Edgar Filing: LAKELAND BANCORP INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended March 31, 2014

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

For the transition period from to

Commission file number 000-17820

LAKELAND BANCORP, INC.

(Exact name of registrant as specified in its charter)


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

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

(973) 697-2000

(Registrant’s telephone number, including area code)

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

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

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

As of April 30, 2014 there were 36,107,273 outstanding shares of Common Stock, no par value.

LAKELAND BANCORP, INC.

Form 10-Q Index


		PAGE
	Part I Financial Information

Item 1.	Financial Statements:

	Consolidated Balance Sheets - March 31, 2014 (unaudited) and December 31, 2013		3
	Consolidated Statements of Income - Unaudited Three Months Ended March 31, 2014 and 2013		4
	Consolidated Statements of Comprehensive Income - Unaudited Three Months Ended March 31, 2014 and 2013		5
	Consolidated Statements of Changes in Stockholders’ Equity - Unaudited Three Months Ended March 31, 2014		6
	Consolidated Statements of Cash Flows - Unaudited Three Months Ended March 31, 2014 and 2013		7
	Notes to Consolidated Financial Statements (unaudited)		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		48

Item 4.	Controls and Procedures		49

	Part II Other Information

Item 1.	Legal Proceedings		50

Item 1A.	Risk Factors		50

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		50

Item 3.	Defaults Upon Senior Securities		50

Item 4.	Mine Safety Disclosures		50

Item 5.	Other Information		50

Item 6.	Exhibits		50

Signatures			51

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

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS


	March 31, 2014 (unaudited)			December 31, 2013
	(dollars in thousands except share and per share amounts)
ASSETS:
Cash	$	128,307		$	94,205
Interest-bearing deposits due from banks		19,298			8,516

Total cash and cash equivalents		147,605			102,721

Investment securities available for sale, at fair value		429,777			431,106
Investment securities held to maturity; fair value of $95,041 at March 31, 2014 and $100,394 at December 31, 2013		95,451			101,744
Federal Home Loan Bank and other membership bank stock, at cost		7,937			7,938
Loans held for sale		—			1,206
Loans, net of deferred costs (fees)		2,503,297			2,469,016
Less: allowance for loan and lease losses		29,520			29,821

Net loans		2,473,777			2,439,195
Premises and equipment, net		36,731			37,148
Accrued interest receivable		8,332			8,603
Goodwill		109,974			109,974
Other identifiable intangible assets		2,301			2,424
Bank owned life insurance		56,328			55,968
Other assets		18,507			19,764

TOTAL ASSETS	$	3,386,720		$	3,317,791


LIABILITIES
Deposits:
Noninterest bearing	$	630,499		$	600,652
Savings and interest-bearing transaction accounts		1,816,084			1,812,467
Time deposits under $100 thousand		177,284			180,859
Time deposits $100 thousand and over		112,866			115,227

Total deposits		2,736,733			2,709,205
Federal funds purchased and securities sold under agreements to repurchase		115,952			81,991
Other borrowings		119,000			119,000
Subordinated debentures		41,238			41,238
Other liabilities		14,258			14,933

TOTAL LIABILITIES		3,027,181			2,966,367


STOCKHOLDERS’ EQUITY
Common stock, no par value; authorized shares, 70,000,000; issued 36,106,277 shares at March 31, 2014 and 36,070,286 shares at December 31, 2013		365,304			364,637
Accumulated deficit		(4,081	)		(8,538	)
Accumulated other comprehensive loss		(1,684	)		(4,675	)

TOTAL STOCKHOLDERS’ EQUITY		359,539			351,424

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,386,720		$	3,317,791

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

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED


	For the Three Months Ended March 31,
	2014		2013
	(In thousands, except per share data)
INTEREST INCOME
Loans, leases and fees	$	26,898	$	24,407
Federal funds sold and interest-bearing deposits with banks		13		13
Taxable investment securities and other		2,546		1,719
Tax-exempt investment securities		473		430

TOTAL INTEREST INCOME		29,930		26,569

INTEREST EXPENSE
Deposits		1,263		1,662
Federal funds purchased and securities sold under agreements to repurchase		15		9
Other borrowings		807		962

TOTAL INTEREST EXPENSE		2,085		2,633

NET INTEREST INCOME		27,845		23,936
Provision for loan and lease losses		1,489		3,183

NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES		26,356		20,753
NONINTEREST INCOME
Service charges on deposit accounts		2,559		2,522
Commissions and fees		1,013		1,213
Gains on sales and calls of investment securities		2		505
Income on bank owned life insurance		360		313
Other income		139		498

TOTAL NONINTEREST INCOME		4,073		5,051

NONINTEREST EXPENSE
Salaries and employee benefits		10,813		9,953
Net occupancy expense		2,617		1,974
Furniture and equipment		1,693		1,405
Stationery, supplies and postage		354		370
Marketing expense		386		288
FDIC insurance expense		501		513
Legal expense		273		242
Expenses on other real estate owned and other repossessed assets		15		19
Long term debt prepayment fee		—		526
Merger related expenses		—		631
Core deposit intangible amortization		123		—
Other expenses		2,967		2,306

