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EX-31.1 - CERTIFICATION BY THOMAS J. SHARA PURSUANT TO SECTION 302 - LAKELAND BANCORP INCdex311.htm
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EX-32.1 - CERTIFICATION BY THOMAS J. SHARA AND JOSEPH F. HURLEY PURSUANT TO SECTION 906 - LAKELAND BANCORP INCdex321.htm
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended                                 March 31, 2011

OR

 

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

For the transition period from                                      to                                     

Commission file number                                 000-17820

LAKELAND BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

New Jersey   22-2953275

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

250 Oak Ridge Road, Oak Ridge, New Jersey   07438
(Address of principal executive offices)   (Zip Code)
(973) 697-2000
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed
since last report.)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, any Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).        Yes  ¨    No  ¨    Not applicable.

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

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

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

Yes  ¨    No  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

As of April 29, 2011 there were 25,467,678 outstanding shares of Common Stock, no par value.


Table of Contents

LAKELAND BANCORP, INC.

Form 10-Q Index

 

         PAGE  
  Part I     Financial Information   
Item 1.   Financial Statements:   
  Consolidated Balance Sheets - March 31, 2011 (unaudited) and December 31, 2010      1   
  Consolidated Statements of Operations - Unaudited Three Months ended March 31, 2011 and 2010      2   
  Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income - Unaudited Three Months ended March 31, 2011      3   
  Consolidated Statements of Cash Flows - Unaudited Three Months ended March 31, 2011 and 2010      4   
  Notes to Consolidated Financial Statements (unaudited)      5   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      23   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      31   
Item 4.   Controls and Procedures      32   
  Part II Other Information   
Item 1.   Legal Proceedings      33   
Item 1A.   Risk Factors      33   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      33   
Item 3.   Defaults Upon Senior Securities      33   
Item 4.   Reserved      33   
Item 5.   Other Information      33   
Item 6.   Exhibits      33   
Signatures      34   
  The Securities and Exchange Commission maintains a web site which contains reports, proxy and information statements and other information relating to registrants that file electronically at the address: http:/ / www.sec.gov.   


Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

ASSETS:    March 31, 2011
(unaudited)
          December 31,
2010
 
     (dollars in thousands)   

Cash

     $47,106           $26,063   

Interest-bearing deposits due from banks

     14,856           23,215   
   

Total cash and cash equivalents

     61,962           49,278   

Investment securities available for sale

     469,969           487,107   

Investment securities held to maturity; fair value of $72,231 in 2011 and $68,815 in 2010

     70,072           66,573   

Leases held for sale

     0           1,517   

Loans, net of deferred costs

     1,977,446           2,013,100   

Less: allowance for loan and lease losses

     28,192           27,331   
   

Net loans

     1,949,254           1,987,286   

Premises and equipment, net

     27,801           27,554   

Accrued interest receivable

     8,583           8,849   

Goodwill

     87,111           87,111   

Other identifiable intangible assets, net

     312           578   

Bank owned life insurance

     43,639           43,284   

Other assets

     32,873           35,054   
   

TOTAL ASSETS

     $2,751,576           $2,792,674   
   

LIABILITIES

       
   

Deposits:

       

Noninterest bearing

     $407,099           $383,877   

Savings and interest-bearing transaction accounts

     1,414,604           1,399,163   

Time deposits under $100 thousand

     240,614           241,911   

Time deposits $100 thousand and over

     176,195           170,938   
   

Total deposits

     2,238,512           2,195,889   

Federal funds purchased and securities sold under agreements to repurchase

     46,382           52,123   

Other borrowings

     130,000           195,000   

Subordinated debentures

     77,322           77,322   

Other liabilities

     14,289           11,631   
   

TOTAL LIABILITIES

     2,506,505           2,531,965   
   

Commitments and contingencies

       

STOCKHOLDERS EQUITY

       

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

     18,311           37,474   

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

     269,959           271,595   

Accumulated deficit

     (35,671        (38,004

Treasury stock, at cost, 510,253 shares at March 31, 2011 and 655,768 at December 31, 2010

     (6,735        (8,683

Accumulated other comprehensive loss

     (793        (1,673
   

TOTAL STOCKHOLDERS' EQUITY

     245,071           260,709   
   

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

     $2,751,576           $2,792,674   
   

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

      For the three months ended
March 31,
 
     2011      2010  
     (In thousands, except per share data)  

INTEREST INCOME

     

Loans, leases and fees

     $26,665         $28,252   

Federal funds sold and interest-bearing deposits with banks

     12         28   

Taxable investment securities

     2,713         2,983   

Tax-exempt investment securities

     499         520   
   

TOTAL INTEREST INCOME

     29,889         31,783   
   

INTEREST EXPENSE

     

Deposits

     2,931         4,405   

Federal funds purchased and securities sold under agreements to repurchase

     27         37   

Other borrowings

     2,347         2,754   
   

TOTAL INTEREST EXPENSE

     5,305         7,196   
   

NET INTEREST INCOME

     24,584         24,587   

Provision for loan and lease losses

     4,927         4,879   
   

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES

     19,657         19,708   

NONINTEREST INCOME

     

Service charges on deposit accounts

     2,478         2,448   

Commissions and fees

     832         885   

Gains on investment securities

             1   

Income on bank owned life insurance

     355         386   

Gains on leasing related assets

     463         304   

Other income

     102         85   
   

TOTAL NONINTEREST INCOME

     4,230         4,109   
   

NONINTEREST EXPENSE

     

Salaries and employee benefits

     8,986         8,903   

Net occupancy expense

     1,911         1,795   

Furniture and equipment

     1,164         1,170   

Stationery, supplies and postage

     365         426   

Marketing expense

     615         554   

Core deposit intangible amortization

     265         265   

FDIC insurance expense

     947         933   

Collection expense

     65         148   

Legal expense

     295         341   

Other real estate and repossessed asset expense

     272         37   

Other expenses

     2,141         2,208   
   

TOTAL NONINTEREST EXPENSE

     17,026         16,780   
   

Income before provision for income taxes

     6,861         7,037   

Income tax expense

     2,090         2,471   
   

NET INCOME

     $4,771         $4,566   
   

Dividends on Preferred Stock and Accretion

     1,286         898   
   

Net Income Available to Common Stockholders

     $3,485         $3,668   
   

PER SHARE OF COMMON STOCK

     

Basic earnings

     $0.14         $0.15   
   

Diluted earnings

     $0.14         $0.15   
   

Dividends

     $0.06         $0.05   
   

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Three Months ended March 31, 2011

 

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

BALANCE DECEMBER 31, 2010

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

Comprehensive income:

              

Net Income

                          4,771                      4,771   

Other comprehensive income, net of tax

                                        880        880   
                    

Total
comprehensive
income

                 5,651   
                    

Preferred dividends

                          (449                   (449

Accretion of discount

                   837        (837                     

Stock based compensation

            155                                    155   

Redemption of preferred stock

                   (20,000                          (20,000

Adjustment for stock dividend

     (944     (309            309                        

Issuance of restricted stock awards

            (1,262                   1,262                 

Issuance of stock to dividend reinvestment and stock purchase plan

            (157            (245     550               148   

Exercise of stock options, net of excess tax benefits

            (63                   136               73   

Cash dividends, common stock

                          (1,216                   (1,216
   

BALANCE March 31, 2011 (UNAUDITED)

     25,976,648      $ 269,959        $18,311        ($35,671     ($6,735     ($793   $ 245,071   
   

