Form 10-Q
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one)

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

For the quarterly period ended September 30, 2016

OR

 

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

For the transition period from                      to                     

Commission file number 000-17820

 

 

LAKELAND BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

New Jersey   22-2953275

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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

(973) 697-2000

(Registrant’s telephone number, including area code)

 

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

 

 

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

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

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  
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  ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

As of October 28, 2016, there were 44,442,621 outstanding shares of Common Stock, no par value.

 

 

 


Table of Contents

LAKELAND BANCORP, INC.

Form 10-Q Index

 

          PAGE  
   Part I. Financial Information   

Item 1.

   Financial Statements:   
  

Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015

     3   
  

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)

     4   
  

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)

     5   
  

Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2016 and 2015 (unaudited)

     6   
  

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (unaudited)

     7   
  

Notes to Consolidated Financial Statements

     8   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      39   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      54   

Item 4.

   Controls and Procedures      55   
   Part II. Other Information   

Item 1.

   Legal Proceedings      57   

Item 1A.

   Risk Factors      57   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      57   

Item 3.

   Defaults Upon Senior Securities      57   

Item 4.

   Mine Safety Disclosures      57   

Item 5.

   Other Information      57   

Item 6.

   Exhibits      57   

Signatures

        58   

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

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

     September 30, 2016      December 31,  
     (unaudited)      2015  
     (dollars in thousands)  

ASSETS

     

Cash

   $ 182,356       $ 113,894   

Interest-bearing deposits due from banks

     12,995         4,599   
  

 

 

    

 

 

 

Total cash and cash equivalents

     195,351         118,493   

Investment securities available for sale, at fair value

     480,392         442,349   

Investment securities held to maturity; fair value of $143,939 at September 30, 2016 and $117,594 at December 31, 2015

     141,124         116,740   

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

     16,575         14,087   

Loans, net of deferred costs (fees)

     3,791,332         2,965,200   

Less: allowance for loan and lease losses

     31,369         30,874   
  

 

 

    

 

 

 

Net loans

     3,759,963         2,934,326   

Loans held for sale

     3,690         1,233   

Premises and equipment, net

     52,384         35,881   

Accrued interest receivable

     11,551         9,208   

Goodwill

     136,392         109,974   

Other identifiable intangible assets

     3,545         1,545   

Bank owned life insurance

     71,930         65,361   

Other assets

     31,394         20,353   
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 4,904,291       $ 3,869,550   
  

 

 

    

 

 

 

LIABILITIES

     

Deposits:

     

Noninterest-bearing

   $ 931,385       $ 693,741   

Savings and interest-bearing transaction accounts

     2,471,097         1,958,510   

Time deposits $250 thousand and under

     408,904         270,623   

Time deposits over $250 thousand

     130,356         72,698   
  

 

 

    

 

 

 

Total deposits

     3,941,742         2,995,572   

Federal funds purchased and securities sold under agreements to repurchase

     29,699         151,234   

Other borrowings

     293,875         271,905   

Subordinated debentures

     104,796         31,238   

Other liabilities

     35,457         19,085   
  

 

 

    

 

 

 

TOTAL LIABILITIES

     4,405,569         3,469,034   
  

 

 

    

 

 

 

STOCKHOLDERS’ EQUITY

     

Common stock, no par value; authorized shares, 70,000,000; issued 44,442,621 shares at September 30, 2016 and 37,906,481 shares at December 31, 2015

     461,460         386,287   

Retained earnings

     30,903         13,079   

Accumulated other comprehensive income

     6,359         1,150   
  

 

 

    

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     498,722         400,516   
  

 

 

    

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 4,904,291       $ 3,869,550   
  

 

 

    

 

 

 

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

     For the Three Months Ended September 30,      For the Nine Months Ended September 30,  
     2016     2015      2016      2015  
     (in thousands, except per share data)  

INTEREST INCOME

          

Loans, leases and fees

   $ 39,766      $ 29,123       $ 109,687       $ 85,230   

Federal funds sold and interest-bearing deposits with banks

     142        7         341         30   

Taxable investment securities and other

     2,627        2,639         8,285         8,001   

Tax-exempt investment securities

     470        390         1,300         1,198   
  

 

 

   

 

 

    

 

 

    

 

 

 

TOTAL INTEREST INCOME

     43,005        32,159         119,613         94,459   
  

 

 

   

 

 

    

 

 

    

 

 

 

INTEREST EXPENSE

          

Deposits

     2,886        1,464         7,495         4,093   

Federal funds purchased and securities sold under agreements to repurchase

     19        33         66         92   

Other borrowings

     1,582        1,328         4,582         3,753   
  

 

 

   

 

 

    

 

 

    

 

 

 

TOTAL INTEREST EXPENSE

     4,487        2,825         12,143         7,938   
  

 

 

   

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

     38,518        29,334         107,470         86,521   

Provision for loan and lease losses

     1,763        332         3,848         1,942   
  

 

 

   

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES

     36,755        29,002         103,622         84,579   

NONINTEREST INCOME

          

Service charges on deposit accounts

     2,615        2,614         7,580         7,404   

Commissions and fees

     1,182        984         3,260         3,487   

Gains on sales of investment securities

     —          173         370         190   

Gains on sales of loans

     753        515         1,598         1,244   

Gain on debt extinguishment

     —          1,830         —           1,830   

Income on bank owned life insurance

     1,303        455         2,125         1,542   

Other income

     564        116         1,236         686   
  

 

 

   

 

 

    

 

 

    

 

 

 

TOTAL NONINTEREST INCOME

     6,417        6,687         16,169         16,383   
  

 

 

   

 

 

    

 

 

    

 

 

 

NONINTEREST EXPENSE

          

Salaries and employee benefits

     14,626        12,376         41,802         36,270   

Net occupancy expense

     2,372        2,067         7,401         6,888   

Furniture and equipment

     1,876        1,881         5,904         5,166   

Stationery, supplies and postage

     412        395         1,271         1,137   

Marketing expense

     429        396         1,123         1,052   

FDIC insurance expense

     715        474         1,986         1,523   

Data processing expense

     518        359         1,497         1,132   

Telecommunications expense

     479        371         1,289         1,074   

ATM and debit card expense

     420        357         1,149         1,081   

Expenses on other real estate owned and other repossessed assets

     (32     27         33         46   

Long-term debt prepayment fee

     —          2,407         —           2,407   

Merger related expenses

     1,697        330         4,103         330   

Core deposit intangible amortization

     201        98         532         316   

Other expenses

     2,293        2,294         7,055         6,647   
  

 

 

   

 

 

    

 

 

    

 

 

 

TOTAL NONINTEREST EXPENSE

     26,006        23,832         75,145         65,069   
  

 

 

   

 

 

    

 

 

    

 

 

 

Income before income tax expense

     17,166        11,857         44,646         35,893   

Income tax expense

     5,839        4,032         15,081         11,876   
  

 

 

   

 

 

    

 

 

    

 

 

 

NET INCOME

   $ 11,327      $ 7,825       $ 29,565       $ 24,017   
  

 

 

   

 

 

    

 

 

    

 

 

 

PER SHARE OF COMMON STOCK

          

Basic earnings

   $ 0.25      $ 0.20       $ 0.69       $ 0.63   
  

 

 

   

 

 

    

 

 

    

 

 

 

Diluted earnings

   $ 0.25      $ 0.20       $ 0.69       $ 0.63   
  

 

 

   

 

 

    

 

 

    

 

 

 

Dividends

   $ 0.095      $ 0.085       $ 0.275       $ 0.245   
  

 

 

   

 

 

    

 

 

    

 

 

 

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

     For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
     2016     2015     2016     2015  
     (in thousands)  

NET INCOME

   $ 11,327      $ 7,825      $ 29,565      $ 24,017   

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

        

Unrealized gains (losses) on securities available for sale

     (502     1,972        5,352        2,470   

Reclassification for securities gains included in net income

     —          (106     (233     (123

Unrealized gains on derivatives

     174        —          48        —     

Change in pension liability, net

     (2     5        42        15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (330     1,871        5,209        2,362   
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL COMPREHENSIVE INCOME

   $ 10,997      $ 9,696      $ 34,774      $ 26,379   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

For the Nine Months Ended September 30, 2016 and 2015

(Unaudited)

 

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

At January 1, 2015

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

Net income

     —          24,017        —           24,017   

Other comprehensive income, net of tax

     —          —          2,362         2,362   

Stock based compensation

     1,259        —          —           1,259   

Retirement of restricted stock

     (254     —          —           (254

Issuance of stock

     22        —          —           22   

Exercise of stock options, net of excess tax benefits

     183        —          —           183   

Cash dividends, common stock

     —          (9,340     —           (9,340
  

 

 

   

 

 

   

 

 

    

 

 

 

At September 30, 2015

   $ 385,941      $ 7,861      $ 3,885       $ 397,687   
  

 

 

   

 

 

   

 

 

    

 

 

 

At January 1, 2016

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

Net income

     —          29,565        —           29,565   

Other comprehensive income, net of tax

     —          —          5,209         5,209   

Stock based compensation

     1,494        —          —           1,494   

Issuance of stock for Pascack acquisition

     37,221        —          —           37,221   

Issuance of stock for Harmony acquisition

     36,654        —          —           36,654   

Issuance of stock

     10        —          —           10   

Retirement of restricted stock

     (206     —          —           (206

Cash dividends, common stock

     —          (11,741     —           (11,741
  

 

 

   

 

 

   

 

 

    

 

 

 

At September 30, 2016

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

 

 

   

 

 

   

 

 

    

 

 

 

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

 

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Table of Contents

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     For the Nine Months Ended September 30,  
     2016     2015  
     (in thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 29,565      $ 24,017   

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

    

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

     3,351        3,077   

Depreciation and amortization

     2,885        2,786   

Amortization of intangible assets

     532        317   

Provision for loan and lease losses

     3,848        1,942   

Loans originated for sale

     (61,566     (54,467

Proceeds from sales of loans

     60,707        54,383   

Gains on sales of securities

     (370     (190

Gain on debt redemption and extinguishment

     —          (1,830

Gains on sales of loans held for sale

     (1,598     (1,244

Gains on proceeds from bank owned life insurance policies

     (864     (378

Gains on other real estate and other repossessed assets

     (254     (100

Losses (gains) on sales of premises and equipment

     117        (6

Long-term debt prepayment penalty

     —          2,407   

Stock-based compensation

     1,494        1,259   

Increase in other assets

     (8,194     (4,151

Decrease in other liabilities

     7,869        3,343   
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     37,522        31,165   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Net cash acquired in acquisitions

     68,751        —     

Proceeds from repayments and maturities of available for sale securities

     58,911        55,528   

Proceeds from repayments and maturities of held to maturity securities

     24,369        16,371   

Proceeds from sales of available for sale securities

     15,654        33,563   

Purchase of available for sale securities

     (87,767     (54,683

Purchase of held to maturity securities

     (49,022     (30,367

Purchase of bank owned life insurance

     —          (7,000

Death benefit proceeds from bank owned life insurance policy

     2,129        1,035   

Net decrease (increase) in Federal Home Loan Bank Stock

     1,254        (3,006

Net increase in loans and leases

     (254,307     (200,489

Proceeds from sales of other real estate and repossessed assets

     2,051        1,332   

Proceeds from dispositions and sales of premises and equipment

     15        28   

Purchases of premises and equipment

     (2,851     (2,986
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (220,813     (190,674
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase in deposits

     364,141        128,947   

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

     (121,534     22,421   

Proceeds from other borrowings

     14,921        69,523   

Repayments of other borrowings

     (59,000     (30,000

Early redemption and extinguishment of subordinated debentures

     —          (8,170

Net proceeds from issuance of subordinated debt

     73,558        —     

Excess tax benefits

     —          59   

Exercise of stock options

     —          124   

Issuance of stock

     10        22   

Retirement of restricted stock

     (206     (254

Dividends paid

     (11,741     (9,340
  

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

     260,149        173,332   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     76,858        13,823   

Cash and cash equivalents, beginning of period

     118,493        109,316   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 195,351      $ 123,139   
  

 

 

   

 

 

 

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

 

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Table of Contents

Notes to Consolidated Financial Statements

 

Note 1. Significant Accounting Policies

Basis of Presentation.

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

The Company’s unaudited interim financial statements reflect all adjustments, such as normal recurring accruals that are, in the opinion of management, necessary for the fair presentation of the results of the interim periods. The results of operations for the three and nine months ended September 30, 2016 do not necessarily indicate the results that the Company will achieve for all of 2016.

