LAKELAND BANCORP INC - FORM 10-Q

Attached files

file	filename
EX-31.1 - CERTIFICATION BY THOMAS J. SHARA PURSUANT TO SECTION 302 - LAKELAND BANCORP INC	d234182dex311.htm
EX-31.2 - CERTIFICATION BY JOSEPH F. HURLEY PURSUANT TO SECTION 302 - LAKELAND BANCORP INC	d234182dex312.htm
EXCEL - IDEA: XBRL DOCUMENT - LAKELAND BANCORP INC	Financial_Report.xls
EX-32.1 - CERTIFICATION BY THOMAS J. SHARA AND JOSEPH F. HURLEY PURSUANT TO SECTION 906 - LAKELAND BANCORP INC	d234182dex321.htm

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended September 30, 2011

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

For the transition period from to

Commission file number 000-17820

LAKELAND BANCORP, INC.

(Exact name of registrant as specified in its charter)


New Jersey		22-2953275
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

250 Oak Ridge Road, Oak Ridge, New Jersey		07438
(Address of principal executive offices)		(Zip Code)

(973) 697-2000

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

Yes ¨ No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

As of October 31, 2011 there were 25,528,766 outstanding shares of Common Stock, no par value.

LAKELAND BANCORP, INC.

Form 10-Q Index


		PAGE
	Part I Financial Information

Item 1.	Financial Statements:

	Consolidated Balance Sheets - September 30, 2011 (unaudited) and December 31, 2010		3

	Consolidated Statements of Income - Unaudited Three Months and Nine Months ended September 30, 2011 and 2010		4

	Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income - Unaudited Nine Months ended September 30, 2011		5

	Consolidated Statements of Cash Flows - Unaudited Nine Months ended September 30, 2011 and 2010		6

	Notes to Consolidated Financial Statements (unaudited)		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		38

Item 4.	Controls and Procedures		38

	Part II Other Information

Item 1.	Legal Proceedings		40

Item 1A.	Risk Factors		40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		40

Item 3.	Defaults Upon Senior Securities		40

Item 4.	Reserved		40

Item 5.	Other Information		40

Item 6.	Exhibits		40

Signatures			41

	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.

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS


	September 30, 2011 (unaudited)			December 31, 2010
ASSETS:		(dollars in thousands)
Cash		$44,424			$26,063
Interest-bearing deposits due from banks		20,834			23,215

Total cash and cash equivalents		65,258			49,278

Investment securities available for sale		448,885			487,107
Investment securities held to maturity; fair value of $68,656 in 2011 and $68,815 in 2010		66,134			66,573
Leases held for sale		—			1,517
Loans, net of deferred costs		1,992,775			2,013,100
Less: allowance for loan and lease losses		28,024			27,331

Net loans		1,964,751			1,987,286
Premises and equipment, net		27,311			27,554
Accrued interest receivable		8,128			8,849
Goodwill		87,111			87,111
Other identifiable intangible assets, net		—			578
Bank owned life insurance		44,354			43,284
Other assets		29,836			35,054

TOTAL ASSETS		$2,741,768			$2,792,674


LIABILITIES
Deposits:
Noninterest bearing		$424,789			$383,877
Savings and interest-bearing transaction accounts		1,411,058			1,399,163
Time deposits under $100 thousand		222,337			241,911
Time deposits $100 thousand and over		174,381			170,938

Total deposits		2,232,565			2,195,889
Federal funds purchased and securities sold under agreements to repurchase		53,175			52,123
Other borrowings		110,000			195,000
Subordinated debentures		77,322			77,322
Other liabilities		13,808			11,631

TOTAL LIABILITIES		2,486,870			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 September 30, 2011 and 39,000 shares at December 31, 2010		18,424			37,474
Common stock, no par value; authorized shares, 40,000,000; issued 25,976,648 shares at September 30, 2011 and 25,977,592 shares at December 31, 2010		270,068			271,595
Accumulated deficit		(29,351	)		(38,004	)
Treasury stock, at cost, 448,984 shares at September 30, 2011 and 655,768 at December 31, 2010		(5,957	)		(8,683	)
Accumulated other comprehensive gain (loss)		1,714			(1,673	)

TOTAL STOCKHOLDERS’ EQUITY		254,898			260,709

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$2,741,768			$2,792,674

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

Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME


	For the three months ended September 30,				For the nine months ended September 30,
	2011		2010		2011		2010
	(In thousands, except per share data)
INTEREST INCOME
Loans, leases and fees		$25,999		$27,670		$78,784		$83,971
Federal funds sold and interest-bearing deposits with banks		16		42		39		110
Taxable investment securities		2,773		3,107		8,448		9,099
Tax-exempt investment securities		500		495		1,506		1,512

TOTAL INTEREST INCOME		29,288		31,314		88,777		94,692

INTEREST EXPENSE
Deposits		2,572		3,584		8,310		11,857
Federal funds purchased and securities sold under agreements to repurchase		18		27		73		95
Other borrowings		2,347		2,713		7,038		8,234

TOTAL INTEREST EXPENSE		4,937		6,324		15,421		20,186

NET INTEREST INCOME		24,351		24,990		73,356		74,506
Provision for loan and lease losses		4,058		4,857		14,391		14,737

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES		20,293		20,133		58,965		59,769
NONINTEREST INCOME
Service charges on deposit accounts		2,623		2,678		7,672		7,626
Commissions and fees		915		965		2,787		2,683
Gains on investment securities		785		1,681		1,229		1,682
Income on bank owned life insurance		356		376		1,070		1,147
Gains on leasing related assets		117		312		810		1,171
Other income		299		77		467		442

TOTAL NONINTEREST INCOME		5,095		6,089		14,035		14,751

NONINTEREST EXPENSE
Salaries and employee benefits		9,280		9,073		27,465		26,972
Net occupancy expense		1,692		1,594		5,205		5,025
Furniture and equipment		1,172		1,270		3,561		3,661
Stationery, supplies and postage		298		360		1,058		1,172
Marketing expense		612		511		1,846		1,713
Core deposit intangible amortization		46		265		577		796
FDIC insurance expense		636		937		2,178		2,834
Collection expense		70		188		195		495
Legal expense		457		411		1,163		1,175
Expenses on other real estate owned and other repossessed assets		336		119		808		354
Long term debt prepayment fee		800		1,835		800		1,835
Other expenses		2,641		2,388		6,942		6,806

TOTAL NONINTEREST EXPENSE		18,040		18,951		51,798		52,838

Income before provision for income taxes		7,348		7,271		21,202		21,682
Income tax expense		2,242		2,399		6,467		7,491

NET INCOME		$5,106		$4,872		$14,735		$14,191

Dividends on Preferred Stock and Accretion		293		1,589		1,873		3,391

Net Income Available to Common Stockholders		$4,813		$3,283		$12,862		$10,800

PER SHARE OF COMMON STOCK
Basic earnings		$0.19		$0.13		$0.50		$0.43

Diluted earnings		$0.19		$0.13		$0.50		$0.43

Dividends		$0.06		$0.05		$0.18		$0.14

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

Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months ended September 30, 2011