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     For the three months ended
March 31,
 
      2011                2010  
     (dollars in thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES

  

Net income

     $4,771                $4,566   

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

            

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

     1,514                1,047   

Depreciation and amortization

     1,010                1,046   

Provision for loan and lease losses

     4,927                4,879   

Gains on securities

                    (1

Gains on leases

     (382             (106

Gains on sales of other assets

     (35             (158

Stock-based compensation

     155                132   

Decrease in other assets

     1,737                2,059   

Increase in other liabilities

     2,791                76   
   

NET CASH PROVIDED BY OPERATING ACTIVITIES

     16,488                13,540   
   

CASH FLOWS FROM INVESTING ACTIVITIES

            

Proceeds from repayments on and maturity of securities:

            

Available for sale

     49,560                37,449   

Held to maturity

     3,166                6,837   

Purchase of securities:

            

Available for sale

     (32,196             (56,811

Held to maturity

     (6,701             (2,380

Proceeds from sales of leases

     16,433                192   

Net decrease in loans and leases

     15,843                4,393   

Proceeds from sales of other repossessed assets

     769                1,262   

Capital expenditures

     (991             (378
   

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

     45,883                (9,436
   

CASH FLOWS FROM FINANCING ACTIVITIES

            

Net increase in deposits

     42,623                45,589   

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

     (5,741             (6,346

Proceeds from other borrowings

     15,000                  

Repayments of other borrowings

     (80,000               

Redemption of preferred stock

     (20,000               

Exercise of stock options

     57                389   

Excess tax benefits

     16                  

Issuance of stock to dividend reinvestment and stock purchase plan

     148                14   

Dividends paid

     (1,790             (1,728
   

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

     (49,687             37,918   
   

Net increase in cash and cash equivalents

     12,684                42,022   

Cash and cash equivalents, beginning of year

     49,278                58,663   
   

CASH AND CASH EQUIVALENTS, END OF PERIOD

     $61,962                $100,685   
   

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

 

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Table of Contents

Notes to Consolidated Financial Statements – (Unaudited)

Note 1. Significant Accounting Policies

Basis of Presentation.

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

The Company’s unaudited interim financial statements reflect all adjustments, such as normal recurring accruals that are, in the opinion of management, necessary for fair statement of the results of interim periods presented. The results of operations for the quarter presented do not necessarily indicate the results that the Company will achieve for all of 2011. You should read these interim financial statements in conjunction with the audited consolidated financial statements and accompanying notes that are presented in the Lakeland Bancorp, Inc. Annual Report on Form 10-K for the year ended December 31, 2010.

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

The Company evaluated its March 31, 2011 consolidated financial statements for subsequent events through the date the financial statements were issued. The Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements.

Note 2. Stock-Based Compensation

Share-based compensation expense of $155,000 and $132,000 was recognized for the three months ended March 31, 2011 and 2010, respectively. As of March 31, 2011, there was unrecognized compensation cost of $1.5 million related to unvested restricted stock; that cost is expected to be recognized over a weighted average period of approximately 4.2 years. Unrecognized compensation expense related to unvested stock options was approximately $77,000 as of March 31, 2011 and is expected to be recognized over a period of 1.6 years.

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

There were no grants of stock options in the first three months of 2011 and 2010.

 

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

 

       Number
of shares
    Weighted
average
exercise
price
    

Weighted
average
remaining
contractual
term

( in years)

     Aggregate
intrinsic
value
 
        

Outstanding, January 1, 2011

     721,123        $12.77            $158,349   

Issued

                    

Exercised

     (10,303     5.49         

Forfeited

                    
        

Outstanding, March 31, 2011

     710,820        $12.88         3.25         $102,509   
        

Options exercisable at
March 31, 2011

     673,624        $13.04         2.99         $65,825   
        

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the first quarter of 2011 and the exercise price, multiplied by the number of in-the-money options).

The aggregate intrinsic value of options exercised during the first three months ended March 31, 2011 and 2010 was $41,000 and $34,000, respectively. Exercise of stock options during the first three months of 2011 and 2010 resulted in cash receipts of $57,000 and $401,000, respectively.

Information regarding the Company’s restricted stock (all unvested) and changes during the three months ended March 31, 2011 is as follows:

 

       Number of
shares
    Weighted
average
price
 
        

Outstanding, January 1, 2011

     101,314        $9.62   

Granted

     95,345        9.87   

Vested

     (3,557     8.82   

Forfeited

     (417     9.67   
        

Outstanding, March 31, 2011

     192,685        $9.76   
        

 

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Table of Contents

Note 3. Comprehensive Income

The components of other comprehensive income are as follows:

 

For the quarter ended March 31, 2011   

Before

  tax amount

     Tax Benefit
(Expense)
    Net of
tax amount
 
        
     (in thousands)  

Net unrealized gains on available for sale securities

       

Net unrealized holding gains arising during period

     $1,364         ($488     $876   

Less reclassification adjustment for net gains arising during the period

                      
        

Net unrealized gains

     1,364         (488     876   

Change in minimum pension liability

     7         (3     4   
        

Other comprehensive income, net

     $1,371         ($491     $880   
        
For the quarter ended March 31, 2010    Before
  tax amount
     Tax Benefit
(Expense)
    Net of tax
amount
 
        
     (in thousands)  

Net unrealized gains on available for sale securities

       

Net unrealized holding gains arising during period

     $2,074         ($753     $1,321   

Less reclassification adjustment for net gains arising during the period

     1                1   
        

Net unrealized gains

     2,073         (753     1,320   

Change in minimum pension liability

     8         (3     5   
        

Other comprehensive income, net

     $2,081         ($756     $1,325   
        

Note 4. Statement of Cash Flow Information, Supplemental Information

 

     For the three months ended
March 31,
 
     2011      2010  
        
     (in thousands)  

Supplemental schedule of noncash investing and

     

financing activities:

     

Cash paid during the period for income taxes

     $569         $142   

Cash paid during the period for interest

     5,301         7,176   

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

     871         684   

Transfer of leases held for sale to leases held for investment

     1,517           

 

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Note 5. Earnings Per Share.

All weighted average, actual share and per share information set forth in this quarterly report on Form 10-Q for the period ended March 31, 2010 have been adjusted retroactively for the effects of the stock dividend. The following schedule shows the Company’s earnings per share for the periods presented:

 

     For the three months ended
March 31,
 
(In thousands except per share data)    2011      2010  
        

Net income available to common shareholders

     $3,485         $3,668   

Less: earnings allocated to participating securities

     24         20   
        

Net income allocated to common shareholders

     3,461         3,648   
        

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

     25,249         25,020   

Share-based plans (1)

     133         11   
        

Weighted average number of common shares diluted (1)

     25,382         25,031   

Basic earnings per share

     $0.14         $0.15   
   

Diluted earnings per share

     $0.14         $0.15   
   
(1) Adjusted for 5% stock dividend granted February 16, 2011 to shareholders of record January 31, 2011.

Options to purchase 702,167 shares of common stock at a weighted average price of $12.97 per share, and 62,035 shares of restricted stock at a weighted average price of $9.91 per share were outstanding and were not included in the computation of diluted earnings per share for the quarter ended March 31, 2011 because the exercise price and the grant-date price were greater than the average market price. Options to purchase 683,127 shares of common stock at a weighted average price of $13.15 per share, a warrant to purchase 997,049 shares of common stock at a price of $8.88 per share, and 110,430 shares of restricted stock at a weighted average price of $10.57 per share were outstanding and were not included in the computation of diluted earnings per share for the quarter ended March 31, 2010 because the exercise price and the grant-date price were greater than the average market price.