Certain information and footnote disclosures required under U.S. GAAP have been condensed or omitted, as permitted by rules and regulations of the Securities and Exchange Commission. These unaudited interim financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes that are presented in the the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

Note 2. Acquisitions

Harmony Bank

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

 

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Table of Contents

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

 

     On July 1,
2016
 
     (in thousands)  

Cash and cash equivalents

   $ 27,809   

Securities available for sale

     7,474   

Securities held to maturity

     6,885   

Federal Home Loan Bank stock

     780   

Loans

     259,725   

Premises and equipment

     3,125   

Goodwill

     11,107   

Identifiable intangible assets

     1,416   

Accrued interest receivable and other assets

     8,118   
  

 

 

 

Total assets acquired

     326,439   
  

 

 

 

Deposits

     (278,060

Other borrowings

     (9,314

Other liabilities

     (2,411
  

 

 

 

Total liabilities assumed

     (289,785
  

 

 

 

Net assets acquired

   $ 36,654   
  

 

 

 

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

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

 

(in thousands)

   Acquired
Credit
Impaired
Loans
 

Contractually required principal and interest at acquisition

   $ 1,264   

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

     398   
  

 

 

 

Expected cash flows at acquisition

     866   

Interest component of expected cash flows (accretable difference)

     97   
  

 

 

 

Fair value of acquired loans

   $ 769   
  

 

 

 

The core deposit intangible totaled $1.0 million and is being estimated over its estimated useful life of approximately 10 years using an accelerated method. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes.

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

 

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Table of Contents

Pascack Bancorp

On January 7, 2016, the Company completed its acquisition of Pascack Bancorp, Inc. (“Pascack”), a bank holding company headquartered in Waldwick, New Jersey. Pascack was the parent of Pascack Community Bank which operated 8 branches in Bergen and Essex Counties in New Jersey. This acquisition enabled the Company to broaden its presence in Bergen and Essex counties. Effective as of the close of business on January 7, 2016, Pascack merged into the Company, and Pascack Community Bank merged into Lakeland Bank. The merger agreement provided that the shareholders of Pascack would receive, at their election, for each outstanding share of Pascack common stock that they own at the effective time of the merger, either 0.9576 shares of Lakeland Bancorp common stock or $11.35 in cash, subject to proration as described in the merger agreement, so that 90% of the aggregate merger consideration was shares of Lakeland Bancorp common stock and 10% was cash. Lakeland Bancorp issued 3,314,284 shares of its common stock in the merger and paid approximately $4.5 million in cash including the cash paid in connection with the cancellation of Pascack stock options. Outstanding Pascack stock options were paid out in cash at the difference between $11.35 and an average strike price of $7.37 for a total cash payment of $122,000. This transaction resulted in $15.3 million of goodwill and generated $1.5 million in core deposit intangibles.

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

 

     On January 7,
2016
 
     (in thousands)  

Cash and cash equivalents

   $ 40,942   

Securities held to maturity

     3,925   

Federal Home Loan Bank stock

     2,962   

Loans

     319,575   

Premises and equipment

     14,438   

Goodwill

     15,311   

Identifiable intangible assets

     1,514   

Accrued interest receivable and other assets

     6,672   
  

 

 

 

Total assets acquired

     405,339   
  

 

 

 

Deposits

     (304,466

Other borrowings

     (57,308

Other liabilities

     (6,344
  

 

 

 

Total liabilities assumed

     (368,118
  

 

 

 

Net assets acquired

   $ 37,221   
  

 

 

 

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

 

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

 

(in thousands)

   Acquired
Credit
Impaired
Loans
 

Contractually required principal and interest at acquisition

   $ 4,932   

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

     4,030   
  

 

 

 

Expected cash flows at acquisition

     902   

Interest component of expected cash flows (accretable difference)

     85   
  

 

 

 

Fair value of acquired loans

   $ 817   
  

 

 

 

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

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

Direct costs related to the Pascack and Harmony acquisitions were expensed as incurred. During the nine months ended September 30, 2016 and 2015, the Company incurred $4.1 million and $330,000, respectively, of merger and acquisition integration-related expenses, which have been separately stated in the Company’s consolidated statements of income.

Supplemental Pro Forma Financial Information

The following table provides unaudited condensed pro forma financial information assuming that the Pascack and Harmony acquisitions had been completed as of January 1, 2016, for the nine months ended September 30, 2016 and as of January 1, 2015 for the nine months ended September 30, 2015. The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisitions occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings or the impact of conforming certain accounting policies of the acquired companies to the Company’s policies that may have occurred as a result of the integration and consolidation of Pascack’s and Harmony’s operations. The pro forma information shown reflects adjustments related to certain purchase accounting fair value adjustments; amortization of core deposit and other intangibles; and related income tax effects. The Company has not provided separate information regarding revenue and earnings of Pascack since the acquisition because of the manner in which Pascack’s branches and lending team were immediately merged into Lakeland’s branches and lending team making such information impracticable to provide. Harmony contributed net interest income, net income and earnings per share of $2.9 million, $1.7 million and $0.04, respectively, for the three and nine months ended September 30, 2016.

 

(in thousands)

   Pro-Forma
September 30, 2016
     Pro-Forma
September 30, 2015
 

Net interest income

   $ 113,377       $ 104,887   

Provision for loan losses

     3,848         1,942   

Noninterest income

     16,718         17,584   

Noninterest expense

     75,740         80,526   

Net income

     33,415         26,498   

Earnings per share:

     

Fully diluted

   $ 0.75       $ 0.59   

 

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Note 3. Earnings Per Share

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

 

    

For the Three Months Ended

September 30,

    

For the Nine Months Ended

September 30,

 
(In thousands, except per share data)    2016      2015      2016      2015  

Net income available to common shareholders

   $ 11,327       $ 7,825       $ 29,565       $ 24,017   

Less: earnings allocated to participating securities

     114         68         275         189   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocated to common shareholders

   $ 11,213       $ 7,757       $ 29,290       $ 23,828   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding - basic

     44,439         37,856         42,211         37,837   

Share-based plans

     220         159         179         139   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding - diluted

     44,659         38,015         42,390         37,976   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.25       $ 0.20       $ 0.69       $ 0.63   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 0.25       $ 0.20       $ 0.69       $ 0.63   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

Options to purchase 83,054 shares of common stock at a weighted average price of $12.29 per share were outstanding and were not included in the computations of diluted earnings per share for the three and nine months ended September 30, 2015 because the exercise price was greater than the average market price.

 

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Note 4. Investment Securities

 

                                                                                                                       
Available For Sale    September 30, 2016      December 31, 2015  
     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

   $ 103,503       $ 1,635       $ (65   $ 105,073       $ 97,617       $ 190       $ (674   $ 97,133   

Mortgage-backed securities, residential

     291,853         4,022         (276     295,599         280,018         1,717         (2,283     279,452   

Mortgage-backed securities, multifamily

     10,206         276         —          10,482         10,249         —           (129     10,120   

Obligations of states and political subdivisions

     47,452         1,167         (27     48,592         35,639         910         (51     36,498   

Other debt securities

     351         —           —          351         498         3         —          501   

Equity securities

     17,197         3,348         (250     20,295         16,550         2,393         (298     18,645   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 470,562       $ 10,448       $ (618   $ 480,392       $ 440,571       $ 5,213       $ (3,435   $ 442,349   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

                                                                                                                       
Held to Maturity    September 30, 2016      December 31, 2015  
     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

   $ 26,556       $ 847       $ —        $ 27,403       $ 30,477       $ 289       $ (94   $ 30,672   

Mortgage-backed securities, residential

     39,272         791         (38     40,025         36,466         411         (426     36,451   

Mortgage-backed securities, multifamily

     2,085         20         —          2,105         2,159         —           (60     2,099   

Obligations of states and political subdivisions

     71,197         1,161         (28     72,330         45,617         809         (156     46,270   

Other debt securities

     2,014         62         —          2,076         2,021         81         —          2,102   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 141,124       $ 2,881       $ (66   $ 143,939       $ 116,740       $ 1,590       $ (736   $ 117,594   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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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):

 

     September 30, 2016  
     Available for Sale      Held to Maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ 2,452       $ 2,460       $ 29,076       $ 29,070   

Due after one year through five years

     74,557         75,881         31,921         32,636   

Due after five years through ten years

     68,342         69,540         32,956         34,120   

Due after ten years

     5,955         6,135         5,814         5,983   
  

 

 

    

 

 

    

 

 

    

 

 

 
     151,306         154,016         99,767         101,809   

Mortgage-backed securities

     302,059         306,081         41,357         42,130   

Equity securities

     17,197         20,295         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 470,562       $ 480,392       $ 141,124       $ 143,939   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     For the Three Months Ended
September 30,
     For the Nine Months Ended
September 30,
 
     2016      2015      2016      2015  

Sale proceeds

   $ —         $ 22,091       $ 15,654       $ 33,563   

Gross gains

     —           223         370         251   

Gross losses

     —           (50      —           (61

There were no other-than-temporary impairments for the nine months ended September 30, 2016 or 2015.

Gains or losses on sales of investment securities are based on the net proceeds and the adjusted carrying amount of the securities sold using the specific identification method.

Securities with a carrying value of approximately $341.2 million and $347.7 million at September 30, 2016 and December 31, 2015, respectively, were pledged to secure public deposits and for other purposes required by applicable laws and regulations.

 

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

 

                                                                                                        

September 30, 2016

   Less than 12 months      12 months or longer      Total  
Available for Sale    Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Number of
Securities
     Fair Value      Unrealized
Losses
 
                   (in thousands)                       

U.S. government agencies

   $ 4,970       $ 65       $ —         $ —           1       $ 4,970       $ 65   

Mortgage-backed securities, residential

     24,313         145         15,545         131         22         39,858         276   

Obligations of states and political subdivisions

     7,548         27         —           —           14         7,548         27   

Other debt securities

     351         —           —           —           1         351         —     

Equity securities

     253         27         4,798         223         2         5,051         250   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 37,435       $ 264       $ 20,343       $ 354         40       $ 57,778       $ 618   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Held to Maturity                                                 

Mortgage-backed securities, residential

   $ 4,529       $ 19       $ 1,115       $ 19         5       $ 5,644       $ 38   

Obligations of states and political subdivisions

     17,097         28         401         —           13         17,498         28   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 21,626       $ 47       $ 1,516       $ 19         18       $ 23,142       $ 66   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                                                        

December 31, 2015

   Less than 12 months      12 months or longer      Total  
Available for Sale    Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Number of
Securities
     Fair Value      Unrealized
Losses
 
                   (in thousands)                       

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

   $ 80,192       $ 674       $ —         $ —           16       $ 80,192       $ 674   

Mortgage-backed securities, residential

     103,749         1,043         50,095         1,240         50         153,844         2,283   

Mortgage-backed securities, multifamily

     10,120         129         —           —           2         10,120         129   

Obligations of states and political subdivisions

     2,051         4         1,466         47         7         3,517         51   

Equity securities

     247         24         4,643         274         3         4,890         298   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 196,359       $ 1,874       $ 56,204       $ 1,561         78       $ 252,563       $ 3,435   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Held to Maturity                                                 

U.S. government agencies

   $ 15,683       $ 94       $ —         $ —           3       $ 15,683       $ 94   

Mortgage-backed securities, residential

     20,283         262         6,687         164         11         26,970         426   

Mortgage-backed securities, multifamily

     1,223         18         876         42         2         2,099         60   

Obligations of states and political subdivisions

     9,181         149         2,043         7         15         11,224         156   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 46,370       $ 523       $ 9,606       $ 213         31       $ 55,976       $ 736   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2016, the equity securities include investments in equity securities and investment funds that use net asset value per share to measure fair value. The equity securities represent investments in other financial institutions for market appreciation purposes. Those equities had a purchase price of $2.7 million and a market value of $6.0 million as of September 30, 2016.

The investment funds include $11.1 million that are invested in government guaranteed loans, mortgage-backed securities, small business loans and other instruments supporting affordable housing and economic development. The Company may redeem these funds at the net asset value calculated at the end of the current business day less any unpaid management fees. As of September 30, 2016, the amortized cost of these securities was $11.2 million and the fair value was $11.1 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.

The investment funds also include $3.3 million that are primarily invested in community development loans that are guaranteed by the Small Business Administration (SBA). Because the funds are primarily guaranteed by the federal government there are minimal changes in market value between accounting periods. These funds can be redeemed with 60 days notice at the net asset value less unpaid management fees with the approval of the fund manager. As of September 30, 2016, the net amortized cost equaled the market value of the investment. There are no unfunded commitments related to this investment.

