September 30, 2016  
     Unrealized                        Unrealized                    
     Gains (Losses) on     Unrealized                  Gains on     Unrealized              
     Available for sale     Gains (losses)                  Available for sale     Gains              
     Securities     on Derivatives     Pension Items      Total     Securities     on Derivatives     Pension Items     Total  

Beginning Balance

   $ (117   $ 672     $ 38      $ 593     $ 1,154     $ —       $ (4   $ 1,150  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income before classifications

     1,933       (105     —          1,828       5,352       48       42       5,442  

Amounts reclassified from accumulated other comprehensive income

     (1,640     —         —          (1,640     (233     —         —         (233
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income

     293       (105     —          188       5,119       48       42       5,209  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 176     $ 567     $ 38      $ 781     $ 6,273       48     $ 38     $ 6,359  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 11 – 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.

 

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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 it’s 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 U.S. Treasury Notes 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, 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.

The fair values of derivatives are based on valuation models from a third party using current market terms (including interest rates and fees), the remaining terms of the agreements and the credit worthiness of the counter party as of the measurement date (Level 2).

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. During the nine months ended September 30, 2017, the Company did not make any transfers between any levels within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:

 

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

September 30, 2017

           

Assets:

           

Investment securities, available for sale

           

U.S. Treasury and government agencies

   $ 5,697      $ 136,134      $ —        $ 141,831  

Mortgage-backed securities

     —          430,135        —          430,135  

Obligations of states and political subdivisions

     —          52,414        —          52,414  

Other debt securities

     —          5,100        —          5,100  

Equity securities

     4,858        12,954        —          17,812  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

     10,555        636,737        —          647,292  
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative assets

     —          6,251        —          6,251  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 10,555      $ 642,988      $ —        $ 653,543  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative liabilities

   $ —        $ 5,380      $ —        $ 5,380  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ —        $ 5,380      $ —        $ 5,380  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

           

Assets:

           

Investment securities, available for sale

           

U.S. Treasury and government agencies

   $ 5,931      $ 111,428      $ —        $ 117,359  

Mortgage-backed securities

     —          413,725        —          413,725  

Obligations of states and political subdivisions

     —          48,326        —          48,326  

Other debt securities

     —          5,412        —          5,412  

Equity securities

     7,748        14,134        —          21,882  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

     13,679        593,025        —          606,704  

Derivative assets

     —          3,378        —          3,378  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 13,679      $ 596,403      $ —        $ 610,082  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative liabilities

   $ —        $ 2,345      $ —        $ 2,345  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ —        $ 2,345      $ —        $ 2,345  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     (Level 1)      (Level 2)      (Level 3)      Total
Fair Value
 
            (in thousands)         

September 30, 2017

           

Assets:

           

Impaired loans and leases

   $ —        $ —        $ 21,590      $ 21,590  

Loans held for sale

     —          2,221        —          2,221  

Other real estate owned and other repossessed assets

     —          —          1,168        1,168  

December 31, 2016

           

Assets:

           

Impaired loans and leases

   $ —        $ —        $ 25,285      $ 25,285  

Loans held for sale

     —          1,742        —          1,742  

Other real estate owned and other repossessed assets

     —          —          1,072        1,072  

Impaired loans are evaluated and valued at the time the loan is identified as impaired at the lower of cost or market value of the underlying collateral. Because most of Lakeland’s impaired loans are collateral dependent, fair value is generally measured based on the value of the collateral, less estimated costs to sell, 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 real estate is assessed based on appraisals by qualified third party licensed appraisers. The appraisers may use the sales comparison approach, the cost approach and/or the income approach to value the collateral using discount rates (with ranges of 5-11%) or capitalization rates (with ranges of 5-10%) 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 adjusted 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. Loans that are not collateral dependent are evaluated based on a discounted cash flow method. 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.

The Company has a held for sale loan portfolio that consists of residential mortgages that are being sold in the secondary market. The Company records these mortgages at the lower of cost or market value. Fair value is generally determined by the value of purchase commitments.

Other real estate owned (“OREO”) and other repossessed assets, representing property acquired through foreclosure, are recorded at fair value less estimated disposal costs of the acquired property on the date of acquisition and thereafter re-measured and carried at lower of cost or fair market value. Fair value on other real estate owned is based on the appraised value of the collateral using the sales comparison approach and/or the income approach with 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. 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.

 

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The estimation methodologies used, the estimated fair values, and recorded book balances at September 30, 2017 and December 31, 2016 are outlined below.

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

The fair value of investment securities held to maturity was measured using information from the same third-party servicer used for investment securities available for sale using the same methodologies discussed above. Investment securities held to maturity includes $16.1 million in short-term municipal bond anticipation notes and $1.0 million in subordinated debt 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. Management performs a credit analysis before investing in these securities.

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

The net loan portfolio at September 30, 2017 and December 31, 2016 has been valued using a present value discounted cash flow where market prices are not available. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk. The valuation of the Company’s loan portfolio is consistent with accounting guidance but does not fully incorporate the exit price approach.

For fixed maturity certificates of deposit, fair value is 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. The fair value of commitments to extend credit and standby letters of credit are deemed immaterial.

 

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The following table presents the carrying values, fair values and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2017 and December 31, 2016:

 

     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)  

September 30, 2017

              

Financial Assets:

              

Investment securities held to maturity

   $ 135,021      $ 135,085      $ —        $ 118,002      $ 17,083  

Federal Home Loan Bank and other membership bank stocks

     12,783        12,783        —          12,783        —    

Loans and leases, net

     4,055,248        4,057,939        —          —          4,057,939  

Financial Liabilities:

              

Certificates of deposit

     720,040        717,318        —          717,318        —    

Other borrowings

     196,539        195,253        —          195,253        —    

Subordinated debentures

     104,872        96,717        —          —          96,717  

December 31, 2016

              

Financial Assets:

              

Investment securities held to maturity

   $ 147,614      $ 146,990      $ —        $ 111,403      $ 35,587  

Federal Home Loan Bank and other membership bank stocks

     15,099        15,099        —          15,099        —    

Loans and leases, net

     3,839,353        3,832,465        —          —          3,832,465  

Financial Liabilities:

              

Certificates of deposit

     544,908        543,399        —          543,399        —    

Other borrowings

     260,866        264,586        —          264,586        —    

Subordinated debentures

     104,784        94,476        —          —          94,476  

NOTE 12 – RECENT ACCOUNTING PRONOUNCMENTS

In August 2017, the Financial Accounting Standards Board (“FASB”) issued an update intended to improve and simplify accounting rules around hedge accounting. Amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this update also make certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2019. The Company is still evaluating the impact that this guidance will have on its financial statements.