																Accumulated Other Comprehensive Income (Loss)
	Common stock						Series A Preferred Stock
	Number of Shares			Amount			Series A Preferred Stock			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		—			—			—			14,735			—			—			14,735
Other comprehensive income, net of tax		—			—			—			—			—			3,387			3,387

Total comprehensive income																				18,122

Preferred dividends		—			—			—			(923	)		—			—			(923	)
Accretion of discount		—			—			950			(950	)		—			—			—
Stock based compensation		—			474			—			—			—			—			474
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		—			(375	)		—			(757	)		1,308			—			176
Exercise of stock options, net of excess tax benefits		—			(55	)		—			—			156			—			101
Cash dividends, common stock		—			—			—			(3,761	)		—			—			(3,761	)

BALANCE September 30, 2011 (UNAUDITED)		25,976,648		$	270,068			$18,424			($29,351	)		($5,957	)		$1,714		$	254,898

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

Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the nine months ended September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES		(dollars in thousands)
Net income		$14,735			$14,191
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premiums, discounts and deferred loan fees and costs		4,161			2,828
Depreciation and amortization		2,962			3,103
Provision for loan and lease losses		14,391			14,737
Gains on securities		(1,229	)		(1,682	)
Gains on leases		(824	)		(635	)
Losses (gains) on sales of other assets		77			(536	)
Gains on sales of premises and equipment		(163	)		(82	)
Stock-based compensation		474			402
Decrease in other assets		2,643			7,947
Increase in other liabilities		2,325			559

NET CASH PROVIDED BY OPERATING ACTIVITIES		39,552			40,832

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from repayments on and maturity of securities:
Available for sale		118,627			121,476
Held to maturity		15,652			21,016
Proceeds from sales of securities
Available for sale		92,409			72,747
Purchase of securities:
Available for sale		(169,123	)		(252,937	)
Held to maturity		(15,299	)		(10,296	)
Proceeds from sales of leases		16,433			931
Net (increase) decrease in loans and leases		(10,414	)		14,240
Proceeds from sales of other repossessed assets		1,720			3,026
Capital expenditures		(2,096	)		(1,093	)
Proceeds from sales of bank premises and equipment		321			273

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		48,230			(30,617	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		36,677			77,585
Increase in federal funds purchased and securities sold under agreements to repurchase		1,052			4,776
Repayments of other borrowings		(85,000	)		(30,000	)
Redemption of preferred stock		(20,000	)		(20,000	)
Exercise of stock options		72			463
Excess tax benefits		29			8
Issuance of stock to dividend reinvestment and stock purchase plan		176			43
Dividends paid		(4,808	)		(5,158	)

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(71,802	)		27,717

Net increase cash and cash equivalents		15,980			37,932
Cash and cash equivalents, beginning of year		49,278			58,663

CASH AND CASH EQUIVALENTS, END OF PERIOD		$65,258			$96,595

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

Notes to Consolidated Financial Statements – (Unaudited)

Note 1. Significant Accounting Policies

Basis of Presentation.

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

The Company’s unaudited interim financial statements reflect all adjustments, such as normal recurring accruals, that are, in the opinion of management, necessary for the fair statement of the results of the interim periods presented. The results of operations for the quarter and nine month period 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 September 30, 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 $474,000 and $402,000 was recognized for the nine months ended September 30, 2011 and 2010, respectively. As of September 30, 2011, there was unrecognized compensation cost of $1.2 million related to unvested restricted stock; that cost is expected to be recognized over a weighted average period of approximately 2.8 years. Unrecognized compensation expense related to unvested stock options was approximately $55,000 as of September 30, 2011 and is expected to be recognized over a period of 1.4 years.

In the first nine 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 nine 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 nine months of 2011.

In the first nine months of 2010, the Company granted options to purchase 26,250 shares to a new non-employee director of the Company at an exercise price of $8.64 per share. The director’s options vest in five equal installments beginning on the date of grant and continuing on the next four anniversaries of the date of the grant. The Company estimated the fair value of the option grant using a Black-Scholes option pricing model using the following assumptions: the risk-free interest rate was 2.32%; the expected dividend yield, 2.20%; the expected volatility, 47%; and the expected life, six years. The fair value of the options granted was estimated to be $3.31. The expected compensation expense to be recorded over the vesting period is $87,000, with approximately $46,000 remaining to be expensed.

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		(20,023	)		5.82
Forfeited		(12,084	)		13.42

Outstanding, September 30, 2011		689,016			$12.97		2.80		$0

Options exercisable at September 30, 2011		667,051			$13.07		2.63		$0

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

The aggregate intrinsic value of options exercised during the nine months ended September 30, 2011 and 2010 was $78,000 and $106,000, respectively. Exercise of stock options during the first nine months of 2011 and 2010 resulted in cash receipts of $72,000 and $463,000, respectively.

Information regarding the Company’s restricted stock (all unvested) and changes during the nine months ended September 30, 2011 is as follows:


	Number of shares			Weighted average price

Outstanding, January 1, 2011		101,314			$9.62
Granted		95,345			9.87
Vested		(4,737	)		9.03
Forfeited		(1,489	)		9.64

Outstanding, September 30, 2011		190,433			$9.76

Note 3. Comprehensive Income

The components of other comprehensive income are as follows:


	September 30, 2011							September 30, 2010
For the quarter ended:	Before tax amount		Tax Benefit (Expense)			Net of tax amount		Before tax amount			Tax Benefit (Expense)			Net of tax amount

	(in thousands)							(in thousands)
Net unrealized gains on available for sale securities
Net unrealized holding gains arising during period		$1,701		($634	)		$1,067		$721			($278	)		$443
Less reclassification adjustment for net gains arising during the period		785		(276	)		509		1,681			(602	)		1,079

Net unrealized gains (losses)		$916		($358	)		$558		($960	)		$324			($636	)
Change in minimum pension liability		8		(3	)		5		8			(3	)		5

Other comprehensive income (loss), net		$924		($361	)		$563		($952	)		$321			($631	)


For the nine months ended:		Before tax amount		Tax Benefit (Expense	)		Net of tax amount		Before tax amount			Tax Benefit (Expense	)		Net of tax amount

	(in thousands)							(in thousands)
Net unrealized gains on available for sale securities
Net unrealized holding gains arising during period		$6,568		($2,397	)		$4,171		$5,892			($2,170	)		$3,722
Less reclassification adjustment for net gains arising during the period		1,229		(430	)		799		1,682			(602	)		1,080

Net unrealized gains		$5,339		($1,967	)		$3,372		$4,210			($1,568	)		$2,642
Change in minimum pension liability		23		(8	)		15		23			(8	)		15

Other comprehensive income, net		$5,362		($1,975	)		$3,387		$4,233			($1,576	)		$2,657

Note 4. Statement of Cash Flow Information, Supplemental Information


	For the nine months ended September 30,
	2011		2010

		(in thousands)
Supplemental schedule of noncash investing and financing activities:
Cash paid during the period for income taxes		$6,084		$3,073
Cash paid during the period for interest		15,609		20,637
Transfer of loans and leases into other repossessed assets and other real estate owned		1,547		2,371
Transfer of leases held for sale to leases held for investment		1,517		1,888