 

Note 5. Loans, Leases and Other Real Estate

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

 

     September 30,
2016
     December 31,
2015
 
     (in thousands)  

Commercial, secured by real estate

   $ 2,494,841       $ 1,761,589   

Commercial, industrial and other

     339,291         307,044   

Leases

     65,659         56,660   

Real estate - residential mortgage

     370,766         389,692   

Real estate - construction

     180,313         118,070   

Home equity and consumer

     343,649         334,891   
  

 

 

    

 

 

 

Total loans

     3,794,519         2,967,946   
  

 

 

    

 

 

 

Less: deferred fees

     (3,187      (2,746
  

 

 

    

 

 

 

Loans, net of deferred fees

   $ 3,791,332       $ 2,965,200   
  

 

 

    

 

 

 

At September 30, 2016 and December 31, 2015, home equity and consumer loans included overdraft deposit balances of $325,000 and $705,000, respectively. At September 30, 2016 and December 31, 2015, the Company had $950.1 million and $738.7 million in loans pledged for actual and potential borrowings at the Federal Home Loan Bank of New York (“FHLB”).

 

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Purchased Credit Impaired Loans

The carrying value of loans acquired in the Pascack acquisition and accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” was $0.7 million at September 30, 2016, which was $141,000 less than the balance at the time of acquisition on January 7, 2016. The carrying value of loans acquired in the Harmony acquisition was $0.8 million at September 30, 2016 which was substantially the same as the balance at acquisition date on July 1, 2016. Under ASC Subtopic 310-30, these loans, referred to as purchased credit impaired (“PCI”) loans, may be aggregated and accounted for as pools of loans if the loans being aggregated have common risk characteristics. The Company elected to account for the loans with evidence of credit deterioration individually rather than aggregate them into pools. The difference between the undiscounted cash flows expected at acquisition and the investment in the acquired loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or as a valuation allowance.

Increases in expected cash flows subsequent to the acquisition are recognized prospectively through an adjustment of the yield on the loans over the remaining life, while decreases in expected cash flows are recognized as impairments through a loss provision and an increase in the allowance for loan and lease losses. Valuation allowances (recognized in the allowance for loan and lease losses) on these impaired loans reflect only losses incurred after the acquisition (representing all cash flows that were expected at acquisition but currently are not expected to be received).

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

 

(in thousands)    Nine months ended
September 30, 2016
 

Balance, beginning of period

   $ —     

Acquisitions

     181   

Accretion

     (62

Net reclassification non-accretable difference

     11   
  

 

 

 

Balance, end of period

   $ 130   
  

 

 

 

There were no PCI loans in 2015.

Non-Performing Assets and Past Due Loans

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

 

(in thousands)    September 30,
2016
     December 31,
2015
 

Commercial, secured by real estate

   $ 13,068       $ 10,446   

Commercial, industrial and other

     39         103   

Leases

     78         316   

Real estate - residential mortgage

     7,264         8,664   

Home equity and consumer

     2,210         3,167   
  

 

 

    

 

 

 

Total non-accrual loans and leases

   $ 22,659       $ 22,696   

Other real estate and other repossessed assets

     1,918         983   
  

 

 

    

 

 

 

TOTAL NON-PERFORMING ASSETS

   $ 24,577       $ 23,679   
  

 

 

    

 

 

 

Troubled debt restructurings, still accruing

   $ 9,251       $ 10,108   
  

 

 

    

 

 

 

 

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Non-accrual loans included $2.5 million of troubled debt restructurings for each of the periods ended September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016 and December 31, 2015, the Company had $6.5 million and $7.9 million, respectively, in residential mortgages and consumer home equity loans that were in the process of foreclosure.

An age analysis of past due loans, segregated by class of loans as of September 30, 2016 and December 31, 2015, is as follows:

 

September 30, 2016

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

Commercial, secured by real estate

   $ 7,101       $ 361       $ 10,320       $ 17,782       $ 2,477,059       $ 2,494,841       $ —     

Commercial, industrial and other

     241         48         68         357         338,934         339,291         —     

Leases

     115         251         78         444         65,215         65,659         —     

Real estate - residential mortgage

     1,757         429         6,325         8,511         362,255         370,766         —     

Real estate - construction

     —           —           —           —           180,313         180,313         —     

Home equity and consumer

     929         365         1,964         3,258         340,391         343,649         10   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,143       $ 1,454       $ 18,755       $ 30,352       $ 3,764,167       $ 3,794,519       $ 10   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

                                                

Commercial, secured by real estate

   $ 1,465       $ 693       $ 7,853       $ 10,011       $ 1,751,578       $ 1,761,589       $ —     

Commercial, industrial and other

     205         —           103         308         306,736         307,044         —     

Leases

     62         26         316         404         56,256         56,660         —     

Real estate - residential mortgage

     1,361         725         7,472         9,558         380,134         389,692         —     

Real estate - construction

     —           —           —           —           118,070         118,070         —     

Home equity and consumer

     876         141         3,498         4,515         330,376         334,891         331   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,969       $ 1,585       $ 19,242       $ 24,796       $ 2,943,150       $ 2,967,946       $ 331   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 September 30, 2016 and December 31, 2015 are as follows:

 

September 30, 2016

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

Loans without specific allowance:

              

Commercial, secured by real estate

   $ 15,432       $ 15,994       $ —         $ 13,401       $ 173   

Commercial, industrial and other

     613         613         —           1,090         18   

Leases

     —           —           —           —           —     

Real estate - residential mortgage

     2,062         2,079         —           2,560         12   

Real estate - construction

     —           —           —           —           —     

Home equity and consumer

     193         193         —           507         —     

Loans with specific allowance:

              

Commercial, secured by real estate

     6,293         6,845         435         7,331         211   

Commercial, industrial and other

     370         370         15         384         13   

Leases

     —           —           —           2         —     

Real estate - residential mortgage

     808         850         26         814         23   

Real estate - construction

     —           —           —           —           —     

Home equity and consumer

     1,213         1,229         101         1,201         44   

Total:

              

Commercial, secured by real estate

   $ 21,725       $ 22,839       $ 435       $ 20,732       $ 384   

Commercial, industrial and other

     983         983         15         1,474         31   

Leases

     —           —           —           2         —     

Real estate - residential mortgage

     2,870         2,929         26         3,374         35   

Real estate - construction

     —           —           —           —           —     

Home equity and consumer

     1,406         1,422         101         1,708         44   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 26,984       $ 28,173       $ 577       $ 27,290       $ 494   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

December 31, 2015

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

Loans without specific allowance:

              

Commercial, secured by real estate

   $ 14,065       $ 14,712       $ —         $ 12,928       $ 344   

Commercial, industrial and other

     209         887         —           749         14   

Leases

     —           —           —           —           —     

Real estate - residential mortgage

     2,195         2,242         —           2,096         —     

Real estate - construction

     —           —           —           94         —     

Home equity and consumer

     574         575         —           762         5   

Loans with specific allowance:

              

Commercial, secured by real estate

     5,721         5,918         598         6,249         271   

Commercial, industrial and other

     1,023         1,023         77         717         32   

Leases

     6         6         1         —           —     

Real estate - residential mortgage

     832         865         73         840         37   

Real estate - construction

     380         380         21         308         13   

Home equity and consumer

     1,001         1,013         73         1,006         54   

Total:

              

Commercial, secured by real estate

   $ 19,786       $ 20,630       $ 598       $ 19,177       $ 615   

Commercial, industrial and other

     1,232         1,910         77         1,466         46   

Leases

     6         6         1         —           —     

Real estate - residential mortgage

     3,027         3,107         73         2,936         37   

Real estate - construction

     380         380         21         402         13   

Home equity and consumer

     1,575         1,588         73         1,768         59   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 26,006       $ 27,621       $ 843       $ 25,749       $ 770   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized on impaired loans was $0.5 million and $0.6 million for the nine months ended September 30, 2016 and 2015, respectively. Interest that would have been accrued on impaired loans during the each of the first nine months of 2016 and 2015 had the loans been performing under original terms would have been $1.1 million.

Credit Quality Indicators

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

 

20


Table of Contents

The following table shows the Company’s commercial loan portfolio as of September 30, 2016 and December 31, 2015, by the risk ratings discussed above (in thousands):

 

September 30, 2016

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

1

   $ —         $ 4,752       $ —     

2

     —           26,301         —     

3

     79,888         38,867         —     

4

     720,204         121,927         24,608   

5

     1,531,117         121,785         146,796   

5W - Watch

     80,424         9,763         2,795   

6 - Other assets especially mentioned

     31,255         5,286         1,471   

7 - Substandard

     51,953         10,610         4,643   

8 - Doubtful

     —           —           —     

9 - Loss

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,494,841       $ 339,291       $ 180,313   
  

 

 

    

 

 

    

 

 

 

December 31, 2015

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

1

   $ —         $ 3,517       $ —     

2

     —           9,662         —     

3

     65,199         56,895         —     

4

     526,909         111,702         19,125   

5

     1,044,888         105,301         94,535   

5W - Watch

     43,342         4,259         146   

6 - Other assets especially mentioned

     34,570         4,105         1,851   

7 - Substandard

     46,681         11,603         2,413   

8 - Doubtful

     —           —           —     

9 - Loss

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,761,589       $ 307,044       $ 118,070   
  

 

 

    

 

 

    

 

 

 

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

Allowance for Loan and Lease Losses

In 2015, the Company refined and enhanced its assessment of the adequacy of the allowance for loan and lease losses by extending the lookback period on its commercial loan portfolios from three years to five years and by extending the lookback period for all other portfolios from two to three years in order to capture more of the economic cycle. It also enhanced its qualitative factor framework to include a factor that captures the risk related to appraised real estate values, and how those values could change in relation to a change in capitalization rates. This enhancement is meant to increase the level of precision in the allowance for loan and lease losses. As a result, the Company no longer has an “unallocated” segment in its allowance for loan losses, as the risks and uncertainties meant to be captured by the unallocated allowance have been included in the qualitative framework for the respective portfolios.

 

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Table of Contents

The following table details activity in the allowance for loan and lease losses by portfolio segment for the three and nine months ended September 30, 2016 and 2015:

 

Three Months Ended September 30, 2016

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

Beginning Balance

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

Charge-offs

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

Recoveries

     131        30        4        1        —          46        212     

Provision

     996        (327     12        282        236        564        1,763     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Ending Balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Three Months Ended September 30, 2015

   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

   $ 13,919      $ 2,868      $ 954      $ 3,016      $ 725      $ 5,919      $ 2,773      $ 30,174   

Charge-offs

     (41     (131     (17     (151     —          (244     —          (584

Recoveries

     977        43        4        8        —          40        —          1,072   

Provision

     6,812        (1,467     (256     (651     704        (2,037     (2,773     332   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 21,667      $ 1,313      $ 685      $ 2,222      $ 1,429      $ 3,678      $ —        $ 30,994   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2016

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

Beginning Balance

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

Charge-offs

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

Recoveries

     212        106        26        5        —          159        508     

Provision

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Ending Balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Nine Months Ended September 30, 2015

   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

     (1,392     (205     (546     (257     (20     (920     —          (3,340

Recoveries

     1,341        127        24        11        106        99        —          1,708   

Provision

     8,141        (1,805     625        (1,552     790        (1,834     (2,423     1,942   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 21,667      $ 1,313      $ 685      $ 2,222      $ 1,429      $ 3,678      $ —        $ 30,994   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

 

September 30, 2016

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

Ending Balance: Individually evaluated for impairment

   $ 21,725       $ 983       $ —         $ 2,870       $ —         $ 1,406       $ 26,984   

Ending Balance: Collectively evaluated for impairment

     2,471,999         337,986         65,659         367,896         180,313         342,227       $ 3,766,080   

Ending Balance: Loans acquired with deteriorated credit quality

     1,117         322         —           —           —           16       $ 1,455   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance (1)

   $ 2,494,841       $ 339,291       $ 65,659       $ 370,766       $ 180,313       $ 343,649       $ 3,794,519   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

December 31, 2015

   (in thousands)  

Ending Balance: Individually evaluated for impairment

   $ 19,786       $ 1,232       $ 6       $ 3,027       $ 380       $ 1,575       $ 26,006   

Ending Balance: Collectively evaluated for impairment

     1,741,803         305,812         56,654         386,665         117,690         333,316       $ 2,941,940   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance (1)

   $ 1,761,589       $ 307,044       $ 56,660       $ 389,692       $ 118,070       $ 334,891       $ 2,967,946   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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:

 

September 30, 2016

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

Ending Balance: Individually evaluated for impairment

   $ 435       $ 15       $ —         $ 26       $ —         $ 101       $ 577   

Ending Balance: Collectively evaluated for impairment

     20,932         1,900         596         2,035         2,024         3,305       $ 30,792   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

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

Ending Balance: Individually evaluated for impairment

   $ 598       $ 77       $ 1       $ 73       $ 21       $ 73       $ 843   

Ending Balance: Collectively evaluated for impairment

     19,625         2,560         459         2,515         1,570         3,302       $ 30,031   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Lakeland also maintains a reserve for unfunded lending commitments which is included in other liabilities. This reserve was $2.5 million and $2.0 million at September 30, 2016 and December 31, 2015, 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.