In July 2017, the FASB issued guidance which simplifies the accounting for certain financial instruments with down round features, a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings. The provisions of the new guidance related to down rounds are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this update is not expected to have a material impact on the Company’s financial statements because the Company does not have any equity-linked financial instruments that have such down round features.

 

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In May 2017, the FASB issued an update which provides clarity and reduces diversity in practice when accounting for the modification of terms and conditions for share-based payment awards. Previous accounting guidance did not distinguish between modifications which were substantive from modifications that were merely administrative. The accounting standards update requires entities to account for the effects of a modification unless the following three conditions are met: the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. This update will be effective for annual and interim periods beginning after December 15, 2017. The adoption of this update is not expected to have a material impact on the Company’s financial statements.

In March 2017, the FASB issued an update which shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. Under current GAAP, entities amortize the premium as an adjustment of yield over the contractual life of the instrument even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. The update shortens the amortization period for certain callable debt securities held at a premium and requires the premium be amortized to the earliest call date. This update will be effective for annual and interim periods beginning after December 15, 2018. Entities are required to apply the amendments on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of this update is not expected to have a material impact on the Company’s financial statements.

In March 2017, the FASB issued an update which improves the presentation of net periodic pension cost and net periodic postretirement benefit cost in a company’s income statement. The amendment requires that an employer report the service cost component in the same line items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendment is effective for annual and interim periods beginning after December 15, 2017. The adoption of this update is not expected to have a material impact on the Company’s financial statements.

In January 2017, the FASB issued an update to simplify the test for goodwill impairment. This amendment eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. This update will be effective for the Company’s financial statements for fiscal years beginning after December 15, 2019. The adoption of this update is not expected to have a material impact on the Company’s financial statements.

In January 2017, the FASB issued an update that clarifies the definition of a business as it pertains to business combinations. This amendment affects all companies and other reporting organizations that must determine whether they have sold or acquired a business. This update will be effective for the Company’s financial statements for fiscal years beginning after December 15, 2017. The adoption of this update is not expected to have a material impact on the Company’s financial statements.

In September 2016, the FASB issued an accounting standards update to address diversity in presentation in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2017. The adoption of this update is not expected to have a material impact on the Company’s financial statements.

In June 2016, the FASB issued an accounting standards update pertaining to the measurement of credit losses on financial instruments. This update requires the measurement of all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. This update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2019. The Company is currently evaluating its existing systems and data to support the new standard as well as assessing the impact that the guidance will have on the Company’s consolidated financial statements.

 

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In March 2016, the FASB issued an accounting standards update to simplify employee share-based payment accounting. The areas for simplification in this update involve several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standard specifically requires excess tax benefits and tax deficiencies to be recorded in the income statement when awards vest or are settled. The Company adopted this accounting standards update in the first quarter of 2017. As a result, during the first nine months of 2017, the Company recorded $582,000 in excess tax benefits in the income statement. The Company elected to continue its existing practice of estimating the number of awards that will be forfeited. The Company elected to apply the cash flow classification guidance prospectively, and therefore, prior periods have not been adjusted.

In March 2016, the FASB issued an accounting standards update that requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met, including the “clearly and closely related” criterion. The amendments in this update clarify the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The Company adopted this accounting standards update in the first quarter of 2017.The adoption of this update did not have a material impact on the Company’s financial statements.

In February 2016, FASB issued accounting guidance that requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period, with early adoption permitted. A modified retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently assessing the impact of the new guidance on its consolidated financial statements by reviewing its existing lease contracts and service contracts that may include embedded leases. The Company expects an increase to assets and liabilities as a result of recognizing a right-of-use asset and a lease liability for its operating lease commitments.

In January 2016, the FASB issued an accounting standards update intended to improve the recognition and measurement of financial instruments. Specifically, the accounting standards update requires all equity instruments, with the exception of those that are accounted for under the equity method of accounting, to be measured at fair value with changes in the fair value recognized through net income. Additionally, public business entities are required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The amendments in this update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this update is not expected to have a material impact on the Company’s financial statements.

In May 2014, the FASB issued an accounting standards update that clarifies the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In 2016, the FASB issued further implementation guidance regarding revenue recognition. This additional guidance included clarification on certain principal versus agent considerations within the implementation of the guidance as well as clarification related to identifying performance obligations and licensing. The guidance also requires new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations. The guidance along with its updates is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is still evaluating the potential impact on the Company’s financial statements. In evaluating this standard, management has determined that the majority of revenue earned by the Company is from revenue streams not included in the scope of this standard and therefore management does not expect the new revenue recognition guidance to have a material impact on its consolidated financial statements. The Company is continuing its overall assessment of revenue streams and reviewing contracts potentially affected by the guidance including deposit related fees, interchange fees and merchant fee income to determine the potential impact the new guidance is expected to have on the Company’s consolidated financial statements. The Company will adopt the guidance on January 1, 2018 using the modified retrospective method with a cumulative-effect adjustment to opening retained earnings.

 

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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, 2016.

Statements Regarding Forward Looking Information

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

In addition to the risk factors disclosed elsewhere in this document, the following factors, among others, could cause the Company’s actual results to differ materially and adversely from such forward-looking statements: changes in the financial services industry and the U.S. and global capital markets, changes in economic conditions nationally, regionally and in the Company’s markets, the nature and timing of actions of the Federal Reserve Board and other regulators, the nature and timing of legislation affecting the financial services industry, 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 Lakeland’s lending and leasing activities, successful implementation, deployment and upgrades of new and existing technology, systems, services and products, customers’ acceptance of Lakeland’s products and services, and competition.

The above-listed risk factors are not necessarily exhaustive, particularly as to possible future events, and new risk factors may emerge from time to time. Certain events may occur that could cause the Company’s actual results to be materially different than those described in the Company’s periodic filings with the Securities and Exchange Commission. Any statements made by the Company that are not historical facts should be considered to be forward-looking statements. The Company is not obligated to update and does not undertake to update any of its forward-looking statements made herein.

Critical Accounting Policies, Judgments and Estimates

The accounting and reporting policies of the Company and its subsidiaries conform to 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 quarter and nine months ended September 30, 2017 represented a period of continued growth for the Company. As discussed in this Management’s Discussion and Analysis:

 

    For the third quarter of 2017, net income of $13.7 million increased from $11.3 million in the third quarter of 2016. Diluted earnings per share of $0.29 represents a 16% increase over $0.25 for the same period in 2016. Excluding merger related expenses and other items, net income for the third quarter of 2016 was $12.4 million, or $0.28 per diluted share.

