Form 10-Q
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one)

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

For the quarterly period ended March 31, 2015

OR

 

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

For the transition period from                      to                     

Commission file number 000-17820

 

 

LAKELAND BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

New Jersey   22-2953275
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
250 Oak Ridge Road, Oak Ridge, New Jersey   07438
(Address of principal executive offices)   (Zip Code)

(973) 697-2000

(Registrant’s telephone number, including area code)

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

 

 

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

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

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

 

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

As of April 30, 2015, there were 37,900,107 outstanding shares of Common Stock, no par value.

 

 

 

 


Table of Contents

LAKELAND BANCORP, INC.

Form 10-Q Index

 

  PAGE   
Part I Financial Information

Item 1. Financial Statements:

Consolidated Balance Sheets—March 31, 2015 (unaudited) and December 31, 2014

  3   

Consolidated Statements of Income —Unaudited Three Months Ended March 31, 2015 and 2014

  4   

Consolidated Statements of Comprehensive Income—Unaudited Three Months Ended March 31, 2015 and 2014

  5   

Consolidated Statements of Changes in Stockholders’ Equity—Unaudited Three Months Ended March  31, 2015

  6   

Consolidated Statements of Cash Flows—Unaudited Three Months Ended March 31, 2015 and 2014

  7   

Notes to Consolidated Financial Statements (unaudited)

  8   

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

  32   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  44   

Item 4. Controls and Procedures

  45   
Part II Other Information

Item 1. Legal Proceedings

  46   

Item 1A. Risk Factors

  46   

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

  46   

Item 3. Defaults Upon Senior Securities

  46   

Item 4. Mine Safety Disclosures

  46   

Item 5. Other Information

  46   

Item 6. Exhibits

  46   

Signatures

  47   

The Securities and Exchange Commission maintains a web site which contains reports, proxy and information statements and other information relating to registrants that file electronically at the address: http:/ / www.sec.gov.

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

     March 31, 2015     December 31,  
     (unaudited)     2014  
     (dollars in thousands except share and per share amounts)  

ASSETS:

    

Cash

   $ 112,929      $ 102,549   

Interest-bearing deposits due from banks

     20,276        6,767   
  

 

 

   

 

 

 

Total cash and cash equivalents

  133,205      109,316   

Investment securities available for sale, at fair value

  473,452      457,449   

Investment securities held to maturity; fair value of $117,717 at March 31, 2015 and $109,030 at December 31, 2014

  115,779      107,976   

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

  10,755      9,846   

Loans held for sale

  1,598      592   

Loans, net of deferred costs (fees)

  2,689,796      2,653,826   

Less: allowance for loan and lease losses

  30,505      30,684   
  

 

 

   

 

 

 

Net loans

  2,659,291      2,623,142   

Premises and equipment, net

  35,626      35,675   

Accrued interest receivable

  8,860      8,896   

Goodwill

  109,974      109,974   

Other identifiable intangible assets

  1,849      1,960   

Bank owned life insurance

  61,481      57,476   

Other assets

  15,894      16,023   
  

 

 

   

 

 

 

TOTAL ASSETS

$ 3,627,764    $ 3,538,325   
  

 

 

   

 

 

 

LIABILITIES

Deposits:

Noninterest bearing

$ 672,264    $ 646,052   

Savings and interest-bearing transaction accounts

  1,878,598      1,864,805   

Time deposits under $100 thousand

  164,946      165,625   

Time deposits $100 thousand and over

  126,757      114,337   
  

 

 

   

 

 

 

Total deposits

  2,842,565      2,790,819   

Federal funds purchased and securities sold under agreements to repurchase

  117,351      108,935   

Other borrowings

  222,728      202,498   

Subordinated debentures

  41,238      41,238   

Other liabilities

  15,798      15,397   
  

 

 

   

 

 

 

TOTAL LIABILITIES

  3,239,680      3,158,887   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

Common stock, no par value; authorized shares, 70,000,000; issued 37,900,107 shares at March 31, 2015 and 37,910,840 shares at December 31, 2014

  385,219      384,731   

Accumulated deficit

  (1,338   (6,816

Accumulated other comprehensive income

  4,203      1,523   
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

  388,084      379,438   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$ 3,627,764    $ 3,538,325   
  

 

 

   

 

 

 

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME—UNAUDITED

 

     For the Three Months Ended March 31,  
     2015     2014  
     (In thousands, except per share data)  

INTEREST INCOME

    

Loans, leases and fees

   $ 27,896      $ 26,898   

Federal funds sold and interest-bearing deposits with banks

     12        13   

Taxable investment securities and other

     2,674        2,546   

Tax-exempt investment securities

     410        473   
  

 

 

   

 

 

 

TOTAL INTEREST INCOME

  30,992      29,930   
  

 

 

   

 

 

 

INTEREST EXPENSE

Deposits

  1,283      1,263   

Federal funds purchased and securities sold under agreements to repurchase

  22      15   

Other borrowings

  1,169      807   
  

 

 

   

 

 

 

TOTAL INTEREST EXPENSE

  2,474      2,085   
  

 

 

   

 

 

 

NET INTEREST INCOME

  28,518      27,845   

Provision for loan and lease losses

  870      1,489   
  

 

 

   

 

 

 

NET INTEREST INCOME AFTER

PROVISION FOR LOAN AND LEASE LOSSES

  27,648      26,356   

NONINTEREST INCOME

Service charges on deposit accounts

  2,340      2,559   

Commissions and fees

  1,307      1,013   

Gains on sales and calls of investment securities

  —        2   

Income on bank owned life insurance

  699      360   

Other income

  392      139   
  

 

 

   

 

 

 

TOTAL NONINTEREST INCOME

  4,738      4,073   
  

 

 

   

 

 

 

NONINTEREST EXPENSE

Salaries and employee benefits

  11,750      10,813   

Net occupancy expense

  2,548      2,617   

Furniture and equipment

  1,656      1,693   

Stationery, supplies and postage

  365      354   

Marketing expense

  240      386   

FDIC insurance expense

  518      501   

Legal expense

  116      273   

Expenses on other real estate owned and other repossessed assets

  (8   15   

Core deposit intangible amortization

  111      123   

Other expenses

  2,746      2,967   
  

 

 

   

 

 

 

TOTAL NONINTEREST EXPENSE

  20,042      19,742   
  

 

 

   

 

 

 

Income before provision for income taxes

  12,344      10,687   

Income tax expense

  4,014      3,524   
  

 

 

   

 

 

 

NET INCOME

$ 8,330    $ 7,163   
  

 

 

   

 

 

 

PER SHARE OF COMMON STOCK

Basic earnings

$ 0.22    $ 0.19   
  

 

 

   

 

 

 

Diluted earnings

$ 0.22    $ 0.19   
  

 

 

   

 

 

 

Dividends

$ 0.075    $ 0.071   
  

 

 

   

 

 

 

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME-UNAUDITED

 

     For the Three Months Ended March 31,  
     2015      2014  
     (in thousands)  

NET INCOME

   $ 8,330       $ 7,163   
  

 

 

    

 

 

 

OTHER COMPREHENSIVE INCOME, NET OF TAX:

Unrealized securities gains during period

  2,675      2,988   

Reclassification for gains included in net income

  —        (2

Change in pension liability, net

  5      5   
  

 

 

    

 

 

 

Other Comprehensive Income

  2,680      2,991   
  

 

 

    

 

 

 

TOTAL COMPREHENSIVE INCOME

$ 11,010    $ 10,154   
  

 

 

    

 

 

 

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

 

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY—UNAUDITED

Three Months Ended March 31, 2015

 

     Common
Stock
    Accumulated
deficit
    Accumulated
Other
Comprehensive
Income
     Total  
     (dollars in thousands)  

BALANCE January 1, 2015

   $ 384,731      ($ 6,816   $ 1,523       $ 379,438   

Net Income

     —          8,330        —           8,330   

Other comprehensive income, net of tax

     —          —          2,680         2,680   

Stock based compensation

     567        —          —           567   

Retirement of restricted stock

     (230     —          —           (230

Exercise of stock options, net of excess tax benefits

     151        —          —           151   

Cash dividends, common stock

     —          (2,852     —           (2,852
  

 

 

   

 

 

   

 

 

    

 

 

 

BALANCE March 31, 2015 (UNAUDITED)

$ 385,219    ($ 1,338 $ 4,203    $ 388,084   
  

 

 

   

 

 

   

 

 

    

 

 

 

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS—UNAUDITED

 

     For the Three Months Ended March 31,  
     2015     2014  
     (dollars in thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 8,330      $ 7,163   

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

    

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

     874        758   

Depreciation and amortization

     849        970   

Amortization of intangible assets

     111        123   

Provision for loan and lease losses

     870        1,489   

Loans originated for sale

     (11,976     (3,775

Proceeds from sales of loans

     11,235        5,064   

Gains on calls of securities

     —          (2

Gains on proceeds of bank owned life insurance

     (332     —     

Gains on sales of loans held for sale

     (265     (83

Gains on other real estate and other repossessed assets

     (94     (39

Losses on sales of premises and equipment

     3        —     

Stock-based compensation

     567        248   

Increase in other assets

     (1,954     (383

Increase (decrease) in other liabilities

     410        (667
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

  8,628      10,866   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from repayments on and maturity of securities:

Available for sale

  19,309      11,421   

Held to maturity

  4,162      7,660   

Purchase of securities:

Available for sale

  (31,706   (5,959

Held to maturity

  (12,100   (1,488

Purchase of bank owned life insurance

  (4,078   —     

Proceeds from bank owned life insurance policy

  772      —     

Net (increase) decrease in Federal Home Loan Bank Stock

  (910   1   

Net increase in loans and leases

  (37,298   (36,417

Proceeds from sales of other real estate and repossessed assets

  559      127   

Capital expenditures

  (947   (577
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

  (62,237   (25,232
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

Net increase in deposits

  51,783      27,576   

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

  8,416      33,961   

Proceeds from other borrowings

  20,230      20,000   

Repayments of other borrowings

  —        (20,000

Excess tax benefits

  58      65   

Exercise of stock options

  93      79   

Retirement of restricted stock

  (230   (56

Issuance of stock to dividend reinvestment and stock purchase plan

  —        26   

Dividends paid

  (2,852   (2,401
  

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

  77,498      59,250   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

  23,889      44,884   

Cash and cash equivalents, beginning of period

  109,316      102,721   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

$ 133,205    $ 147,605   
  

 

 

   

 

 

 

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

 

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Table of Contents

Notes to Consolidated Financial Statements – (Unaudited)

Note 1. Significant Accounting Policies

Basis of Presentation.