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.

 

24


Table of Contents

The following table summarizes loans that have been restructured during the three and nine months ended September 30, 2016 and 2015:

 

     For the Three Months Ended
September 30, 2016
     For the Three Months Ended
September 30, 2015
 
     Number of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Number of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 
     (dollars in thousands)  

Troubled Debt Restructurings

                 

Commercial, secured by real estate

     1       $ 303       $ 303         —         $ —         $ —     

Real estate - residential mortgage

     1         255         255         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2       $ 558       $ 558         —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     For the Nine Months Ended
September 30, 2016
     For the Nine Months Ended
September 30, 2015
 
     Number of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Number of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 
     (dollars in thousands)  

Troubled Debt Restructurings

                 

Commercial, secured by real estate

     1       $ 303       $ 303         2       $ 1,458       $ 1,458   

Commercial, industrial and other

     —           —           —           3         1,933         1,933   

Leases

     —           —           —           1         14         14   

Real estate-residential mortgage

     1         255         255         —           —           —     

Real estate - construction

     —           —           —           1         396         396   

Home equity and consumer

     3         285         285         1         9         9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     5       $ 843       $ 843         8       $ 3,810       $ 3,810   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes as of September 30, 2016 and 2015, loans that were restructured within the previous twelve months that have subsequently defaulted:

 

     September 30, 2016      September 30, 2015  
     Number of
Contracts
     Recorded
Investment
     Number of
Contracts
     Recorded
Investment
 
     (dollars in thousands)  

Defaulted Troubled Debt Restructurings

           

Real estate - residential mortgage

     1       $ 255         —         $ —     

Home equity and consumer

     1         162         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     2       $ 417         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Other Real Estate and Other Repossessed Assets

At September 30, 2016, the Company had other real estate owned of $1.9 million and other repossessed assets of $12,000. At December 31, 2015, the Company had other real estate owned and other repossessed assets of $934,000 and $49,000, respectively. The other real estate owned that the Company held at September 30, 2016 and December 31, 2015 included $1.9 million and $805,000, respectively, in residential property acquired as a result of foreclosure proceedings or through a deed in lieu of foreclosure.

 

Note 6. Derivatives

Lakeland is a party to interest rate derivatives that are not designated as hedging instruments. Under a program, Lakeland executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Lakeland executes with a third party, such that Lakeland minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties. As of September 30, 2016 and December 31, 2015, Lakeland had $7.6 million and $2.5 million, respectively, in available for sale securities pledged for collateral on its interest rate swaps with the financial institution.

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

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s debt. During the next twelve months, the Company estimates that $73,000 will be reclassified as an increase to interest expense should the rate environment remain the same.

 

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

 

September 30, 2016

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

Customer interest rate swaps

   $ 117,657        11.3         4.00   1 Mo Libor + 2.08    $ 6,522   

3rd Party interest rate swaps

     (117,657     11.3         4.00   1 Mo Libor + 2.08      (6,522

Interest rate swap (cash flow hedge)

     30,000        4.8         1.10   3 Mo. Libor      74   
                                

December 31, 2015

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

Customer interest rate swaps

   $ 35,664        14.6         4.54   1 Mo Libor + 2.00    $ 1,518   

3rd party interest rate swaps

     (35,664     14.6         4.54   1 Mo Libor + 2.00      (1,518

 

Note 7. Goodwill and Intangible Assets

The Company has recorded goodwill of $136.4 million and $110.0 million at September 30, 2016 and December 31, 2015, respectively, which includes $11.1 million from the Harmony merger in 2016, $15.3 million from the Pascack merger in 2016 and $110.0 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 $1.0 million, $1.5 million and $2.7 million in core deposit intangible for the Harmony, Pascack and Somerset Hills acquisitions, respectively. Year-to-date, it has amortized $532,000 in core deposit intangible including $46,000, $206,000 and $280,000 for Harmony, Pascack and Somerset Hills, respectively. The estimated future amortization expense for the remainder of 2016 and for each of the succeeding five years ended December 31 is as follows (dollars in thousands):

 

For the Year Ended

   Pascack      Somerset
Hills
     Harmony  

2016

   $ 86       $ 69       $ 46   

2017

     248         316         176   

2018

     220         267         157   

2019

     193         218         139   

2020

     165         168         120   

2021

     138         119         102   

 

Note 8. Borrowings

Repurchase Agreements

At September 30, 2016, the Company had federal funds purchased and securities sold under agreements to repurchase of $0 million and $29.7 million respectively. The securities sold under agreements to repurchase are overnight sweep arrangement accounts with our customers. The Company also had $40.0 million in long-term securities sold under agreements to repurchase included in other borrowings which have maturities ranging from one to seven years. As of September 30, 2016, the Company had $89.7 million in mortgage backed securities pledged for its securities sold under agreements to repurchase.

At times the market values of securities collateralizing our securities sold under agreements to repurchase may decline due to changes in interest rates and may necessitate our lenders to issue a “margin call” which requires Lakeland to pledge additional collateral to meet that margin call.

 

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Table of Contents

Subordinated Debenture Offering

On September 30, 2016, the Company completed an offering of $75.0 million fixed to floating rate subordinated notes due September 30, 2026. The notes will bear interest at a rate of 5.125% per annum until September 30, 2021 and will then reset quarterly to the then current three-month LIBOR rate plus 397 basis points until maturity in September, 2026. The debt is included in Tier 2 capital for Lakeland Bancorp. On September 30, 2016, the Company contributed $69.9 million to Lakeland Bank’s Tier 1 capital, increasing the Bank’s capital ratios.

Early Redemption and Extinguishment of Debt

On August 3, 2015, the Company redeemed and extinguished $10.0 million of Lakeland Bancorp Capital Trust IV debentures and recorded a $1.8 million gain on the redemption and extinguishment of debt.

 

Note 9. Share-Based Compensation

The Company grants restricted stock, restricted stock units (RSUs) and stock options under the 2009 Equity Compensation Program. Share-based compensation expense of $1.5 million and $1.3 million was recognized for the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016, there was unrecognized compensation cost of $157,000 related to unvested restricted stock that is expected to be recognized over a weighted average period of approximately 0.47 years. Unrecognized compensation expense related to RSUs was approximately $1.6 million as of September 30, 2016, and that cost is expected to be recognized over a period of 1.4 years. Unrecognized compensation expense related to unvested stock options was approximately $23,000 as of September 30, 2016 and is expected to be recognized over a period of 0.75 years.

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

The following is a summary of the Company’s restricted stock activity during the nine months ended September 30, 2016:

 

     Number of
Shares
     Weighted
Average
Price
 

Outstanding, January 1, 2016

     73,500       $ 9.33   

Granted

     23,952         10.02   

Vested

     (54,362      9.33   

Forfeited

     (215      9.12   
  

 

 

    

 

 

 

Outstanding, September 30, 2016

     42,875       $ 9.72   
  

 

 

    

 

 

 

In the first nine months of 2016, the Company granted 168,726 RSUs to certain officers at a weighted average grant date fair value of $10.22 per share under the Company’s 2009 Equity Compensation Program. These units vest within a range of two to three years. A portion of these RSUs will vest subject to certain performance conditions in the restricted stock unit agreement. There are also certain provisions in the compensation program which state that if a recipient of the RSUs reaches a certain age and years of service, the person has effectively earned a portion of the RSUs at that time. Compensation expense on the restricted stock units issued in the first nine months of 2016 is expected to average approximately $575,000 per year over a three year period. In the first nine months of 2015, the Company granted 131,509 RSUs at a weighted average grant date fair value of $11.08 per share under the Company’s 2009 Equity Compensation Program. Compensation expense on these restricted stock units is expected to average approximately $485,000 per year over a three year period.

 

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The following is a summary of the Company’s RSU activity during the nine months ended September 30, 2016:

 

     Number of
Shares
     Weighted
Average
Price
 

Outstanding, January 1, 2016

     200,910       $ 10.87   

Granted

     168,726         10.22   

Vested

     (66,749      10.28   

Forfeited

     (10,993      10.79   
  

 

 

    

 

 

 

Outstanding, September 30, 2016

     291,894       $ 10.63   
  

 

 

    

 

 

 

There were no grants of stock options in the first nine months of 2016 or 2015. 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, 2016

     175,892       $ 8.38          $ 602,236   

Granted

     —           —           

Exercised

     —           —           

Forfeited

     —           —           

Expired

     —           —           
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding, September 30, 2016

     175,892       $ 8.38         4.35       $ 997,994   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options exercisable at September 30, 2016

     165,274       $ 8.30         4.20       $ 948,872   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2015 was $68,000. Exercise of stock options during the first nine months of 2015 resulted in cash receipts of $124,000.

 

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Note 10. Comprehensive Income

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

 

     September 30, 2016     September 30, 2015  
For the quarter ended:    Before
Tax Amount
    Tax Benefit
(Expense)
    Net of
Tax Amount
    Before
Tax Amount
    Tax Benefit
(Expense)
    Net of
Tax Amount
 
     (in thousands)     (in thousands)  

Net unrealized gains (losses) on available for sale securities

            

Net unrealized holding gains (losses) arising during period

   ($ 825   $ 323      ($ 502   $ 3,117      ($ 1,145   $ 1,972   

Reclassification adjustment for net gains arising during the period

     —          —          —          (164     58        (106
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses)

     (825     323        (502     2,953        (1,087     1,866   

Unrealized gain on derivatives

     267        (93     174        —          —          —     

Change in minimum pension liability

     (2     —          (2     7        (2     5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net

   ($ 560   $ 230      ($ 330   $ 2,960      ($ 1,089   $ 1,871   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

Net unrealized gains on available for sale securities

            

Net unrealized holding gains arising during period

   $ 8,422      ($ 3,070   $ 5,352      $ 3,876      ($ 1,406   $ 2,470   

Reclassification adjustment for net gains arising during the period

     (370     137        (233     (190     67        (123
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains

     8,052        (2,933     5,119        3,686        (1,339     2,347   

Unrealized gain on derivatives

     74        (26     48        —          —          —     

Change in minimum pension liability

     70        (28     42        23        (8     15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net

   $ 8,196      ($ 2,987   $ 5,209      $ 3,709      ($ 1,347   $ 2,362   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

     For the three months ended September 30, 2016     For the three months ended September 30, 2015  
     Unrealized
Gains on
Available-for-Sale
Securities
    Unrealized
Gains (Losses)
on Derivatives
    Pension Items     Total     Unrealized Gains
(Losses) on
Available-for-Sale
Securities
    Pension Items     Total  

Beginning Balance

   $ 6,775      $ (126   $ 40      $ 6,689      $ 2,012      $ 2      $ 2,014   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before classifications

     (502     174        (2     (330     1,972        5        1,977   

Amounts reclassified from accumulated other comprehensive income

     —          —          —          —          (106     —          (106
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     (502     174        (2     (330     1,866        5        1,871   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 6,273      $ 48      $ 38      $ 6,359      $ 3,878      $ 7      $ 3,885   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    

For the nine months ended September 30, 2016

    For the nine months ended September 30, 2015  
     Unrealized
Gains on
Available-for-sale
Securities
    Unrealized
Gains
on Derivatives
    Pension Items     Total     Unrealized
Gains on
Available-for-sale
Securities
    Pension Items     Total  

Beginning Balance

   $ 1,154      $ —        ($ 4   $ 1,150      $ 1,531      ($ 8   $ 1,523   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income before classifications

     5,352        48        42        5,442        2,470        15        2,485   

Amounts reclassified from accumulated other comprehensive income

     (233     —          —          (233     (123     —          (123
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income

     5,119        48        42        5,209        2,347        15        2,362   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 6,273      $ 48      $ 38      $ 6,359      $ 3,878      $ 7      $ 3,885   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Note 11. Estimated Fair Value of Financial Instruments and Fair Value Measurement

Fair Value Measurement

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

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

 

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

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

 

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The following table sets forth the Company’s financial assets that were accounted for at fair value on a recurring basis as of the periods presented by level within the fair value hierarchy. During the nine months ended September 30, 2016, 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:

 

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

September 30, 2016

                           

Assets:

           

Investment securities, available for sale

           

U.S. treasury and government agencies

   $ 105,073       $ 6,032       $ 99,041       $ —     

Mortgage-backed securities

     306,081         —           306,081         —     

Obligations of states and political subdivisions

     48,592         —           48,592         —     

Other debt securities

     351         —           351         —     

Equity securities

     20,295         5,954         14,341         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

     480,392         11,986         468,406         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative assets

     6,596         —           6,596         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 486,988       $ 11,986       $ 475,002       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative liabilities

   $ 6,522       $ —         $ 6,522       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ 6,522       $ —         $ 6,522       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

                           

Assets:

           

Investment securities, available for sale

           

U.S. treasury and government agencies

   $ 97,133       $ 4,888       $ 92,245       $ —     

Mortgage-backed securities

     289,572         —           289,572         —     

Obligations of states and political subdivisions

     36,498         —           36,498         —     

Other debt securities

     501         —           501         —     

Equity securities

     18,645         5,052         13,593         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

     442,349         9,940         432,409         —     

Derivative assets

     1,518         —           1,518         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 443,867       $ 9,940       $ 433,927       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative liabilities

   $ 1,518       $ —         $ 1,518       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ 1,518       $ —         $ 1,518       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

September 30, 2016

   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)  

Assets:

           

Impaired Loans and Leases

   $ —         $ —         $ 26,984       $ 26,984   

Loans held for sale

     —           3,690         —           3,690   

Other real estate owned and other repossessed assets

     —           —           1,918         1,918   

December 31, 2015

           

Assets:

           

Impaired Loans and Leases

   $ —         $ —         $ 26,006       $ 26,006   

Loans held for sale

     —           1,233         —           1,233   

Other real estate owned and other repossessed assets

     —           —           983         983   

Impaired loans are evaluated and valued at the time the loan is identified as impaired at the lower of cost or market value of the underlying collateral. Because most of Lakeland’s impaired loans are collateral dependent, fair value is generally measured based on the value of the collateral, less estimated costs to sell, securing these loans and leases and is classified at a level 3 in the fair value hierarchy. Collateral may be real estate, accounts receivable, inventory, equipment and/or other business assets. The value of real estate is assessed based on appraisals by qualified third party licensed appraisers. The appraisers may use the sales comparison approach, the cost approach or the income approach to value the collateral using discount rates (with ranges of 5-11%) or capitalization rates (with ranges of 4-9%) 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. 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 September 30, 2016 and December 31, 2015 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 $33.7 million in short-term municipal bond anticipation notes and $1.0 million in subordinated debt that are non-rated and do not have an active secondary market or information readily available on standard financial systems. As a result, the securities are classified as Level 3 securities. Management performs a credit analysis before investing in these securities.

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

The net loan portfolio at September 30, 2016 and December 31, 2015 has been valued using a present value discounted cash flow where market prices are not available. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk. The valuation of the Company’s loan portfolio is consistent with accounting guidance but does not fully incorporate the exit price approach.

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

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

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

 

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The following table presents the carrying values, fair values and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2016 and December 31, 2015:

 

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

September 30, 2016

                                  

Financial Instruments - Assets:

              

Investment securities held to maturity

   $ 141,124       $ 143,939       $ —         $ 109,262       $ 34,677   

Federal Home Loan Bank and other membership bank stocks

     16,575         16,575         —           16,575         —     

Loans and leases, net

     3,759,963         3,780,056         —           —           3,780,056   

Financial Instruments - Liabilities:

              

Certificates of deposit

     539,260         540,337         —           540,337         —     

Other borrowings

     293,875         299,832         —           299,382         —     

Subordinated debentures

     104,796         93,862         —           —           93,862   

December 31, 2015

                                  

Financial Instruments - Assets:

              

Investment securities held to maturity

   $ 116,740       $ 117,594       $ —         $ 110,293       $ 7,301   

Federal Home Loan Bank and other membership bank stocks

     14,087         14,087         —           14,087         —     

Loans and leases, net

     2,934,326         2,930,188         —           —           2,930,188   

Financial Instruments - Liabilities:

              

Certificates of deposit

     343,321         341,998         —           341,998         —     

Other borrowings

     271,905         275,409         —           275,409         —     

Subordinated debentures

     31,238         24,366         —           —           24,366   

 

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Note 12. Statement of Cash Flow Information, Supplemental Information

 

     For the nine months ended September 30,  
     2016      2015  
     (in thousands)  

Supplemental schedule of non-cash investing and financing activities:

     

Cash paid during the period for income taxes

   $ 15,168       $ 11,651   

Cash paid during the period for interest

     11,957         7,880   

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

     2,732         1,025   

Acquisition of Pascack and Harmony:

     

Non-cash assets acquired:

     

Federal Home Loan Bank stock

     3,742         —     

Investment securities held for maturity

     10,810         —     

Investment securities available for sale

     7,474      

Loans, including loans held for sale

     579,300         —     

Goodwill and other intangible assets, net

     29,348         —     

Other assets

     32,353         —     

Total non-cash assets acquired

     663,027         —     

Liabilities assumed:

     

Deposits

     (582,526      —     

Other borrowings

     (66,622      —     

Other liabilities

     (8,755      —     

Total liabilities assumed

     (657,903      —     

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

     73,874         —     

 

Note 13. Recent Accounting Pronouncements

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

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

In March 2016, the FASB issued an accounting standards update to simplify employee share-based payment accounting. The areas for simplification in this update involve several aspects of the accounting for employee share-based payment

 

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transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2017. The Company is currently assessing the impact that the guidance will have on the Company’s consolidated financial statements.

In March, 2016, the FASB issued an accounting standards update that requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met, including the “clearly and closely related” criterion. The amendments in this update clarify the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2016. This guidance will be applied on a modified retrospective basis as of the beginning of the fiscal year that the amendment is effective. The adoption of this update is not expected to have a material impact on the Company’s financial statements.

In February 2016, FASB issued accounting guidance that requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period, with early adoption permitted. A modified retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently assessing the impact that the guidance will have on the Company’s consolidated financial statements.

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

In September 2015, the FASB issued an accounting standards update simplifying the accounting for adjustments made to provisional amounts recognized in a business combination, eliminating the requirement to retrospectively account for those adjustments. To simplify the accounting for adjustments made to provisional amounts, the amendments in the accounting standards update require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this update did not have a material impact on the Company’s financial statements.

In May 2015, the FASB issued an accounting standards update clarifying how investments valued using the net asset value practical expedient within the fair value hierarchy should be classified. The accounting standards update was issued to address diversity in practice by exempting investments measured using the net asset value expedient from categorization in the fair value hierarchy. This accounting standards update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this update did not have a material impact on the Company’s financial statements.

In April 2015, the 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 U.S. GAAP presentation of debt more closely with international accounting standards. In August 2015, the FASB issued a subsequent update which discussed presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. These amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of these updates did not 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 U.S. 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 did not have a material impact on the Company’s financial statements.

In May 2014, the FASB issued an accounting standards update that clarifies the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In 2016, the FASB issued further implementation guidance regarding revenue recognition. This additional guidance included clarification on certain principal versus agent considerations within the implementation of the guidance as well as clarification related to identifying performance obligations and licensing. The guidance along with its updates is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is still evaluating the potential impact on the Company’s financial statements.

 

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, 2015.

Statements Regarding Forward Looking Information

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

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

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.

 

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

Management Overview

The quarter and nine months ended September 30, 2016 represented a period of continued growth for the Company. As discussed in this Management’s Discussion and Analysis:

 

    Net income for the third quarter of 2016 was $11.3 million, or $0.25 per diluted share, compared to $7.8 million, or $0.20 per diluted share, for the same period in 2015. Excluding merger related expenses and other items, net income for the third quarter of 2016 was $12.4 million, or $0.28 per diluted share, compared to $8.3 million, or $0.22 per diluted share, for the third quarter of 2015.

 

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

 

    Net income for the first nine months of 2016 was $29.6 million, or $0.69 per diluted share, compared to $24.0 million, or $0.63 per diluted share, for the same period in 2015. Excluding merger related expenses and other items, net income for the first nine months of 2016 was $32.3 million, or $0.76 per diluted share, compared to $24.5 million, or $0.64 per diluted share, for the first nine months of 2015.

 

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

 

    The Company reported strong loan growth in the third quarter of 2016. Excluding the acquisition of Harmony Bank (“Harmony”), total loans and leases increased by $80.5 million, or 2%, to $3.79 billion during the quarter. This overall increase was primarily due to the addition of $65.8 million in commercial real estate loans and $23.3 million in commercial, industrial and other loans. For the first nine months of 2016, total loans and leases increased by $826.6 million, or 28%. Excluding the acquisitions of Pascack and Harmony, this increase was $247.3 million, or 8%.

 

    The Company also reported robust deposit growth in the third quarter of 2016. Excluding the acquisition of Harmony, total deposits increased $126.4 million, or 4%, to $3.94 billion during the quarter. Most notably, noninterest-bearing deposits increased $58.3 million, or 7%, during the quarter, excluding the impact of Harmony. Total deposits have increased $946.2 million, or 32%, since December 31, 2015. This increase was $363.6 million, or 12%, after excluding the acquisitions of Pascack and Harmony.

 

    The efficiency ratio was 53.4% for the three months ended September 30, 2016, as compared to 60.8% for the same period in 2015. The decrease in this ratio, in part, reflects the realization of cost savings from the Pascack acquisition and the closure of six branches in 2016.

 

    Net interest margin (“NIM”) was 3.45% for the third quarter of 2016 compared to 3.47% for the second quarter of 2016 and 3.42% for the third quarter of 2015.

 

    On September 30, 2016, the Company closed the offering of $75 million of its Fixed-to-Floating Rate Subordinated Notes due September 30, 2026 (the “Notes”). The Notes bear interest at a rate of 5.125% per annum until September 2021 and the interest rate will then reset quarterly to the then current three-month LIBOR rate plus 397 basis points until maturity in September 2026.

 

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Comparison of Operating Results for the Three Months Ended September 30, 2016 and 2015

Net Income

Net income was $11.3 million in the third quarter of 2016 compared to net income of $7.8 million for the third quarter of 2015. Diluted earnings per share was $0.25 for the third quarter of 2016, compared to diluted earnings per share of $0.20 for the same period last year. Excluding the impact of merger related expenses, net income would have been $12.4 million, or $0.28 per diluted share, in the third quarter of 2016. Net interest income of $38.5 million for the third quarter of 2016 increased $9.2 million from the third quarter of 2015 due primarily to a $10.8 million increase in interest income, partially offset by an increase of $1.7 million in interest expense. The increase in interest income reflects an increase in interest earning assets resulting primarily from the Pascack and Harmony acquisitions as well as 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 third quarter of 2016 was $38.8 million, compared to $29.5 million for the third quarter of 2015. The net interest margin increased from 3.42% in the third quarter of 2015 to 3.45% in the third quarter of 2016 primarily as a result of a 10 basis point increase in the yield on earning assets, partially offset by a 9 basis point increase in the cost of interest bearing liabilities. The increase in the yield on earning assets included 5 basis points in additional yield resulting from the amortization of purchase accounting adjustments relating to the Pascack and Harmony acquisitions. The increase in the net interest margin was also augmented by an increase in interest income earned on free funds (interest earning assets funded by noninterest bearing liabilities) resulting from an increase in average noninterest bearing deposits of $185.8 million. The components of net interest income will be discussed in greater detail below.