 

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For the third quarter of 2017, annualized return on average assets was 1.03%, annualized return on average common equity was 9.48%, and annualized return on average tangible common equity was 12.51% compared to 0.94%, 9.10%, and 12.68%, respectively, for the third quarter of 2016. Excluding merger related expenses, these 2016 ratios were 1.03%, 9.96% and 13.89%, respectively.

 

   

Net income for the first nine months of 2017 was $39.4 million, or $0.82 per diluted share, compared to $29.6 million, or $0.69 per diluted share, for the same period in 2016. Excluding merger related expenses and other items, net income for the first nine months of 2016 was $32.3 million, or $0.76 per diluted share.

 

   

The annualized return on average assets for the nine months ended September 30, 2017 was 1.01%, the annualized return on average common equity was 9.33%, and the annualized return on average tangible common equity was 12.38% compared to 0.88%, 8.54% and 11.95%, respectively, for the same period in 2016. Excluding merger related expenses, these 2016 ratios were 0.96%, 9.34% and 13.07%, respectively.

 

   

Commercial loans secured by real estate grew $220.3 million, or 9%, during the first nine months of 2017, while total loans grew $219.0 million, or 6%, to $4.09 billion during the same time period.

 

   

Net interest margin (“NIM”) was 3.39% in the third quarter of 2017 compared to 3.45% in the third quarter of 2016.

 

   

Total deposits increased $264.2 million from December 31, 2016 to September 30, 2017, or 6%, to $4.36 billion.

 

   

The efficiency ratio of 51.7% in the third quarter of 2017 decreased from 53.4% for the same period in 2016.

Comparison of Operating Results for the Three Months Ended September 30, 2017 and 2016

Net Income

Net income was $13.7 million, or $0.29 per diluted share, for the third quarter of 2017 compared to net income of $11.3 million, or $0.25 per diluted share, for the third quarter of 2016. Excluding the impact of merger related expenses, net income would have been $12.4 million, or $0.28 per diluted share, for the third quarter of 2016. Net interest income of $42.1 million for the third quarter of 2017 increased $3.6 million from the third quarter of 2016 reflecting an increase in interest-earning assets resulting from organic growth and an increase in rates caused by the recent increases in the federal funds rate and prime rate.

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 on a tax equivalent basis for the third quarter of 2017 was $42.4 million, compared to $38.8 million for the third quarter of 2016. The net interest margin decreased from 3.45% in the third quarter of 2016 to 3.39% in the third quarter of 2017 primarily as a result of an 18 basis point increase in the cost of interest-bearing liabilities, partially offset by an 8 basis point increase in the yield on interest-earning assets. The increase in the cost of interest-bearing liabilities was due primarily to an increase in the cost of borrowings resulting from the subordinated debt issuance in the third quarter of 2016 as well as a higher cost of deposits. The decrease in net interest margin was somewhat mitigated by an increase in interest income earned on free funds (interest-earning assets funded by noninterest-bearing liabilities) resulting from an increase in average noninterest-bearing deposits of $75.3 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-

 

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bearing liabilities, (4) the Company’s net interest spread (i.e., the average yield on interest-earning assets less the average cost of interest-bearing liabilities) and (5) the Company’s net interest margin. Rates are computed on a tax equivalent basis using a tax rate of 35%.

 

     For the Three Months Ended,     For the Three Months Ended,  
     September 30, 2017     September 30, 2016  
                  Average                  Average  
           Interest      Rates           Interest      Rates  
     Average     Income/      Earned/     Average     Income/      Earned/  
     Balance     Expense      Paid     Balance     Expense      Paid  
     (dollars in thousands)  

ASSETS

              

Interest-earning assets:

              

Loans and leases (1)

   $ 4,060,838     $ 44,302        4.33   $ 3,743,434     $ 39,766        4.23

Taxable investment securities and other

     711,873       3,720        2.09     510,638       2,627        2.06

Tax-exempt securities

     103,900       774        2.98     96,141       723        3.01

Federal funds sold (2)

     81,245       210        1.03     117,311       142        0.48
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     4,957,856       49,006        3.93     4,467,524       43,258        3.85

Noninterest-earning assets:

              

Allowance for loan and lease losses

     (33,397          (30,915     

Other assets

     375,732            368,772       
  

 

 

        

 

 

      

TOTAL ASSETS

   $ 5,300,191          $ 4,805,381       
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

           

Interest-bearing liabilities:

              

Savings accounts

   $ 484,982     $ 69        0.06   $ 487,918     $ 80        0.07

Interest-bearing transaction accounts

     2,206,206       2,713        0.49     1,988,405       1,722        0.34

Time deposits

     645,333       1,661        1.03     533,224       1,084        0.81

Borrowings

     386,947       2,177        2.20     374,812       1,601        1.71
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     3,723,468       6,620        0.71     3,384,359       4,487        0.53

Noninterest-bearing liabilities:

              

Demand deposits

     971,143            895,851       

Other liabilities

     31,467            29,828       

Stockholders’ equity

     574,113            495,343       
  

 

 

        

 

 

      

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 5,300,191          $ 4,805,381       
  

 

 

        

 

 

      

Net interest income/spread

       42,386        3.22       38,771        3.32
       

 

 

        

 

 

 

Tax equivalent basis adjustment

       271            253     
    

 

 

        

 

 

    

NET INTEREST INCOME

     $ 42,115          $ 38,518     
    

 

 

        

 

 

    

Net interest margin (3)

          3.39          3.45
       

 

 

        

 

 

 

 

(1) Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.
(2) Includes interest-bearing cash accounts.
(3) Net interest income divided by interest-earning assets.

Interest income on a tax equivalent basis increased from $43.3 million in the third quarter of 2016 to $49.0 million in the third quarter of 2017, an increase of $5.7 million, or 13.3%. The increase in interest income was primarily a result of an increase in rates caused by the recent increases in the federal funds rate and prime rate as well as organic growth in loans, as average loans and leases increased $317.4 million compared to the third quarter of 2016. The yield on average loans and leases at 4.33% in the third quarter of 2017 was 10 basis points higher than the third quarter of 2016. Interest income on investment securities increased $1.1 million compared to the third quarter of 2016 due primarily to a $209.0 million increase in average investment securities to $815.8 million for the third quarter of 2017.