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

The Company’s unaudited interim financial statements reflect all adjustments, such as normal recurring accruals that are, in the opinion of management, necessary for the fair presentation of the results of the interim periods. The results of operations for the quarter ended March 31, 2015 do not necessarily indicate the results that the Company will achieve for all of 2015. 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, 2014.

On May 21, 2014, the Company’s Board of Directors authorized a 5% stock dividend which was distributed on June 17, 2014 to holders of record as of June 3, 2014. All weighted average, actual share and per share information set forth in this Quarterly Report on Form 10-Q have been adjusted retroactively for the effects of the stock dividend.

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.

Certain reclassifications have been made to prior period financial statements to conform to the 2015 presentation.

Note 2. Share-Based Compensation

The Company grants stock options, restricted stock and restricted stock units (RSUs) under the 2009 Equity Compensation Program. Share-based compensation expense of $567,000 and $248,000 was recognized for the three months ended March 31, 2015 and 2014, respectively. As of March 31, 2015, there was unrecognized compensation cost of $569,000 related to unvested restricted stock; that cost is expected to be recognized over a weighted average period of approximately 2.3 years. Unrecognized compensation expense related to unvested stock options was approximately $75,000 as of March 31, 2015 and is expected to be recognized over a period of 2.2 years. Unrecognized compensation expense related to RSUs was approximately $1.6 million as of March 31, 2015, and that cost is expected to be recognized over a period of 2.0 years.

In the first three months of 2014, the Company granted 1,942 shares of restricted stock at a grant date fair value of $11.21 per share under the 2009 Equity Compensation Program. Compensation expense on these shares is expected to average approximately $4,000 per year over a five year period.

In the first three months of 2015, the Company granted 120,509 RSUs at a weighted average grant date fair value of $11.01 per share under the Company’s 2009 Equity Compensation Program. These units vest within a range of two to three years. A portion of these RSUs will vest subject to certain performance conditions in the restricted stock unit agreement. There are also certain provisions in the compensation program which state that if a holder of the RSUs reaches a certain age and years of service, the person has effectively earned a portion of the RSUs at that time. Compensation expense on these restricted stock units is expected to average approximately $442,000 per year over a three year period. In the first three months of 2014, the Company granted 125,697 RSUs at a weighted average grant date fair value of $10.66 per share under the Company’s 2009 Equity Compensation Program. Compensation expense on these RSUs is expected to average approximately $447,000 over a three year period.

There were no grants of stock options in the first three months of 2015 or 2014.

 

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Table of Contents

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

 

     Number of
shares
     Weighted
average
exercise
price
     Weighted
average
remaining
contractual
term
(in years)
     Aggregate
intrinsic value
 

Outstanding, January 1, 2015

     311,705       $ 9.69          $ 681,861   

Issued

     —           —           

Exercised

     (12,540      7.39         

Forfeited

     (2,810      12.29         

Expired

     —           —           
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding, March 31, 2015

  296,355    $ 9.76      4.01    $ 585,356   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options exercisable at

March 31, 2015

  264,855    $ 9.79      3.52    $ 519,867   
  

 

 

    

 

 

    

 

 

    

 

 

 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the first three months of 2015 and the exercise price, multiplied by the number of in-the-money options).

The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2015 and 2014 was $50,000 and $38,000, respectively. Exercise of stock options during the first three months of 2015 and 2014 resulted in cash receipts of $93,000 and $79,000, respectively.

Information regarding the Company’s restricted stock (all unvested) and changes during the three months ended March 31, 2015 is as follows:

 

     Number of
shares
     Weighted
average
price
 

Outstanding, January 1, 2015

     160,284       $ 9.21   

Granted

     —           —     

Vested

     (86,470      9.11   

Forfeited

     (88      9.39   
  

 

 

    

 

 

 

Outstanding, March 31, 2015

  73,726    $ 9.32   
  

 

 

    

 

 

 

Information regarding the Company’s RSUs (all unvested) and changes during the three months ended March 31, 2015 is as follows:

 

     Number of
shares
     Weighted
average
price
 

Outstanding, January 1, 2015

     98,535       $ 10.64   

Granted

     120,509         11.01   

Vested

     (25,566      11.02   

Forfeited

     (415      10.71   
  

 

 

    

 

 

 

Outstanding, March 31, 2015

  193,063    $ 10.82   
  

 

 

    

 

 

 

 

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Table of Contents

Note 3. Comprehensive Income

The components of other comprehensive income are as follows:

 

For the quarter ended:    Before
tax amount
     March 31, 2015
Tax Benefit
(Expense)
    Net of
tax amount
     Before
tax amount
    March 31, 2014
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

   $ 4,225       ($ 1,550   $ 2,675       $ 4,715      ($ 1,727   $ 2,988   

Reclassification adjustment for net gains arising during the period

     —           —          —           (3     1        (2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net unrealized gains

$ 4,225    ($ 1,550 $ 2,675    $ 4,712    ($ 1,726 $ 2,986   

Change in minimum pension liability

  8      (3   5      8      (3   5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income, net

$ 4,233    ($ 1,553 $ 2,680    $ 4,720    ($ 1,729 $ 2,991   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

Changes in Accumulated Other Comprehensive Income by Component (a)

 

     For the Three Months Ended      For the Three Months Ended  
     March 31, 2015      March 31, 2014  
     Unrealized                   Unrealized Gains              
     Gains on                   (Losses) on              
     Available-for-sale                   Available-for-sale              
     Securities      Pension Items     Total      Securities     Pension Items     Total  
     (in thousands)  

Beginning Balance

   $ 1,531       ($ 8   $ 1,523       ($ 4,647   ($ 28   ($ 4,675
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income before classifications

  2,675      5      2,680      2,988      5      2,993   

Amounts reclassified from accumulated other comprehensive income

  —        —        —        (2   —        (2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income

  2,675      5      2,680      2,986      5      2,991   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

$ 4,206    ($ 3 $ 4,203    ($ 1,661 ($ 23 ($ 1,684
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(a) All amounts are net of tax.

 

 

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Table of Contents

Note 4. Statement of Cash Flow Information, Supplemental Information

 

     For the Three Months Ended  
     March 31,  
     2015      2014  
     (in thousands)  

Supplemental schedule of noncash investing and financing activities:

  

Cash paid during the period for income taxes

   $ 4,706       $ 3,500   

Cash paid during the period for interest

     2,403         2,095   

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

     266         266   

Note 5. Earnings Per Share

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

 

     For the Three Months Ended  
     March 31,  
(In thousands, except per share data)    2015      2014  

Net income available to common shareholders

   $ 8,330       $ 7,163   

Less: earnings allocated to participating securities

     50         36   
  

 

 

    

 

 

 

Net income allocated to common shareholders

$ 8,280    $ 7,127   
  

 

 

    

 

 

 

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

  37,800      37,683   

Share-based plans (1)

  137      123   
  

 

 

    

 

 

 

Weighted average number of common shares— diluted (1)

  37,937      37,806   
  

 

 

    

 

 

 

Basic earnings per share

$ 0.22    $ 0.19   
  

 

 

    

 

 

 

Diluted earnings per share

$ 0.22    $ 0.19   
  

 

 

    

 

 

 

 

(1) Adjusted for 5% stock dividend distributed June 17, 2014 to shareholders of record on June 3, 2014 .

Options to purchase 113,023 shares of common stock at a weighted average price of $12.06 per share were outstanding and were not included in the computations of diluted earnings per share for the three months ended March 31, 2015 because the exercise price was greater than the average market price.

Options to purchase 357,163 shares of common stock at a weighted average price of $11.90 per share were outstanding and were not included in the computation of diluted earnings per share for the quarter ended March 31, 2014 because the exercise price was greater than the average market price.

 

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Note 6. Investment Securities

 

AVAILABLE FOR SALE

  March 31, 2015     December 31, 2014  
    Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair Value     Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair Value  
    (in thousands)     (in thousands)  

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

  $ 105,797      $ 897      $ (119   $ 106,575      $ 94,466      $ 261      $ (807   $ 93,920   

Mortgage-backed securities, residential

    308,784        4,114        (1,030     311,868        309,162        2,868        (2,075     309,955   

Mortgage-backed securities, multifamily

    4,974        92        —          5,066        4,973        3        —          4,976   

Obligations of states and political subdivisions

    30,518        963        (107     31,374        29,764        888        (133     30,519   

Other debt securities

    495        9        —          504        494        11        —          505   

Equity securities

    16,265        2,002        (202     18,065        16,196        1,589        (211     17,574   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
$ 466,833    $ 8,077    $ (1,458 $ 473,452    $ 455,055    $ 5,620    $ (3,226 $ 457,449   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

HELD TO MATURITY

  March 31, 2015     December 31, 2014  
    Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair Value     Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair Value  
    (in thousands)     (in thousands)  

U.S. government agencies

  $ 25,550      $ 498      $ (10   $ 26,038      $ 20,477      $ 232      $ (84   $ 20,625   

Mortgage-backed securities, residential

    40,673        806        (125     41,354        42,309        645        (385     42,569   

Mortgage-backed securities, multifamily

    2,233        —          (26     2,207        2,259        —          (60     2,199   

Obligations of states and political subdivisions

    45,795        755        (92     46,458        41,401        658        (90     41,969   

Other debt securities

    1,528        132        —          1,660        1,530        138        —          1,668   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
$ 115,779    $ 2,191    $ (253 $ 117,717    $ 107,976    $ 1,673    $ (619 $ 109,030   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

     March 31, 2015  
     Available for Sale      Held to Maturity  
     Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value  

Due in one year or less

   $ 1,966       $ 1,992       $ 7,922       $ 7,951   

Due after one year through five years

     86,033         86,940         12,574         12,994   

Due after five years through ten years

     47,429         48,154         45,746         46,541   

Due after ten years

     1,382         1,367         6,631         6,670   
  

 

 

    

 

 

    

 

 

    

 

 

 
  136,810      138,453      72,873      74,156   

Mortgage-backed securities

  313,758      316,934      42,906      43,561   

Equity securities

  16,265      18,065      —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

$ 466,833    $ 473,452    $ 115,779    $ 117,717   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no sales of securities for the three months ended March 31, 2015 or 2014.