TOTAL NONINTEREST EXPENSE		19,742		18,227

Income before provision for income taxes		10,687		7,577
Income tax expense		3,524		2,469

NET INCOME	$	7,163	$	5,108

PER SHARE OF COMMON STOCK
Basic earnings	$	0.20	$	0.17

Diluted earnings	$	0.20	$	0.17

Dividends	$	0.075	$	0.070

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

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED


	For the Three Months Ended March 31,
	2014			2013
	(in thousands)
NET INCOME	$	7,163		$	5,108


OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized securities gains (losses) during period		2,988			(251	)
Reclassification for gains included in net income		(2	)		(328	)
Change in pension liability, net		5			6

Other Comprehensive Income (Loss)		2,991			(573	)

TOTAL COMPREHENSIVE INCOME	$	10,154		$	4,535

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

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY - UNAUDITED

Three Months Ended March 31, 2014


	Common Stock		Accumulated deficit			Accumulated Other Comprehensive Income (Loss)			Total
	(dollars in thousands)
BALANCE January 1, 2014	$	364,637	($	8,538	)	($	4,675	)	$	351,424

Net Income		—		7,163			—			7,163
Other comprehensive income, net of tax		—		—			2,991			2,991
Stock based compensation		248		—			—			248
Issuance of stock to dividend reinvestment and stock purchase plan		331		(305	)		—			26
Exercise of stock options, net of excess tax benefits		88		—			—			88
Cash dividends, common stock		—		(2,401	)		—			(2,401	)

BALANCE March 31, 2014 (UNAUDITED)	$	365,304	($	4,081	)	($	1,684	)	$	359,539

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

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED


	For the Three Months Ended March 31,
	2014			2013
	(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	7,163		$	5,108
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premiums, discounts and deferred loan fees and costs		758			1,501
Depreciation and amortization		970			860
Amortization of intangible assets		123			—
Provision for loan and lease losses		1,489			3,183
Loans originated for sale		(3,775	)		—
Proceeds from sales of loans		5,064			—
Gains on securities		(2	)		(505	)
Gains on sales of loans held for sale		(83	)		—
Gains on other real estate and other repossessed assets		(39	)		(29	)
Gains on sales of premises and equipment		—			(68	)
Stock-based compensation		248			185
Increase in other assets		(383	)		(109	)
(Decrease) increase in other liabilities		(667	)		1,558

NET CASH PROVIDED BY OPERATING ACTIVITIES		10,866			11,684

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from repayments on and maturity of securities:
Available for sale		11,421			20,608
Held to maturity		7,660			2,543
Proceeds from sales of securities
Available for sale		—			53,670
Purchase of securities:
Available for sale		(5,959	)		(52,239	)
Held to maturity		(1,488	)		(2,609	)
Net decrease in Federal Home Loan Bank Stock		1			1
Net increase in loans and leases		(36,417	)		(27,428	)
Proceeds from sales of other real estate and repossessed assets		127			531
Capital expenditures		(577	)		(696	)
Proceeds from sales of bank premises and equipment		—			462

NET CASH USED IN INVESTING ACTIVITIES		(25,232	)		(5,157	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		27,576			17,678
Increase (decrease) in federal funds purchased and securities sold under agreements to repurchase		33,961			(22,974	)
Proceeds from other borrowings		20,000			—
Repayments of other borrowings		(20,000	)		(10,000	)
Excess tax benefits		65			27
Exercise of stock options		23			—
Issuance of stock to dividend reinvestment and stock purchase plan		26			44
Dividends paid		(2,401	)		(1,781	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		59,250			(17,006	)

Net increase (decrease) in cash and cash equivalents		44,884			(10,479	)
Cash and cash equivalents, beginning of period		102,721			107,545

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	147,605		$	97,066

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

Notes to Consolidated Financial Statements - (Unaudited)

Note 1. Significant Accounting Policies

Basis of Presentation.

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

The Company’s unaudited interim financial statements reflect all adjustments, such as normal recurring accruals that are, in the opinion of management, necessary for the fair presentation of the results of the interim periods. The results of operations for the quarter presented do not necessarily indicate the results that the Company will achieve for all of 2014. You should read these interim financial statements in conjunction with the audited consolidated financial statements and accompanying notes that are presented in the Lakeland Bancorp, Inc. Annual Report on Form 10-K for the year ended December 31, 2013.

On May 31, 2013, the Company completed its acquisition of Somerset Hills Bancorp (“Somerset Hills”). For more information, see Note 2 below.

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

All weighted average, actual share and per share information set forth in this Quarterly Report on Form 10-Q have been adjusted retroactively for the effects of stock dividends.