Total interest expense of $6.6 million in the third quarter of 2017 was $2.1 million greater than the $4.5 million reported for the same period in 2016. The cost of average interest-bearing liabilities increased from 0.53% in the third quarter of 2016 to 0.71% in the third quarter of 2017. The increase in the cost of interest-bearing liabilities was due primarily to an increase in the cost of borrowings as well as an increasingly competitive market for deposits resulting from a higher interest rate environment. The 49 basis point increase in the cost of borrowings was due primarily to the $75.0 million issuance of subordinated debt in September 2016 bearing a rate of 5.125%. The prepayment of FHLB borrowings and term repurchase agreements mitigated the

 

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impact of the subordinated debt. The cost of interest-bearing liabilities was impacted by an increase in the cost of interest-bearing transaction accounts and time deposits which increased by 15 basis points and 22 basis points, respectively. Average time deposits increased from $533.2 million in the third quarter of 2016 to $645.3 million in the third quarter of 2017 as a result of a certificate of deposit promotion in the third quarter of 2017.

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

In the third quarter of 2017, a $1.8 million provision for loan and lease losses was recorded, which was equivalent to the same period last year. The Company charged off $869,000 and recovered $144,000 in the third quarter of 2017 compared to $1.3 million and $212,000, respectively, in the third quarter of 2016. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income of $5.5 million in the third quarter of 2017 decreased by $963,000 compared to $6.4 million in the third quarter of 2016. This decrease was primarily due to $863,000 in death benefits received on bank owned life insurance in the third quarter of 2016. Service charges on deposit accounts of $2.8 million in the third quarter of 2017 increased $182,000 compared to the same period last year, due primarily to changes in the fee structure on deposit accounts. Gains on sales of loans decreased $275,000, while other income decreased $267,000 compared to the same period in 2016. Within other income, gains on sales of other real estate owned and swap fee income decreased $151,000 and $342,000, respectively, partially offset by $175,000 in gains on the sale of a former branch.

Noninterest Expense

Noninterest expense in the third quarter of 2017 totaled $24.8 million, which was $1.2 million less than the $26.0 million reported for the third quarter of 2016. Included in noninterest expense in the third quarter of 2016 was $1.7 million in merger related expenses. Salaries and employee benefits expense of $15.1 million increased $474,000 or 3% from the same period last year, primarily due to year-over-year increases in employee salary and benefit costs. Furniture and equipment expense increased $197,000, compared to the third quarter of 2016, due primarily to an increase in service agreements. FDIC insurance expense of $430,000 in the third quarter of 2017 decreased $285,000 compared to the same period last year, due primarily to the decreased non-performing loans and increased capital levels. In the third quarter of 2017, telecommunications and data processing expenses decreased $99,000 and $77,000, respectively, while other real estate and other repossessed asset expense increased $99,000 compared to the same period last year. The decrease in telecommunications and data processing expense resulted from the integration of Harmony Bank’s systems into Lakeland’s systems which did not occur until the end of the third quarter of 2016. The Company’s efficiency ratio, a non-GAAP financial measure, was 51.7% in the third quarter of 2017, compared to 53.4% for the same period last year. The decrease in this ratio reflects a 6% increase in revenue as well as the realization of cost savings from the Pascack and Harmony acquisitions, and the closure of four branches in the second half of 2016. The Company uses this ratio because it believes that the ratio provides a good comparison of period-to-period performance and because the ratio is widely accepted in the banking industry. The following table shows the calculation of the efficiency ratio for the periods presented:

 

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     For the Three Months Ended September 30,  
     2017     2016  
     (dollars in thousands)  

Calculation of Efficiency Ratio

    

Total noninterest expense

   $ 24,849     $ 26,006  

Amortization of core deposit intangibles

     (104     (201

Merger related expenses

     —         (1,697
  

 

 

   

 

 

 

Noninterest expense, as adjusted

   $ 24,745     $ 24,108  
  

 

 

   

 

 

 

Net interest income

   $ 42,115     $ 38,518  

Noninterest income

     5,454       6,417  
  

 

 

   

 

 

 

Total revenue

     47,569       44,935  

Tax-equivalent adjustment on municipal securities

     271       253  
  

 

 

   

 

 

 

Total revenue, as adjusted

   $ 47,840     $ 45,188  
  

 

 

   

 

 

 

Efficiency ratio

     51.7     53.4
  

 

 

   

 

 

 

Income Tax Expense

The effective tax rate in the third quarter of 2017 was 34.3% compared to 34.0% during the same period last year primarily as a result of a decrease in tax advantaged items as a percent of pretax income.

Comparison of Operating Results for the Nine Months Ended September 30, 2017 and 2016

Net Income

Net income was $39.4 million, or $0.82 per diluted share, for the first nine months of 2017 compared to net income of $29.6 million, or $0.69 per diluted share, for the first nine months of 2016. Excluding the impact of merger related expenses, net income would have been $32.3 million or $0.76 per diluted share for the first nine months of 2016. Net interest income of $122.9 million for the first nine months of 2017 increased $15.4 million from the first nine months of 2016 reflecting an increase in interest-earning assets resulting from organic growth and an increase in market rates.

Net Interest Income

Net interest income on a tax equivalent basis for the first nine months of 2017 was $123.7 million, compared to $108.2 million for the first nine months of 2016. The net interest margin decreased from 3.47% in the first nine months of 2016 to 3.38% in the first nine months of 2017 primarily as a result of a 14 basis point increase in the cost of interest-bearing liabilities. The increase in the cost of interest-bearing liabilities was due primarily to an increase in the cost of borrowings resulting from the subordinated debt issuance in the third quarter of 2016 as well as higher costs of deposits. The decrease in net interest margin was somewhat mitigated by an increase in interest income earned on free funds (interest-earning assets funded by noninterest-bearing liabilities) resulting from an increase in average noninterest-bearing deposits of $130.0 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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     For the Nine Months Ended,     For the Nine Months Ended,  
     September 30, 2017     September 30, 2016  
                  Average                  Average  
           Interest      Rates           Interest      Rates  
     Average     Income/      Earned/     Average     Income/      Earned/  
     Balance     Expense      Paid     Balance     Expense      Paid  
     (dollars in thousands)  

ASSETS

  

Interest-earning assets:

              

Loans (1)

   $ 3,993,030     $ 127,453        4.27   $ 3,481,053     $ 109,687        4.21

Taxable investment securities and other

     704,645       11,137        2.11     500,110       8,285        2.21

Tax-exempt securities

     109,747       2,362        2.87     84,161       2,000        3.17

Federal funds sold (2)