Securities with a carrying value of approximately $380.6 million and $356.1 million at March 31, 2015 and December 31, 2014, respectively, were pledged to secure public deposits and for other purposes required by applicable laws and regulations.

 

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The following table indicates the length of time individual securities have been in a continuous unrealized loss position at March 31, 2015 and December 31, 2014:

 

March 31, 2015   Less than 12 months     12 months or longer     Total  
          Unrealized           Unrealized     Number of           Unrealized  
AVAILABLE FOR SALE   Fair value     Losses     Fair value     Losses     securities     Fair value     Losses  
                (dollars in thousands)              

U.S. government agencies

  $ 33,157      $ 101      $ 3,982      $ 18        7      $ 37,139      $ 119   

Mortgage-backed securities, residential

    25,926        147        57,757        883        20        83,683        1,030   

Obligations of states and political subdivisions

    4,123        52        1,481        55        11        5,604        107   

Equity securities

    —          —          4,866        202        2        4,866        202   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
$ 63,206    $ 300    $ 68,086    $ 1,158      40    $ 131,292    $ 1,458   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

HELD TO MATURITY

U.S. government agencies

$ 5,776    $ 10    $ —      $ —        1    $ 5,776    $ 10   

Mortgage-backed securities, residential

  2,579      3      7,797      122      4      10,376      125   

Mortgage-backed securities, multifamily

  1,282      4      925      22      2      2,207      26   

Obligations of states and political subdivisions

  8,928      56      1,619      36      12      10,547      92   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
$ 18,565    $ 73    $ 10,341    $ 180      19    $ 28,906    $ 253   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
December 31, 2014   Less than 12 months     12 months or longer     Total  
          Unrealized           Unrealized     Number of           Unrealized  
AVAILABLE FOR SALE   Fair value     Losses     Fair value     Losses     securities     Fair value     Losses  
                (dollars in thousands)              

U.S. government agencies

  $ 5,057      $ 28      $ 46,135      $ 779        11      $ 51,192      $ 807   

Mortgage-backed securities, residential

    34,832        177        74,414        1,898        28        109,246        2,075   

Obligations of states and political subdivisions

    1,266        29        5,033        104        12        6,299        133   

Equity securities

    —          —          4,819        211        2        4,819        211   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
$ 41,155    $ 234    $ 130,401    $ 2,992      53    $ 171,556    $ 3,226   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

HELD TO MATURITY

U.S. government agencies

$ —      $ —      $ 5,736    $ 84      1    $ 5,736    $ 84   

Mortgage-backed securities, residential

  6,236      50      17,557      335      8      23,793      385   

Mortgage-backed securities, multifamily

  —        —        2,199      60      2      2,199      60   

Obligations of states and political subdivisions

  1,290      7      4,206      83      13      5,496      90   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
$ 7,526    $ 57    $ 29,698    $ 562      24    $ 37,224    $ 619   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Management has evaluated the securities in the above table and has concluded that none of the securities are other-than-temporarily impaired. The cause of the fair values being below cost is due to interest rate movements and is deemed temporary. All investment securities are evaluated on a periodic basis to identify any factors that would require a further analysis. In evaluating the Company’s securities, management considers the following items:

 

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

 

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    The financial condition of the underlying issuer;

 

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

 

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

 

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

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

As of March 31, 2015, the equity securities include investments in other financial institutions for market appreciation purposes. Those equities had a purchase price of $2.6 million and a market value of $4.5 million as of March 31, 2015.

As of March 31, 2015, equity securities also included $13.5 million in investment funds that do not have a quoted market price but use net asset value per share or its equivalent to measure fair value.

The funds include $2.9 million in funds that are primarily invested in community development loans that are guaranteed by the Small Business Administration (SBA). Because the funds are primarily guaranteed by the federal government there are minimal changes in market value between accounting periods. These funds can be redeemed with 60 days notice at the net asset value less unpaid management fees with the approval of the fund manager. As of March 31, 2015, the net amortized cost equaled the market value of the investment. There are no unfunded commitments related to this investment.

The funds also include $10.6 million in funds that are invested in government guaranteed loans, mortgage-backed securities, small business loans and other instruments supporting affordable housing and economic development. The Company may redeem these funds at the net asset value calculated at the end of the current business day less any unpaid management fees. As of March 31, 2015, the amortized cost of these securities was $10.7 million and the fair value was $10.6 million. There are no restrictions on redemptions for the holdings in these investments other than the notice required by the fund manager. There are no unfunded commitments related to this investment.

Note 7. Loans, Leases and Other Real Estate.

The following sets forth the composition of Lakeland’s loan and lease portfolio as of March 31, 2015 and December 31, 2014:

 

     March 31,
2015
     December 31,
2014
 
     (in thousands)  

Commercial, secured by real estate

   $ 1,562,898       $ 1,529,761   

Commercial, industrial and other

     244,162         238,252   

Leases

     54,271         54,749   

Real estate-residential mortgage

     426,339         431,190   

Real estate-construction

     73,230         64,020   

Home equity and consumer

     330,805         337,642   
  

 

 

    

 

 

 

Total loans

  2,691,705      2,655,614   
  

 

 

    

 

 

 

Less: deferred fees

  (1,909   (1,788
  

 

 

    

 

 

 

Loans, net of deferred fees

$ 2,689,796    $ 2,653,826   
  

 

 

    

 

 

 

 

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Table of Contents

At March 31, 2015 and December 31, 2014, home equity and consumer loans included overdraft deposit balances of $529,000 and $791,000, respectively. At March 31, 2015 and December 31, 2014, the Company had $380.7 million and $338.5 million in residential loans pledged for actual and potential borrowings at the Federal Home Loan Bank of New York (FHLB).

Non-Performing Assets and Past Due Loans

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

 

(in thousands)

   March 31,
2015
     December 31,
2014
 

Commercial, secured by real estate

   $ 6,825       $ 7,424   

Commercial, industrial and other

     285         308   

Leases

     111         88   

Real estate - residential mortgage

     9,552         9,246   

Real estate - construction

     169         188   

Home equity and consumer

     3,472         3,415   
  

 

 

    

 

 

 

Total non-accrual loans and leases

$ 20,414    $ 20,669   

Other real estate and other repossessed assets

  826      1,026   
  

 

 

    

 

 

 

TOTAL NON-PERFORMING ASSETS

$ 21,240    $ 21,695   
  

 

 

    

 

 

 

Troubled debt restructurings, still accruing

$ 11,538    $ 10,579   
  

 

 

    

 

 

 

Non-accrual loans included $2.0 million and $1.3 million of troubled debt restructurings as of March 31, 2015 and December 31, 2014, respectively. As of March 31, 2015, the Company had $8.4 million in consumer mortgage loans that were in the process of foreclosure.

 

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Table of Contents

An age analysis of past due loans, segregated by class of loans as of March 31, 2015 and December 31, 2014, is as follows:

 

March 31, 2015

   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

   $ 5,810       $ 1,915       $ 5,860       $ 13,585       $ 1,549,313       $ 1,562,898       $ —     

Commercial, industrial and other

     623         905         11         1,539         242,623         244,162         —     

Leases

     253         33         111         397         53,874         54,271         —     

Real estate—residential mortgage

     1,482         118         8,495         10,095         416,244         426,339         —     

Real estate—construction

     —           —           168         168         73,062         73,230         —     

Home equity and consumer

     1,558         343         2,756         4,657         326,148         330,805         134   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
$ 9,726    $ 3,314    $ 17,401    $ 30,441    $ 2,661,264    $ 2,691,705    $ 134   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

Commercial, secured by real estate

$ 2,714    $ 2,999    $ 5,972    $ 11,685    $ 1,518,076    $ 1,529,761    $ —     

Commercial, industrial and other

  944      2      308      1,254      236,998      238,252      —     

Leases

  108      24      88      220      54,529      54,749      —     

Real estate—residential mortgage

  3,325      354      6,710      10,389      420,801      431,190      —     

Real estate—construction

  224      —        188      412      63,608      64,020      —     

Home equity and consumer

  1,583      598      2,951      5,132      332,510      337,642      66   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
$ 8,898    $ 3,977    $ 16,217    $ 29,092    $ 2,626,522    $ 2,655,614    $ 66   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Impaired Loans

The Company defines impaired loans as all non-accrual loans and leases with recorded investments of $500,000 or greater. Impaired loans also includes all loans modified in troubled debt restructurings. Impaired loans as of March 31, 2015, March 31, 2014 and December 31, 2014 are as follows:

 

March 31, 2015

   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

   $ 12,802       $ 15,058       $ —         $ 99       $ 13,177   

Commercial, industrial and other

     1,177         1,281         —           3         233   

Leases

     —           —           —           —           —     

Real estate-residential mortgage

     2,160         2,160         —           4         2,162   

Real estate-construction

     169         169         —           —           178   

Home equity and consumer

     765         765         —           —           741   

Loans with specific allowance:

              

Commercial, secured by real estate

     5,563         5,695         351         58         5,449   

Commercial, industrial and other

     684         1,191         5         5         695   

Leases

     14         14         14         —           —     

Real estate-residential mortgage

     753         753         72         9         753   

Real estate-construction

     394         394         2         1         92   

Home equity and consumer

     1,331         1,331         1,014         16         1,243   

Total:

              

Commercial, secured by real estate

   $ 18,365       $ 20,753       $ 351       $ 157       $ 18,626   

Commercial, industrial and other

     1,861         2,472         5         8         928   

Leases

     14         14         14         —           —     

Real estate—residential mortgage

     2,913         2,913         72         13         2,915   

Real estate-construction

     563         563         2         1         270   

Home equity and consumer

     2,096         2,096         1,014         16         1,984   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
$ 25,812    $ 28,811    $ 1,458    $ 195    $ 24,723   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

March 31, 2014

   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

   $ 10,044       $ 10,137       $ —         $ 56       $ 9,026   

Commercial, industrial and other

     46         147         —           42         3,652   

Real estate-residential mortgage

     567         567         —           —           592   

Real estate-construction

     495         2,411         —           —           498   

Home equity and consumer

     263         263         —           4         263   

Loans with specific allowance:

              

Commercial, secured by real estate

     11,891         12,918         1,005         88         10,740   

Commercial, industrial and other

     153         153         68         2         153   

Real estate-residential mortgage

     —           —           —           —           —     

Real estate-construction

     —           —           —           —           —     

Home equity and consumer

     1,259         1,259         189         10         928   

Total:

              

Commercial, secured by real estate

   $ 21,935       $ 23,055       $ 1,005       $ 144       $ 19,766   

Commercial, industrial and other

     199         300         68         44         3,805   

Real estate—residential mortgage

     567         567         —           —           592   

Real estate-construction

     495         2,411         —           —           498   

Home equity and consumer

     1,522         1,522         189         14         1,191   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
$ 24,718    $ 27,855    $ 1,262    $ 202    $ 25,852   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

December 31, 2014

   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

   $ 14,172       $ 15,520       $ —         $ 436       $ 16,092   

Commercial, industrial and other

     327         1,697         —           43         1,513   

Real estate-residential mortgage

     1,681         1,681         —           —           308   

Real estate-construction

     188         552         —           —           464   

Home equity and consumer

     741         741         —           7         153   

Loans with specific allowance:

              

Commercial, secured by real estate

     5,666         5,818         634         156         3,858   

Commercial, industrial and other

     425         425         10         9         342   

Real estate-residential mortgage

     1,238         1,238         217         19         438   

Real estate-construction

     —           —           —           —           —     

Home equity and consumer

     1,255         1,255         1,031         41         975   

Total:

              

Commercial, secured by real estate

   $ 19,838       $ 21,338       $ 634       $ 592       $ 19,950   

Commercial, industrial and other

     752         2,122         10         52         1,855   

Real estate—residential mortgage

     2,919         2,919         217         19         746   

Real estate-construction

     188         552         —           —           464   

Home equity and consumer

     1,996         1,996         1,031         48         1,128   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
$ 25,693    $ 28,927    $ 1,892    $ 711    $ 24,143   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest that would have been accrued on impaired loans during the first three months of 2015 and 2014 had the loans been performing under original terms would have been $420,000 and $410,000, respectively. Interest that would have accrued for the year ended December 31, 2014 was $1.8 million.

Credit Quality Indicators

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

 

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Table of Contents

The following table shows the Company’s commercial loan portfolio as of March 31, 2015 and December 31, 2014, by the risk ratings discussed above (in thousands):

 

March 31, 2015

   Commercial,      Commercial,         
     secured by      industrial      Real estate-  

Risk Rating

   real estate      and other      construction  

1

   $ —         $ 1,477       $ —     

2

     —           9,789         —     

3

     67,404         52,503         —     

4

     501,876         76,275         10,643   

5

     868,916         66,169         55,002   

5W - Watch

     56,925         18,858         3,003   

6 - Other Assets Especially Mentioned

     27,210         4,141         3,101   

7 - Substandard

     40,567         14,950         1,481   

8 - Doubtful

     —           —           —     

9 - Loss

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

$ 1,562,898    $ 244,162    $ 73,230   
  

 

 

    

 

 

    

 

 

 

 

December 31, 2014

   Commercial,      Commercial,         
     secured by      industrial      Real estate-  

Risk Rating

   real estate      and other      construction  

1

   $ —         $ 1,040       $ —     

2

     —           8,755         —     

3

     69,243         30,386         —     

4

     479,667         91,836         7,527   

5

     867,023         69,723         51,833   

5W - Watch

     40,991         15,572         225   

6 - Other Assets Especially Mentioned

     27,764         8,057         2,710   

7 - Substandard

     45,073         12,883         1,725   

8 - Doubtful

     —           —           —     

9 - Loss

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

$ 1,529,761    $ 238,252    $ 64,020   
  

 

 

    

 

 

    

 

 

 

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

 

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Allowance for Loan and Lease Losses

The following table details activity in the allowance for loan and lease losses by portfolio segment for the three months ended March 31, 2015 and 2014:

 

Three Months Ended March 31, 2015

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
    Unallocated     Total  
    (in thousands)  

Beginning Balance

  $ 13,577      $ 3,196      $ 582      $ 4,020      $ 553      $ 6,333      $ 2,423      $ 30,684   

Charge-offs

    (546     (10     (427     (17     (20     (261     —          (1,281

Recoveries

    39        42        20        1        100        30        —          232   

Provision

    (510     79        863        (706     4        822        318        870   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

$ 12,560    $ 3,307    $ 1,038    $ 3,298    $ 637    $ 6,924    $ 2,741    $ 30,505   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2014

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
    Unallocated     Total  
    (in thousands)  

Beginning Balance

  $ 14,463      $ 5,331      $ 504      $ 3,214      $ 542      $ 2,737      $ 3,030      $ 29,821   

Charge-offs

    (1,647     (13     (39     (155     —          (601     —          (2,455

Recoveries

    34        591        —          6        —          34        —          665   

Provision

    1,285        (403     (5     (97     (59     442        326        1,489   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

$ 14,135    $ 5,506    $ 460    $ 2,968    $ 483    $ 2,612    $ 3,356    $ 29,520   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

 

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

At March 31, 2015

             

Ending Balance: Individually evaluated for impairment

  $ 18,365      $ 1,861      $ 14      $ 2,913      $ 563      $ 2,096      $ 25,812   

Ending Balance: Collectively evaluated for impairment

    1,544,533        242,301        54,257        423,426        72,667        328,709      $ 2,665,893   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance (1)

$ 1,562,898    $ 244,162    $ 54,271    $ 426,339    $ 73,230    $ 330,805    $ 2,691,705   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Excludes deferred fees

 

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

At December 31, 2014

             

Ending Balance: Individually evaluated for impairment

  $ 19,838      $ 752      $ —        $ 2,919      $ 188      $ 1,996      $ 25,693   

Ending Balance: Collectively evaluated for impairment

    1,509,923        237,500        54,749        428,271        63,832        335,646      $ 2,629,921   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance(1)

$ 1,529,761    $ 238,252    $ 54,749    $ 431,190    $ 64,020    $ 337,642    $ 2,655,614   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Excludes deferred fees

 

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Table of Contents

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

 

    Commercial,
secured by
real estate
    Commercial,
industrial
and other
    Leases     Real estate-
residential
mortgage
    Real estate-
construction
    Home
equity and
consumer
    Unallocated     Total  
At March 31, 2015   (in thousands)        

Ending Balance: Individually evaluated for impairment

  $ 351      $ 5      $ 14      $ 72      $ 2      $ 1,014      $ —        $ 1,458   

Ending Balance: Collectively evaluated for impairment

    12,209        3,302        1,024        3,226        635        5,910        2,741      $ 29,047   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

$ 12,560    $ 3,307    $ 1,038    $ 3,298    $ 637    $ 6,924    $ 2,741    $ 30,505   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Commercial,
secured by
real estate
    Commercial,
industrial
and other
    Leases     Real estate-
residential
mortgage
    Real estate-
construction
    Home
equity and
consumer
    Unallocated     Total  
At December 31, 2014   (in thousands)        

Ending Balance: Individually evaluated for impairment

  $ 634      $ 10      $ —        $ 217      $ —        $ 1,031      $ —        $ 1,892   

Ending Balance: Collectively evaluated for impairment

    12,943        3,186        582        3,803        553        5,302        2,423      $ 28,792   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

$ 13,577    $ 3,196    $ 582    $ 4,020    $ 553    $ 6,333    $ 2,423    $ 30,684   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Lakeland also maintains a reserve for unfunded lending commitments which is included in other liabilities. This reserve was $1.2 million and $1.1 million at March 31, 2015 and December 31, 2014, respectively. The Company analyzes the adequacy of the reserve for unfunded lending commitments in conjunction with its analysis of the adequacy of the allowance for loan and lease losses. For more information on this analysis, see “Risk Elements” in Management’s Discussion and Analysis.

Troubled Debt Restructurings

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

 

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Table of Contents

The following table summarizes loans that have been restructured during the three months ended March 31, 2015 and 2014:

 

     For the Three Months Ended      For the Three Months Ended  
     March 31, 2015      March 31, 2014  
            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

     —         $ —         $ —           —         $ —         $ —     

Commercial, industrial and other

     1         1,149         1,149         —           —           —     

Leases

     1         14         14         —           —           —     

Real estate—residential mortgage

     —           —           —           —           —           —     

Real estate—construction

     1         396         396         —           —           —     

Home equity and consumer

     1         9         9         3         335         335   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  4    $ 1,568    $ 1,568      3    $ 335    $ 335   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes as of March 31, 2015 and 2014, loans that were restructured within the previous 12 months that have subsequently defaulted:

 

     For the Three Months Ended  
     March 31, 2015      March 31, 2014  
     Number of      Recorded      Number of      Recorded  
     Contracts      Investment      Contracts      Investment  
     (Dollars in thousands)      (Dollars in thousands)  

Defaulted Troubled Debt Restructurings:

           

Commercial, secured by real estate

     —         $ —           2       $ 214   

Commercial, industrial and other

     —           —           —           —     

Leases

     —           —           —           —     

Real estate—residential mortgage

     1         483         —           —     

Real estate—construction

     —           —           —           —     

Home equity and consumer

     1         2         1         236   
  

 

 

    

 

 

    

 

 

    

 

 

 
  2    $ 485      3    $ 450   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgages Held for Sale

Residential mortgages originated by the bank and held for sale in the secondary market are carried at the lower of cost or fair market value. Fair market value is generally determined by the value of purchase commitments on individual loans. Losses are recorded as a valuation allowance and charged to earnings. As of March 31, 2015, the Company had $1.6 million in mortgages held for sale compared to $592,000 as of December 31, 2014.