Note 5. Earnings Per Share

All weighted average, actual share and per share information set forth in this quarterly report on Form 10-Q for the three and nine months ended September 30, 2010 have been adjusted retroactively for the effects of the stock dividend granted on February 16, 2011. The following schedule shows the Company’s earnings per share for the periods presented:


	For the three months ended September 30,			For the nine months ended September 30,
(In thousands, except per share data)		2011	2010		2011	2010


Net income available to common shareholders		$4,813	$3,283		$12,862	$10,800
Less: earnings allocated to participating securities		36	17		95	37

Net income allocated to common shareholders		$4,777	$3,266		$12,767	$10,763

Weighted average number of common shares outstanding - basic (1)		25,322	25,117		25,288	25,074
Share-based plans (1)		48	39		122	26

Weighted average number of common shares - diluted (1)		25,370	25,156		25,410	25,100

Basic earnings per share		$0.19	$0.13		$0.50	$0.43

Diluted earnings per share		$0.19	$0.13		$0.50	$0.43

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

Options to purchase 689,016 shares of common stock at a weighted average price of $12.97 per share and a warrant to purchase 997,049 shares of common stock at a price of $8.88 per share were outstanding and were not included in the computation of diluted earnings per share for the quarter ended September 30, 2011 because the exercise price was greater than the average market price. Options to purchase 702,167 shares of common stock at a weighted average price of $12.97 per share, a warrant to purchase 997,049 shares of common stock at a price of $8.88 per share, and 2,362 shares of restricted stock at a weighted average price of $10.06 per share were outstanding and were not included in the computation of diluted earnings per share for the quarter ended September 30, 2010 because the exercise price was greater than the average market price.

Options to purchase 689,016 shares of common stock at a weighted average price of $12.97 per share were outstanding and were not included in the computation of diluted earnings per share for the nine months ended September 30, 2011 because the exercise price was greater than the average market price. Options to purchase 702,167 shares of common stock at a weighted average price of $12.97 per share, a warrant to purchase 997,049 shares of common stock at a price of $8.88 per share, and 2,362 shares of restricted stock at a weighted average price of $10.06 per share were outstanding and were not included in the computation of diluted earnings per share for the nine months ended September 30, 2010 because the exercise price and the grant-date price were greater than the average market price.

Note 6. Investment Securities


AVAILABLE FOR SALE	September 30, 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		$23,785		$10		$(11	)		$23,784		$107,870		$294		$(867	)		$107,297
Mortgage-backed securities		350,150		4,032		(791	)		353,391		306,882		2,536		(3,566	)		305,852
Obligations of states and political subdivisions		29,623		1,259		(1	)		30,881		27,567		357		(375	)		27,549
Other debt securities		21,008		85		(1,247	)		19,846		22,582		102		(811	)		21,873
Equity securities		20,753		453		(223	)		20,983		23,979		559		(2	)		24,536

		$445,319		$5,839		$(2,273	)		$448,885		$488,880		$3,848		$(5,621	)		$487,107


HELD TO MATURITY	September 30, 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		$4,999		$93		$—			$5,092		$4,996		$229		$—			$5,225
Mortgage-backed securities		19,475		1,206		—			20,681		20,774		1,105		—			21,879
Obligations of states and political subdivisions		40,099		1,260		(11	)		41,348		39,235		956		(84	)		40,107
Other debt securities		1,561		80		(106	)		1,535		1,568		40		(4	)		1,604

		$66,134		$2,639		$(117	)		$68,656		$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):


	September 30, 2011

	Available for Sale				Held to Maturity

	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less		$16,181		$16,202		$18,365		$18,513
Due after one year through five years		38,459		38,270		16,017		16,660
Due after five years through ten years		16,122		16,855		10,581		11,065
Due after ten years		3,654		3,184		1,696		1,737

		74,416		74,511		46,659		47,975
Mortgage-backed securities		350,150		353,391		19,475		20,681
Equity securities		20,753		20,983		—		—

Total securities		$445,319		$448,885		$66,134		$68,656

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


	For the three months ended September 30,					For the nine months ended September 30,
	2011		2010			2011			2010

Sale proceeds		$52,481		$72,747			$92,409			$72,747
Gross gains		785		1,691			1,285			1,692
Gross losses		—		(10	)		(56	)		(10	)
Other than temporary impairment		—		—			—			—

Securities with a carrying value of approximately $302.9 million and $340.6 million at September 30, 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 September 30, 2011 and December 31, 2010:


September 30, 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		$6,990		$11		$ —		$ —		2		$6,990		$11
Mortgage-backed securities		96,642		758		5,606		33		27		102,248		791
Obligations of states and political subdivisions		402		1		20		—		2		422		1
Other debt securities		—		—		5,706		1,247		3		5,706		1,247
Equity securities		1,102		223		—		—		6		1,102		223
		$105,136		$993		$11,332		$1,280		40		$116,468		$2,273

HELD TO MATURITY
Obligations of states and political subdivisions		$83		$3		$414		$8		3		$497		$11
Corporate debt securities		928		106		—		—		2		928		106
		$1,011		$109		$414		$8		5		$1,425		$117


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 September 30, 2011 and December 31, 2010:


	September 30, 2011		December 31, 2010

	(in thousands)
Commercial, secured by real estate		$993,024		$970,240
Commercial, industrial and other		195,121		194,259
Leases		36,178		65,640
Leases held for sale, at fair value		—		1,517
Real estate-residential mortgage		392,454		403,561
Real estate-construction		70,985		70,775
Home equity and consumer		304,112		306,322

Total loans		1,991,874		2,012,314

Plus: deferred costs		901		2,303

Loans, net of deferred costs		$1,992,775		$2,014,617

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, its loans and leases past due 90 days or more and still accruing and its accruing troubled debt restructurings:


(in thousands)	September 30, 2011			December 31, 2010

Commercial, secured by real estate		$18,141			$12,905
Commercial, industrial and other		4,414			1,702
Leases, including leases held for sale		4,670			6,277
Real estate - residential mortgage		12,503			12,834
Real estate - construction		12,831			6,321
Home equity and consumer		3,840			2,930

Total non-accrual loans and leases		$56,399			$42,969
Other real estate and other repossessed assets		1,342			1,592

TOTAL NON-PERFORMING ASSETS		$57,741			$44,561

Non-performing assets as a percent of total assets		2.11	%		1.60	%

Loans and leases past due 90 days or more and still accruing		$1,304			$1,218

Troubled debt restructurings, still accruing		$6,075			$9,073

Non-accrual loans included $4.1 million and $3.6 million of troubled debt restructurings as of September 30, 2011 and December 31, 2010, respectively.