     90,128       618        0.91     100,866       341        0.45
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     4,897,550       141,570        3.87     4,166,190       120,313        3.86

Noninterest-earning assets:

              

Allowance for loan and lease losses

     (32,512          (30,980     

Other assets

     367,245            351,769       
  

 

 

        

 

 

      

TOTAL ASSETS

   $ 5,232,283          $ 4,486,979       
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Interest-bearing liabilities:

              

Savings accounts

   $ 489,562     $ 208        0.06   $ 483,140     $ 237        0.07

Interest-bearing transaction accounts

     2,247,674       7,344        0.44     1,816,003       4,346        0.32

Time deposits

     587,086       4,009        0.91     495,278       2,912        0.78

Borrowings

     364,391       6,323        2.29     384,024       4,648        1.61
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     3,688,713       17,884        0.65     3,178,445       12,143        0.51

Noninterest-bearing liabilities:

              

Demand deposits

     949,474            819,459       

Other liabilities

     29,653            26,630       

Stockholders’ equity

     564,443            462,445       
  

 

 

        

 

 

      

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 5,232,283          $ 4,486,979       
  

 

 

        

 

 

      

Net interest income/spread

       123,686        3.22       108,170        3.35
       

 

 

        

 

 

 

Tax equivalent basis adjustment

       827            700     
    

 

 

        

 

 

    

NET INTEREST INCOME

     $ 122,859          $ 107,470     
    

 

 

        

 

 

    

Net interest margin (3)

          3.38          3.47
       

 

 

        

 

 

 

 

(1) Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.    
(2) Includes interest-bearing cash accounts.    
(3) Net interest income divided by interest-earning assets.    

Interest income on a tax equivalent basis increased from $120.3 million in the first nine months of 2016 to $141.6 million in the first nine months of 2017, an increase of $21.3 million, or 18%. The increase in interest income was due primarily to growth in loans, as average loans and leases increased $512.0 million compared to the first nine months of 2016 resulting from organic growth and the impact of the acquisition of Harmony Bank on July 1, 2016. The yield on average loans and leases at 4.27% in the first nine months of 2017 was 6 basis points higher than the first nine months of 2016.    The yield on average taxable and tax-exempt investment securities decreased by 10 and 30 basis points, respectively, compared to the first nine months of 2016. The reduction in the yield of taxable investment securities resulted primarily from $358,000 in income on called U.S. government agency securities received in the first nine months of 2016. The reduction in yields on tax-exempt investment securities was due primarily to maturing securities at higher rates and new purchases of shorter-term securities at lower rates.

Total interest expense of $17.9 million in the first nine months of 2017 was $5.7 million greater than the $12.1 million reported for the same period in 2016. The cost of average interest-bearing liabilities increased from 0.51% in the first nine months of 2016 to 0.65% in the first nine months of 2017. The increase in the cost of interest-bearing liabilities was due primarily to an increase in the cost of borrowings as well as an increasingly competitive market for deposits. The 68 basis point increase in the cost of borrowings was due primarily to the $75.0 million issuance of subordinated debt in September 2016 bearing a rate of 5.125%. Also impacting the cost of interest-bearing liabilities was an increase in the cost of interest-bearing transaction accounts and time deposits which increased by 12 basis points and 13 basis points, respectively.

 

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Provision for Loan and Lease Losses

In the first nine months of 2017, a $4.9 million provision for loan and lease losses was recorded, which was $1.0 million higher than the provision for the same period last year. The higher provision resulted from commercial real estate loan growth and higher charge-offs in commercial construction loans. The Company charged off $3.1 million and recovered $907,000 in the first nine months of 2017 compared to $3.9 million and $508,000, respectively, in the first nine months of 2016. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income of $19.7 million in the first nine months of 2017 increased by $3.5 million compared to $16.2 million in the first nine months of 2016. Included in noninterest income in the first nine months of 2017 was $2.5 million in gains on sales of investment securities, which compares to $370,000 during the same period last year. Service charges on deposit accounts of $7.9 million in the first nine months of 2017 was $346,000 higher than the same period in 2016 due to the same reason discussed in the quarterly comparison. Commissions and fees of $3.5 million in the first nine months of 2017 increased $289,000 compared to the same period last year due primarily to increases in credit card related merchant service fees. Gains on sales of loans of $1.3 million decreased $251,000 compared to the first nine months of 2016 due primarily to a reduced volume of sales. Income on bank owned life insurance of $1.6 million for the first nine months of 2017 decreased $575,000 compared to the same period in 2016 due to the same reason discussed in the quarterly comparison. Other income of $2.8 million in the first nine months of 2017 was $1.5 million higher than the same period in 2016 due primarily to a $246,000 increase in gains on sales of other real estate owned, a $324,000 gain on the payoff of an acquired loan and $881,000 in gains on the sale of three former branches.

Noninterest Expense

Noninterest expense in the first nine months of 2017 totaled $78.7 million, which was $3.5 million greater than the $75.1 million reported for the first nine months of 2016. During the first nine months of 2017, the Company incurred $2.8 million in long-term debt prepayment penalties, and in the first nine months of 2016, the Company incurred $4.1 million in merger related expenses. Salaries and employee benefits expense of $45.6 million, increased $3.8 million from the same period last year, primarily due to the addition of Harmony employees during the second half of 2016 and year-over-year increases in employee salary and benefit costs. Stationary, supplies and postage increased $148,000 compared to the first nine months of 2016 due primarily to consumer deposit mailings during the second quarter of 2017. Marketing expense of $1.4 million in the first nine months of 2017 increased $228,000 compared to the same period last year due primarily to advertising related to the opening of the new branch in New York as well as new marketing efforts directed at the Ocean county region. FDIC insurance expense of $1.2 million in the first nine months of 2017 decreased $813,000 compared to the same period last year, due primarily to the same reasons discussed in the quarterly comparison. Telecommunications expense of $1.2 million decreased $133,000 resulting from a reduction of branches and from the integration of Harmony Bank’s systems into Lakeland’s systems at the end of third quarter 2017. Other expenses of $7.7 million in the first nine months of 2017 increased $657,000 compared to the first nine months of 2016 primarily due to higher audit, legal, training, correspondent and consulting fees.    The Company’s efficiency ratio, a non-GAAP financial measure, was 53.5% in the first nine months of 2017, compared to 56.5% for the same period last year. The decrease in this ratio reflects a 14% increase in revenue as well as the realization of cost savings from the Pascack and Harmony acquisitions, and the closure of seven branches in 2016. The Company uses this ratio because it believes that the ratio provides a good comparison of period-to-period performance and because the ratio is widely accepted in the banking industry. The following table shows the calculation of the efficiency ratio for the periods presented:

 

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For the Nine Months Ended September 30,

 
     2017     2016  
     (dollars in thousands)  

Calculation of Efficiency Ratio

    

Total noninterest expense

   $ 78,685     $ 75,145  

Less:

    

Amortization of core deposit intangibles

     (489     (532

Long-term debt prepayment penalty

     (2,828     —    

Merger related expenses

     —         (4,103

Provision for unfunded lending commitments

     —         (438
  

 

 

   

 

 

 

Noninterest expense, as adjusted

   $ 75,368     $ 70,072  
  

 

 

   

 

 

 

Net interest income

   $ 122,859     $ 107,470  

Noninterest income

     19,659       16,169  
  

 

 

   

 

 

 

Total revenue

     142,518       123,639  

Tax-equivalent adjustment on municipal securities

     827       700  

Gains on sales of investment securities

     (2,524     (370
  

 

 

   

 

 

 

Total revenue, as adjusted

   $ 140,821     $ 123,969  
  

 

 

   

 

 

 

Efficiency ratio

     53.5     56.5
  

 

 

   

 

 

 

Income Tax Expense

The effective tax rate in the first nine months of 2017 was 33.2% compared to 33.8% during the same period last year. The decrease in the effective tax rate was due primarily to the implementation of ASU 2016-09 during the first quarter of 2017 which resulted in a $582,000 tax benefit related to excess tax benefits from the exercise of stock options and the vesting of restricted stock and RSUs.

Financial Condition

The Company’s total assets increased $306.4 million from December 31, 2016, to $5.40 billion at September 30, 2017. Total loans net of deferred fees were $4.09 billion, an increase of $218.6 million, or 6%, from $3.87 billion at December 31, 2016. Total deposits were $4.36 billion, an increase of $264.2 million, or 6%, from December 31, 2016.

Loans and Leases

Gross loans and leases of $4.09 billion at September 30, 2017 increased $219.0 million from December 31, 2016, primarily in the commercial loans secured by real estate category which increased $220.3 million, or 9%, during that time period. Real estate construction loans increased $30.1 million, or 14%, while residential mortgages decreased $20.0 million, or 6%. The decline in residential mortgages results from a decline in mortgage demand as well as a decision to sell most of the residential loans that the Company originates. For more information on the loan portfolio, see Note 5 in Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

 

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Risk Elements

Non-performing assets, excluding PCI loans, decreased from $21.5 million at December 31, 2016 to $14.7 million at September 30, 2017, primarily in the commercial secured by real estate and residential mortgages categories, which decreased $5.1 million and $1.6 million, respectively. The percentage of non-performing assets to total assets decreased from 0.42% at December 31, 2016 to 0.27% at September 30, 2017. Non-accrual loans at September 30, 2017 included one loan relationship with a balance of $1 million or over, totaling $1.5 million, and 4 loan relationships between $500,000 and $1.0 million, totaling $2.4 million.

There were $9,000 in loans and leases past due ninety days or more and still accruing at September 30, 2017 compared to $10,000 at December 31, 2016. These loans primarily consist of consumer loans which are generally placed on non-accrual and reviewed for charge-off when principal and interest payments are four months in arrears unless the obligations are well-secured and in the process of collection.

On September 30, 2017, the Company had $11.3 million in loans that were troubled debt restructurings and accruing interest income compared to $8.8 million at December 31, 2016. Troubled debt restructurings are those loans where the Company has granted concessions to the borrower in payment terms, either in rate or in term, as a result of the financial condition of the borrower.

On September 30, 2017, the Company had $21.6 million in impaired loans (consisting primarily of non-accrual and restructured loans and leases) compared to $25.3 million at year-end 2016. The Company also had purchased credit impaired loans from the Pascack and Harmony acquisitions with carrying values of $198,000 and $524,000, respectively, at September 30, 2017. For more information on impaired loans and leases see Note 5 in Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. The valuation allowance for impaired loans is based primarily on the fair value of the underlying collateral. Based on such evaluation, $504,000 of the allowance for loan and lease losses has been allocated for impairment at September 30, 2017 compared to $529,000 at December 31, 2016. At September 30, 2017, the Company also had $20.0 million in loans and leases that were rated substandard that were not classified as non-performing or impaired compared to $28.7 million at December 31, 2016.

There were no loans and leases at September 30, 2017, 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.

 

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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:

 

     Nine Months     Nine Months     Year  
     Ended     Ended     Ended  
     September 30,     September 30,     December 31,  
(dollars in thousands)    2017     2016     2016  

Balance of the allowance at the beginning of the year

   $ 31,245     $ 30,874     $ 30,874  
  

 

 

   

 

 

   

 

 

 

Loans and leases charged off:

      

Commercial, secured by real estate

     (618     (393     (410

Commercial, industrial and other

     (430     (796     (796

Leases

     (250     (319     (366

Real estate - mortgage

     (408     (692     (1,103

Real estate - construction

     (609     —        
—  
 

Home equity and consumer

     (784     (1,661     (1,980
  

 

 

   

 

 

   

 

 

 

Total loans charged off

     (3,099     (3,861     (4,655
  

 

 

   

 

 

   

 

 

 

Recoveries:

      

Commercial, secured by real estate

     390       212       297  

Commercial, industrial and other

     150       106       202  

Leases

     39       26       31  

Real estate - mortgage

     3       5       8  

Real estate - construction

     24       —         18  

Home equity and consumer

     301       159       247  
  

 

 

   

 

 

   

 

 

 

Total recoveries

     907       508       803  
  

 

 

   

 

 

   

 

 

 

Net charge-offs:

     (2,192     (3,353     (3,852

Provision for loan and lease losses

     4,872       3,848       4,223  
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 33,925     $ 31,369     $ 31,245  
  

 

 

   

 

 

   

 

 

 

Net charge-offs as a percentage of average loans and leases outstanding

     0.07     0.13     0.11

Allowance as a percentage of total loans and leases oustanding

     0.83     0.83     0.81

The Company continually evaluates, through its governance process, the development of the allowance for loan and lease losses methodology. During the third quarter of 2017, the Company refined and enhanced its quantitative framework by implementing a migration analysis to determine the historical loss factors. It also enhanced its qualitative framework to be responsive to the migration analysis. These enhancements are meant to increase the level of precision in the allowance for loan and lease losses and did not result in a change in the required allowance.