 

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Table of Contents

Other Real Estate and Other Repossessed Assets

At March 31, 2015 the Company had other real estate owned of $826,000 and had no other repossessed assets. All of the other real estate owned that the Company held at March 31, 2015, was residential property acquired as a result of foreclosure proceedings or through a deed in lieu of foreclosure. At December 31, 2014, the Company had other real estate owned and other repossessed assets of $977,000 and 49,000, respectively.

Note 8. Estimated Fair Value of Financial Instruments and Fair Value Measurement

Fair Value Measurement

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

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

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

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

The Company’s assets that are measured at fair value on a recurring basis are its available for sale investment securities. The Company obtains fair values on its securities using information from a third party servicer. If quoted prices for securities are available in an active market, those securities are classified as Level 1 securities. The Company has U.S. Treasury Notes and certain equity securities that are classified as Level 1 securities. Level 2 securities were primarily comprised of U.S. Agency bonds, residential mortgage-backed securities, obligations of state and political subdivisions and corporate securities. Fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, issuer spreads, bids and offers. On a quarterly basis, the Company reviews the pricing information received from the Company’s third party pricing service. This review includes a comparison to non-binding third-party quotes.

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

The following table sets forth the Company’s financial assets that were accounted for at fair value on a recurring basis as of the periods presented by level within the fair value hierarchy. During the three months ended March 31, 2015, the Company did not make any transfers between any levels within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:

 

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

March 31, 2015

           

Assets:

           

Investment securities, available for sale

           

U.S. treasury and government agencies

   $ 8,425       $ 98,150       $ —         $ 106,575   

Mortgage backed securities

     —           316,934         —           316,934   

Obligations of states and political subdivisions

     —           31,374         —           31,374   

Corporate debt securities

     —           504         —           504   

Equity securities

     4,508         13,557         —           18,065   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

  12,933      460,519      —        473,452   

Non-hedging interest rate derivatives

  —        209      —        209   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

$ 12,933      460,728      —      $ 473,661   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-hedging interest rate derivatives

$ —      $ 209    $ —      $ 209   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

$ —      $ 209    $ —      $ 209   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

Assets:

Investment securities, available for sale

U.S. treasury and government agencies

$ 8,321    $ 85,599    $ —      $ 93,920   

Mortgage backed securities

  —        314,931      —        314,931   

Obligations of states and political subdivisions

  —        30,519      —        30,519   

Corporate debt securities

  —        505      —        505   

Equity securities

  4,154      13,420      —        17,574   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

  12,475      444,974      —        457,449   

Non-hedging interest rate derivatives

  —        37      —        37   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

$ 12,475    $ 445,011    $ —      $ 457,486   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-hedging interest rate derivatives

$ —      $ 37    $ —      $ 37   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

$ —      $ 37    $ —      $ 37   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

27


Table of Contents

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

 

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

March 31, 2015

           

Assets:

           

Impaired Loans and Leases

   $ —         $ —         $ 25,812       $ 25,812   

Loans held for sale

     —           1,598         —           1,598   

Other real estate owned and other repossessed assets

     —           —           826         826   

December 31, 2014

           

Assets:

           

Impaired Loans and Leases

   $ —         $ —         $ 25,693       $ 25,693   

Loans held for sale

     —           592         —           592   

Other real estate owned and other repossessed assets

     —           —           1,026         1,026   

Impaired loans are evaluated and valued at the time the loan is identified as impaired at the lower of cost or market value of the underlying collateral. Because most of Lakeland’s impaired loans are collateral dependent, fair value is generally measured based on the value of the collateral, less estimated costs to sell, securing these loans and leases and is classified at a level 3 in the fair value hierarchy. Collateral may be real estate, accounts receivable, inventory, equipment and/or other business assets. The value of the real estate is assessed based on appraisals by qualified third party licensed appraisers. The appraisers may use the sales comparison approach, the cost approach or the income approach to value the collateral using discount rates (with ranges of 5-11%) or capitalization rates (with ranges of 5-9%) to evaluate the property. The value of the equipment may be determined by an appraiser, if significant, inquiry through a recognized valuation resource, or by the value on the borrower’s financial statements. Field examiner reviews on business assets may be conducted based on the loan exposure and reliance on this type of collateral. Appraised and reported values may be adjusted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Loans that are not collateral dependent are evaluated based on a discounted cash flow method. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

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

Other real estate owned (OREO) and other repossessed assets, representing property acquired through foreclosure, are recorded at fair value less estimated disposal costs of the acquired property on the date of acquisition and thereafter remeasured and carried at lower of cost or fair market value. Fair value on other real estate owned is based on the appraised value of the collateral using the sales comparison approach or the income approach with discount rates or capitalization rates similar to those used in impaired loan valuation. The fair value of other repossessed assets is estimated by inquiry through recognized valuation resources.

Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Changes in economic conditions, locally or nationally, could impact the value of the estimated amounts of impaired loans, OREO and other repossessed assets.

 

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Table of Contents

Fair Value of Certain Financial Instruments

Estimated fair values have been determined by the Company using the best available data and an estimation methodology suitable for each category of financial instruments. Management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.

The estimation methodologies used, the estimated fair values, and recorded book balances at March 31, 2015 and December 31, 2014 are outlined below.

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

The fair value of Investment Securities Held to Maturity was measured using information from the same third-party servicer used for Investment Securities Available for Sale using the same methodologies discussed above. Investment Securities Held to Maturity includes $5.2 million in short-term municipal bond anticipation notes that are non-rated and do not have an active secondary market or information readily available on standard financial systems. As a result, the securities are classified as Level 3 securities. These are investments in municipalities in the Company’s market area, and management performs a credit analysis on the municipality before investing in these securities.

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

The net loan portfolio at March 31, 2015 and December 31, 2014 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 valuation of the Company’s loan portfolio is consistent with accounting guidance but does not fully incorporate the exit price approach.

For fixed maturity certificates of deposit, fair value was estimated based on the present value of discounted cash flows using the rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.

The fair value of long-term debt is based upon the discounted value of contractual cash flows. The Company estimates the discount rate using the rates currently offered for similar borrowing arrangements. The fair value of subordinated debentures is based on bid/ask prices from brokers for similar types of instruments.

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

 

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The following table presents the carrying values, fair values and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2015 and December 31, 2014:

 

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

March 31, 2015

              

Financial Instruments—Assets

        

Investment securities held to maturity

   $ 115,779       $ 117,717       $ —         $ 112,542       $ 5,175   

Federal Home Loan Bank and other membership bank stocks

     10,755         10,755         —           10,755         —     

Loans and leases, net

     2,659,291         2,665,726         —           —           2,665,726   

Financial Instruments—Liabilities

              

Certificates of Deposit

     291,703         291,627         —           291,627         —     

Other borrowings

     222,728         228,388         —           228,388         —     

Subordinated debentures

     41,238         30,929         —           —           30,929   

December 31, 2014

              

Financial Instruments—Assets

              

Investment securities held to maturity

   $ 107,976       $ 109,030       $ —         $ 103,916       $ 5,114   

Federal Home Loan Bank and other membership bank stocks

     9,846         9,846         —           9,846         —     

Loans and leases, net

     2,623,142         2,624,581         —           —           2,624,581   

Financial Instruments—Liabilities

              

Certificates of Deposit

     279,962         279,439         —           279,439         —     

Other borrowings

     202,498         205,343         —           205,343         —     

Subordinated debentures

     41,238         30,929         —           —           30,929   

Note 9. Derivatives

Lakeland is a party to interest rate derivatives that are not designated as hedging instruments. These derivatives relate to interest rate swaps that the Company enters into with customers to allow customers to convert variable rate loans to a fixed rate. Lakeland pays interest to the customer at a floating rate on the notional amount and receives interest from the customer at a fixed rate for the same notional amount. At the same time the interest rate swap is entered into with the customer, an offsetting interest rate swap is entered into with another financial institution. Lakeland pays the other financial institution interest at the same fixed rate on the same notional amount as the swap entered into with the customer, and receives interest from the financial institution for the same floating rate on the same notional amount. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss of given default for all counterparties. As of March 31, 2015 and December 31, 2014, Lakeland had $491,000 and $505,000, respectively, in available for sale securities pledged for collateral on its interest rate swaps with the financial institution.

 

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

 

March 31, 2015   Notional
Amount
    Average
Maturity (Years)
   

Weighted Average

Rate Fixed

    Weighted Average
Variable Rate
    Fair Value  

Customer interest rate swaps

  $ (17,176     5.5        3.840     1 Mo Libor + 2.21      $ 209   

3rd Party interest rate swaps

    17,176        5.5        3.840     1 Mo Libor + 2.21        (209
December 31, 2014   Notional
Amount
    Average
Maturity (Years)
   

Weighted Average

Rate Fixed

    Weighted Average
Variable Rate
    Fair Value  

Customer interest rate swaps

  $ (17,279     5.7        3.840     1 Mo Libor + 2.21      $ 37   

3rd party interest rate swaps

    17,279        5.7        3.840     1 Mo Libor + 2.21        ($37

Note 10. Goodwill and Intangible Assets

The Company has recorded goodwill of $110.0 million at March 31, 2015 and December 31, 2014 which includes $22.9 million from the Somerset Hills acquisition and $87.1 million from prior acquisitions. The Company reviews its goodwill and intangible assets annually, on November 30, or more frequently if conditions warrant, for impairment. In testing goodwill for impairment, the Company compares the estimated fair value of its reporting unit to its carrying amount, including goodwill. The Company has determined that it has one reporting unit, Community Banking.