An age analysis of past due loans, segregated by class of loans as of September 30, 2011 and December 31, 2010, are as follows:


September 30, 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	$	6,159	$	4,932	$	18,466	$	29,557	$	963,467	$	993,024	$	325
Commercial, industrial and other		854		1,139		4,414		6,407		188,714		195,121		—
Leases		402		332		4,672		5,406		30,772		36,178		2
Real estate-residential mortgage		4,959		1,034		12,823		18,816		373,638		392,454		320
Real estate-construction		—		908		12,831		13,739		57,246		70,985		—
Home equity and consumer		1,973		423		4,497		6,893		297,219		304,112		657

	$	14,347	$	8,768	$	57,703	$	80,818	$	1,911,056	$	1,991,874	$	1,304

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

Impaired Loans

Impaired loans as of September 30, 2011 and December 31, 2010 are as follows:


September 30, 2011	Recorded Investment in Impaired loans		Contractual Unpaid Principal Balance		Specific Allowance		Interest Income Recognized		Average Investment in Impaired loans
	(in thousands)
Loans without specific allowance:
Commercial, secured by real estate	$	18,858	$	23,984	$	—	$	237	$	16,379
Commercial, industrial and other		4,103		8,185		—		—		2,634
Leases		—		—		—		—		—
Real estate-residential mortgage		415		415		—		22		585
Real estate-construction		12,587		15,771		—		14		10,671
Home equity and consumer		400		485		—		1		82
Loans with specific allowance:
Commercial, secured by real estate		4,453		5,465		472		11		3,829
Commercial, industrial and other		313		389		63		—		563
Leases		—		—		—		—		—
Real estate-residential mortgage		501		509		75		13		501
Real estate-construction		244		518		24		—		300
Home equity and consumer		157		157		24		28		910
Total:
Commercial, secured by real estate	$	23,311	$	29,449	$	472	$	248	$	20,208
Commercial, industrial and other		4,416		8,574		63		—		3,197
Leases, including leases held for sale		—		—		—		—		—
Real estate-residential mortgage		916		924		75		35		1,086
Real estate-construction		12,831		16,289		24		14		10,971
Home equity and consumer		557		642		24		29		992

	$	42,031	$	55,878	$	658	$	326	$	36,454


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 nine months of 2010 was $31.0 million and the income recognized, primarily on a cash basis, on impaired loans during the first nine months of 2010 was $294,000. Interest that would have been accrued on impaired loans and leases during the first nine months of 2011 and 2010 had the loans been performing under original terms would have been $2.2 million and $1.9 million, respectively.

Credit Quality Indicators

The classes of loans 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.

The following table shows the Company’s commercial loan portfolio as of September 30, 2011 and December 31, 2010, by the risk ratings discussed above (in thousands):


September 30 2011	Commercial,		Commercial,
	secured by		industrial		Real estate-
Risk Rating	real estate		and other		construction
1	$	—	$	—	$	—
2		—		11,393		—
3		27,212		15,670		10,156
4		298,079		41,716		13,355
5		543,547		90,035		29,774
5W - Watch		43,435		8,102		434
6 - Other Assets Especially Mentioned		36,930		16,567		597
7 - Substandard		43,650		11,638		16,358
8 - Doubtful		171		—		311
9 - Loss		—		—		—

Total	$	993,024	$	195,121	$	70,985


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 payment performance status.

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:


Nine Months ended September 30, 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		(4,380	)		(5,188	)		(2,333	)		(617	)		(2,966	)		(1,614	)		($17,098	)
Recoveries		1,863			177			1,039			31			13			277		$	3,400
Provision		6,266			5,391			(718	)		260			1,860			1,332		$	14,391

Ending Balance	$	15,115		$	5,493		$	1,465		$	2,302		$	1,083		$	2,566		$	28,024


Ending Balance: Individually evaluated for impairment	$	472		$	63		$	—		$	75		$	24		$	24		$	658
Ending Balance: Collectively evaluated for impairment		14,643			5,430			1,465			2,227			1,059			2,542		$	27,366


Ending Balance	$	15,115		$	5,493		$	1,465		$	2,302		$	1,083		$	2,566		$	28,024


Loans and Leases:
Ending Balance: Individually evaluated for impairment	$	23,311		$	4,416		$	—		$	916		$	12,831		$	557		$	42,031
Ending Balance: Collectively evaluated for impairment		969,713			190,705			36,178			391,538			58,154			303,555		$	1,949,843


Ending Balance	$	993,024		$	195,121		$	36,178		$	392,454		$	70,985		$	304,112		$	1,991,874


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

Troubled Debt Restructurings

Troubled debt restructurings are those loans where significant concessions have been made due to borrowers’ financial difficulties. Restructured loans typically involve a modification of terms such as a reduction of the stated interest rate, a moratorium of principal payments and/or an extension of the maturity date at a stated interest rate lower than the current market rate of a new loan with similar risk.

The following table summarizes, as of September 30, 2011, loans that have been restructured during the periods presented:


	For the three months ended September 30, 2011						For the nine months ended September 30, 2011
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment
	(Dollars in thousands)						(Dollars in thousands)
Troubled Debt Restructurings:
Commercial, secured by real estate		1	$	195	$	195		7	$	3,188	$	2,827
Commercial, industrial and other		—		—		—		—		—		—
Leases		—		—		—		—		—		—
Real estate-residential mortgage		—		—		—		1		415		415
Real estate-construction		—		—		—		—		—		—
Home equity and consumer		—		—		—		—		—		—

		1	$	195	$	195		8	$	3,603	$	3,242

The following table summarizes as of September 30, 2011, loans that were restructured within the last 12 months that have subsequently defaulted:


	Number of Contracts		Recorded Investment
	(Dollars in thousands)
Defaulted Troubled Debt Restructurings:
Commercial, secured by real estate		4	$	1,550
Commercial, industrial and other		—		—
Leases		—		—
Real estate-residential mortgage		1		173
Real estate-construction		—		—
Home equity and consumer		1		400

		6	$	2,123

Leases

Lakeland had no leases held for sale as of September 30, 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 September 30,						For the nine months ended September 30,
	2011			2010			2011			2010

	(in thousands)						(in thousands)
Gains (losses) on sales of leases		$ —			($45	)		$143			($18	)
Realized gains on paid off leases		125			246			681			653
(Losses) gains on other repossessed assets		(8	)		111			(14	)		536

Total gains on leasing related assets		$117			$312			$810			$1,171

Other Real Estate and Other Repossessed Assets

At September 30, 2011, the Company had other repossessed assets and other real estate owned of $243,000 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.

Note 8. Employee Benefit Plans

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


	For the three months ended September 30,						For the nine months ended September 30,
	2011			2010			2011			2010

	(in thousands)						(in thousands)
Interest cost		$24			$24			$72			$72
Expected return on plan assets		(23	)		(21	)		(67	)		(60	)
Amortization of unrecognized net actuarial loss		12			14			36			41

Net periodic benefit expense		$13			$17			$41			$53

Note 9. Directors’ Retirement Plan

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


	For the three months ended September 30,				For the nine months ended September 30,
	2011		2010		2011		2010

	(in thousands)				(in thousands)
Service cost		$6		$6		$18		$20
Interest cost		12		13		36		38
Amortization of prior service cost		4		8		12		23
Amortization of unrecognized net actuarial loss		1		2		5		6

Net periodic benefit expense		$23		$29		$71		$87

The Company made contributions of $88,000 and $80,000 to the plan during the nine months ended September 30, 2011 and 2010, respectively. The Company 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.