 

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Note 6. Investment Securities

 

AVAILABLE FOR SALE   March 31, 2011     December 31, 2010  
   
(in thousands)   Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair
Value
    Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair
Value
 
   

U.S. government agencies

    $103,738        $208        ($924     $103,022        $107,870        $294        $(867     $107,297   

Mortgage-backed securities

    295,473        2,692        (2,737     295,428        306,882        2,536        (3,566     305,852   

Obligations of states and political subdivisions

    27,913        474        (166     28,221        27,567        357        (375     27,549   

Other debt securities

    22,057        154        (531     21,680        22,582        102        (811     21,873   

Equity securities

    21,197        479        (58     21,618        23,979        559        (2     24,536   
   
    $470,378        $4,007        $(4,416     $469,969        $488,880        $3,848        $(5,621     $487,107   
   
HELD TO MATURITY   March 31, 2011     December 31, 2010  
   
(in thousands)   Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair
Value
    Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair
Value
 
   

U.S. government agencies

    $4,997        $191        $—        $5,188        $4,996        $229        $—        $5,225   

Mortgage-backed securities

    20,851        1,027               21,878        20,774        1,105               21,879   

Obligations of states and political subdivisions

    42,658        936        (69     43,525        39,235        956        (84     40,107   

Other debt securities

    1,566        74               1,640        1,568        40        (4     1,604   
   
    $70,072        $2,228        $(69     $72,231        $66,573        $2,330        $(88     $68,815   
   

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

 

     March 31, 2011  
   
     Available for Sale      Held to Maturity  
                 
      Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due in one year or less

     $35,225         $35,259         $16,736         $16,837   

Due after one year through five years

     88,217         87,473         20,773         21,559   

Due after five years through ten years

     23,343         23,567         10,782         10,995   

Due after ten years

     6,923         6,624         930         962   
   
     153,708         152,923         49,221         50,353   

Mortgage-backed securities

     295,473         295,428         20,851         21,878   

Equity securities

     21,197         21,618                   
   

Total securities

     $470,378         $469,969         $70,072         $72,231   
   

 

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

 

     For the three months ended
March 31,
 
     2011      2010  
        

Sale proceeds

     $ —         $ —   

Gross gains

             1   

Gross losses

               

Other than temporary impairment

               

Securities with a carrying value of approximately $315.7 million and $340.6 million at March 31, 2011 and December 31, 2010, respectively, were pledged to secure public deposits and for other purposes required by applicable laws and regulations.

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

 

March 31, 2011   Less than 12 months     12 months or longer            Total  
AVAILABLE FOR SALE   Fair
value
    Unrealized
Losses
    Fair
value
    Unrealized
Losses
    Number of
securities
    Fair
value
    Unrealized
Losses
 
                 (dollars in thousands)                    

U.S. government agencies

    $54,914        $924        $ —        $ —        12        $54,914        $924   

Mortgage-backed securities

    124,859        2,702        5,052        35        32        129,911        2,737   

Obligations of states and political subdivisions

    6,678        165        40        1        17        6,718        166   

Other debt securities

                  6,423        531        3        6,423        531   

Equity securities

    4,075        56        1        2        2        4,076        58   
      $190,526        $3,847        $11,516        $569        66        $202,042        $4,416   
                                                         

HELD TO MATURITY

                 

Obligations of states and political subdivisions

    $3,235        $60        $414        $9        8        $3,649        $69   
      $3,235        $60        $414        $9        8        $3,649        $69   

 

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December 31, 2010   Less than 12 months     12 months or longer            Total  
AVAILABLE FOR SALE   Fair
value
    Unrealized
Losses
    Fair
value
    Unrealized
Losses
    Number of
securities
    Fair
value
    Unrealized
Losses
 
                 (dollars in thousands)                    

U.S. government agencies

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

Mortgage-backed securities

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

Obligations of states and political subdivisions

    11,404        374        40        1        27        11,444        375   

Other debt securities

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

Equity securities

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

HELD TO MATURITY

                 
     

Obligations of states and political subdivisions

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

Other debt securities

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

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

 

   

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

   

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

   

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

   

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

Note 7. Loans and Leases.

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

 

     March 31,
2011
          December 31,
2010
 
   
            (in thousands)       

Commercial, secured by real estate

     $973,223            $970,240   

Commercial, industrial and other

     194,616            194,259   

Leases

     46,050            65,640   

Leases held for sale, at fair value

     —              1,517   

Real estate-residential mortgage

     393,935            403,561   

Real estate-construction

     65,627            70,775   

Home equity and consumer

     302,032            306,322   
   

Total loans

     1,975,483            2,012,314   
   

Plus: deferred costs

     1,963            2,303   
   

Loans net of deferred costs

     $1,977,446            $2,014,617   
   

 

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Non-accrual and Past Due Loans

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

 

(in thousands)    March 31,
2011
    December 31,
2010
 
   

Commercial, secured by real estate

     $13,423        $12,905   

Commercial, industrial and other

     920        1,702   

Leases, including leases held for sale

     5,299        6,277   

Real estate - residential mortgage

     13,023        12,834   

Real estate - construction

     12,779        6,321   

Home equity and consumer

     3,259        2,930   
        

Total non-accrual loans and leases

     $48,703        $42,969   

Other real estate and other repossessed assets

     1,729        1,592   
        

TOTAL NON-PERFORMING ASSETS

     $50,432        $44,561   
        

Non-performing assets as a percent of total assets

     1.83     1.60
        

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

     $2,499        $1,218   
        

Troubled debt restructurings, still accruing

     $8,356        $9,073   
        

Non-accrual loans included $3.2 million and $3.6 million of troubled debt restructurings as of March 31, 2011 and December 31, 2010, respectively.

 

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Table of Contents

An age analysis of past due loans, segregated by class of loans as of March 31, 2011 and December 31, 2010 is as follows:

 

March 31, 2011    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater
Than
89 Days
     Total
Past Due
     Current      Total Loans
and Leases
     Recorded
Investment greater
than 89 Days and
still accruing
 
     (in thousands)  

Commercial, secured by real estate

   $ 11,193       $ 1,755       $ 15,255       $ 28,203       $ 945,020       $ 973,223       $ 1,833   

Commercial, industrial and other

     722         98         922         1,742         192,874         194,616         1   

Leases

     2,468         1,797         5,305         9,570         36,480         46,050         6   

Real estate-residential mortgage

     4,240                 13,273         17,513         376,422         393,935         250   

Real estate-construction

     1,216                 12,779         13,995         51,632         65,627           

Home equity and consumer

     2,251         786         3,668         6,705         295,327         302,032         409   
        
   $ 22,090       $ 4,436       $ 51,202       $ 77,728       $ 1,897,755       $ 1,975,483       $ 2,499   
        

December 31, 2010

                    

Commercial, secured by real estate

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

Commercial, industrial and other

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

Leases, including leases held for sale

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

Real estate-residential mortgage

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

Real estate-construction

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

Home equity and consumer

     3,459         842         3,137         7,438         298,884         306,322         206   
        
   $ 34,257       $ 5,782       $ 44,187       $ 84,226       $ 1,928,088       $ 2,012,314       $ 1,218   
        

 

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Impaired Loans

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

 

March 31, 2011

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

Loans without specific allowance:

              