The Company recorded $2.7 million in core deposit intangible for the Somerset Hills acquisition. Year-to-date, it has amortized $111,000 in core deposit intangible. The estimated future amortization expense for each of the succeeding five years ended December 31 is as follows (dollars in thousands):

 

For the year ended:

  

2015

   $ 304   

2016

     366   

2017

     316   

2018

     267   

2019

     218   

Note 11. Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (FASB) issued an accounting standards update requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability consistent with the presentation of debt discounts. The purpose of this update is to simplify the presentation of debt issuance costs and to align the US GAAP presentation of debt more closely with international accounting standards. This amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this update is not expected to have a material impact on the Company’s financial statements.

 

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In January 2015, the FASB issued an accounting standards update regarding the elimination of the concept of the extraordinary items from the statement of operations. The purpose of this update is to simplify the statement of operations presentation and to align the US GAAP income statement more closely with international accounting standards. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this update is not expected to have a material impact on the Company’s financial statements.

In June 2014, the FASB issued an accounting standards update regarding share –based payments that requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. This update is effective for interim and annual periods beginning after December 15, 2015. The amendments can be applied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented and to all new or modified awards thereafter. Early adoption is permitted. The Company has determined that adoption of this update is not expected to have a material impact on its accounting and disclosures.

In June 2014, the FASB issued an accounting standards update that aligns the accounting for repurchase to maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. This update is effective for the first interim or annual period beginning after December 15, 2014. In addition, the disclosure of certain transactions accounted for as a sale is effective for the first interim or annual period beginning on or after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required for annual periods beginning after December 15, 2014, and interim periods after March 15, 2015. Early adoption is prohibited. The Company does not engage in repurchase to maturity transactions, and therefore has determined that the adoption of this update is not expected to have a material impact on the Company’s financial results.

In May 2014, the FASB issued an accounting standards update that clarifies the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods or services. This guidance is effective for the Company beginning January 1, 2017. The Company is still evaluating the potential impact on the Company’s financial statements.

In January 2014, the FASB issued an accounting standards update to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. This update is effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. The Company adopted this update in the first quarter of 2015, and the disclosures required are included in Note 7. The adoption of this update did not have a material impact on the Company’s financial statements.

PART I — ITEM 2

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

This section should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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.

 

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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, 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 to accounting principles generally accepted in the United States of America and predominant practices within the banking industry. The consolidated financial statements include the accounts of the Company, Lakeland, Lakeland NJ Investment Corp., Lakeland Investment Corp., Lakeland Equity, Inc., Lakeland Preferred Equity, Inc., and Sullivan Financial Services, Inc. All intercompany balances and transactions have been eliminated.

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

Management Overview

The quarter ended March 31, 2015 represented a period of continued growth for the Company. As discussed in this Management’s Discussion and Analysis:

 

    Net income available to common shareholders at $8.3 million or $0.22 per diluted share in the first quarter of 2015 increased 16% compared to $7.2 million or $0.19 per diluted share for the same period last year. Annualized return on average assets was 0.96% for the first quarter of 2015 compared to 0.88% for the first quarter of 2014. Annualized return on average equity was 8.81% for the first quarter of 2015 compared to 8.14% for the first quarter of 2014.

 

    The Company reported growth in both loans and non-interest bearing demand deposits in the first quarter of 2015. Loans totaling $2.69 billion at March 31, 2015 increased by $36.1 million from December 31, 2014, with the majority of the growth generated in commercial loans. Non-interest-bearing demand deposits at $672.3 million increased by $26.2 million, or 4%, and represented 24% of total deposits at March 31, 2015.

 

    Non-performing assets totaled $21.2 million at March 31, 2015 compared to $21.7 million at December 31, 2014 and $22.7 million reported at March 31, 2014.

 

    As a result of declining charge-offs, the provision for loan and lease losses was reduced from $1.5 million in the first three months of 2014 to $870,000 in the first three months of 2015.

 

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Table of Contents

Results of Operations

(First Quarter 2015 Compared to First Quarter 2014)

Net Income

Net income was $8.3 million in the first quarter of 2015 compared to net income of $7.2 million for the first quarter of 2014. Diluted earnings per share was $0.22 for the first quarter of 2015, compared to diluted earnings per share of $0.19 for the same period last year. Net interest income at $28.5 million for the first quarter of 2015 increased $673,000 from the first quarter of 2014 due primarily to a $1.1 million increase in interest income. The increase in interest income reflects an increase in interest earning assets resulting from organic growth.

Net Interest Income

Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. The Company’s net interest income is determined by: (i) the volume of interest-earning assets that it holds and the yields that it earns on those assets, and (ii) the volume of interest-bearing liabilities that it has assumed and the rates that it pays on those liabilities.

Net interest income on a tax equivalent basis for the first quarter of 2015 was $28.7 million, compared to $28.1 million for the first quarter of 2014. The net interest margin decreased from 3.72% in the first quarter of 2014 to 3.56% in the first quarter of 2015 primarily as a result of a 13 basis point decrease in the yield on interest earning assets as well as a four basis point increase in the cost of interest bearing liabilities. Net interest income in the first quarter of 2015 included $454,000 in interest received from the resolution of non-performing loans and prepayment fee income compared to $1,000 of such income in the same period in 2014. The net interest margin excluding the impact of these items would be 3.51% in the first quarter of 2015. The decrease in the net interest margin was somewhat mitigated by an increase in interest 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 $41.6 million. The components of net interest income will be discussed in greater detail below.

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

 

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     For the Three Months Ended,     For the Three Months Ended,  
     March 31, 2015     March 31, 2014  
                  Average                  Average  
           Interest      rates           Interest      rates  
     Average     Income/      earned/     Average     Income/      earned/  
     Balance     Expense      paid     Balance     Expense      paid  
     (dollars in thousands)  

Assets

              

Interest-earning assets:

              

Loans and leases (A)

   $ 2,660,512      $ 27,896         4.25   $ 2,486,990      $ 26,898         4.39

Taxable investment securities and other

     514,109        2,674         2.08     465,159        2,546         2.19

Tax-exempt securities

     68,803        631         3.67     76,562        728         3.80

Federal funds sold (B)

     27,686        12         0.17     32,844        13         0.16
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

  3,271,110      31,213      3.86   3,061,555      30,185      3.99

Noninterest-earning assets:

Allowance for loan and lease losses

  (30,993   (30,290

Other assets

  286,781      281,444   
  

 

 

        

 

 

      

TOTAL ASSETS

$ 3,526,898    $ 3,312,709   
  

 

 

        

 

 

      

Liabilities and Stockholders’ Equity

Interest-bearing liabilities:

Savings accounts

$ 395,153    $ 51      0.05 $ 385,007    $ 51      0.05

Interest-bearing transaction accounts

  1,495,270      839      0.23   1,440,770      802      0.23

Time deposits

  280,837      393      0.56   293,225      410      0.56

Borrowings

  295,143      1,191      1.61   202,182      822      1.63
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

  2,466,403      2,474      0.40   2,321,184      2,085      0.36
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest-bearing liabilities:

Demand deposits

  660,548      618,944   

Other liabilities

  16,360      15,629   

Stockholders’ equity

  383,587      356,952   
  

 

 

        

 

 

      

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$ 3,526,898    $ 3,312,709   
  

 

 

        

 

 

      

Net interest income/spread

  28,739      3.46   28,100      3.63

Tax equivalent basis adjustment

  221      255   
    

 

 

        

 

 

    

NET INTEREST INCOME

$ 28,518    $ 27,845   
    

 

 

        

 

 

    

Net interest margin (C)

  3.56   3.72
       

 

 

        

 

 

 

 

(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 increased from $30.2 million in the first quarter of 2014 to $31.2 million in the first quarter of 2015, an increase of $1.0 million, or 3%. The increase in interest income was primarily a result of a $209.6 million increase in average interest earning assets partially offset by a 13 basis point decrease in the yield on interest earning assets. The yield on average loans and leases at 4.25% in the first quarter of 2015 was 14 basis points lower than the first quarter of 2014 due primarily to strong growth in new loans and leases originated or refinanced at lower rates. The yield on average taxable and tax exempt investment securities decreased by 11 basis points and 13 basis points, respectively, compared to the first quarter of 2014.

Total interest expense at $2.5 million in the first quarter of 2015 was $390,000 greater than the $2.1 million reported for the same period in 2014. The cost of average interest-bearing liabilities increased from 0.36% in the first quarter of 2014 to 0.40% in 2015. The increase in the cost of funds was due to a change in the mix in total interest-bearing liabilities. Interest-bearing deposits as a percent of total interest-bearing liabilities declined from 91.3% for the first quarter of 2014 to 88% in the first quarter of 2015. Borrowings as a percent of interest-bearing liabilities increased from 8.7% in the first quarter of 2014, to 12% in the first quarter of 2015 as borrowings increased $93 million in that time period to help fund loan growth. Borrowings at a rate of 1.61% have a higher cost than deposits which had an average cost of 0.24% for both the first quarter of 2014 and 2015.

 

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Provision for Loan and Lease Losses

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

In the first quarter of 2015, an $870,000 provision for loan and lease losses was recorded, which was $619,000 or 42% lower than the provision for the same period last year. During the first quarter of 2015, the Company charged off loans and leases of $1.3 million and recovered $232,000 in previously charged off loans and leases compared to $2.5 million and $665,000, respectively, during the same period in 2014. The lower provision resulted primarily from declining trends in net charge-offs and non-performing loans during the quarter. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income at $4.7 million in the first quarter of 2015 increased by $665,000 or 16% compared to the first quarter of 2014. Service charges on deposit accounts at $2.3 million decreased $219,000, or 9%, primarily due to a decline in overdraft fees. Commissions and fees at $1.3 million in the first quarter of 2015 increased $294,000 or 29% compared to the same period last year due primarily to an increase in investment commission income. In the first quarter of 2015, a $332,000 death benefit was received on a bank owned life insurance policy, accounting for the 94% increase in that category. Other income totaling $392,000 in the first quarter of 2015 was $253,000 higher than the same period in 2014 due primarily to an $182,000 increase in gains on sale of mortgages as well as $63,000 in gains recorded on the sale of other real estate properties.