The following table sets forth the Company’s financial assets that were accounted for at fair value on a recurring basis as of the periods presented by level within the fair value hierarchy. The Company had no liabilities accounted for at fair value as of September 30, 2011 or December 31, 2010. During the nine months ended September 30, 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:


September 30, 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		$ —		$23,784		$ —		$23,784
Mortgage backed securities		—		353,391		—		353,391
Obligations of states and political subdivisions		—		30,881		—		30,881
Corporate debt securities		—		19,846		—		19,846
Equity securities		1,694		19,289		—		20,983

Total securities available for sale		$1,694		$447,191		$ —		$448,885

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:


September 30, 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	$	—	$	—	$	42,031	$	42,031
Other real estate owned and other repossessed assets		—		—		1,342		1,342

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 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 September 30, 2011 and December 31, 2010 are outlined below.

The net loan portfolio at September 30, 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.

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


	September 30,				December 31,
	2011				2010
	Carrying Value		Estimated fair value		Carrying Value		Estimated fair value
Financial Assets:		(in thousands)
Cash and cash equivalents		$65,258		$65,258		$49,278		$49,278
Investment securities available for sale		448,885		448,885		487,107		487,107
Investment securities held to maturity		66,134		68,656		66,573		68,815
Loans, including leases held for sale		1,992,775		1,993,842		2,014,617		2,008,192
Financial Liabilities:
Deposits		2,232,565		2,235,777		2,195,889		2,199,018
Federal funds purchased and securities sold under agreements to repurchase		53,175		53,175		52,123		52,123
Other borrowings		110,000		120,697		195,000		209,631
Subordinated debentures		77,322		78,039		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 (“CPP”). 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 nine months ended September 30, 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.

In May 2011, the FASB and the International Accounting Standards Board (the “IASB”) issued new accounting guidance on fair value measurement and disclosure requirements. This guidance is the result of work by the FASB and IASB to develop common requirements for measuring fair value and disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). As a result, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The guidance is effective during interim and annual periods beginning after December 15, 2011. The guidance is to be applied prospectively, and early application by public entities is not permitted. Adoption of the guidance is not expected to have a significant impact on the Company’s financial statements.

In June 2011, the FASB issued accounting guidance updating the requirements regarding the presentation of comprehensive income to increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS. Under the new guidance, the components of net income and the components of other comprehensive income can be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present components of other comprehensive income as part of the changes in stockholders’ equity. This amendment will be applied prospectively and the amendments are effective for fiscal years and interim periods beginning after December 15, 2011. Early adoption is permitted. Adoption of the guidance is not expected to have a significant impact on the Company’s financial statements.

In September 2011, the FASB issued accounting guidance related to the annual testing of goodwill for impairment. Under the new guidance, an entity has the option to first determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. If, however, the entity concludes otherwise, then it is required to perform the first step of the two-step impairment test and then performing the second test, if required. This amendment is effective for annual and interim goodwill impairment tests performed for the fiscal years beginning after December 15, 2011. Early adoption is permitted.

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.

Results of Operations

(Third Quarter 2011 Compared to Third Quarter 2010)

Net Income

Net income for the third quarter of 2011 was $5.1 million, compared to net income of $4.9 million for the same period in 2010. Net income available to common shareholders was $4.8 million compared to $3.3 million for the same period last year. Dividends on preferred stock and accretion decreased to $293,000 for the third quarter of 2011 from $1.6 million for the same period last year. The lower dividends and accretion reflect a total of $40.0 million in repayments to the U.S. Department of the Treasury to repurchase preferred stock under the CPP. Diluted earnings per share was $0.19 for the third quarter of 2011, compared to diluted earnings per share of $0.13 for the same period last year. During the third quarter of 2010 the Company repaid $20.0 million in preferred stock to the U.S. Department of the Treasury under the CPP. In doing so, a non-cash charge of $898,000 was recorded, reflecting the acceleration of the preferred stock discount accretion. The non-cash charge affected diluted earnings per share in the third quarter of 2010 by $0.04.

Net Interest Income

Net interest income on a tax equivalent basis for the third quarter of 2011 was $24.6 million, compared to $25.3 million earned in the third quarter of 2010. The net interest margin decreased from 3.93% in the third quarter of 2010 to 3.85% in the third quarter of 2011, primarily as a result of a 30 basis point decline in the yield on interest-earning assets, which was partially offset by a 23 basis point reduction in the cost of interest-bearing liabilities. The net interest spread as a result declined six basis points to 3.68%. 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 $60.9 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%.


	For the three months ended, September 30, 2011								For the three months ended, September 30, 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)	$	1,982,637		$	25,999		5.20	%	$	1,976,248		$	27,670		5.55	%
Taxable investment securities		447,196			2,773		2.48	%		443,156			3,107		2.80	%
Tax-exempt securities		70,998			769		4.33	%		63,329			762		4.81	%
Federal funds sold (B)		36,453			16		0.18	%		63,824			42		0.26	%
Total interest-earning assets		2,537,284			29,557		4.63	%		2,546,557			31,581		4.93	%
Noninterest-earning assets:
Allowance for loan and lease losses		(29,132	)							(28,565	)
Other assets		254,153								263,741
TOTAL ASSETS	$	2,762,305							$	2,781,733

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Savings accounts	$	334,909		$	105		0.12	%	$	319,438		$	141		0.18	%
Interest-bearing transaction accounts		1,058,085			1,345		0.50	%		1,082,769			1,859		0.68	%
Time deposits		397,029			1,122		1.13	%		452,129			1,584		1.40	%
Borrowings		281,069			2,365		3.37	%		282,386			2,740		3.88	%
Total interest-bearing liabilities		2,071,092			4,937		0.95	%		2,136,722			6,324		1.18	%
Noninterest-bearing liabilities:
Demand deposits		424,938								364,075
Other liabilities		12,101								12,641
Stockholders’ equity		254,174								268,295
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,762,305							$	2,781,733
Net interest income/spread					24,620		3.68	%					25,257		3.74	%
Tax equivalent basis adjustment					269								267
NET INTEREST INCOME				$	24,351							$	24,990
Net interest margin (C)							3.85	%							3.93	%

(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 $31.6 million in the third quarter of 2010 to $29.6 million in the third quarter of 2011, a decrease of $2.0 million, or 6%. The decrease in interest income was due primarily to a 30 basis point decrease in the yield on interest earning assets, as a result of increased loan modifications and refinances along with lower yields on new loans and investments. The yield on average loans and leases at 5.20% in the third quarter of 2011 was 35 basis points lower than the third quarter of 2010. The yield on average taxable and tax exempt investment securities decreased by 32 basis points and 48 basis points, respectively, compared to the third quarter of 2010. Average loans and leases at $1.98 billion increased $6.4 million from the third quarter of 2010, while average investment securities at $518.2 million increased $11.7 million.

Total interest expense decreased from $6.3 million in the third quarter of 2010 to $4.9 million in the third quarter of 2011, a decrease of $1.4 million, or 22%. The cost of average interest-bearing liabilities decreased from 1.18% in the third quarter of 2010 to 0.95% in 2011. The decrease in yield was due to the continuing low rate environment along with a $55.1 million reduction in higher yielding time deposits as customers preferred to keep their deposits in short-term transaction accounts. Average rates paid on interest-bearing liabilities declined in all categories.