 

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

 

    

For the Three Months Ended,

September 30, 2016

    For the Three Months Ended,
September 30, 2015
 
     Average
Balance
    Interest
Income/
Expense
     Average
Rates
Earned/
Paid
    Average
Balance
    Interest
Income/
Expense
     Average
Rates
Earned/
Paid
 
     (dollars in thousands)  

Assets

  

Interest-earning assets:

              

Loans and leases (A)

   $ 3,743,434      $ 39,766         4.23   $ 2,811,581      $ 29,123         4.11

Taxable investment securities and other

     510,638        2,627         2.06     511,261        2,639         2.06

Tax-exempt securities

     96,141        723         3.01     70,304        600         3.41

Federal funds sold (B)

     117,311        142         0.48     37,872        7         0.07
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     4,467,524        43,258         3.85     3,431,018        32,369         3.75

Noninterest-earning assets:

              

Allowance for loan and lease losses

     (30,915          (30,832     

Other assets

     368,772             285,387        
  

 

 

        

 

 

      

TOTAL ASSETS

   $ 4,805,381           $ 3,685,573        
  

 

 

        

 

 

      

Liabilities and Stockholders’ Equity

              

Interest-bearing liabilities:

              

Savings accounts

   $ 487,918      $ 80         0.07   $ 398,147      $ 53         0.05

Interest-bearing transaction accounts

     1,988,405        1,722         0.34     1,497,340        925         0.25

Time deposits

     533,224        1,084         0.81     309,235        486         0.63

Borrowings

     374,812        1,601         1.71     358,820        1,361         1.52
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     3,384,359        4,487         0.53     2,563,542        2,825         0.44

Noninterest-bearing liabilities:

              

Demand deposits

     895,851             710,011        

Other liabilities

     29,828             17,072        

Stockholders’ equity

     495,343             394,948        
  

 

 

        

 

 

      

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 4,805,381           $ 3,685,573        
  

 

 

        

 

 

      

Net interest income/spread

       38,771         3.32       29,544         3.31
       

 

 

        

 

 

 

Tax equivalent basis adjustment

       253             210      
    

 

 

        

 

 

    

NET INTEREST INCOME

     $ 38,518           $ 29,334      
    

 

 

        

 

 

    

Net interest margin (C)

          3.45          3.42
       

 

 

        

 

 

 

 

(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 $32.4 million in the third quarter of 2015 to $43.3 million in the third quarter of 2016, an increase of $10.9 million, or 34%. The increase in interest income was primarily a result of the Pascack and Harmony acquisitions as well as organic growth in loans, as average loans and leases increased $931.9 million compared to the third quarter of 2015. The yield on average loans and leases at 4.23% in the third quarter of 2016 was 12 basis points higher than the third quarter of 2015, due primarily to the addition of higher yielding loans resulting from the acquisitions of Harmony and Pascack as well as a $430,000 increase in loan and lease prepayment fees. The yield on average taxable investment securities remained the same, while the yield on tax-exempt investment securities decreased by 40 basis points, compared to the third quarter of 2015. The decrease in yield on tax-exempt investment securities was primarily due to securities maturing at higher rates and new purchases of securities at lower rates.

Total interest expense of $4.5 million in the third quarter of 2016 was $1.6 million greater than the $2.8 million reported for the same period in 2015. The cost of average interest-bearing liabilities increased from 0.44% in the third

 

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quarter of 2015 to 0.53% in the third quarter of 2016. The increase in the yield on interest-bearing deposits was due primarily to higher costing deposits acquired in the Pascack and Harmony acquisitions as well as an increasingly competitive market for deposits. The yield on interest-bearing transaction accounts and time deposits increased by 9 basis points and 18 basis points, respectively. Time deposits, which pay a higher interest rate than interest-bearing transaction accounts, increased from 12% of interest-bearing liabilities in the third quarter of 2015 to 16% in the third quarter of 2016, impacting the increase in the Company’s cost of interest-bearing liabilities. Also impacting the cost of interest-bearing liabilities was an increase in the cost of borrowings which increased 19 basis points compared to the third quarter of 2015. As loan growth exceeded growth in core deposits from the third quarter of 2015 to the same period in 2016, the Company utilized higher cost time deposits and term borrowings from the Federal Home Loan Bank of New York to fund loan growth.

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 third quarter of 2016, a $1.8 million provision for loan and lease losses was recorded, which was $1.4 million higher than the provision for the same period last year. The higher provision resulted primarily from increased charge offs. During the third quarter of 2016, the Company charged off loans and leases of $1.3 million and recovered $212,000 in previously charged off loans and leases compared to $584,000 and $1.1 million, respectively, during the same period in 2015. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income at $6.4 million in the third quarter of 2016 decreased by $270,000 compared to $6.7 million in the third quarter of 2015. Included in noninterest income in the third quarter of 2016 in income on bank owned life insurance was an $863,000 death benefit payout. Noninterest income in the third quarter of 2015 included a $1.8 million gain on debt extinguishment and $173,000 in gains on sales of investment securities. After excluding these items in 2016 and 2015, noninterest income increased $870,000 from the third quarter 2015 to the third quarter of 2016. Commissions and fees at $1.2 million in the third quarter of 2016 increased $198,000 compared to the same period last year, due primarily to an increase in commercial loan fees. Gains on sales of loans totaled $753,000 in the third quarter of 2016 compared to $515,000 during the same period last year. Other income at $564,000 in the third quarter of 2016 was $448,000 higher than the same period in 2015 due primarily to a $250,000 increase in swap fee income and a $100,000 increase in gains on sales of other real estate owned.

Noninterest Expense

Noninterest expense in the third quarter of 2016 totaled $26.0 million, which was $2.2 million greater than the $23.8 million reported for the third quarter of 2015. Included in noninterest expense during the third quarter of 2016 was $1.7 million in merger related expenses compared to $330,000 in 2015. Noninterest expense in the third quarter of 2015 included a $2.4 million long-term debt prepayment fee. Excluding merger related expenses and the debt prepayment fee, total noninterest expense increased $3.2 million compared to the third quarter of 2015. Salaries and employee benefits expense of $14.6 million, increased $2.3 million from the same period last year, primarily due to the addition of Pascack employees during the first quarter of 2016, the addition of Harmony employees during the third quarter of 2016, and year-over-year increases in employee salary and benefit costs. Net occupancy expense, telecommunications expense and data processing expense increased $305,000, $108,000 and $159,000, respectively, compared to the third quarter of 2015, due primarily to the addition of the Pascack and Harmony branches. FDIC insurance expense of $715,000 in the third quarter of 2016 increased $241,000 compared to the same period last year, due to the addition of the Pascack and Harmony deposits. The Company’s efficiency ratio, a non-GAAP financial measure, was 53.4% in the third quarter of 2016, compared to 60.8% for the same period last year. The decrease in this ratio reflects the realization of cost savings from the Pascack acquisition, and the closure of six branches in 2016. The Company uses this ratio because it believes that the ratio provides a good comparison of period-to-period performance and because the ratio is widely accepted in the banking industry. The following table shows the calculation of the efficiency ratio for the periods presented:

 

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For the Three Months Ended

September 30,

 
     2016     2015  
     (dollars in thousands)  

Calculation of Efficiency Ratio

    

Total noninterest expense

   $ 26,006      $ 23,832   

Amortization of core deposit intangibles

     (201     (98

Other real estate owned and other repossessed asset expense

     32        (27

Long term debt prepayment penalty

     —          (2,407

Merger related expenses

     (1,697     (330

Provision for unfunded lending commitments

     —          (168
  

 

 

   

 

 

 

Noninterest expense, as adjusted

   $ 24,140      $ 20,802   
  

 

 

   

 

 

 

Net interest income

   $ 38,518      $ 29,334   

Noninterest income

     6,417        6,687   
  

 

 

   

 

 

 

Total revenue

     44,935        36,021   

Tax-equivalent adjustment on municipal securities

     253        210   

Less:

    

Gains on debt redemption and extinguishment

     —          (1,830

Gains on sales of investment securities

     —          (173
  

 

 

   

 

 

 

Total revenue, as adjusted

   $ 45,188      $ 34,228   
  

 

 

   

 

 

 

Efficiency ratio

     53.4     60.8
  

 

 

   

 

 

 

Income Tax Expense

The effective tax rate in the third quarter of 2016 of 34.0% equaled the effective tax rate in the third quarter of 2015.

Comparison of Operating Results for the Nine Months Ended September 30, 2016 and 2015

Net Income

Net income was $29.6 million in the first nine months of 2016 compared to net income of $24.0 million for the first nine months of 2015. Diluted earnings per share was $0.69 for the first nine months of 2016, compared to diluted earnings per share of $0.63 for the same period last year. Excluding the impact of merger related expenses, net income for the first nine months of 2016 was $32.3 million, or $0.76 per diluted share. Net interest income at $107.5 million for the first nine months of 2016 increased $20.9 million compared to the first nine months of 2015 due to a $25.2 million increase in interest income partially offset by a $4.2 million increase in interest expense. The increase in interest income reflects an increase in interest-earning assets resulting primarily from the Pascack and Harmony acquisitions as well as organic growth.

Net Interest Income

Net interest income on a tax equivalent basis for the first nine months of 2016 was $108.2 million, compared to $87.2 million for the first nine months of 2015, resulting primarily from growth in average earning assets of $816.4 million. The net interest margin decreased from 3.48% in the first nine months of 2015 to 3.47% in the first nine months of 2016 primarily as a result of a 9 basis point increase in the cost of interest-bearing liabilities. The increase in the cost of interest-bearing deposits is primarily attributable to an increasingly competitive market for deposits as well as higher costing core deposits acquired in the Pascack and Harmony acquisitions. The increase in the cost of funds was mitigated by an increase in the yield on interest-earning assets of 7 basis points and an increase in interest income earned on free funds (interest-earning assets funded by noninterest-bearing liabilities) resulting from an increase in average noninterest-bearing deposits of $132.8 million. The components of net interest income will be discussed in greater detail below.

 

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

 

    

For the Nine Months Ended,

September 30, 2016

   

For the Nine Months Ended,

September 30, 2015

 
     Average
Balance
    Interest
Income/
Expense
     Average
Rates
Earned/
Paid
    Average
Balance
    Interest
Income/
Expense
     Average
Rates
Earned/
Paid
 
     (dollars in thousands)  

Assets

  

Interest-earning assets:

              

Loans (A)

   $ 3,481,053      $ 109,687         4.21   $ 2,731,518      $ 85,230         4.17

Taxable investment securities and other

     500,110        8,285         2.21     519,163        8,001         2.05

Tax-exempt securities

     84,161        2,000         3.17     69,174        1,843         3.55

Federal funds sold (B)

     100,866        341         0.45     29,900        30         0.13
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     4,166,190        120,313         3.86     3,349,755        95,104         3.79

Noninterest-earning assets:

              

Allowance for loan and lease losses

     (30,980          (30,940     

Other assets

     351,769             285,898        
  

 

 

        

 

 

      

TOTAL ASSETS

   $ 4,486,979           $ 3,604,713        
  

 

 

        

 

 

      

Liabilities and Stockholders’ Equity

              

Interest-bearing liabilities:

              

Savings accounts

   $ 483,140      $ 237         0.07   $ 398,491      $ 157         0.05

Interest-bearing transaction accounts

     1,816,003        4,346         0.32     1,491,166        2,617         0.23

Time deposits

     495,278        2,912         0.78     295,460        1,319         0.60

Borrowings

     384,024        4,648         1.61     327,174        3,845         1.57
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     3,178,445        12,143         0.51     2,512,291        7,938         0.42

Noninterest-bearing liabilities:

              

Demand deposits

     819,459             686,652        

Other liabilities

     26,630             16,166        

Stockholders’ equity

     462,445             389,604        
  

 

 

        

 

 

      

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 4,486,979           $ 3,604,713        
  

 

 

        

 

 

      

Net interest income/spread

       108,170         3.35       87,166         3.37
       

 

 

        

 

 

 

Tax equivalent basis adjustment

       700             645      
    

 

 

        

 

 

    

NET INTEREST INCOME

     $ 107,470           $ 86,521      
    

 

 

        

 

 

    

Net interest margin (C)

          3.47          3.48
       

 

 

        

 

 

 

 

(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 $95.1 million in the first nine months of 2015 to $120.3 million in the first nine months of 2016, an increase of $25.2 million, or 27%. The increase in interest income was primarily a result of the Pascack and Harmony acquisitions as well as organic growth in loans, as the average balance of loans and leases increased $749.5 million compared to the first nine months of 2015. The yield on average loans and leases of 4.21% in the first nine months of 2016 was 4 basis points greater than the first nine months of 2015. The yield on average taxable investment securities increased 16 basis points, while the yield on tax-exempt investment securities decreased by 38 basis points, compared to the first nine months of 2015. Interest on taxable investment securities in 2016 included $358,000 in income on called U.S. Government Agency securities. The decrease in yield on tax-exempt investment securities was due to the same reasons discussed in the quarterly comparison.

Total interest expense increased from $7.9 million in the first nine months of 2015 to $12.1 million in the first nine months of 2016, an increase of $4.2 million, or 53%. The cost of average interest-bearing liabilities increased from 0.42% in

 

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the first nine months of 2015 to 0.51% in 2016. The yield on interest-bearing transaction accounts and time deposits increased by 9 basis points and 18 basis points, respectively. The increase in the yield on interest-bearing deposits was due primarily to higher costing deposits acquired in the Pascack and Harmony acquisitions as well as an increasingly competitive market for deposits. As growth in loans exceeded growth in core deposits from the first nine months of 2015 to the first nine months of 2016, the Company utilized higher cost time deposits and term borrowings from the Federal Home Loan Bank of New York to fund loan growth.