Noninterest Expense

Noninterest expense totaling $20.0 million increased $300,000 in the first quarter of 2015 compared to the first quarter of 2014. Salaries and employee benefits expense at $11.8 million, increased by $937,000 from the same period last year, including $319,000 in additional equity compensation costs. Marketing expense at $240,000 in the first quarter of 2015 decreased $146,000 compared to the first quarter of 2014 due primarily to the timing of marketing campaigns. Legal expense at $116,000 decreased $157,000 or 58% compared to the same period last year primarily resulting from the continuing reduction in delinquencies and the recovery of expenses related to non-performing loans. Other expenses at $2.7 million decreased $221,000 due primarily to a $235,000 decrease in professional fees. The Company’s efficiency ratio, a non-GAAP financial measure, was 59.2% in the first quarter of 2015, compared to 60.90% for the same period last year. The decrease was primarily due to an increase in tax-equivalent revenue. The Company uses this ratio because it believes that the ratio provides a good comparison of period-to-period performance and because the ratio is widely accepted in the banking industry. The following table shows the calculation of the efficiency ratio for the periods presented:

 

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     For the Three Months Ended March 31,  
     2015     2014  
     (dollars in thousands)  

Calculation of efficiency ratio:

    

Total noninterest expense

   $ 20,042      $ 19,742   

Less:

    

Amortization of core deposit intangibles

     (111     (123

Other real estate owned and other repossessed asset expense

     8        (15

Provision for unfunded lending commitments

     (130     (11
  

 

 

   

 

 

 

Noninterest expense, as adjusted

$ 19,809    $ 19,593   
  

 

 

   

 

 

 

Net interest income

$ 28,518    $ 27,845   

Noninterest income

  4,738      4,073   
  

 

 

   

 

 

 

Total revenue

  33,256      31,918   

Plus: Tax-equivalent adjustment on municipal securities

  221      255   

Less:

Gains on sales of investment securities

  —        (2
  

 

 

   

 

 

 

Total revenue, as adjusted

$ 33,477    $ 32,171   
  

 

 

   

 

 

 

Efficiency ratio

  59.17   60.90
  

 

 

   

 

 

 

Income Tax Expense

The effective tax rate decreased from 33.0% in the first quarter of 2014 to 32.5% in the first quarter of 2015 primarily as a result of an increase in tax advantaged items as a percent of pretax income. Tax advantaged items include tax-exempt security interest and income on bank owned life insurance policies.

Financial Condition

The Company’s total assets increased $89.4 million from $3.54 billion at December 31, 2014, to $3.63 billion at March 31, 2015. Total loans were $2.69 billion, an increase of $36.1 million from $2.66 billion at December 31, 2014. Total deposits were $2.84 billion, an increase of $51.7 million from December 31, 2014.

Loans and Leases

Gross loans and leases at $2.69 billion increased by $36.1 million from December 31, 2014 primarily in the commercial loans secured by real estate category. Commercial loans secured by real estate and commercial, industrial and other increased $33.1 million (2%) and $5.9 million (2%), respectively, from December 31, 2014 to March 31, 2015. Real estate construction loans at $73.2 million increased $9.2 million, while residential mortgages and home equity and consumer loans decreased $4.9 million and $6.8 million, respectively. For more information on the loan portfolio, see Note 7 in Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Risk Elements

Non-performing assets decreased from $21.7 million, or 0.61% of total assets, on December 31, 2014 to $21.2 million, or 0.59% of total assets, on March 31, 2015. Non-performing assets decreased primarily in the commercial secured by real estate category, which decreased by $599,000, partially offset by a $306,000 increase in residential mortgage non-accruals. Non-accrual loans at March 31, 2015 included one loan relationship with a balance of $1.0 million or over, totaling $2.4 million, and five loan relationships between $500,000 and $1.0 million, totaling $3.4 million.

 

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There were $134,000 in loans and leases past due ninety days or more and still accruing at March 31, 2015 compared to $66,000 at December 31, 2014. These loans primarily consisted of consumer loans which are generally placed on non-accrual and reviewed for charge-off when principal and interest payments are four months in arrears unless the obligations are well-secured and in the process of collection.

On March 31, 2015, the Company had $11.5 million in loans that were troubled debt restructurings and still accruing interest income compared to $10.6 million on December 31, 2014. Troubled debt restructurings are those loans where the Company has granted concessions to the borrower in payment terms, either in rate or in term, as a result of the financial condition of the borrower.

On March 31, 2015, the Company had $25.8 million in impaired loans (consisting primarily of non-accrual and restructured loans and leases) compared to $25.7 million at year-end 2014. For more information on impaired loans and leases see Note 7 in Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. The valuation allowance for impaired loans is based primarily on the fair value of the underlying collateral. Based on such evaluation, $1.5 million has been allocated as a portion of the allowance for loan and lease losses for impairment at March 31, 2015. At March 31, 2015, the Company also had $46.0 million in loans and leases that were rated substandard that were not classified as non-performing or impaired compared to $46.3 million at December 31, 2014.

There were no loans and leases at March 31, 2015, other than those designated non-performing, impaired or substandard, where the Company was aware of any credit conditions of any borrowers or obligors that would indicate a strong possibility of the borrowers not complying with present terms and conditions of repayment and which may result in such loans and leases being included as non-accrual, past due or renegotiated at a future date.

The following table sets forth for the periods presented, the historical relationships among the allowance for loan and lease losses, the provision for loan and lease losses, the amount of loans and leases charged-off and the amount of loan and lease recoveries:

 

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     Three Months     Three Months     Year  
    

Ended

March 31,

   

Ended

March 31,

    Ended
December 31,
 
(dollars in thousands)    2015     2014     2014  

Balance of the allowance at the beginning of the year

   $ 30,684      $ 29,821      $ 29,821   
  

 

 

   

 

 

   

 

 

 

Loans and leases charged off:

Commercial, secured by real estate

  546      1,647      2,282   

Commercial, industrial and other

  10      13      999   

Leases

  427      39      597   

Real estate—mortgage

  17      155      827   

Real estate-construction

  20      —        25   

Home equity and consumer

  261      601      2,697   
  

 

 

   

 

 

   

 

 

 

Total loans charged off

  1,281      2,455      7,427   
  

 

 

   

 

 

   

 

 

 

Recoveries:

Commercial, secured by real estate

  39      34      999   

Commercial, industrial and other

  42      591      1,039   

Leases

  20      —        19   

Real estate—mortgage

  1      6      42   

Real estate-construction

  100      —        106   

Home equity and consumer

  30      34      220   
  

 

 

   

 

 

   

 

 

 

Total Recoveries

  232      665      2,425   
  

 

 

   

 

 

   

 

 

 

Net charge-offs:

  1,049      1,790      5,002   

Provision for loan and lease losses

  870      1,489      5,865   
  

 

 

   

 

 

   

 

 

 

Ending balance

$ 30,505    $ 29,520    $ 30,684   
  

 

 

   

 

 

   

 

 

 

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

  0.16   0.29   0.19

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

  1.13   1.18   1.16

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

Methodology employed for assessing the adequacy of the allowance consists of the following criteria:

 

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

 

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

 

    The establishment of reserve amounts for the non-classified loans and leases in each portfolio based upon the historical average loss experience as modified by management’s assessment of the loss emergence period for these portfolios and management’s evaluation of key environmental factors.

 

    Lakeland also maintains an unallocated component in its allowance for loan and lease losses. Management believes that the unallocated component is warranted for inherent factors that cannot be practically assigned to individual loss categories, such as the periodic updating of appraisals on impaired loans, as well as periodic updating of commercial loan credit risk ratings by loan officers and Lakeland’s internal credit review process.

 

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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 the overall balance of the allowance for loan and lease losses at $30.5 million at March 31, 2015 only decreased $179,000, or 1%, from December 31, 2014, the distribution of the allowance changed between segments of the loan portfolio reflecting changes in the non-performing loan and charge-off statistics within each portfolio. Loan reserves are based on a combination of historical charge-off experience (analyzing gross charge-offs over a twelve quarter period for commercial loans, and an eight quarter period for all other portfolios), estimating the appropriate loss emergence period and assigning qualitative factors based on general economic conditions and specific bank portfolio characteristics.

Based on the above analysis, and based on trends in charge-offs and non-performing loans, the allowances for commercial real estate loans and commercial, industrial and other loans have declined as a result of a significant reduction in charge-offs over a three year look-back period. On the other hand, home equity, consumer and lease financing receivable charge-offs have not experienced the same level of decline. Because of the negative trend in charge-offs over a three year look-back period in the home equity, consumer and leasing portfolios, management believed that a higher allowance was required for these portfolios.

Non-performing loans and leases decreased from $20.7 million on December 31, 2014 to $20.4 million on March 31, 2015. The allowance for loan and lease losses as a percent of total loans was 1.13% of total loans on March 31, 2015 compared to 1.16% as of December 31, 2014. The reduction in the percentage of the allowance for loan and leases losses as a percent of total loans and leases results from a declining trend in charge-offs and non-performing loans. Management believes, based on appraisals and estimated selling costs, that the majority of its non-performing loans and leases are adequately secured and reserves on its non-performing loans and leases are adequate. Based upon the process employed and giving recognition to all accompanying factors related to the loan and lease portfolio, management considers the allowance for loan and lease losses to be adequate at March 31, 2015.

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 increased from $565.4 million on December 31, 2014 to $589.2 million on March 31, 2015, an increase of $23.8 million, or 4%.