Commercial, secured by real estate

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

Commercial, industrial and other

             2               54   

Leases

             27                         1   

Real estate-residential mortgage

     415         415                         5   

Real estate-construction

     13,793         17,257                 11         7,393   

Home equity and consumer

     610         610                 5         610   

Loans with specific allowance:

              

Commercial, secured by real estate

     7,377         8,431         889         24         5,931   

Commercial, industrial and other

     974         1,115         465         1         1,314   

Leases

     62         64         47                 61   

Real estate-residential mortgage

     397         397         60         4         397   

Real estate-construction

     36         100         4                 36   

Home equity and consumer

     636         639         100         8         636   

Total:

              

Commercial, secured by real estate

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

Commercial, industrial and other

     974         1,117         465         1         1,368   

Leases, including leases held for sale

     62         91         47                 62   

Real estate-residential mortgage

     812         812         60         4         402   

Real estate-construction

     13,829         17,357         4         11         7,429   

Home equity and consumer

     1,246         1,249         100         13         1,246   
        
   $ 35,477       $ 42,739       $ 1,565       $ 94       $ 27,873   
        

 

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December 31, 2010

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

Loans without specific allowance:

              

Commercial, secured by real estate

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

Commercial, industrial and other

     513         530                         375   

Leases, including leases held for sale

                                       

Real estate-residential mortgage

     969         969                 30         776   

Real estate-construction

     7,302         8,330                 9         3,195   

Home equity and consumer

                                     123   

Loans with specific allowance:

              

Commercial, secured by real estate

     3,992         5,191         403         6         11,180   

Commercial, industrial and other

     1,243         1,400         511         2         2,485   

Leases, including leases held for sale

     91         91         49                 114   

Real estate-residential mortgage

     397         397         60         6         347   

Real estate-construction

     69         309         7                 1,005   

Home equity and consumer

     1,249         1,249         103         41         529   

Total:

              

Commercial, secured by real estate

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

Commercial, industrial and other

     1,756         1,930         511         2         2,860   

Leases, including leases held for sale

     91         91         49                 114   

Real estate-residential mortgage

     1,366         1,366         60         36         1,123   

Real estate-construction

     7,371         8,639         7         9         4,200   

Home equity and consumer

     1,249         1,249         103         41         652   
                                            
   $ 30,001       $ 37,549       $ 1,133       $ 300       $ 31,680   
                                            

The average recorded investment in impaired loans and leases for the first three months of 2010 was $31.3 million and the income recognized, primarily on a cash basis, on impaired loans during the first three months of 2010 was $19,000. Interest that would have been accrued on impaired loans and leases during the first three months of 2011 and 2010 had the loans been performing under original terms would have been $567,000 and $648,000, respectively.

Troubled debt restructured loans are loans and leases where significant concessions have been made due to borrowers’ financial difficulties. Interest on these loans and leases is either accrued or credited directly to interest income upon the receipt of cash.

Credit Quality Indicators

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

 

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Table of Contents

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

 

March 31, 2011    Commercial,      Commercial,         
     secured by      Industrial      Real estate-  
Risk Rating    real estate      and other      construction  

1

   $       $ 9       $   

2

             4,423           

3

     23,369         14,158           

4

     297,917         44,998         10,508   

5

     505,286         93,983         33,031   

5W - Watch

     54,099         15,913         1,082   

6 - Other Assets Especially Mentioned

     41,548         9,955         1,773   

7 - Substandard

     50,833         11,133         19,233   

8 - Doubtful

     171         44           

9 - Loss

                       
        

Total

   $ 973,223       $ 194,616       $ 65,627   
        
December 31, 2010    Commercial,      Commercial,         
     secured by      Industrial      Real estate-  
Risk Rating    real estate      and other      construction  

1

   $       $ 9       $   

2

             4,454           

3

     30,704         14,279           

4

     280,478         41,018         10,317   

5

     495,798         102,217         35,627   

5W - Watch

     61,383         14,925         1,908   

6 - Other Assets Especially Mentioned

     48,382         6,593         17,361   

7 - Substandard

     53,291         10,205         5,562   

8 - Doubtful

     204         559           

9 - Loss

                       
        

Total

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

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

 

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Table of Contents

Allowance for Loan and Lease Losses

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

 

Quarter ended
March 31, 2011
Allowance for Loan and
Lease Losses:
   Commercial,
secured by
real estate
    Commercial,
industrial
and other
    Leases     Real estate-
residential
mortgage
    Real estate-
construction
    Home
equity and
consumer
    Total  
        
     (in thousands)        

Beginning Balance

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

Charge-offs

     (523     (698     (1,090     (295     (2,436     (633     ($5,675

Recoveries

     958        100        503        1               47      $ 1,609   

Provision

     1,060        735        (776     1,003        2,154        751      $ 4,927   
        

Ending Balance

   $ 12,861      $ 5,250      $ 2,114      $ 3,337      $ 1,894      $ 2,736      $ 28,192   
        

Ending Balance: Individually evaluated for impairment

   $ 889      $ 465      $ 47      $ 60      $ 4      $ 100      $ 1,565   

Ending Balance: Collectively evaluated for impairment

     11,972        4,785        2,067        3,277        1,890        2,636      $ 26,627   
        

Ending Balance

   $ 12,861      $ 5,250      $ 2,114      $ 3,337      $ 1,894      $ 2,736      $ 28,192   
        

Loans and Leases:

              

Ending Balance: Individually evaluated for impairment

   $ 18,554      $ 974      $ 62      $ 812      $ 13,829      $ 1,246      $ 35,477   

Ending Balance: Collectively evaluated for impairment

     954,669        193,642        45,988        393,123        51,798        300,786      $ 1,940,006   
        

Ending Balance (1)

   $ 973,223      $ 194,616      $ 46,050      $ 393,935      $ 65,627      $ 302,032      $ 1,975,483   
        
(1) Excludes deferred costs

 

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Table of Contents
Year ended December 31, 2010
Allowance for Loan and
Lease Losses:
  Commercial,
secured by
real estate
    Commercial,
industrial
and other
    Leases     Real estate-
residential
mortgage
    Real estate-
construction
    Home
equity and
consumer
    Total  
       
    (in thousands)        

Beginning Balance

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

Charge-offs

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

Recoveries

    134        62        1,391        7               411      $ 2,005   

Provision

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

Ending Balance

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

Ending Balance: Individually evaluated for impairment

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

Ending Balance: Collectively evaluated for impairment

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

Ending Balance

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

Loans and Leases:

             

Ending Balance: Individually evaluated for impairment

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

Ending Balance: Collectively evaluated for impairment

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

Ending Balance(1)

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

 

(1) Excludes leases held for sale and deferred costs

Leases

Lakeland had no leases held for sale as of March 31, 2011, compared to $1.5 million as of December 31, 2010. Management recorded mark-to-market adjustments on the pools of leases based on indications of interest from potential buyers, and sales prices of similar leases previously sold adjusted for differences in types of collateral and other characteristics. During the first quarter of 2011, management reclassified $1.5 million of leases held for sale as held for investment because management’s intent regarding these leases had changed. The following table shows the components of gains on leasing related assets for the periods presented:

 

     For the three months ended
March 31,
 
     2011      2010  
        
     (in thousands)  

Gains on sales of leases

     $143         $10   

Realized gains on paid off leases

     239         136   

Gains on other repossessed assets

     81         158   
        

Total gains on leasing related assets

     $463         $304   
        

Other Real Estate and Other Repossessed Assets

At March 31, 2011, the Company had other repossessed assets and other real estate owned of $590,000 and $1.1 million, respectively. At December 31, 2010, the Company had other repossessed assets and other real estate owned of $558,000 and $1.0 million, respectively.