Note 2. Acquisitions

On May 31, 2013, the Company completed its acquisition of Somerset Hills Bancorp, a bank holding company headquartered in Bernardsville, New Jersey. This acquisition enables the Company to expand into Somerset and Union counties, and broaden its presence in Morris County. Effective at the close of business on May 31, 2013, Somerset Hills Bancorp merged into the Company, and Somerset Hills Bank merged into Lakeland Bank. The Merger Agreement provided that the shareholders of Somerset Hills Bancorp would receive, at their election, for each outstanding share of Somerset Hills Bancorp common stock that they own at the effective time of the merger, either 1.1962 shares of Lakeland Bancorp common stock or $12.00 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 an aggregate of 5,794,079 shares of its common stock in the merger, and also assumed outstanding Somerset Hills Bancorp stock options (which were converted into options to purchase Lakeland Bancorp common stock). Lakeland Bancorp paid $6.5 million in cash in the transaction.

The acquisition was accounted for under the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at their estimated fair values as of the acquisition date. Somerset Hills’ assets were recorded at their preliminary estimated fair values as of May 31, 2013 and Somerset Hills’ results of operations have been included in the Company’s Consolidated Statements of Income since that date.

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 (in thousands).


Consideration Paid
Lakeland Bancorp stock issued	$	57,419
Cash Payment		6,460
Fair value of Somerset Hills stock options converted to Lakeland Bancorp stock options		1,500

Total Consideration Paid	$	65,379

Recognized amounts of identifiable assets and liabilities assumed at fair value
Cash and cash equivalents	$	80,776
Securities available for sale		1,777
Securities held to maturity		8,686
Federal Home Loan Bank stock		493
Loans and leases		243,927
Loans held for sale		2,532
Premises and equipment		5,214
Identifiable intangible assets		2,712
Accrued interest receivable and other assets		9,946
Deposits		(311,801	)
Other liabilities		(1,745	)

Total identifiable assets	$	42,517


Goodwill	$	22,862

Loans acquired in the Somerset Hills acquisition were recorded at fair value and subsequently accounted for in accordance with ASC Topic 310, and there was no carryover related allowance for loan and lease losses. The fair values of loans acquired from Somerset Hills 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 acquired in the Somerset Hills acquisition as of the closing date.


(in thousands)	Acquired Credit Impaired Loans		Acquired Non-Credit Impaired Loans		Total Acquired Loans
Contractually required principal and interest at acquisition	$	4,507	$	352,148	$	356,655
Contractual cash flows not expected to be collected (non-accretable difference)		2,541		—		2,541

Expected cash flows at acquisition	$	1,966	$	352,148	$	354,114
Interest component of expected cash flows (accretable difference)		322		107,333		107,655

Fair value of acquired loans, including mortgages held for sale	$	1,644	$	244,815	$	246,459

The core deposit intangible totaled $2.7 million and is being amortized over its estimated useful life of approximately 10 years using an accelerated method. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes.

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

Direct costs related to the acquisition were expensed as incurred. During the three months ended March 31, 2013, the Company incurred $631,000 of merger and acquisition integration-related expenses, which have been separately stated in the Company’s Consolidated Statements of Income.

Note 3. Stock-Based Compensation

Share-based compensation expense of $248,000 and $185,000 was recognized for the three months ended March 31, 2014 and 2013, respectively. As of March 31, 2014, there was unrecognized compensation cost of $1.2 million related to unvested restricted stock; that cost is expected to be recognized over a weighted average period of approximately 2.5 years. Unrecognized compensation expense related to unvested stock options was approximately $110,000 as of March 31, 2014 and is expected to be recognized over a period of 2.0 years.

In the first three months of 2014, the Company granted 1,850 shares of restricted stock at an average grant date fair value of $11.77 per share under the Company’s 2009 equity compensation program. These shares vest over a five year period. Compensation expense on these shares is expected to average approximately $4,000 per year for the next five years. In the first three months of 2013, the Company granted 99,182 shares of restricted stock at a grant date fair value of $9.82 per share under the 2009 program. Compensation expense on these shares is expected to average approximately $195,000 per year over a five year period.

In the first quarter of 2014, the Company granted 119,711 restricted stock units at a weighted average grant date fair value of $11.19 per share under the Company’s 2009 equity compensation program. These shares cliff vest after a range of two to three years. A portion of these shares will vest subject to certain performance conditions in the restricted stock unit agreement. Compensation expense on these restricted stock units is expected to be approximately $447,000 per year over a three year period.

There were no grants of stock options in the first three months of 2014 or 2013.

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, 2014		490,120		$	11.19			$	754,938
Issued		—			—
Exercised		(9,973	)		7.93
Forfeited		(1,121	)		13.20


Outstanding, March 31, 2014		479,026		$	11.25		3.27	$	487,220

Options exercisable at March 31, 2014		433,513		$	11.43		2.69	$	416,864

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the first three months of 2014 and the exercise price, multiplied by the number of in-the-money options).

The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2014 was $38,000. Exercise of stock options during the first three months of 2014 resulted in cash receipts of $79,000. There were no options exercised in the first quarter of 2013.