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 consists of the following criteria:

 

   

The establishment of specific reserve amounts for all impaired loans and leases that have been designated as requiring attention by Lakeland.

   

The establishment of reserves for pools of homogeneous types of loans and leases not subject to specific review, including impaired loans under $500,000, leases, 1 – 4 family residential mortgages, and consumer loans.

   

The establishment of reserve amounts for the unimpaired loans and leases in each portfolio based upon the determination of a loss emergence period, historical loss experience and management’s evaluation of key qualitative factors.

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

The overall balance of the allowance for loan and lease losses of $33.9 million at September 30, 2017 increased $2.7 million, from December 31, 2016, an increase of 9%. The change in the allowance within segments of the loan portfolio reflects changes in the non-performing loan and charge-off statistics within each segment as well as the level of growth in each segment.    

 

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Non-performing loans and leases of $13.5 million at September 30, 2017 decreased $6.9 million from December 31, 2016. The allowance for loan and lease losses as a percent of total loans was 0.83% at September 30, 2017 compared to 0.81% at December 31, 2016. Management believes, based on appraisals and estimated selling costs that the majority of its non-performing loans and leases are adequately secured and reserves on its non-performing loans and leases are adequate. Based upon the process employed and giving recognition to all accompanying factors related to the loan and lease portfolio, management considers the allowance for loan and lease losses to be adequate at September 30, 2017.

Investment Securities

For detailed information on the composition and maturity distribution of the Company’s investment securities portfolio, see Note 4 in Notes to Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q. Total investment securities increased from $754.3 million at December 31, 2016 to $782.3 million at September 30, 2017, an increase of $28.0 million.                

Deposits

Total deposits increased from $4.09 billion at December 31, 2016 to $4.36 billion at September 30, 2017, an increase of $264.2 million, or 6%. Noninterest-bearing deposits, savings and interest-bearing transaction accounts and time deposits increased $28.2 million, $60.9 million and $175.1 million, respectively.

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 $47.2 million for the first nine months of 2017 compared to $37.5 million for the same period in 2016.

 

   

Deposits. Lakeland can offer new products or change its rate structure in order to increase deposits. In the first nine months of 2017, Lakeland’s deposits increased $264.2 million.

 

   

Sales of securities. At September 30, 2017 the Company had $647.3 million in securities designated “available for sale.” Of these securities, $451.1 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.

 

   

Credit lines. As a member of the FHLB, Lakeland has the ability to borrow overnight based on the market value of collateral pledged. Lakeland had no overnight borrowings from the FHLB on September 30, 2017. Lakeland also has overnight federal funds lines available for it to borrow up to $210.0 million of which $102.9 million was outstanding at September 30, 2017. Lakeland may also borrow from the discount window of the Federal Reserve Bank of New York based on the market value of collateral pledged. Lakeland had no borrowings with the Federal Reserve Bank of New York as of September 30, 2017.

 

   

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.

 

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The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statement for the nine months ended September 30, 2017 follows.

Cash and cash equivalents totaling $202.9 million on September 30, 2017 increased $27.1 million from December 31, 2016. Operating activities provided $47.2 million in net cash. Investing activities used $281.2 million in net cash, primarily reflecting an increase in loans and leases and the purchase of securities. Financing activities provided $261.2 million in net cash primarily reflecting the net increase in deposits of $264.7 million. The Company anticipates that it will have sufficient funds available to meet its current loan commitments and deposit maturities. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of September 30, 2017. Interest on subordinated debentures and long-term borrowed funds is calculated based on current contractual interest rates.

 

                   After One      After Three         
            Within      But Within      But Within      After  
     Total      One Year      Three Years      Five Years      Five Years  
     (dollars in thousands)  

Minimum annual rentals on noncancellable operating leases

   $ 30,213      $ 3,146      $ 5,881      $ 4,752      $ 16,434  

Benefit plan commitments

     6,041        374        793        793        4,081  

Remaining contractual maturities of time deposits

     720,040        528,943        161,042        30,055        —    

Subordinated debentures

     104,872        —          —          ——          104,872  

Loan commitments

     936,480        633,335        129,993        40,902        132,250  

Other borrowings

     196,539        81,307        105,056        10,176        —    

Interest on other borrowings*

     59,716        7,554        12,141        10,164        29,857  

Standby letters of credit

     14,859        12,649        2,098        32        80  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,068,760      $ 1,267,308      $ 417,004      $ 96,874      $ 287,574  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

*Includes interest on other borrowings and subordinated debentures at a weighted rate of 2.80%.    

 

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Capital Resources

Total stockholders’ equity increased from $550.0 million on December 31, 2016 to $577.1 million on September 30, 2017, an increase of $27.0 million. Book value per common share increased to $12.19 on September 30, 2017 from $11.65 on December 31, 2016. Tangible book value per share increased from $8.70 per share on December 31, 2016 to $9.25 per share on September 30, 2017, an increase of 6%. Please see “Non-GAAP Financial Measures” below. The increase in stockholders’ equity from December 31, 2016 to September 30, 2017 was primarily due to $39.4 million of net income, partially offset by the payment of cash dividends on common stock of $14.1 million.

The Company and Lakeland are subject to various regulatory capital requirements that are monitored by federal banking agencies. Failure to meet minimum capital requirements can lead to certain supervisory actions by regulators; any supervisory action could have a direct material adverse effect on the Company or Lakeland’s financial statements. As of September 30, 2017, the Company and Lakeland met all capital adequacy requirements to which they are subject.     

The final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks became effective for the Company on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019. As of September 30, 2017, the Company’s capital levels remained characterized as “well-capitalized” under the new rules.

The capital ratios for the Company and Lakeland for the periods presented are as follows:

 

    Tier 1 Capital to Total
Average Assets Ratio
    Common Equity Tier 1 to
Risk-Weighted Assets
Ratio
    Tier 1 Capital to Risk-
Weighted Assets Ratio
    Total Capital to Risk-
Weighted Assets Ratio
 
    September 30,     December 31,     September 30,     December 31,     September 30,     December 31,     September 30,     December 31,  
    2017     2016     2017     2016     2017     2016     2017     2016  

The Company

    9.07     9.07     10.13     10.11     10.82     10.85     13.37     13.48

Lakeland Bank

    10.05     10.21     11.99     12.21     11.99     12.21     12.83     13.03

Required capital ratios including conservation buffer

    4.00     4.00     5.75     5.125     7.25     6.625     9.25     8.625

“Well capitalized” institution under FDIC Regulations

    5.00     5.00     6.50     6.50     8.00     8.00     10.00     10.00

Non-GAAP Financial Measures

Reported amounts are presented in accordance with U.S. GAAP. The Company’s management uses certain supplemental non-GAAP information in its analysis of the Company’s financial results. Specifically, the Company provides measurements and ratios based on tangible equity and tangible assets. These measures are utilized by regulators and market analysts to evaluate a company’s financial condition and therefore, such information is useful to investors.