 

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Table of Contents

Note 8. Employee Benefit Plans

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

 

     For the three months ended
March 31,
 
     2011     2010  
        
     (in thousands)  

Interest cost

     $24        $24   

Expected return on plan assets

     (22     (20

Amortization of unrecognized net actuarial loss

     12        14   
        

Net periodic benefit expense

     $14        $18   
        

Note 9. Directors’ Retirement Plan

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

 

     For the three months ended
March 31,
 
     2011      2010  
        
     (in thousands)  

Service cost

     $6         $7   

Interest cost

     12         12   

Amortization of prior service cost

     4         8   

Amortization of unrecognized net actuarial loss

     2         2   
        

Net periodic benefit expense

     $24         $29   
        

The Company made contributions of $63,000 and $80,000 to the plan during the three months ended March 31, 2011 and 2010, respectively. The Company expects to make $25,000 in contributions to the plan in the second quarter of 2011 and does not expect to make any more contributions for the remainder of 2011.

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

U.S. GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest level priority to unobservable inputs (level 3 measurements). The following describes the three levels of fair value hierarchy:

Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities.

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

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

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

 

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The following table sets forth the Company’s financial assets that were accounted for at fair value on a recurring basis as of the periods presented by level within the fair value hierarchy. The Company had no liabilities accounted for at fair value as of March 31, 2011 or December 31, 2010. During the three months ended March 31, 2011, the Company did not make any transfers between recurring Level 1 fair value measurements and recurring Level 2 fair value measurements. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:

 

March 31, 2011    Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
    

Significant
Unobservable
Inputs

(Level 3)

     Total
Fair
Value
 
        
Assets:    (in thousands)  

Investment securities, available for sale

           

US government agencies

     $ —         $103,022         $ —         $103,022   

Mortgage backed securities

             295,428                 295,428   

Obligations of states and political subdivisions

             28,221                 28,221   

Corporate debt securities

             21,680                 21,680   

Equity securities

     2,088         19,530                 21,618   
        

Total securities available for sale

     $2,088         $467,881         $ —         $469,969   

December 31, 2010

           

Assets:

           

Investment securities, available for sale

           

US government agencies

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

Mortgage backed securities

             305,852                 305,852   

Obligations of states and political subdivisions

             27,549                 27,549   

Corporate debt securities

             21,873                 21,873   

Equity securities

     2,090         22,446                 24,536   
        

Total securities available for sale

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

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

 

March 31, 2011   

Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)

     Significant
Other
Observable
Inputs
(Level 2)
    

Significant
Unobservable
Inputs

(Level 3)

     Total
Fair Value
 
        
Assets:    (in thousands)  

Impaired Loans and Leases

   $  —       $  —       $ 35,477       $ 35,477   

Other real estate owned and other repossessed assets

                     1,729         1,729   

December 31, 2010

           

Assets:

           

Impaired Loans and Leases

                     30,001       $ 30,001   

Other real estate owned and other repossessed assets

                     1,592       $ 1,592   

Impaired loans and leases are evaluated and valued at the time the loan is identified as impaired at the lower of cost or market value. Because most of Lakeland’s impaired loans are collateral dependant, fair value is measured based on the value of the collateral securing these loans and leases and is classified at a level 3 in the fair value hierarchy. Collateral may be real estate, accounts receivable, inventory, equipment and/or other business assets. The value of the real estate is assessed based on appraisals by qualified third party licensed appraisers. The value of the equipment may be determined by an appraiser, if

 

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significant, inquiry through a recognized valuation resource, or by the value on the borrower’s financial statements. Field examiner reviews on business assets may be conducted based on the loan exposure and reliance on this type of collateral. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Impaired loans and leases are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

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

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

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

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

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

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

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

 

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

 

     March 31,      December 31,  
     2011      2010  
      Carrying
Value
     Estimated
fair value
     Carrying
Value
     Estimated
fair value
 

Financial Assets:

     (in thousands)   

Cash and cash equivalents

     $61,962         $61,962         $49,278         $49,278   

Investment securities available for sale

     469,969         469,969         487,107         487,107   

Investment securities held to maturity

     70,072         72,231         66,573         68,815   

Loans, including leases held for sale

     1,977,446         1,972,713         2,014,617         2,008,192   

Financial Liabilities:

           

Deposits

     2,238,512         2,241,051         2,195,889         2,199,018   

Federal funds purchased and securities sold under agreements to repurchase

     46,382         46,382         52,123         52,123   

Other borrowings

     130,000         144,424         195,000         209,631   

Subordinated debentures

     77,322         77,596         77,322         78,707   

Commitments:

           

Standby letters of credit

             94                 78   

Note 11. Preferred Stock

On March 16, 2011, the Company redeemed 20,000 shares of its Fixed Rate Cumulative Preferred Stock, Series A originally issued to the U.S. Department of the Treasury under the Troubled Asset Relief Program Capital Purchase Program. The Company paid to the Treasury $20.1 million, which included $20.0 million of principal and $86,000 in accrued and unpaid dividends, on March 16, 2011. As a result of the early payment, the Company also accelerated the accretion of $745,000 of the preferred stock discount during the three months ended March 31, 2011. The warrant previously issued to the Treasury to purchase 997,049 shares of common stock at an exercise price of $8.88, subject to anti-dilution adjustments, remains outstanding.

Note 12. Recent Accounting Pronouncements

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

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

 

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PART I — ITEM 2

Management's Discussion and Analysis of

Financial Condition and Results of Operations

This section should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Statements Regarding Forward Looking Information

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

In addition to the risk factors disclosed elsewhere in this document, the following factors, among others, could cause the Company’s actual results to differ materially and adversely from such forward-looking statements: changes in the financial services industry and the U.S. and global capital markets, changes in economic conditions nationally, regionally and in the Company’s markets, the nature and timing of actions of the Federal Reserve Board and other regulators, the nature and timing of legislation affecting the financial services industry including, but not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, government intervention in the U.S. financial system, passage by the U.S. Congress of legislation which unilaterally amends the terms of the U.S. Treasury Department’s preferred stock investment in the Company, changes in levels of market interest rates, pricing pressures on loan and deposit products, credit risks of the Company’s lending and leasing activities, customers’ acceptance of the Company’s products and services and competition.

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

Critical Accounting Policies, Judgments and Estimates

The accounting and reporting policies of the Company and its subsidiaries conform with accounting principles generally accepted in the United States of America and predominant practices within the banking industry. The consolidated financial statements include the accounts of the Company, Lakeland, Lakeland NJ Investment Corp., Lakeland Investment Corp., Lakeland Equity, Inc., and Lakeland Preferred Equity, Inc. All intercompany balances and transactions have been eliminated. Lakeland Preferred Equity, Inc. is a Real Estate Investment Trust formed by Lakeland in the fourth quarter of 2010.

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

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

 

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Table of Contents

Results of Operations

(First Quarter 2011 Compared to First Quarter 2010)

Net Income

Net income for the first quarter of 2011 was $4.8 million, compared to net income of $4.6 million for the same period in 2010. Net income available to common shareholders was $3.5 million compared to net income of $3.7 million for the same period last year. Diluted earnings per share was $0.14 for the first quarter of 2011, compared to diluted earnings per share of $0.15 per share for the same period last year. As previously reported, the Company repaid $20.0 million of the outstanding $39.0 million in preferred stock to the U.S. Department of the Treasury under the Capital Purchase Program in the first quarter of 2011. In doing so, a non-cash charge of $745,000 was recorded, reflecting the acceleration of the preferred stock discount accretion. The effect of this non-cash charge was ($0.03) per diluted share.