Information regarding the Company’s restricted stock (all unvested) and changes during the three months ended March 31, 2014 is as follows:


	Number of shares			Weighted average price

Outstanding, January 1, 2014		249,781		$	9.58
Granted		1,850			11.77
Vested		(84,000	)		9.45
Forfeited		(1,716	)		9.44


Outstanding, March 31, 2014		165,915		$	9.67

Note 4. Comprehensive Income

The components of other comprehensive income are as follows:


	March 31, 2014									March 31, 2013
For the quarter ended:	Before tax amount			Tax Benefit (Expense)			Net of tax amount			Before tax amount			Tax Benefit (Expense)			Net of tax amount
	(in thousands)									(in thousands)
Net unrealized gains on available for sale securities
Net unrealized holding gains (losses) arising during period	$	4,715		($	1,727	)	$	2,988		($	414	)	$	163		($	251	)
Reclassification adjustment for net gains arising during the period		(3	)		1			(2	)		(505	)		177			(328	)

Net unrealized gains (losses)	$	4,712		($	1,726	)	$	2,986		($	919	)	$	340		($	579	)
Change in minimum pension liability		8			(3	)		5			8			(2	)		6

Other comprehensive income (loss), net	$	4,720		($	1,729	)	$	2,991		($	911	)	$	338		($	573	)

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


Changes in Accumulated Other Comprehensive Income by Component (a)
	For the Three Months Ended March 31, 2014									For the Three Months Ended March 31, 2013
	Unrealized Gains and Losses on Available-for-sale Securities			Pension Items			Total			Unrealized Gains and Losses on Available-for-sale Securities			Pension Items			Total
Beginning Balance	($	4,647	)	($	28	)	($	4,675	)	$	4,552		($	616	)	$	3,936

	(in thousands)
Other comprehensive income (loss) before classifications		2,988			5			2,993			(251	)		6			(245	)

Amounts reclassified from accumulated other comprehensive income		(2	)		—			(2	)		(328	)		—			(328	)


Net current period other comprehensive income (loss)		2,986			5			2,991			(579	)		6			(573	)

Ending balance	($	1,661	)	($	23	)	($	1,684	)	$	3,973		($	610	)	$	3,363

(a)	All amounts are net of tax.

Note 5. Statement of Cash Flow Information, Supplemental Information


	For the Three Months Ended March 31,
	2014		2013
	(in thousands)
Supplemental schedule of noncash investing and financing activities:
Cash paid during the period for income taxes	$	3,500	$	99
Cash paid during the period for interest		2,095		2,676
Transfer of loans and leases into other repossessed assets and other real estate owned		266		688

Note 6. Earnings Per Share

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


	For the Three Months Ended March 31,
(In thousands, except per share data)	2014		2013

Net income available to common shareholders	$	7,163	$	5,108
Less: earnings allocated to participating securities		36		29

Net income allocated to common shareholders	$	7,127	$	5,079

Weighted average number of common shares outstanding - basic		35,888		29,563
Share-based plans		118		62

Weighted average number of common shares - diluted		36,006		29,625


Basic earnings per share	$	0.20	$	0.17


Diluted earnings per share	$	0.20	$	0.17

Options to purchase 340,155 shares of common stock at a weighted average price of $12.50 per share were outstanding and were not included in the computation of diluted earnings per share for the quarter ended March 31, 2014 because the exercise price was greater than the average market price. Options to purchase 444,375 shares of common stock at a weighted average price of $12.56 were outstanding and were not included in the computation of diluted earnings per share for the quarter ended March 31, 2013 because the exercise price was greater than the average market price.

Note 7. Investment Securities


AVAILABLE FOR SALE	March 31, 2014									December 31, 2013
	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	$	72,815	$	—	$	(1,931	)	$	70,884	$	72,828	$	—	$	(2,663	)	$	70,165
Mortgage-backed securities, residential		303,120		2,244		(4,404	)		300,960		310,088		1,752		(7,338	)		304,502
Obligations of states and political subdivisions		37,345		1,017		(329	)		38,033		36,482		914		(523	)		36,873
Other debt securities		3,538		44		(123	)		3,459		3,541		37		(158	)		3,420
Equity securities		15,513		1,255		(327	)		16,441		15,433		1,097		(384	)		16,146

	$	432,331	$	4,560	$	(7,114	)	$	429,777	$	438,372	$	3,800	$	(11,066	)	$	431,106


HELD TO MATURITY	March 31, 2014									December 31, 2013
	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	$	14,710	$	50	$	(256	)	$	14,504	$	19,732	$	3	$	(576	)	$	19,159
Mortgage-backed securities, residential		33,669		542		(897	)		33,314		34,596		524		(1,025	)		34,095
Mortgage-backed securities, multifamily		2,331		—		(127	)		2,204		2,355		—		(166	)		2,189
Obligations of states and political subdivisions		43,204		504		(398	)		43,310		43,521		495		(770	)		43,246
Other debt securities		1,537		172		—			1,709		1,540		165		—			1,705