The Company also provides measures based on what it believes are its operating earnings on a consistent basis, and excludes material non-routine operating items which affect the GAAP reporting of results of operations. The Company’s management believes that providing this information to analysts and investors allows them to better understand and evaluate the Company’s core financial results for the periods in question.

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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     September 30,     December 31,  
(dollars in thousands, except per share amounts)    2017     2016  

Calculation of Tangible Book Value per Common Share

    

Total common stockholders’ equity at end of period - GAAP

   $ 577,081     $ 550,044  

Less:

    

Goodwill

     136,433       135,747  

Other identifiable intangible assets, net

     2,526       3,344  
  

 

 

   

 

 

 

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

   $ 438,122     $ 410,953  
  

 

 

   

 

 

 

Shares outstanding at end of period

     47,353       47,223  
  

 

 

   

 

 

 

Book value per share - GAAP

   $ 12.19     $ 11.65  
  

 

 

   

 

 

 

Tangible book value per share - Non-GAAP

   $ 9.25     $ 8.70  
  

 

 

   

 

 

 

Calculation of Tangible Common Equity to Tangible Assets

    

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

   $ 438,122     $ 410,953  
  

 

 

   

 

 

 

Total assets at end of period

   $ 5,399,481     $ 5,093,131  

Less:

    

Goodwill

     136,433       135,747  

Other identifiable intangible assets, net

     2,526       3,344  
  

 

 

   

 

 

 

Total tangible assets at end of period - Non-GAAP

   $ 5,260,522     $ 4,954,040  
  

 

 

   

 

 

 

Common equity to assets - GAAP

     10.69     10.80
  

 

 

   

 

 

 

Tangible common equity to tangible assets - Non-GAAP

     8.33     8.30
  

 

 

   

 

 

 

 

     For the Three Months Ended,     For the Nine Months ended,  
(dollars in thousands)    September 30,     September 30,     September 30,     September 30,  
     2017     2016     2017     2016  

Calculation of Return on Average Tangible Common Equity

        

Net income - GAAP

   $ 13,723     $ 11,327     $ 39,405     $ 29,565  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total average common stockholders’ equity

   $ 574,113     $ 495,343     $ 564,443     $ 462,445  

Less:

        

Average goodwill

     136,433       136,392       135,981       128,774  

Average other identifiable intangible assets, net

     2,606       3,685       2,981       3,146  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total average tangible common stockholders’ equity - Non-GAAP

   $ 435,074     $ 355,266     $ 425,481     $ 330,525  
  

 

 

   

 

 

   

 

 

   

 

 

 

Return on average common stockholders’ equity - GAAP

     9.48     9.10     9.33     8.54
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     12.51     12.68     12.38     11.95
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,      September 30,      September 30,  
     2017      2016      2017      2016  
     (in thousands, except per share amounts)  

Reconciliation of Earnings per Share

           

Net income - GAAP

   $ 13,723      $ 11,327      $ 39,405      $ 29,565  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-routine transactions, net of tax

           

Tax deductible merger related expenses

     —          893        —          1,915  

Non-tax deductible merger related expenses

     —          187        —          866  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net effect of non-routine transactions

     —          1,080        —          2,781  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders excluding non-routine transactions

     13,723        12,407        39,405        32,346  

Less: Earnings allocated to participating securities

     (122      (114      (362      (275
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 13,601      $ 12,293      $ 39,043      $ 32,071  

Weighted average shares - Basic

     47,466        44,439        47,429        42,211  

Weighted average shares - Diluted

     47,692        44,659        47,660        42,390  

Basic earnings per share, GAAP

   $ 0.29      $ 0.25      $ 0.82      $ 0.69  

Diluted earnings per share, GAAP

   $ 0.29      $ 0.25      $ 0.82      $ 0.69  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share, adjusted for non-routine transactions

   $ 0.29      $ 0.28      $ 0.82      $ 0.76  

Diluted earnings per share, adjusted for non-routine transactions

   $ 0.29      $ 0.28      $ 0.82      $ 0.76  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 $165.2 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.

 

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     Changes in Interest Rates  

Rate Ramp

     +200 bp       -200 bp  

Asset/Liability policy limit

     -5.0     -5.0

September 30, 2017

     -0.6     -3.2

December 31, 2016

     -0.5     -2.4

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

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

Asset/Liability policy limit

     -15.0     -10.0     -5.0     -5.0

September 30, 2017

     1.5     1.1     0.7     -6.1

December 31, 2016

     1.9     1.4     0.9     -4.8

The base case for the following table is an estimate of the Company’s net portfolio value for the periods presented using current discount rates, and assuming the Company’s interest-sensitive assets and liabilities remain at period-end levels. The net portfolio value at September 30, 2017 (the base case) was $759.2 million. The information provided for the net portfolio value assumes fluctuations or “rate shocks” 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  

Asset/Liability policy limit

     -25.0     -20.0     -10.0     -10.0

September 30, 2017

     -5.5     -3.4     -1.3     -0.7

December 31, 2016

     -7.5     -4.9     -2.2     0.4

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, 2016.

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes in net interest income requires the making of certain assumptions regarding prepayment and deposit decay rates, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. While management believes such assumptions are reasonable, there can be no assurance that assumed prepayment rates and decay rates will approximate actual future loan prepayment and deposit withdrawal activity. Moreover, the net interest income table presented assumes that the composition of interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the net interest income table provides an indication of the Company’s interest rate risk exposure at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results.

 

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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 September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

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

Item 1A.   Risk Factors

There have been no material changes in risk factors from those disclosed under Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds  

Not  Applicable

 
Item 3.   Defaults Upon Senior Securities  

Not Applicable

 
Item 4.   Mine Safety Disclosures  

Not Applicable

 
Item 5.   Other Information  

Not Applicable

 

Item 6.   Exhibits

 

  31.1

   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  31.2

   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  32.1

   Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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
  

 

 

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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

  

(Principal Executive Officer)

  

/s/ Thomas F. Splaine

  

Thomas F. Splaine

  

Executive Vice President and Chief Financial Officer

  

(Principal Financial Officer)

Date: November 8, 2017

 

58