Net Interest Income

Net interest income on a tax equivalent basis for the first quarter of 2011 was $24.9 million, which was equivalent to net interest income earned in the first quarter of 2010. The net interest margin decreased from 3.99% in the first quarter of 2010 to 3.91% in the first quarter of 2011, primarily as a result of a 40 basis point decline in the yield on interest-earning assets, which was partially offset by a 36 basis point reduction in the cost of interest-bearing liabilities. The net interest spread as a result declined five basis points to 3.73%. Although the net interest spread declined, the decline was mitigated by an increase in income earned on free funds (interest earning assets funded by non-interest bearing liabilities) resulting from an increase in average non-interest bearing deposits of $71.7 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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Table of Contents
     For the three months ended,
March 31, 2011
    For the three months ended,
March 31, 2010
 
      Average
Balance
    Interest
Income/
Expense
     Average
rates
earned/
paid
    Average
Balance
    Interest
Income/
Expense
     Average
rates
earned/
paid
 
Assets    (dollars in thousands)  

Interest-earning assets:

              

Loans and leases (A)

   $ 2,000,057      $ 26,665         5.41   $ 2,009,389      $ 28,252         5.70

Taxable investment securities

     476,688        2,713         2.28     405,645        2,983         2.94

Tax-exempt securities

     67,594        768         4.54     62,493        800         5.12

Federal funds sold (B)

     32,896        12         0.15     48,105        28         0.23

Total interest-earning assets

     2,577,235        30,158         4.74     2,525,632        32,063         5.14

Noninterest-earning assets:

              

Allowance for loan and lease losses

     (28,874          (26,383     

Other assets

     249,178                         252,544                    

TOTAL ASSETS

   $ 2,797,539                       $ 2,751,793                    

Liabilities and Stockholders' Equity

              

Interest-bearing liabilities:

              

Savings accounts

   $ 322,225      $ 127         0.16   $ 313,025      $ 186         0.24

Interest-bearing transaction accounts

     1,093,625        1,505         0.56     1,075,203        2,364         0.89

Time deposits

     413,481        1,299         1.26     471,699        1,855         1.57

Borrowings

     294,106        2,374         3.23     279,086        2,791         4.00

Total interest-bearing liabilities

     2,123,437        5,305         1.00     2,139,013        7,196         1.36

Noninterest-bearing liabilities:

              

Demand deposits

     400,891             329,152        

Other liabilities

     13,063             12,319        

Stockholders' equity

     260,148                         271,309                    

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

   $ 2,797,539                       $ 2,751,793                    

Net interest income/spread

       24,853         3.73       24,867         3.78

Tax equivalent basis adjustment

             269                         280            

NET INTEREST INCOME

           $ 24,584                       $ 24,587            

Net interest margin (C)

                      3.91                      3.99
  (A) Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.
  (B) Includes interest-bearing cash accounts.
  (C) Net interest income divided by interest-earning assets.

Interest income on a tax equivalent basis decreased from $32.1 million in the first quarter of 2010 to $30.2 million in the first quarter of 2011, a decrease of $1.9 million, or 6%. The decrease in interest income was due to a 40 basis point decrease in the yield on interest earning assets, as a result of the declining rate environment and a change in the mix of interest-earning assets. The yield on average loans and leases at 5.41% in the first quarter of 2011 was 29 basis points lower than the first quarter of 2010. The yield on average taxable and tax exempt investment securities decreased by 66 basis points and 58 basis points, respectively, in the first quarter of 2011. Average loans and leases as a percentage of interest-earning assets decreased from 80% in the first three months of 2010 to 78% in 2011, while average investment securities increased from 19% of interest-earning assets to 21%. Loans and leases typically earn higher yields than investment securities.

Total interest expense decreased from $7.2 million in the first quarter of 2010 to $5.3 million in the first quarter of 2011, a decrease of $1.9 million, or 26%. The cost of average interest-bearing liabilities decreased from 1.36% in the first quarter of 2010 to 1.00% in 2011. The decrease in yield was due to the declining rate environment along with a change in the mix of interest-bearing liabilities. Average rates paid on interest-bearing liabilities declined in all categories. Savings and interest-bearing transaction accounts as a percent of interest-bearing liabilities increased from 65% in the first quarter of 2010 to 67% in the first quarter of 2011. Time deposits as a percent of interest-bearing liabilities declined from 22% in the first quarter of 2010 to 19% in the first quarter of 2011 as customers preferred to keep their deposits in short-term transaction accounts in the current low rate environment. Average borrowings increased from $279.1 million in the first quarter of 2010 to $294.1 million in 2011.

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

 

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management in relation to the complexity of the portfolio; adequacy and adherence to policies, procedures and practices; levels and trends in delinquencies, impaired loans and leases; net charge-offs, and the results of independent third party loan and lease review.

In the first quarter of 2011, a $4.9 million provision for loan and lease losses was recorded, which was comparable to the provision for the same period last year. During the first quarter of 2011, the Company charged off loans of $5.7 million and recovered $1.6 million in previously charged off loans and leases compared to $4.1 million and $535,000, respectively, during the same period in 2010. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income increased $121,000, or 3%, to $4.2 million in the first quarter of 2011 compared to the first quarter of 2010. The increase in noninterest income was due primarily to gains on leasing related assets, which were $463,000 in the first quarter of 2011 compared to gains of $304,000 in the first quarter of 2010. Commissions and fees totaled $832,000 in the first quarter of 2011 and were $53,000 or 6% lower than the same period last year due primarily to a reduction in investment commission income and loan fees. Income on bank owned life insurance at $355,000 was $31,000 less than the same period last year primarily as a result of decreases in rates for the underlying policies.

Noninterest Expense

Noninterest expense totaling $17.0 million increased $246,000, or 1%, in the first quarter of 2011 from the first quarter of 2010. Net occupancy expense at $1.9 million increased $116,000 compared to the first quarter of 2010 due primarily to increased snow removal costs. Stationery, supplies and postage at $365,000 in the first quarter decreased $61,000 primarily as a result of a reduction in postage expense due to the implementation of electronic statement delivery. Marketing expense totaling $615,000 increased $61,000, or 11%, compared to the first quarter of 2010 due primarily to an increase in incentives and the timing of media expenses incurred. Collection expense at $65,000 and legal expense at $295,000 decreased $83,000 and $46,000, respectively, while other real estate and repossessed asset expense at $272,000 increased $235,000. The Company’s efficiency ratio, a non-GAAP financial measure, was 56.7% in the first quarter of 2011, compared to 56.9% for the same period last year reflecting continued management of expenses. The Company uses this ratio because it believes that the ratio provides a good comparison of period-to-period performance and because the ratio is widely accepted in the banking industry. The following table shows the calculation of the efficiency ratio:

 

     For the three months ended
March 31,
 
     2011     2010  
   
     (dollars in thousands)  

Calculation of efficiency ratio

    

Total noninterest expense

   $ 17,026      $ 16,780   

Less:

    

Amortization of core deposit intangibles

     (265     (265

Other real estate owned and other repossessed asset expense

     (272     (37
   

Noninterest expense, as adjusted

   $ 16,489      $ 16,478   
   

Net interest income

   $ 24,584      $ 24,587   

Noninterest income

     4,230        4,109   
   

Total revenue

     28,814        28,696   

Plus: Tax-equivalent adjustment on municipal securities

     269        280   

Less: gains on investment securities

            (1
   

Total revenue, as adjusted

   $ 29,083      $ 28,975   
   

Efficiency ratio

     56.70     56.87
   

 

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Income Taxes

The Company’s effective tax rate was 30.5% in the first quarter of 2011, compared to 35.1% in the first quarter of 2010. The decrease in the effective tax rate was driven by increased tax benefits attributable to the real estate investment trust (“REIT”) subsidiary established in December 2010.