Provision for Loan and Lease Losses

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

In the third quarter of 2011, a $4.1 million provision for loan and lease losses was recorded, which was $799,000 lower than the provision for the same period last year. The Company also recorded a provision for unfunded lending commitments of $365,000 which is included in noninterest expense. During the third quarter of 2011, the Company charged off loans of $4.5 million and recovered $260,000 in previously charged off loans and leases compared to $5.9 million and $497,000, respectively, during the same period in 2010. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income decreased $994,000, or 16%, to $5.1 million in the third quarter of 2011 compared to the third quarter of 2010. The decrease in noninterest income was due primarily to gains on investment securities, which were $785,000 in the third quarter of 2011 compared to $1.7 million in the third quarter of 2010. Commissions and fees at $915,000 decreased by $50,000, or 5%, primarily due to a reduction in investment commission income and loan fees. Gains on leasing related assets at $117,000 decreased by $195,000, reflecting a smaller portfolio, while other income at $299,000 was $222,000 greater than the third quarter of 2010 as the Company recorded a gain of $173,000 on the sale of a branch office building in the third quarter of 2011. Income on bank owned life insurance at $356,000 was $20,000 less than the same period last year primarily as a result of decreases in rates for the underlying policies.

Noninterest Expense

Noninterest expense totaling $18.0 million decreased $911,000, or 5%, in the third quarter of 2011 from the third quarter of 2010. The decrease in noninterest expense in this quarter was due primarily to long term debt prepayment fees which totaled $800,000 in the third quarter of 2011 compared to $1.8 million in the third quarter of 2010. In the third quarter of 2011 $20.0 million in long-term debt at 4.10% was prepaid. FDIC insurance expense at $636,000 decreased $301,000 compared to the third quarter of 2010 as a result of changes made by the FDIC in the method of calculating assessment rates. Net occupancy expense at $1.7 million increased $98,000 compared to the third quarter of 2010 due primarily to increased lease expenses and real estate taxes, while furniture and equipment expense at $1.2 million decreased $98,000 due primarily to decreased equipment depreciation and service contract expenses. Stationery, supplies and postage at $298,000 decreased $62,000 or 17% primarily due to reduced postage expense as a result of the implementation of electronic statement delivery. Marketing expense totaling $612,000 increased $101,000 due primarily to the timing of media expenses. During the third quarter of 2011 the Company completed its core deposit intangible amortization, which resulted in a $219,000 decrease in that category. Collection expense totaling $70,000 in the third quarter of 2011 was $118,000 lower than the same period in 2010 due primarily to a reduction in leasing related costs, while legal expenses totaling $457,000 increased $45,000 due to increased workout expenses related to non-performing loans and leases. Expenses on other real estate owned and other repossessed assets were $217,000 greater than the same period in 2010 due primarily to a $180,000 write-down of an other real estate owned property. Other expenses at $2.6 million increased $253,000 due primarily to a $228,000 increase in the provision for unfunded lending commitments which totaled $365,000 in the third quarter of 2011 compared to $137,000 during the same period in 2010. The Company’s efficiency ratio, a non-GAAP financial measure, was 57.01% in the third quarter of 2011, compared to 55.94% for the same period last year due primarily to a reduction in interest income. The Company uses this ratio because it believes that the ratio provides a good comparison of period-to-period performance and because the ratio is widely accepted in the banking industry. The following table shows the calculation of the efficiency ratio for the periods presented:


	For the three months ended September 30,
	2011			2010

	(dollars in thousands)
Calculation of efficiency ratio
Total noninterest expense	$	18,040		$	18,951
Less:
Amortization of core deposit intangibles		(46	)		(265	)
Other real estate owned and other repossessed asset expense		(336	)		(119	)
Long term debt prepayment fee		(800	)		(1,835	)
Provision for unfunded lending commitments		(365	)		(137	)
Noninterest expense, as adjusted	$	16,493		$	16,595

Net interest income	$	24,351		$	24,990
Noninterest income		5,095			6,089
Total revenue		29,446			31,079
Plus: Tax-equivalent adjustment on municipal securities		269			267
Less: gains on investment securities		(785	)		(1,681	)
Total revenue, as adjusted	$	28,930		$	29,665

Efficiency ratio		57.01	%		55.94	%

Income Taxes

The Company’s effective tax rate was 30.5% in the third quarter of 2011, compared to 33.0% in the third 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.

Results of Operations

(Year to Date 2011 Compared to Year to Date 2010)

Net Income

Net income for the first nine months of 2011 was $14.7 million, compared to net income of $14.2 million for the same period in 2010. Net income available to common shareholders was $12.9 million compared to $10.8 million for the same period last year. Diluted earnings per share was $0.50 for the first nine months of 2011, compared to diluted earnings per share of $0.43 per share for the same period last year. Dividends on preferred stock and accretion declined from $3.4 million for the first nine months of 2010 to $1.9 million for the same period in 2011 reflecting repayments to the U.S. Department of the Treasury to repurchase preferred stock under the CPP. These repayments consisted of a $20.0 million repayment in August of 2010 and a $20.0 million repayment in March of 2011. Dividends on preferred stock and accretion in 2011 include a non-cash charge of $745,000 compared to a charge of $898,000 in 2010 reflecting the acceleration of the preferred stock discount accretion.

Net Interest Income

Net interest income on a tax equivalent basis for the first nine months of 2011 was $74.2 million, which was $1.2 million less than the $75.3 million earned in the first nine months of 2010. The net interest margin decreased from 3.96% in the first nine months of 2010 to 3.89% in the first nine months of 2011, primarily as a result a 33 basis point decline in the yield on interest-earning assets, which was partially offset by a 28 basis point reduction in the cost of interest-bearing liabilities. The net interest spread as a result declined 5 basis points to 3.71%. Although the net interest spread declined, the decline was mitigated by an increase in income earned on free funds resulting from an increase in average non-interest bearing deposits of $63.9 million. The components of net interest income will be discussed in greater detail below.


CONSOLIDATED STATISTICS ON A TAX EQUIVALENT BASIS

	For the nine months ended, September 30, 2011								For the nine months ended, September 30, 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 (A)	$	1,988,585		$	78,784		5.30	%	$	1,994,922		$	83,971		5.63	%
Taxable investment securities		461,149			8,448		2.44	%		423,589			9,099		2.86	%
Tax-exempt securities		69,929			2,317		4.42	%		62,221			2,326		4.98	%
Federal funds sold (B)		32,481			39		0.16	%		60,122			110		0.24	%
Total interest-earning assets		2,552,144			89,588		4.69	%		2,540,854			95,506		5.02	%
Noninterest-earning assets:
Allowance for loan and lease losses		(29,127	)							(27,474	)
Other assets		250,841								255,146
TOTAL ASSETS	$	2,773,858							$	2,768,526

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Savings accounts	$	330,103		$	361		0.15	%	$	318,078		$	476		0.20	%
Interest-bearing transaction accounts		1,075,313			4,314		0.54	%		1,069,720			6,215		0.78	%
Time deposits		407,182			3,635		1.19	%		467,052			5,166		1.47	%
Borrowings		282,133			7,111		3.36	%		280,942			8,329		3.95	%
Total interest-bearing liabilities		2,094,731			15,421		0.98	%		2,135,792			20,186		1.26	%
Noninterest-bearing liabilities:
Demand deposits		412,435								348,527
Other liabilities		12,455								12,591
Stockholders’ equity		254,237								271,616
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,773,858							$	2,768,526
Net interest income/spread					74,167		3.71	%					75,320		3.76	%
Tax equivalent basis adjustment					811								814
NET INTEREST INCOME				$	73,356							$	74,506

Net interest margin (C)							3.89	%							3.96	%

(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 $95.5 million in the first nine months of 2010 to $89.6 million in the first nine months of 2011, a decrease of $5.9 million, or 6%. The decrease in interest income was due to a 33 basis point decrease in the yield on interest earning assets, as a result of lower yields on new loans and investments, along with a lower percentage of earning assets being deployed in loans and leases. The yield on average loans and leases at 5.30% in the first nine months of 2011 was 33 basis points lower than the same period in 2010. The yield on average taxable and tax exempt investment securities decreased by 42 basis points and 56 basis points, respectively, in the first nine months of 2011. Average loans and leases at $1.99 billion decreased $6.3 million from the first nine months of 2010, while average investment securities at $531.1 million increased $45.3 million. Loans and leases typically earn higher yields than investment securities.