	$	95,451	$	1,268	$	(1,678	)	$	95,041	$	101,744	$	1,187	$	(2,537	)	$	100,394

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


	March 31, 2014
	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value

Due in one year or less	$	3,936	$	3,959	$	8,191	$	8,248
Due after one year through five years		51,745		51,560		16,158		16,622
Due after five years through ten years		55,792		54,821		28,568		28,282
Due after ten years		2,225		2,036		6,534		6,371

		113,698		112,376		59,451		59,523
Mortgage-backed securities		303,120		300,960		36,000		35,518
Equity securities		15,513		16,441		—		—

Total securities	$	432,331	$	429,777	$	95,451	$	95,041

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


	For the Three Months Ended March 31,
	2014			2013
Sale proceeds	$	—		$	53,670
Gross gains		6			508
Gross losses		(4	)		(3	)

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 $355.5 million and $324.5 million at March 31, 2014 and December 31, 2013, respectively, were pledged to secure public deposits and for other purposes required by applicable laws and regulations.

The following table indicates the length of time individual securities have been in a continuous unrealized loss position at March 31, 2014 and December 31, 2013:


March 31, 2014	Less than 12 months				12 months or longer				Total
AVAILABLE FOR SALE	Fair value		Unrealized Losses		Fair value		Unrealized Losses		Number of securities		Fair value		Unrealized Losses
	(dollars in thousands)
U.S. treasury and U.S. government agencies	$	70,884	$	1,931	$	—	$	—		16	$	70,884	$	1,931
Mortgage-backed securities, residential		135,173		3,101		27,380		1,303		44		162,553		4,404
Obligations of states and political subdivisions		5,316		173		2,882		156		16		8,198		329
Other debt securities		—		—		841		123		1		841		123
Equity securities		—		—		10,344		327		3		10,344		327

	$	211,373	$	5,205	$	41,447	$	1,909		80	$	252,820	$	7,114


HELD TO MATURITY

U.S. government agencies	$	8,522	$	256	$	—	$	—		3	$	8,522	$	256
Mortgage-backed securities, residential		21,253		781		1,108		116		9		22,361		897
Mortgage-backed securities, multifamily		914		71		1,290		56		2		2,204		127
Obligations of states and political subdivisions		13,134		238		2,184		160		36		15,318		398

	$	43,823	$	1,346	$	4,582	$	332		50	$	48,405	$	1,678


December 31, 2013	Less than 12 months				12 months or longer				Total
AVAILABLE FOR SALE	Fair value		Unrealized Losses		Fair value		Unrealized Losses		Number of securities		Fair value		Unrealized Losses
	(dollars in thousands)
U.S. government agencies	$	70,165	$	2,663	$	—	$	—		16	$	70,165	$	2,663
Mortgage-backed securities, residential		177,262		6,730		10,724		608		51		187,986		7,338
Obligations of states and political subdivisions		8,500		328		2,087		195		21		10,587		523
Other debt securities		—		—		805		158		1		805		158
Equity securities		—		—		10,215		384		3		10,215		384

	$	255,927	$	9,721	$	23,831	$	1,345		92	$	279,758	$	11,066


HELD TO MATURITY

U.S. government agencies	$	14,153	$	576	$	—	$	—		5	$	14,153	$	576
Mortgage-backed securities, residential		22,939		889		1,097		136		11		24,036		1,025
Mortgage-backed securities, multifamily		895		99		1,294		67		2		2,189		166
Obligations of states and political subdivisions		17,826		607		1,456		163		51		19,282		770

	$	55,813	$	2,171	$	3,847	$	366		69	$	59,660	$	2,537

Management has evaluated the securities in the above table and has concluded that none of the securities with unrealized losses have impairments that are other-than-temporary. Fair value below cost is due to interest rate movements and is deemed temporary. All investment securities are evaluated on a periodic basis to determine if factors are identified that would require further analysis. In evaluating the Company’s securities, management considers the following items:

•

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

•

The financial condition of the underlying issuer;

•

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

•

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

•

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

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

As of March 31, 2014, the equity securities include investments in other financial institutions for market appreciation purposes. Those equities had a net amortized cost of $2.2 million and a market value of $3.4 million as of March 31, 2014.

As of March 31, 2014, equity securities also included $13.0 million in investment funds that do not have a quoted market price but we use net asset value per share or its equivalent to measure fair value.

The funds include $2.9 million in funds that are primarily invested in community development loans that are guaranteed by the Small Business Administration (SBA). Because the funds are primarily guaranteed by the federal government there are minimal changes in market value between accounting periods. These funds can be redeemed within 60 days notice at the net asset value less unpaid management fees with the approval of the fund manager. As of March 31, 2014, the net amortized cost equaled the market value of the investment. There are no unfunded commitments related to this investment.