Financial Condition

The Company's total assets decreased $41.1 million from $2.79 billion at December 31, 2010, to $2.75 billion at March 31, 2011 due primarily to a 2% reduction in total loans. Total deposits increased 2%, with non-interest bearing transaction accounts increasing 6%. A reduction in other borrowings of $65.0 million resulted from the increase in deposits and the decline in loans.

Loans and Leases

Gross loans and leases, including leases held for sale, at $1.97 billion decreased by $36.8 million from December 31, 2010. The decrease in gross loans and leases is primarily due to leases at $46.1 million and residential mortgages at $394.0 million decreasing $21.1 million and $9.6 million, respectively. Additionally, construction loans declined from $70.8 million to $65.5 million, a decline of $5.1 million or 7% because repayments on construction loans have not been replaced with new construction loans due to the continued economic downturn. For more information on the loan portfolio, see Note 7 in Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Risk Elements

Non-performing assets increased from $44.6 million, or 1.60% of total assets, on December 31, 2010 to $50.4 million, or 1.83% of total assets, on March 31, 2011. The majority of the increase was due to real estate construction loan non-accruals, which increased $6.5 million from December, 31 2010 as a result of one loan being placed on a non-accrual status which totaled $6.6 million. Leases on non-accrual decreased $978,000 from December 31, 2010 to $5.3 million on March 31, 2011. Non-accrual leases include $4.0 million in net receivables related to one lessee who has named the Company and other unrelated parties in a complaint in connection with the leases. For more information, please see Legal Proceedings in Item 1 of Part II of this Quarterly Report on Form 10-Q. Commercial loan non-accruals at March 31, 2011 included six loan relationships with balances over $1.0 million, totaling $16.8 million, and nine loan relationships between $500,000 and $1.0 million, totaling $6.5 million.

Loans and leases past due ninety days or more and still accruing at March 31, 2011 increased $1.3 million to $2.5 million from $1.2 million on December 31, 2010. Loans and leases past due 90 days or more and still accruing are those loans and leases that are considered both well-secured and in process of collection.

On March 31, 2011, the Company had $8.4 million in loans that were troubled debt restructurings and still accruing interest income compared to $9.1 million on December 31, 2010. Troubled debt restructurings are those loans where the Company has granted concessions to the borrower in payment terms, either in rate or in term, as a result of the financial condition of the borrower.

On March 31, 2011, the Company had $35.5 million in impaired loans and leases (consisting primarily of non-accrual and restructured loans and leases) compared to $30.0 million at year-end 2010. Impaired loans increased from year-end 2010 as a result of the increase in non-accrual construction loans. For more information on these loans and leases see Note 7 in Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. The impairment of the loans and leases is measured using the present value of future cash flows on certain impaired loans and leases and is based on the fair value of the underlying collateral for the remaining loans and leases. Based on such evaluation, $1.6 million has been allocated as a portion of the allowance for loan and lease losses for impairment at March 31, 2011. At March 31, 2011, the Company also had $50.8 million in loans and leases that were rated substandard that were not classified as non-performing or impaired.

There were no loans and leases at March 31, 2011, other than those designated non-performing, impaired or substandard, where the Company was aware of any credit conditions of any borrowers or obligors that would indicate a strong possibility of the borrowers not complying with present terms and conditions of repayment and which may result in such loans

 

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and leases being included as non-accrual, past due or renegotiated at a future date. The following table sets forth for the periods presented, the historical relationships among the allowance for loan and lease losses, the provision for loan and lease losses, the amount of loans and leases charged-off and the amount of loan and lease recoveries:

 

(dollars in thousands)   

Three months
ended
March 31,

2011

   

Three months
ended
March 31,

2010

    Year ended
December 31,
2010
 
        

Balance of the allowance at the beginning of the year

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

Loans and leases charged off:

      

Commercial, secured by real estate (1)

     2,959        2,241        9,266   

Commercial, industrial and other

     698        198        3,298   

Leases

     1,090        1,147        4,307   

Real estate—mortgage

     295               397   

Home Equity and consumer

     633        555        2,250   
        

Total loans charged off

     5,675        4,141        19,518   
        

Recoveries:

      

Commercial, secured by real estate (1)

     958               134   

Commercial, industrial and other

     100               62   

Leases

     503        483        1,391   

Real estate—mortgage

     1               7   

Home Equity and consumer

     47        52        411   
        

Total Recoveries

     1,609        535        2,005   
        

Net charge-offs:

     4,066        3,606        17,513   

Provision for loan and lease losses

     4,927        4,879        19,281   
        

Ending balance

   $ 28,192      $ 26,836      $ 27,331   
        

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

     0.81     0.73     0.88

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

     1.43     1.34     1.36

(1) Includes construction real estate loans

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

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

 

   

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

 

   

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

 

   

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

Consideration is given to the results of ongoing credit quality monitoring processes, the adequacy and expertise of the

 

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

While non-performing loans and leases increased from $43.0 million on December 31, 2010 to $48.7 million on March 31, 2011, the allowance for loan and lease losses as a percent of total loans increased to 1.43% of total loans on March 31, 2011, compared to 1.36% as of December 31, 2010. As discussed above, the increase in non-performing loans was related primarily to one real estate construction loan. Management believes, based on appraisals and estimated selling costs, that its non-performing loans and leases are adequately secured and reserves on these loans are adequate. The preceding statement constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

Based upon the process employed and giving recognition to all accompanying factors related to the loan and lease portfolio, management considers the allowance for loan and lease losses to be adequate at March 31, 2011. The preceding statement constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

Investment Securities

For detailed information on the composition and maturity distribution of the Company’s investment securities portfolio, see the Notes to Consolidated Financial Statements contained in this Form 10-Q. Total investment securities decreased from $553.7 million on December 31, 2010 to $540.0 million on March 31, 2011, a decrease of $13.6 million, or 2%.

Deposits

Total deposits increased from $2.20 billion on December 31, 2010 to $2.24 billion on March 31, 2011, an increase of $42.6 million, or 2%. Noninterest bearing deposits increased $23.2 million, or 6%, to $407.1 million, resulting primarily from an increase in commercial noninterest bearing deposits. Savings and interest-bearing transaction accounts totaling $1.41 billion increased $15.4 million from December 31, 2010.

Liquidity

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

The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statement for the three months ended March 31, 2011 follows.

Cash and cash equivalents, totaling $62.0 million on March 31, 2011, increased $12.7 million from December 31, 2010. Operating activities provided $16.5 million in net cash. Investing activities provided $45.9 million in net cash, primarily reflecting maturities and repayments of securities, sales of leases and the net decrease in loans and leases. Financing activities used $49.7 million in net cash, reflecting repayments of other borrowings and the redemption of $20.0 million in preferred stock, partially offset by an increase in deposits. The Company anticipates that it will have sufficient funds available to meet its current loan commitments and deposit maturities. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of March 31, 2011. Interest on subordinated debentures and long-term borrowed funds is calculated based on current contractual interest rates.