Total interest expense decreased from $20.2 million in the first nine months of 2010 to $15.4 million in the first nine months of 2011, a decrease of $4.8 million, or 24%. Average interest-bearing liabilities decreased $41.1 million, while the cost of those liabilities decreased from 1.26% in 2010 to 0.98% in 2011 for the same reasons as discussed in the quarterly analysis. Average noninterest bearing deposits increased from $348.5 million in the first nine months of 2010 to $412.4 million in the first nine months of 2011, an increase of $63.9 million, or 18%, while average time deposits decreased $59.9 million, or 13% to $407.2 million.

Provision for Loan and Lease Losses

In the first nine months of 2011, a $14.4 million provision for loan and lease losses was recorded, compared to $14.7 million for the same period last year. During the first nine months of 2011, the Company charged off loans of $17.1 million and recovered $3.4 million in previously charged off loans and leases compared to $14.9 million and $1.8 million, respectively, during the same period in 2010. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income decreased $716,000, or 5%, to $14.0 million in the first nine months of 2011 compared to the first nine months of 2010 due primarily to reductions in gains on investment securities and leasing related assets. In the first nine months of 2011, gains on investment securities totaled $1.2 million, which was a $453,000 reduction from the same period in 2010 and gains on leasing related assets at $810,000 for the first nine months of 2011 were $361,000 lower than the same period last year. Additionally, income on bank owned life insurance in the first nine months of 2011 totaling $1.1 million was $77,000 or 7% lower than the same period in 2010 for the same reasons discussed in the quarterly comparison.

Noninterest Expense

Noninterest expense totaling $51.8 million decreased $1.0 million or 2% in the first nine months of 2011 compared to the first nine months of 2010. Long term debt prepayment fees in the first nine months of 2011 were $800,000 compared to $1.8 million for the same period in 2010. FDIC insurance expense at $2.2 million and collection expenses at $195,000 were $656,000 and $300,000 lower, respectively, than the same period in 2010 due to the same reasons discussed in the quarterly comparison. Stationery, supplies and postage at $1.1 million in the first nine months of 2011 decreased $114,000 for the same reason discussed in the quarterly comparison. Core deposit intangible amortization at $577,000 was $219,000 less than the first nine months of 2010 due to the same reason discussed in the quarterly analysis, while other real estate and repossessed asset expense at $808,000 increased $454,000 as a result of increased expenses related to other real estate properties. Marketing expense totaling $1.8 million for the first nine months of 2011 was $133,000 or 8% higher than the same period in 2010 due to the same reasons mentioned in the quarterly analysis. The Company’s efficiency ratio, a non-GAAP financial measure, was 56.61% in the first nine months of 2011, compared to 56.13% for the same period last year reflecting continued management of expenses. The following table shows the calculation of the efficiency ratio for the periods presented:


	For the nine months ended September 30,
	2011			2010
	(dollars in thousands)
Calculation of efficiency ratio
Total noninterest expense	$	51,798		$	52,838
Less:
Amortization of core deposit intangibles		(577	)		(796	)
Other real estate owned and other repossessed asset expense		(808	)		(354	)
Long-term debt prepayment fee		(800	)		(1,835	)
Provision for unfunded lending commitments		(378	)		(243	)

Noninterest expense, as adjusted	$	49,235		$	49,610


Net interest income	$	73,356		$	74,506
Noninterest income		14,035			14,751

Total revenue		87,391			89,257
Plus: Tax-equivalent adjustment on municipal securities		811			814
Less: gains on investment securities		(1,229	)		(1,682	)

Total revenue, as adjusted	$	86,973		$	88,389


Efficiency ratio		56.61	%		56.13	%

Income Taxes

The Company’s effective tax rate was 30.5% in the first nine months of 2011, compared to 34.5% in the first nine months 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 $50.9 million from $2.79 billion at December 31, 2010, to $2.74 billion at September 30, 2011 due primarily to a 7% reduction in investment securities and a 1% reduction in total loans. Total deposits increased 2%, with non-interest bearing transaction accounts increasing 11%. The Company decreased other borrowings by $85.0 million or 44% since December 31, 2010.

Loans and Leases

Gross loans and leases, including leases held for sale, at $1.99 billion decreased by $20.4 million from December 31, 2010. The decrease in gross loans and leases is primarily due to leases at $36.2 million and residential mortgages at $392.5 million decreasing $31.0 million and $11.1 million, respectively. Commercial loans secured by real estate totaling $993.0 million at September 30, 2011 increased $22.8 million from year end 2010. 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 $57.7 million, or 2.11% of total assets, on September 30, 2011. The majority of the increase was in commercial loan and real estate construction loan non-accruals, which increased $7.9 million and $6.5 million, respectively from December 31, 2010. The increase in non-accruals resulted primarily from three loan relationships that became non-performing totaling $16.5 million. Leases on non-accrual decreased $1.6 million from December 31, 2010 to $4.7 million on September 30, 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 September 30, 2011 included eight loan relationships with balances over $1.0 million, totaling $23.8 million, and three loan relationships between $500,000 and $1.0 million, totaling $2.3 million.

Loans and leases past due ninety days or more and still accruing at September 30, 2011 increased $86,000 to $1.3 million from 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 September 30, 2011, the Company had $6.1 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 September 30, 2011, the Company had $42.0 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 commercial 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, $658,000 has been allocated as a portion of the allowance for loan and lease losses for impairment at September 30, 2011. At September 30, 2011, the Company also had $34.4 million in loans and leases that were rated substandard that were not classified as non-performing or impaired compared to $47.0 million at December 31, 2010.