Deposits

Total deposits increased from $2.79 billion on December 31, 2014 to $2.84 billion on March 31, 2015, an increase of $51.7 million, or 2%. Noninterest bearing deposits increased $26.2 million while savings and interest bearing deposits increased $13.8 million. Additionally, time deposits increased $11.7 million, or 4%.

Liquidity

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

 

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Lakeland funds loan demand and operation expenses from several sources:

 

    Net income. Cash provided by operating activities was $8.6 million for the first three months of 2015 compared to $10.9 million for the same period in 2014.

 

    Deposits. Lakeland can offer new products or change its rate structure in order to increase deposits. In the first three months of 2015, Lakeland’s deposits increased $51.7 million.

 

    Sales of securities and overnight funds. At March 31, 2015 the Company had $473.5 million in securities designated “available for sale.” Of these securities, $326.4 million were pledged to secure public deposits and for other purposes required by applicable laws and regulations.

 

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

 

    Overnight credit lines. As a member of the Federal Home Loan Bank of New York (FHLB), Lakeland has the ability to borrow overnight based on the market value of collateral pledged. Lakeland had no overnight borrowings from the FHLB on March 31, 2015. Lakeland also has overnight federal funds lines available for it to borrow up to $162.0 million. Lakeland had borrowings against these lines of $90.0 million at March 31, 2015. Lakeland may also borrow from the discount window of the Federal Reserve Bank of New York based on the market value of collateral pledged. Lakeland had no borrowings with the Federal Reserve Bank of New York as of March 31, 2015.

 

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

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

The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statement for the three months ended March 31, 2015 follows.

Cash and cash equivalents totaling $133.2 million on March 31, 2015 increased $23.9 million from December 31, 2014. Operating activities provided $8.6 million in net cash. Investing activities used $62.2 million in net cash, primarily reflecting an increase in loans and leases and investment securities. Financing activities provided $77.5 million in net cash primarily reflecting the increase in deposits and other borrowings of $51.8 million and $20.2 million, respectively. The Company anticipates that it will have sufficient funds available to meet its current loan commitments and deposit maturities. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of March 31, 2015. Interest on subordinated debentures and long-term borrowed funds is calculated based on current contractual interest rates.

 

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

Minimum annual rentals on noncancellable operating leases

   $ 24,912       $ 2,551       $ 4,239       $ 3,234       $ 14,888   

Benefit plan commitments

     6,552         186         647         793         4,926   

Remaining contractual maturities of time deposits

     291,703         195,083         86,517         9,971         132   

Subordinated debentures

     41,238         —           —           —           41,238   

Loan commitments

     678,992         530,367         106,338         269         42,018   

Other borrowings

     222,728         30,000         117,728         65,000         10,000   

Interest on other borrowings*

     31,831         4,945         8,063         3,237         15,586   

Standby letters of credit

     9,695         9,459         156         —           80   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 1,307,651    $ 772,591    $ 323,688    $ 82,504    $ 128,868   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Includes interest on other borrowings and subordinated debentures at a weighted rate of 1.90%.

Capital Resources

Total stockholders’ equity increased from $379.4 million on December 31, 2014 to $388.1 million on March 31, 2015, an increase of $8.6 million, or 2%. Book value per common share increased to $10.24 on March 31, 2015 from $10.01 on December 31, 2014. The increase in stockholders’ equity from December 31, 2014 to March 31, 2015 was primarily due to $8.3 million in net income and $2.7 million in other comprehensive income on the Company’s available for sale securities portfolio, partially offset by the payment of dividends on common stock of $2.9 million.

The Company and Lakeland are subject to various regulatory capital requirements that are monitored by federal banking agencies. Failure to meet minimum capital requirements can lead to certain supervisory actions by regulators; any supervisory action could have a direct material adverse effect on the Company or Lakeland’s financial statements. Management believes, as of March 31, 2015, that the Company and Lakeland meet all capital adequacy requirements to which they are subject.

The final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks became effective for the Company on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019. As of March 31, 2015, the Company’s capital levels remained characterized as “well-capitalized” under the new rules. For further discussion, see “Basel III” below.

The capital ratios for the Company and Lakeland at March 31, 2015 are as follows:

 

           Common Equity              
     Tier 1 Capital     Tier 1 to     Tier 1 Capital     Total Capital  
     to Total Average     Risk-Weighted     to Risk-Weighted     to Risk-Weighted  
     Assets Ratio     Assets Ratio     Assets Ratio     Assets Ratio  
     March 31,     March 31,     March 31,     March 31,  
Capital Ratios:    2015     2015     2015     2015  

The Company

     9.17     9.79     11.23     12.37

Lakeland Bank

     8.47     10.37     10.37     11.51

“Well capitalized” institution under FDIC Regulations

     5.00     6.50     8.00     10.00

 

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Basel III

On July 2, 2013, the FRB approved the final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Company. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments. On July 9, 2013, the FDIC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the FRB. The FDIC’s rule is identical in substance to the final rules issued by the FRB. The phase-in period for the final rules began for the Company on January 1, 2015, with full compliance with all of the final rule’s requirements to be phased in over a multi-year schedule through January 1, 2019. As of March 31, 2015, the Company and Lakeland met all of the requirements under the new rules on a fully phased-in basis, if such requirements were in effect.

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.

 

     March 31,     December 31,  

(dollars in thousands, except per share amounts)

   2015     2014  

Calculation of tangible book value per common share

    

Total common stockholders’ equity at end of period—GAAP

   $ 388,084      $ 379,438   

Less:

    

Goodwill

     109,974        109,974   

Other identifiable intangible assets, net

     1,849        1,960   
  

 

 

   

 

 

 

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

$ 276,261    $ 267,504   
  

 

 

   

 

 

 

Shares outstanding at end of period

  37,900      37,911   
  

 

 

   

 

 

 

Book value per share—GAAP

$ 10.24    $ 10.01   
  

 

 

   

 

 

 

Tangible book value per share—Non-GAAP

$ 7.29    $ 7.06   
  

 

 

   

 

 

 

Calculation of tangible common equity to tangible assets

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

$ 276,261    $ 267,504   
  

 

 

   

 

 

 

Total assets at end of period

$ 3,627,764    $ 3,538,325   

Less:

Goodwill

  109,974      109,974   

Other identifiable intangible assets, net

  1,849      1,960   
  

 

 

   

 

 

 

Total tangible assets at end of period—Non-GAAP

$ 3,515,941    $ 3,426,391   
  

 

 

   

 

 

 

Common equity to assets—GAAP

  10.70   10.72
  

 

 

   

 

 

 

Tangible common equity to tangible assets—Non-GAAP

  7.86   7.81
  

 

 

   

 

 

 

 

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     For the three months ended,  
     March 31,     March 31,  
(dollars in thousands)    2015     2014  

Calculation of return on average tangible common equity

    

Net income—GAAP

   $ 8,330      $ 7,163   
  

 

 

   

 

 

 

Total average common stockholders’ equity

$ 383,587    $ 356,951   

Less:

Average goodwill

  109,974      109,974   

Average other identifiable intangible assets, net

  1,919      2,379   
  

 

 

   

 

 

 

Total average tangible common stockholders’ equity—Non-GAAP

$ 271,694    $ 244,598   
  

 

 

   

 

 

 

Return on average common stockholders’ equity—GAAP

  8.81   8.14
  

 

 

   

 

 

 

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

  12.43   11.88
  

 

 

   

 

 

 

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 $112.9 million. The information provided for net interest income assumes that changes in interest rates of plus 200 basis points and minus 200 basis points change gradually in equal increments (“rate ramp”) over the twelve month period.

 

     Changes in interest rates  

Rate Ramp

   +200 bp     -200 bp  

Asset/Liability Policy Limit

     -5.0     -5.0

March 31, 2015

     -3.5     -2.0

December 31, 2014

     -3.6     -1.9

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

 

     Changes in interest rates  

Rate Shock

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

Asset/Liability Policy Limit

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

March 31, 2015

     -5.1     -3.1     -1.2     -4.7     -5.6     -6.0

December 31, 2014

     -5.2     -3.2     -1.3     -4.5     -6.3     -6.8

 

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The base case for the following table is an estimate of the Company’s net portfolio value for the periods presented using current discount rates, and assuming the Company’s interest-sensitive assets and liabilities remain at period-end levels. The net portfolio value at March 31, 2015 (the base case) was $492.9 million. The information provided for the net portfolio value assumes fluctuations or “rate shocks” of plus 300 basis points and minus 300 basis points for changes in interest rates as shown in the table below. Rate shocks assume that current interest rates change immediately.

 

     Changes in interest rates  

Rate Shock

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

Asset/Liability Policy Limit

     -35.0     -25.0     -15.0     -15.0     -25.0     -35.0

March 31, 2015

     -12.3     -7.6     -3.2     -0.5     -5.0     -7.5

December 31, 2014

     -13.0     -8.2     -3.5     0.7     -2.5     -4.8

The information set forth in the above tables is based on significant estimates and assumptions, and constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. For more information regarding the Company’s market risk and assumptions used in the Company’s simulation models, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

ITEM 4. Controls and Procedures

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

(b) Changes in internal controls over financial reporting. There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes in risk factors from those disclosed under Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Not Applicable
Item 3. Defaults Upon Senior Securities Not Applicable
Item 4. Mine Safety Disclosures Not Applicable
Item 5. Other Information Not Applicable
Item 6. Exhibits

 

  31.1 Certification by Thomas J. Shara pursuant to Section 302 of the Sarbanes Oxley Act.
  31.2 Certification by Joseph F. Hurley pursuant to Section 302 of the Sarbanes Oxley Act.
  32.1 Certification by Thomas J. Shara and Joseph F. Hurley pursuant to Section 906 of the Sarbanes Oxley Act.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

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

 

Lakeland Bancorp, Inc.
(Registrant)

/s/ Thomas J. Shara

Thomas J. Shara
President and Chief Executive Officer

/s/ Joseph F. Hurley

Joseph F. Hurley
Executive Vice President and
Chief Financial Officer

Date: May 8, 2015

 

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