 

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

Minimum annual rentals or noncancellable operating leases

     $13,712         $1,779         $3,004         $2,515         $6,414   

Benefit plan commitments

     5,055         185         370         300         4,200   

Remaining contractual maturities of time deposits

     416,809         321,637         77,314         16,700         1,158   

Subordinated debentures

     77,322         —           —           —           77,322   

Loan commitments

     435,876         361,717         41,994         2,215         29,950   

Long-term debt

     130,000         15,000         30,000         40,000         45,000   

Interest on long-term debt*

     121,026         9,178         16,442         13,082         82,324   

Series A Preferred Stock

     19,000         —           —           —           19,000   

Interest on Series A Preferred Stock

     11,398         950         1,997         3,539         4,912   

Standby letters of credit

     9,464         7,155         2,092         137         80   
        

Total

   $ 1,239,662       $ 717,601       $ 173,213       $ 78,488       $ 270,360   
        

*Includes interest on long-term debt and subordinated debentures at a weighted rate of 4.47%.

Capital Resources

Total stockholders’ equity decreased from $260.7 million on December 31, 2010 to $245.1 million on March 31, 2011, a decrease of $15.6 million, or 6%. Book value per common share increased to $8.90 on March 31, 2011 from $8.82 on December 31, 2010. The decrease in stockholders’ equity from December 31, 2010 to March 31, 2011 was primarily due to the $20.0 million redemption of preferred stock and payment of cash dividends of $1.8 million. This was partially offset by $4.8 million in net income and a $880,000 increase in accumulated other comprehensive income relating to an increase in market value in the Company’s available for sale securities portfolio.

The Company and Lakeland are subject to various regulatory capital requirements that are monitored by federal banking agencies. Failure to meet minimum capital requirements can lead to certain supervisory actions by regulators; any supervisory action could have a direct material effect on the Company or Lakeland’s financial statements. Management believes, as of March 31, 2011, that the Company and Lakeland meet all capital adequacy requirements to which they are subject.

The capital ratios for the Company and Lakeland at March 31, 2011 are as follows:

 

Capital Ratios:    Tier 1 Capital
to Total Average
Assets Ratio
March 31,
2011
  Tier 1 Capital
to Risk-Weighted
Assets Ratio
March 31,
2011
  Total Capital
to Risk-Weighted
Assets Ratio
March 31,
2011

The Company

   7.79%   10.72%   13.10%

Lakeland Bank

   8.07%   11.11%   12.36%

“Well capitalized” institution under FDIC Regulations

   5.00%   6.00%   10.00%

Non-GAAP Financial Measures

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

 

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

Calculation of tangible book value per common share

    

Total common stockholders' equity at end of period - GAAP

     $226,760        $223,235   

Less:

    

Goodwill

     87,111        87,111   

Other identifiable intangible assets, net

     312        578   
   

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

     $139,337        $135,546   
   

Shares outstanding at end of period

     25,466        25,322   
   

Book value per share - GAAP

     $8.90        $8.82   
   

Tangible book value per share - Non-GAAP

     $5.47        $5.35   
   

Calculation of tangible common equity to tangible assets

    

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

     $139,337        $135,546   
   

Total assets at end of period

     $2,751,576        $2,792,674   

Less:

    

Goodwill

     87,111        87,111   

Other identifiable intangible assets, net

     312        578   
   

Total tangible assets at end of period - Non-GAAP

     $2,664,153        $2,704,985   
   

Common equity to assets - GAAP

     8.24     7.99
   

Tangible common equity to tangible assets - Non-GAAP

     5.23     5.01
   

 

     For the three months ended,  
     March 31,
2011
    March 31,
2010
 
        

Calculation of return on average tangible common equity

    

Net income - GAAP

     $4,771        $4,566   
   

Total average common stockholders' equity

     226,051        $215,228   

Less:

    

Average goodwill

     87,111        87,111   

Average other identifiable intangible assets, net

     460        1,521   
   

Total average tangible common stockholders' equity - Non-GAAP

     $138,480        $126,596   
   

Return on average common stockholders' equity - GAAP

     8.56     8.60
   

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

     13.97     14.63
   

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

 

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behavioral response of the balance sheet to those changes. Market Value of Portfolio Equity represents the fair value of the net present value of assets, liabilities and off-balance-sheet items. Changes in estimates and assumptions made for interest rate sensitivity modeling could have a significant impact on projected results and conclusions. These assumptions could include prepayment rates, sensitivity of non-maturity deposits and other similar assumptions. Therefore, if our assumptions should change, this technique may not accurately reflect the impact of general interest rate movements on the Company's net interest income or net portfolio value.

The starting point (or "base case") for the following table is an estimate of the following year's net interest income assuming that both interest rates and the Company's interest-sensitive assets and liabilities remain at period-end levels. The net interest income estimated for the next twelve months (the base case) is $97.2 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.

 

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

Asset/Liability Policy Limit

   -5.0%       -5.0%

March 31, 2011

   -2.8%   -1.3%   -1.8%   -2.6%

December 31, 2010

   -3.3%   -1.5%   -1.9%   -2.6%

The base case for the following table is an estimate of the Company's net portfolio value for the periods presented using current discount rates, and assuming the Company's interest-sensitive assets and liabilities remain at period-end levels. The net portfolio value at March 31, 2011 (the base case) was $340.9 million. The information provided for the net portfolio value assumes fluctuations or "rate shocks" of plus 200 basis points and minus 200 basis points for changes in interest rates as shown in the table below. Rate shocks assume that current interest rates change immediately.

 

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

Asset/Liability Policy Limit

   -25.0%       -25.0%

March 31, 2011

   -6.8%   -1.4%   -1.9%   -7.7%

December 31, 2010

   -7.9%   -2.0%   -2.5%   -8.6%

The information set forth in the above tables is based on significant estimates and assumptions, and constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. For more information regarding the Company’s market risk and assumptions used in the Company’s simulation models, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

ITEM 4. Controls and Procedures

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

(b)     Changes in internal controls over financial reporting. There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II OTHER INFORMATION

Item 1. Legal Proceedings

A complaint, dated February 24, 2010, was filed by the International Association of Machinists and Aerospace Workers, as plaintiff, against the Company and other unrelated parties in the Circuit Court of Maryland for Prince George's County. The plaintiff alleges fraudulent conduct in connection with certain equipment leases it entered into by a vendor and lease broker not affiliated with the Company. Certain of these leases were subsequently assigned to Lakeland resulting in the plaintiff amending its complaint to include all parties that were assignees. The Company believes that the claims asserted against it are without merit.

A complaint, dated April 6, 2011, was filed by the bankruptcy trustee appointed in the Sunbridge Capital, Inc. bankruptcy case pending before the United States Bankruptcy Court for the District of Kansas. The trustee alleges preferential payments and constructive fraudulent transfers under the Bankruptcy Code and Kansas law. Lakeland believes that the claims asserted against it are without merit.

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

Item 1A. Risk Factors

There have been no material changes in risk factors from those disclosed under Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    Not Applicable
Item 3.    Defaults Upon Senior Securities    Not Applicable
Item 4.    Reserved   
Item 5.    Other Information    Not Applicable

Item 6. Exhibits

 

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

 

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SIGNATURES

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

 

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

Date: May 6, 2011

 

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