There were no loans and leases at September 30, 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 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:


	Nine months ended September 30,			Nine months ended September 30,			Year ended December 31,
(dollars in thousands)	2011			2010			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)		7,346			7,267			9,266
Commercial, industrial and other		5,188			2,275			3,298
Leases		2,333			3,236			4,307
Real estate—mortgage		617			188			397
Home equity and consumer		1,614			1,911			2,250

Total loans charged off		17,098			14,877			19,518

Recoveries:
Commercial, secured by real estate (1)		1,876			126			134
Commercial, industrial and other		177			11			62
Leases		1,039			1,283			1,391
Real estate—mortgage		31			6			7
Home equity and consumer		277			369			411

Total Recoveries		3,400			1,795			2,005

Net charge-offs:		13,698			13,082			17,513
Provision for loan and lease losses		14,391			14,737			19,281

Ending balance	$	28,024		$	27,218		$	27,331

Ratio of annualized net charge-offs to average loans and leases outstanding		0.92	%		0.88	%		0.88	%
Ratio of allowance at end of period as a percentage of period end total loans and leases		1.41	%		1.37	%		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 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 $56.4 million on September 30, 2011, the allowance for loan and lease losses as a percent of total loans increased to 1.41% of total loans on September 30, 2011, compared to 1.36% as of December 31, 2010. As discussed above, the increase in non-performing loans was related primarily to three loan relationships. 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 September 30, 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 $515.0 million on September 30, 2011, a decrease of $38.7 million, or 7%.

Deposits

Total deposits increased from $2.20 billion on December 31, 2010 to $2.23 billion on September 30, 2011, an increase of $36.7 million, or 2%. Savings and interest-bearing transaction accounts totaling $1.41 billion increased $11.9 million from December 31, 2010, while time deposits totaling $396.7 million decreased $16.1 million. Noninterest bearing deposits increased $40.9 million, or 11%, to $424.8 million, resulting primarily from an increase in commercial noninterest bearing deposits.

Liquidity

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

The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statement for the nine months ended September 30, 2011 follows.

Cash and cash equivalents totaling $65.3 million on September 30, 2011, increased $16.0 million from December 31, 2010. Operating activities provided $39.6 million in net cash. Investing activities provided $48.2 million in net cash, primarily reflecting maturities, repayments and sales of securities. Financing activities used $71.8 million in net cash, reflecting repayments of $85.0 million in other borrowings and the redemption of $20.0 million in preferred stock, partially offset by $36.7 million in new 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 September 30, 2011. Interest on subordinated debentures and long-term borrowed funds is calculated based on current contractual interest rates.


(dollars in thousands)	Total		Within one year		After one but within three years		After three but within five years		After five years
Minimum annual rentals or noncancellable operating leases		$16,309		$1,860		$3,300		$2,727		$8,422
Benefit plan commitments		4,980		185		370		300		4,125
Remaining contractual maturities of time deposits		396,718		298,251		83,341		14,198		928
Subordinated debentures		77,322		—		—		—		77,322
Loan commitments		463,610		390,966		44,303		2,296		26,045
Long-term debt		110,000		15,000		10,000		40,000		45,000
Interest on long-term debt*		115,446		8,077		15,363		12,968		79,038
Series A Preferred Stock		19,000		—		—		—		19,000
Interest on Series A Preferred Stock		10,807		950		2,375		3,420		4,062
Standby letters of credit		9,957		8,522		1,218		137		80

Total		$1,224,149		$723,811		$160,270		$76,046		$264,022

*Includes

interest on long-term debt and subordinated debentures at a weighted rate of 4.36%.

Capital Resources

Total stockholders’ equity decreased from $260.7 million on December 31, 2010 to $254.9 million on September 30, 2011, a decrease of $5.8 million, or 2%. Book value per common share increased to $9.26 on September 30, 2011 from $8.82 on December 31, 2010. The decrease in stockholders’ equity from December 31, 2010 to September 30, 2011 was primarily due to the $20.0 million redemption of preferred stock and payment of cash dividends of $4.8 million. This was partially offset by $14.7 million in net income and a $3.4 million 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 adverse effect on the Company or Lakeland’s financial statements. Management believes, as of September 30, 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 September 30, 2011 are as follows:


	Tier 1 Capital	Tier 1 Capital	Total Capital
	to Total Average	to Risk-Weighted	to Risk-Weighted
	Assets Ratio	Assets Ratio	Assets Ratio
	September 30,	September 30,	September 30,
Capital Ratios:	2011	2011	2011
The Company	8.29%	11.21%	13.46%
Lakeland Bank	8.44%	11.42%	12.67%
“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.


(dollars in thousands, except per share amounts)	September 30, 2011			December 31, 2010

Calculation of tangible book value per common share
Total common stockholders’ equity at end of period - GAAP		$236,474			$223,235
Less:
Goodwill		87,111			87,111
Other identifiable intangible assets, net		—			578

Total tangible common stockholders’ equity at end of period - Non- GAAP		$149,363			$135,546


Shares outstanding at end of period		25,528			25,322


Book value per share - GAAP		$9.26			$8.82


Tangible book value per share - Non-GAAP		$5.85			$5.35


Calculation of tangible common equity to tangible assets
Total tangible common stockholders’ equity at end of period - Non- GAAP		$149,363			$135,546


Total assets at end of period		$2,741,768			$2,792,674
Less:
Goodwill		87,111			87,111
Other identifiable intangible assets, net		—			578

Total tangible assets at end of period - Non-GAAP		$2,654,657			$2,704,985


Common equity to assets - GAAP		8.62	%		7.99	%


Tangible common equity to tangible assets - Non-GAAP		5.63	%		5.01	%


	For the three months ended,						For the nine months ended,
	September 30, 2011			September 30, 2010			September 30, 2011			September 30, 2010

Calculation of return on average tangible common equity
Net income - GAAP		$5,106			$4,872			$14,735			$14,191

Total average common stockholders’ equity		$235,785			$223,941			$230,689			$219,431
Less:
Average goodwill		87,111			87,111			87,111			87,111
Average other identifiable intangible assets, net		15			990			221			1,254

Total average tangible common stockholders’ equity - Non-GAAP		$148,659			$135,840			$143,357			$131,066

Return on average common stockholders’ equity - GAAP		8.59	%		8.63	%		8.54	%		8.65	%

Return on average tangible common stockholders’ equity - Non-GAAP		13.63	%		14.23	%		13.74	%		14.48	%

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

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

The starting point (or “base case”) for the following table is an estimate of the following year’s net interest income assuming that both interest rates and the Company’s interest-sensitive assets and liabilities remain at period-end levels. The net interest income estimated for the next twelve months (the base case) is $95.8 milllion. 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%
September 30, 2011	-3.0%	-1.2%	-2.0%	-2.7%
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 September 30, 2011 (the base case) was $323.6 million. The information provided for the net portfolio value assumes fluctuations or “rate shocks” of plus 200 basis points and minus 200 basis points for changes in interest rates as shown in the table below. Rate shocks assume that current interest rates change immediately.


	Changes in interest rates
Rate Shock	+200 bp	+100 bp	-100 bp	-200 bp
Asset/Liability Policy Limit	-25.0%			-25.0%
September 30, 2011	-4.2%	1.0%	-6.6%	-13.6%
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 September 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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.

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.

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document


		* Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

SIGNATURES

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

Lakeland Bancorp, Inc.

(Registrant)

/s/ Thomas J. Shara

Thomas J. Shara

President and Chief Executive Officer

/s/ Joseph F. Hurley

Joseph F. Hurley

Executive Vice President and

Chief Financial Officer

Date: November 9, 2011

LAKELAND BANCORP INC - FORM 10-Q - November 9, 2011

Attached files

Stock widget

Investing forum

LAKELAND BANCORP INC Reports

Also read