Provision for Loan and Lease Losses

In the first nine months of 2016, a $3.8 million provision for loan and lease losses was recorded, which was $1.9 million greater than the provision for the same period last year. During the first nine months of 2016, the Company charged off loans and leases of $3.9 million and recovered $508,000 in previously charged off loans and leases compared to $3.3 million and $1.7 million, respectively, during the same period in 2015. The increased provision primarily resulted from higher net charge-offs during the nine months ended September 30, 2016, as well as an increasing trend in non-performing loans from September 30, 2015 to September 30, 2016. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income of $16.2 million in the first nine months of 2016 decreased by $214,000 compared to the first nine months of 2015. Excluding a $1.8 million gain on debt extinguishment received in 2015, noninterest income increased $1.6 million from the first nine months of 2015 to the same period during 2016. Gain on sales of loans of $1.6 million and gain on investment securities of $370,000 in the first nine months of 2016 increased $354,000 and $180,000, respectively, compared to the same period last year. Income on bank owned life insurance at $2.1 million increased $583,000 compared to the first nine months of 2015. In the first nine months of 2016, an $863,000 death benefit was received on a bank owned life insurance policy, compared to a $332,000 death benefit received in the first nine months of 2015. Other income totaling $1.2 million in the first nine months of 2016 was $550,000 higher than the same period in 2015 as swap income and gain on sales of other real estate owned increased $423,000 and $110,000, respectively, compared to the first nine months of 2015.

Noninterest Expense

Noninterest expense totaling $75.1 million increased $10.1 million in the first nine months of 2016 from the first nine months of 2015. Included in noninterest expense during the first nine months of 2016 was $4.1 million in merger related expenses compared to $330,000 in 2015. Noninterest expense in the first nine months of 2015 included a $2.4 million long-term debt prepayment fee. Excluding merger related expenses and the debt prepayment fee, total noninterest expense increased $8.7 million compared to the first nine months of 2015. Salary and employee benefits of $41.8 million increased by $5.5 million, or 15%, due primarily to the addition of the Pascack and Harmony employees as well as normal salary and benefit increases. Net occupancy expense, telecommunications expense and furniture and equipment expense increased $513,000, $215,000 and $738,000, respectively, compared to the first nine months of 2015 due to the addition of the Pascack and Harmony branches. Stationary, supplies and postage increased $134,000 compared to the first nine months of 2015 primarily due to mailing and supplies associated with the Pascack and Harmony acquisitions. Marketing expense of $1.1 million in the first nine months of 2016 increased $71,000 compared to the first nine months of 2015 due primarily to the timing of marketing campaigns. FDIC insurance expense of $2.0 million in the first nine months of 2016 increased $463,000 compared to the same period last year, due to the addition of the Pascack and Harmony deposits. Data processing expense of $1.5 million increased $365,000 primarily due to increases in the cost of mobile banking and the addition of the Pascack and Harmony branches. Other expenses of $7.1 million in the first nine months of 2016 increased $408,000 compared to the first nine months of 2015 as donation expense and courier expense increased $142,000 and $289,000, respectively. The increase in courier expense is due to the outsourcing of the Company’s couriers which had previously impacted salary expense. The Company’s efficiency ratio, a non-GAAP financial measure, was 56.5% in the first nine months of 2016, compared to 60.7% for the same period last year. The decrease in efficiency ratio was due to the same reason discussed in the quarterly comparison. 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 our calculation of the efficiency ratio for the periods presented:

 

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For the Nine Months Ended

September 30,

 
     2016     2015  
     (dollars in thousands)  

Calculation of Efficiency Ratio

    

Total noninterest expense

   $ 75,145      $ 65,069   

Less:

    

Amortization of core deposit intangibles

     (532     (316

Other real estate owned and other repossessed asset expense

     (33     (46

Long term debt prepayment penalty

     —          (2,407

Merger related expenses

     (4,103     (330

Provision for unfunded lending commitments

     (438     (358
  

 

 

   

 

 

 

Noninterest expense, as adjusted

   $ 70,039      $ 61,612   
  

 

 

   

 

 

 

Net interest income

   $ 107,470      $ 86,521   

Noninterest income

     16,169        16,383   
  

 

 

   

 

 

 

Total revenue

     123,639        102,904   

Tax-equivalent adjustment on municipal securities

     700        645   

Less:

    

Gains on debt redemption and extinguishment

     —          (1,830

Gains on sales of investment securities

     (370     (190
  

 

 

   

 

 

 

Total revenue, as adjusted

   $ 123,969      $ 101,529   
  

 

 

   

 

 

 

Efficiency ratio

     56.5     60.7
  

 

 

   

 

 

 

Income Tax Expense

The effective tax rate increased from 33.1% in the first nine months of 2015 to 33.8% in the first nine months of 2016 primarily as a result of a decrease in tax advantaged items as a percent of pretax income. Contributing to the increase in the effective tax rate was the impact of non-deductible merger related expenses, offset by the impact of interest income from tax-exempt securities and income on bank owned life insurance policies.

Financial Condition

The Company’s total assets increased $1.03 billion from December 31, 2015, to $4.90 billion at September 30, 2016 including the impact of Pascack’s and Harmony’s assets which represented $405.3 million and $326.4 million, respectively, at the time of acquisition.

Loans and Leases

Gross loans and leases of $3.79 billion increased by $826.6 million from December 31, 2015 including Pascack and Harmony loans which totaled $319.6 million and $259.7 million, respectively, at acquisition. Excluding Pascack’s and Harmony’s loans, total loans have increased 8% from December 31, 2015, primarily in the commercial loans secured by real estate category. Excluding the impact of the Pascack and Harmony loans of $505.4 million, commercial loans secured by real estate increased $227.8 million, or 13%, from December 31, 2015 to September 30, 2016. Leases also increased $9.0 million, or 16%, resulting from increased demand for equipment financing. Excluding the impact of the Pascack and Harmony loans of $25.3 million, commercial, industrial and other increased $7.0 million, or 2%. Real estate-residential

 

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mortgages declined $29.2 million, or 7%, excluding the impact of Pascack’s residential mortgages of $10.3 million. The decline in residential mortgages results from a decision to sell most of the residential loans that the Company originates. Excluding the impact of Pascack and Harmony loans totaling $1.0 million and $24.5 million, respectively, real estate construction loans increased $36.7 million, or 31%, while home equity and consumer loans decreased $4.0 million. For more information on the loan portfolio, see Note 5 in Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Risk Elements

Non-performing assets, excluding PCI loans, increased from $23.7 million at December 31, 2015 to $24.6 million at September 30, 2016, primarily in the commercial secured by real estate category, which increased $2.6 million. Additionally, other real estate owned and other repossessed assets increased $935,000. Partially offsetting these increases was non-performing residential mortgage and home equity and consumer, which decreased $1.4 million and $1.0 million, respectively, from December 31, 2015 to September 30, 2016. Although non-performing assets increased, the percentage of non-performing assets to total assets decreased from 0.61% at December 31, 2015 to 0.50% at September 30, 2016. Non-accrual loans at September 30, 2016 included 5 loan relationships with a balance of $1.0 million or over, totaling $7.5 million, and 5 loan relationships between $500,000 and $1.0 million, totaling $3.5 million.

There were $10,000 in loans and leases past due ninety days or more and still accruing at September 30, 2016 compared to $331,000 at December 31, 2015. 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 September 30, 2016, the Company had $9.3 million in loans that were troubled debt restructurings and accruing interest income compared to $10.1 million at December 31, 2015. Troubled debt restructurings are those loans where the Company has granted concessions to the borrower in payment terms, either in rate or in term, as a result of the financial condition of the borrower.

On September 30, 2016, the Company had $27.0 million in impaired loans (consisting primarily of non-accrual and restructured loans and leases) compared to $26.0 million at year-end 2015. The Company also had purchased credit impaired loans from the Pascack and Harmony acquisitions with carrying values of $676,000 and $780,000, respectively, at September 30, 2016. For more information on impaired loans and leases see Note 5 in Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. The valuation allowance for impaired loans is based primarily on the fair value of the underlying collateral. Based on such evaluation, $577,000 of the allowance for loan and lease losses has been allocated for impairment at September 30, 2016. At September 30, 2016, the Company also had $51.3 million in loans and leases that were rated substandard that were not classified as non-performing or impaired compared to $46.6 million at December 31, 2015.

There were no loans and leases at September 30, 2016, other than those designated non-performing, impaired or substandard, where the Company was aware of any credit conditions of any borrowers or obligors that would indicate a strong possibility of the borrowers not complying with present terms and conditions of repayment and which may result in such loans and leases being included as non-accrual, past due or renegotiated at a future date.

 

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

 

(dollars in thousands)    Nine Months
Ended
September 30,
2016
    Nine Months
Ended
September 30,
2015
    Year Ended
December 31,
2015
 

Balance of the allowance at the beginning of the year

   $ 30,874      $ 30,684      $ 30,684   
  

 

 

   

 

 

   

 

 

 

Loans and leases charged off:

      

Commercial, secured by real estate

     393        1,392        1,821   

Commercial, industrial and other

     796        205        205   

Leases

     319        546        548   

Real estate - mortgage

     692        257        375   

Real estate - construction

     —          20        20   

Home equity and consumer

     1,661        920        1,511   
  

 

 

   

 

 

   

 

 

 

Total loans charged off

     3,861        3,340        4,480   
  

 

 

   

 

 

   

 

 

 

Recoveries:

      

Commercial, secured by real estate

     212        1,341        2,221   

Commercial, industrial and other

     106        127        183   

Leases

     26        24        26   

Real estate - mortgage

     5        11        63   

Real estate - construction

     —          106        106   

Home equity and consumer

     159        99        129   
  

 

 

   

 

 

   

 

 

 

Total recoveries

     508        1,708        2,728   
  

 

 

   

 

 

   

 

 

 

Net charge-offs:

     3,353        1,632        1,752   

Provision for loan and lease losses

     3,848        1,942        1,942   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 31,369      $ 30,994      $ 30,874   
  

 

 

   

 

 

   

 

 

 

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

     0.13     0.08     0.06

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

     0.83     1.09     1.04

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 unimpaired 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.

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.

The overall balance of the allowance for loan and lease losses of $31.4 million at September 30, 2016 increased $495,000, from December 31, 2015, an increase of 2%. The change in the allowance within segments of the loan portfolio reflects changes in the non-performing loan and charge-off statistics within each segment as well as the level of growth in

 

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each segment. Loan reserves are based on a combination of historical charge-off experience, estimating the appropriate loss emergence and pre-emergence periods and assigning qualitative factors based on general economic conditions and specific bank portfolio characteristics.

Non-performing loans and leases of $22.7 million at September 30, 2016 equaled the balance at December 31, 2015. The allowance for loan and lease losses as a percent of total loans was 0.83% of total loans on September 30, 2016 compared to 1.04% as of December 31, 2015. The reduction in the percentage of the allowance for loan and lease losses as a percent of total loans and leases was primarily due to the increase in loans resulting from the Pascack and Harmony acquisitions, which are accounted for under acquisition accounting. Excluding the acquired loans, the allowance as a percent of total loans would be 0.99%. Management believes, based on appraisals and estimated selling costs, that the majority of its non-performing loans and leases are adequately secured and reserves on its non-performing loans and leases are adequate. Based upon the process employed and giving recognition to all accompanying factors related to the loan and lease portfolio, management considers the allowance for loan and lease losses to be adequate at September 30, 2016.

Investment Securities

For detailed information on the composition and maturity distribution of the Company’s investment securities portfolio, see Note 4 in Notes to Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q. Total investment securities increased from $559.1 million at December 31, 2015 to $621.5 million at September 30, 2016, an increase of $62.4 million.

Deposits

Total deposits increased from $3.00 billion at December 31, 2015 to $3.94 billion at September 30, 2016, an increase of $946.2 million, or 32%. Pascack’s and Harmony’s deposits totaled $304.5 million and $278.1 million respectively, at the time of acquisition. Noninterest-bearing deposits increased $237.6 million, or 34%, to $931.4 million. Excluding $64.4 million and $43.7 million, respectively, in Pascack and Harmony demand deposits, noninterest-bearing demand deposits have increased by $129.5 million, or 19%, from year-end 2015. Savings and interest-bearing transaction accounts and time deposits increased $512.6 million and $195.9 million, respectively. At the time of acquisition, Pascack had savings and interest-bearing transaction accounts and time deposits of $161.9 million and $78.1 million, respectively. At the time of acquisition, Harmony had savings and interest-bearing transaction accounts and time deposits of $175.7 million and $58.7 million, respectively. The growth in savings and interest-bearing transaction accounts and in time deposits excluding the impact of the acquisitions was 9% and 17%, respectively.