The funds also include $10.1 million in funds that are invested in government guaranteed loans, mortgage-backed securities, small business loans and other instruments supporting affordable housing and economic development. The Company may redeem these funds at the net asset value calculated at the end of the current business day less any unpaid management fees. As of March 31, 2014, the amortized cost of these securities was $10.4 million and the fair value was $10.1 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.

Note 8. Loans, Leases and Other Real Estate.

The following sets forth the composition of Lakeland’s loan and lease portfolio as of March 31, 2014 and December 31, 2013:


	March 31, 2014			December 31, 2013
	(in thousands)
Commercial, secured by real estate	$	1,432,603		$	1,389,861
Commercial, industrial and other		208,056			213,808
Leases		43,720			41,332
Real estate-residential mortgage		430,559			432,831
Real estate-construction		53,671			53,119
Home equity and consumer		336,017			339,338

Total loans		2,504,626			2,470,289

Plus: deferred fees		(1,329	)		(1,273	)

Loans, net of deferred fees	$	2,503,297		$	2,469,016

At March 31, 2014 and December 31, 2013, home equity and consumer loans included overdraft deposit balances of $451,000 and $590,000, respectively. At March 31, 2014 and December 31, 2013, the Company had $256.4 million and $263.1 million in residential loans pledged for potential borrowings at the Federal Home Loan Bank of New York (FHLB).

The carrying value of loans acquired and accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” was $1.5 million at March 31, 2014, which declined $158,000 from December 31, 2013 as a result of a payoff on a loan. Under ASC Subtopic 310-30, 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 impairment through a loss provision and an increase in the allowance for loan losses. Valuation allowances (recognized in the allowance for loan 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).

There was credit deterioration related to one loan between May 31, 2013 (the “acquisition date”) and March 31, 2014. As of December 31, 2013, Lakeland had evaluated this loan for impairment, recognizing a valuation allowance in the allowance for loan and lease losses. In the first quarter of 2014, Lakeland recognized $4,000 of interest income on the loans acquired with deteriorated credit quality from Somerset Hills.

Non-Performing Assets and Past Due Loans

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


(in thousands)	March 31, 2014		December 31, 2013

Commercial, secured by real estate	$	11,637	$	7,697
Commercial, industrial and other		246		88
Leases		143		—
Real estate - residential mortgage		6,875		6,141
Real estate - construction		642		831
Home equity and consumer		2,431		2,175

Total non-accrual loans and leases	$	21,974	$	16,932
Other real estate and other repossessed assets		698		520

TOTAL NON-PERFORMING ASSETS	$	22,672	$	17,452

Troubled debt restructurings, still accruing	$	6,086	$	10,289

Non-accrual loans included $2.2 million and $2.3 million of troubled debt restructurings as of March 31, 2014 and December 31, 2013, respectively.

An age analysis of past due loans, segregated by class of loans as of March 31, 2014 and December 31, 2013, is as follows:


March 31, 2014	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days		Total Past Due		Current		Total Loans and Leases		Recorded Investment greater than 89 Days and still accruing
	(in thousands)
Commercial, secured by real estate	$	10,430	$	813	$	10,142	$	21,385	$	1,411,218	$	1,432,603	$	—
Commercial, industrial and other		536		417		193		1,146		206,910		208,056		—
Leases		278		—		143		421		43,299		43,720		—
Real estate-residential mortgage		3,867		247		5,891		10,005		420,554		430,559		—
Real estate-construction		67		—		642		709		52,962		53,671		—
Home equity and consumer		1,764		407		2,741		4,912		331,105		336,017		451

	$	16,942	$	1,884	$	19,752	$	38,578	$	2,466,048	$	2,504,626	$	451

December 31, 2013

Commercial, secured by real estate	$	6,068	$	5,154	$	8,394	$	19,616	$	1,370,245	$	1,389,861	$	697
Commercial, industrial and other		455		118		88		661		213,147		213,808		—
Leases		77		179		—		256		41,076		41,332		—
Real estate-residential mortgage		5,352		1,306		6,555		13,213		419,618		432,831		414
Real estate-construction		—		—		831		831		52,288		53,119		—
Home equity and consumer		1,776		533		3,061		5,370		333,968		339,338		886

	$	13,728	$	7,290	$	18,929	$	39,947	$	2,430,342	$	2,470,289	$	1,997

Impaired Loans

Impaired loans as of March 31, 2014, March 31, 2013 and December 31, 2013 are as follows:


March 31, 2014	Recorded Investment in Impaired loans		Contractual Unpaid Principal Balance		Specific Allowance		Interest Income Recognized		Average Investment in Impaired loans
	(in thousands)
Loans without specific allowance:
Commercial, secured by real estate	$	10,044	$	10,137	$	—	$	56	$	9,026
Commercial, industrial and other		46		147		—		42		3,652
Real estate-residential mortgage		567		567		—		—		592
Real estate-construction		495		2,411		—		—		498
Home equity and consumer		263		263		—		4		263