Liquidity

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

Lakeland funds loan demand and operation expenses from several sources:

 

    Net income. Cash provided by operating activities was $37.5 million for the first nine months of 2016 compared to $31.2 million for the same period in 2015.

 

    Deposits. Lakeland can offer new products or change its rate structure in order to increase deposits. In the first nine months of 2016, Lakeland’s deposits increased $363.6 million, excluding the impact of Pascack and Harmony deposits.

 

    Sales of securities. At September 30, 2016 the Company had $480.4 million in securities designated “available for sale.” Of these securities, $289.4 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.

 

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    Credit lines. As a member of the FHLB, Lakeland has the ability to borrow overnight based on the market value of collateral pledged. Lakeland had no overnight borrowings from the FHLB on September 30, 2016. Lakeland also has overnight federal funds lines available for it to borrow up to $192.0 million of which none was outstanding at September 30, 2016. Lakeland may also borrow from the discount window of the Federal Reserve Bank of New York based on the market value of collateral pledged. Lakeland had no borrowings with the Federal Reserve Bank of New York as of September 30, 2016.

 

    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 nine months ended September 30, 2016 follows.

Cash and cash equivalents totaling $195.4 million on September 30, 2016 increased $76.9 million from December 31, 2015. Operating activities provided $37.5 million in net cash. Investing activities used $220.8 million in net cash, primarily reflecting an increase in loans and leases. Financing activities provided $260.1 million in net cash primarily reflecting the increase in deposits of $364.1 million and $73.6 million in net proceeds from the issuance of subordinated debt partially offset by declines in federal funds purchased and securities sold under agreements to repurchase of $121.5 million and net repayments of other borrowings of $44.1 million. The Company anticipates that it will have sufficient funds available to meet its current loan commitments and deposit maturities. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of September 30, 2016. Interest on subordinated debentures and long-term borrowed funds is calculated based on current contractual interest rates.

 

(dollars in thousands)    Total      Within
One Year
    

After One

But Within
Three Years

     After Three
But Within
Five Years
     After
Five Years
 

Minimum annual rentals on noncancellable operating leases

   $ 31,791       $ 3,157       $ 5,674       $ 4,827       $ 18,133   

Benefit plan commitments

     6,290         305         793         793         4,399   

Remaining contractual maturities of time deposits

     539,260         331,790         168,405         39,065         —     

Subordinated debentures

     106,238         —           —           —           106,238   

Loan commitments

     954,682         681,752         132,141         12,145         128,644   

Other borrowings

     293,875         109,548         169,324         5,003         10,000   

Interest on other borrowings*

     67,773         10,020         13,231         10,895         33,627   

Standby letters of credit

     14,289         13,658         519         32         80   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,014,198       $ 1,150,230       $ 490,087       $ 72,760       $ 301,121   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Includes interest on other borrowings and subordinated debentures at a weighted rate of 2.64%.

 

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Capital Resources

Total stockholders’ equity increased from $400.5 million on December 31, 2015 to $498.7 million on September 30, 2016, an increase of $98.2 million, or 25%. Book value per common share increased to $11.22 on September 30, 2016 from $10.57 on December 31, 2015. Tangible book value per share increased from $7.62 per share on December 31, 2015 to $8.07 per share on September 30, 2016, an increase of 6%. Please see “Non-GAAP Financial Measures” below. The increase in stockholders’ equity from December 31, 2015 to September 30, 2016 was primarily due to stock issued of $37.2 million for the acquisition of Pascack, stock issued of $36.7 million for the acquisition of Harmony, $29.6 million of net income and $5.2 million of other comprehensive income on the Company’s available for sale securities portfolio, partially offset by the payment of cash dividends on common stock of $11.7 million.

The Company and Lakeland are subject to various regulatory capital requirements that are monitored by federal banking agencies. Failure to meet minimum capital requirements can lead to certain supervisory actions by regulators; any supervisory action could have a direct material adverse effect on the Company or Lakeland’s financial statements. As of September 30, 2016, the Company and Lakeland met all capital adequacy requirements to which they are subject.

The final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks became effective for the Company on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019. As of September 30, 2016, the Company’s capital levels remained characterized as “well-capitalized” under the new rules.

On September 30, 2016, the Company completed an offering of $75.0 million fixed to floating rate subordinated notes due September 30, 2026. The notes will bear interest at a rate of 5.125% per annum until September 30, 2021 and will then reset quarterly to the then current three-month LIBOR rate plus 397 basis points until maturity in September 2026. The debt is included in Tier 2 capital for Lakeland Bancorp. On September 30, 2016, the Company contributed $69.9 million to Lakeland Bank’s capital, increasing the Bank’s capital ratios.

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

 

   

Tier 1 Capital to Total

Average Assets Ratio

    Common Equity Tier 1 to Risk-
Weighted Assets Ratio
    Tier 1 Capital to Risk-
Weighted Assets Ratio
    Total Capital to Risk-
Weighted Assets Ratio
 
    September 30,
2016
    December 31,
2015
    September 30,
2016
    December 31,
2015
    September 30,
2016
    December 31,
2015
    September 30,
2016
    December 31,
2015
 

The Company

    8.26     8.70     8.94     9.54     9.69     10.53     12.41     11.61

Lakeland Bank

    9.46     8.08     11.12     9.78     11.12     9.78     11.98     10.87

Required capital ratios including conservation buffer

    4.00     4.00     5.125     4.50     6.625     6.00     8.625     8.00

“Well capitalized” institution under FDIC Regulations

    5.00     5.00     6.50     6.50     8.00     8.00     10.00     10.00

Non-GAAP Financial Measures

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

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

 

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These disclosures should not be viewed as a substitute for financial results determined in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies.

 

(dollars in thousands, except per share amounts)

   September 30,
2016
    December 31,
2015
 

Calculation of Tangible Book Value per Common Share

    

Total common stockholders’ equity at end of period - GAAP

   $ 498,722      $ 400,516   

Less:

    

Goodwill

     136,392        109,974   

Other identifiable intangible assets, net

     3,545        1,545   
  

 

 

   

 

 

 

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

   $ 358,785      $ 288,997   
  

 

 

   

 

 

 

Shares outstanding at end of period

     44,443        37,906   
  

 

 

   

 

 

 

Book value per share - GAAP

   $ 11.22      $ 10.57   
  

 

 

   

 

 

 

Tangible book value per share - Non-GAAP

   $ 8.07      $ 7.62   
  

 

 

   

 

 

 

Calculation of Tangible Common Equity to Tangible Assets

    

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

   $ 358,785      $ 288,997   
  

 

 

   

 

 

 

Total assets at end of period

   $ 4,904,291      $ 3,869,550   

Less:

    

Goodwill

     136,392        109,974   

Other identifiable intangible assets, net

     3,545        1,545   
  

 

 

   

 

 

 

Total tangible assets at end of period - Non-GAAP

   $ 4,764,354      $ 3,758,031   
  

 

 

   

 

 

 

Common equity to assets - GAAP

     10.17     10.35
  

 

 

   

 

 

 

Tangible common equity to tangible assets - Non-GAAP

     7.53     7.69
  

 

 

   

 

 

 

 

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

(dollars in thousands)

   2016     2015     2016     2015  

Calculation of Return on Average Tangible Common Equity

        

Net income - GAAP

   $ 11,327      $ 7,825      $ 29,565      $ 24,017   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total average common stockholders’ equity

   $ 495,343      $ 394,948      $ 462,445      $ 389,604   

Less:

        

Average goodwill

     136,392        109,974        128,774        109,974   

Average other identifiable intangible assets, net

     3,685        1,706        3,146        1,810   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total average tangible common stockholders’ equity - Non-GAAP

   $ 355,266      $ 283,268      $ 330,525      $ 277,820   
  

 

 

   

 

 

   

 

 

   

 

 

 

Return on average common stockholders’ equity - GAAP

     9.10     7.86     8.54     8.24
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     12.68     10.96     11.95     11.56
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     For the Quarter Ended      For the Nine Months Ended  

(Dollars in thousands, except per share amounts)

   September 30,
2016
     September 30,
2015
     September 30,
2016
     September 30,
2015
 

Reconciliation of Earnings per Share

           

Net income - GAAP

   $ 11,327       $ 7,825       $ 29,565       $ 24,017   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-Routine transactions

           

Debt prepayment charges ($2,407 before tax)

     —           1,424         —           1,424   

Gain on debt extinguishment ($1,830 before tax)

     —           (1,082      —           (1,082

Associated gain on sale of investment

           

securities ($173 before tax)

     —           (102      —           (102

Tax deductible merger related expenses

     893         94         1,915         94   

Non-tax deductible merger related expenses

     187         169         866         169   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net effect of non-routine transactions

     1,080         503         2,781         503   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted net income

     12,407         8,328         32,346         24,520   

Less: Earnings allocated to participating securities

     (114      (68      (275      (189
  

 

 

    

 

 

    

 

 

    

 

 

 

Total adjusted net income - Non-GAAP

   $ 12,293       $ 8,260       $ 32,071       $ 24,331   

Weighted average shares - Basic

     44,439         37,856         42,211         37,837   

Weighted average shares - Diluted

     44,659         38,015         42,390         37,976   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share - Non-GAAP

   $ 0.28       $ 0.22       $ 0.76       $ 0.64   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share - Non-GAAP

   $ 0.28       $ 0.22       $ 0.76       $ 0.64   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 $148.5 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

September 30, 2016

     -0.3     -1.5

December 31, 2015

     -1.4     -1.6

 

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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.

 

Change in interest income    Changes in interest rates  
Rate Shock    +300 bp     +200 bp     +100 bp     -100 bp  

Asset/Liability Policy Limit

     -15.0     -10.0     -5.0     -5.0

September 30, 2016

     4.4     3.2     2.0     -4.1

December 31, 2015

     1.7     1.3     0.8     -4.5

The base case for the following table is an estimate of the Company’s net portfolio value for the periods presented using current discount rates, and assuming the Company’s interest-sensitive assets and liabilities remain at period-end levels. The net portfolio value at September 30, 2016 (the base case) was $635.6 million. The information provided for the net portfolio value assumes fluctuations or “rate shocks” for changes in interest rates as shown in the table below. Rate shocks assume that current interest rates change immediately.

 

Net portfolio value    Changes in interest rates  
Rate Shock    +300 bp     +200 bp     +100 bp     -100 bp  

Asset/Liability Policy Limit

     -25.0     -20.0     -10.0     -10.0

September 30, 2016

     -4.7     -2.4     -0.6     -2.9

December 31, 2015

     -10.2     -6.5     -2.9     0.3

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, 2015.

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

 

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 Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The term “disclosure controls and procedures,” as defined in Rule 13a-15, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

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Based on the evaluation of the Company’s disclosure controls and procedures as of September 30, 2016, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weakness in the Company’s internal control over financial reporting previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 10-K”), the Company’s disclosure controls and procedures were not effective as of September 30, 2016.

As previously disclosed in the Company’s 2015 Form 10-K, during the fourth quarter of 2015, management identified a material weakness in internal controls over the completeness and accuracy of the information used to determine the qualitative component of the allowance for loan and lease losses estimate. This material weakness in internal controls occurred due to the control operator not executing the review control, as designed, of the completeness and accuracy of the information used in the qualitative component of the allowance for loan and lease losses estimate as of December 31, 2015. No restatement of prior period financial statements and no change in previously issued financial results were required as a result of this weakness in internal control. Management has taken steps to remediate this weakness by enhancing review controls, including adding an additional independent level of review over the information used to determine the qualitative component in the allowance for loan and lease losses estimation process. Management is still evaluating these new controls and procedures. Once placed in operation for a sufficient period of time, the Company will subject them to appropriate tests in order to determine whether they are operating effectively.

(b) Changes in internal controls over financial reporting. As discussed above, management has continued to remediate the underlying causes of the material weakness disclosed in the 2015 Form 10-K. Other than the plan for remediation described above, there has been no change in the Company’s internal control over financial reporting in the quarter ended September 30, 2016 that has materially affected, or is 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, 2015.

 

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

 

Item 6. Exhibits

 

  31.1    Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1    Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

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

 

Lakeland Bancorp, Inc.
(Registrant)

/s/ Thomas J. Shara

Thomas J. Shara
President and Chief Executive Officer
(Principal Executive Officer)

/s/ Joseph F. Hurley

Joseph F. Hurley
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)

Date: November 8, 2016

 

58