Loans with specific allowance:
Commercial, secured by real estate		11,891		12,918		1,005		88		10,740
Commercial, industrial and other		153		153		68		2		153
Real estate-residential mortgage		—		—		—		—		—
Real estate-construction		—		—		—		—		—
Home equity and consumer		1,259		1,259		189		10		928

Total:
Commercial, secured by real estate	$	21,935	$	23,055	$	1,005	$	144	$	19,766
Commercial, industrial and other		199		300		68		44		3,805
Real estate-residential mortgage		567		567		—		—		592
Real estate-construction		495		2,411		—		—		498
Home equity and consumer		1,522		1,522		189		14		1,191

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


March 31, 2013	Recorded Investment in Impaired loans		Contractual Unpaid Principal Balance		Specific Allowance		Interest Income Recognized		Average Investment in Impaired loans
	(in thousands)
Loans without specific allowance:
Commercial, secured by real estate	$	17,275	$	29,572	$	—	$	125	$	16,995
Commercial, industrial and other		4,860		4,937		—		48		4,858
Real estate-residential mortgage		355		355		—		—		357
Real estate-construction		3,413		4,826		—		—		3,672
Home equity and consumer		369		369		—		—		369

Loans with specific allowance:
Commercial, secured by real estate		2,632		3,175		279		14		2,694
Commercial, industrial and other		535		594		148		1		736
Real estate-residential mortgage		288		288		43		—		288
Real estate-construction		146		534		15		—		146
Home equity and consumer		970		970		146		14		970

Total:
Commercial, secured by real estate	$	19,907	$	32,747	$	279	$	139	$	19,689
Commercial, industrial and other		5,395		5,531		148		49		5,594
Real estate-residential mortgage		643		643		43		—		645
Real estate-construction		3,559		5,360		15		—		3,818
Home equity and consumer		1,339		1,339		146		14		1,339

	$	30,843	$	45,620	$	631	$	202	$	31,085


December 31, 2013	Recorded Investment in Impaired loans		Contractual Unpaid Principal Balance		Specific Allowance		Interest Income Recognized		Average Investment in Impaired loans
	(in thousands)
Loans without specific allowance:
Commercial, secured by real estate	$	8,223	$	9,656	$	—	$	198	$	8,853
Commercial, industrial and other		4,020		4,118		—		189		4,333
Real estate-residential mortgage		617		672		—		—		622
Real estate-construction		501		2,411		—		—		2,111
Home equity and consumer		17		17		—		1		17

Loans with specific allowance:
Commercial, secured by real estate		10,152		10,217		739		442		9,727
Commercial, industrial and other		155		155		31		5		396
Real estate-residential mortgage		—		—		—		—		—
Real estate-construction		—		—		—		—		—
Home equity and consumer		934		936		140		42		907

Total:
Commercial, secured by real estate	$	18,375	$	19,873	$	739	$	640	$	18,580
Commercial, industrial and other		4,175		4,273		31		194		4,729
Real estate-residential mortgage		617		672		—		—		622
Real estate-construction		501		2,411		—		—		2,111
Home equity and consumer		951		953		140		43		924

	$	24,619	$	28,182	$	910	$	877	$	26,966

Interest that would have been accrued on impaired loans during the first three months of 2014 and 2013 had the loans been performing under original terms would have been $410,000 and $621,000, respectively. Interest that would have accrued for the year ended December 31, 2013 was $2.2 million.

Credit Quality Indicators

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

The following table shows the Company’s commercial loan portfolio as of March 31, 2014 and December 31, 2013, by the risk ratings discussed above (in thousands):


March 31, 2014	Commercial, secured by real estate		Commercial, industrial and other		Real estate- construction
Risk Rating	Commercial, secured by real estate		Commercial, industrial and other		Real estate- construction
1	$	—	$	939	$	—
2		—		11,442		—
3		70,397		8,868		—
4		453,731		65,128		1,662
5		781,518		78,839		48,502
5W - Watch		41,175		9,880		—
6 - Other Assets Especially Mentioned		31,122		13,080		1,243
7 - Substandard		54,660		19,880		2,264
8 - Doubtful		—		—		—
9 - Loss		—		—		—

Total	$	1,432,603	$	208,056	$	53,671


December 31, 2013	Commercial, secured by real estate		Commercial, industrial and other		Real estate- construction
Risk Rating	Commercial, secured by real estate		Commercial, industrial and other		Real estate- construction
1	$	—	$	952	$	—
2		—		12,964		—
3		70,811		9,263		—
4		442,933		60,002		1,178
5		754,275		85,939		48,243
5W - Watch		38,893		12,278		—
6 - Other Assets Especially Mentioned		27,640		9,596		1,245
7 - Substandard		55,309		22,814		2,453
8 - Doubtful		—		—		—
9 - Loss		—		—		—

Total	$	1,389,861	$	213,808	$	53,119

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

Allowance for Loan and Lease Losses

The following table details activity in the allowance for loan and lease losses by portfolio segment for the three months ended March 31, 2014 and 2013:


Three Months Ended March 31, 2014 Allowance for Loan and Lease Losses:	Commercial, secured by real estate			Commercial, industrial and other			Leases			Real estate- residential mortgage			Real estate- construction			Home equity and consumer			Unallocated		Total
	(in thousands)
Beginning Balance	$	14,463		$	5,331		$	504		$	3,214		$	542		$	2,737		$	3,030	$	29,821
Charge-offs		(1,647	)		(13	)		(39	)		(155	)		—			(601	)		—		(2,455	)
Recoveries		34			591			—			6			—			34			—		665
Provision		1,285			(403	)		(5	)		(97	)		(59	)		442			326		1,489

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


Three Months Ended March 31, 2013 Allowance for Loan and Lease Losses:	Commercial, secured by real estate			Commercial, industrial and other			Leases			Real estate- residential mortgage			Real estate- construction			Home equity and consumer			Total
	(in thousands)
Beginning Balance	$	16,258		$	5,103		$	578		$	3,568		$	587		$	2,837		$	28,931
Charge-offs		(749	)		(177	)		(112	)		(565	)		(652	)		(455	)	($	2,710	)
Recoveries		44			30			88			1			7			49		$	219
Provision		868			288			(72	)		824			1,304			(29	)	$	3,183

Ending Balance	$	16,421		$	5,244		$	482		$	3,828		$	1,246		$	2,402		$	29,623

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


At March 31, 2014	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)
Ending Balance: Individually
evaluated for impairment	$	1,005	$	68	$	—	$	—	$	—	$	189	$	—	$	1,262
Ending Balance: Collectively
evaluated for impairment		13,130		5,438		460		2,968		483		2,423		3,356	$	28,258
Ending Balance: Loans acquired
with deteriorated credit quality		—		—		—		—		—		—		—		—

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


At December 31, 2013	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)
Ending Balance: Individually evaluated for impairment	$	739	$	31	$	—	$	—	$	—	$	140	$	—	$	910
Ending Balance: Collectively evaluated for impairment		13,724		5,300		504		3,214		542		2,597		3,030	$	28,911
Ending Balance: Loans acquired with deteriorated credit quality		—		—		—		—		—		—		—		—

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

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


At March 31, 2014	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	$	21,935	$	199	$	—	$	567	$	495	$	1,522	$	24,718
Ending Balance: Collectively
evaluated for impairment		1,410,668		207,857		43,720		429,992		53,176		334,249	$	2,479,662
Ending Balance: Loans acquired
with deteriorated credit quality		—		—		—		—		—		246	$	246

Ending Balance (1)	$	1,432,603	$	208,056	$	43,720	$	430,559	$	53,671	$	336,017	$	2,504,626

(1)	Excludes deferred fees


At December 31, 2013	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	$	18,375	$	4,175	$	—	$	617	$	501	$	951	$	24,619
Ending Balance: Collectively evaluated for impairment		1,371,486		209,633		41,332		432,214		52,618		337,976	$	2,445,259
Ending Balance: Loans acquired with deteriorated credit quality		—		—		—		—		—		411	$	411

Ending Balance (1)	$	1,389,861	$	213,808	$	41,332	$	432,831	$	53,119	$	339,338	$	2,470,289

(1)	Excludes deferred fees

Lakeland also maintains a reserve for unfunded lending commitments which are included in other liabilities. This reserve was $1.2 million for each of the periods ended March 31, 2014 and December 31, 2013. The Company analyzes the adequacy of the reserve for unfunded lending commitments in conjunction with its analysis of the adequacy of the allowance for loan and lease losses. For more information on this analysis, see “Risk Elements” in Management’s Discussion and Analysis.

Troubled Debt Restructurings

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

The following table summarizes loans that have been restructured during the three months ended March 31, 2014 and 2013:


	For the Three Months Ended March 31, 2014						For the Three Months Ended March 31, 2013
	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)						(Dollars in thousands)
Troubled Debt Restructurings:
Commercial, secured by real estate		—	$	—	$	—		4	$	2,000	$	2,000
Commercial, industrial and other		—		—		—		—		—		—
Leases		—		—		—		—		—		—
Real estate-residential mortgage		—		—		—		—		—		—
Real estate-construction		—		—		—		—		—		—
Home equity and consumer		3		335		335		—		—		—


		3	$	335	$	335		4	$	2,000	$	2,000

The following table summarizes as of March 31, 2014 and 2013, loans that were restructured within the last 12 months that have subsequently defaulted:


	For the Three Months Ended
	March 31, 2014				March 31, 2013
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
	(Dollars in thousands)				(Dollars in thousands)
Defaulted Troubled Debt Restructurings:
Commercial, secured by real estate		2	$	214		4	$	731
Commercial, industrial and other		—		—		—		—
Leases		—		—		—		—
Real estate-residential mortgage		—		—		—		—
Real estate-construction		—		—		—		—
Home equity and consumer		1		236		—		—


		3	$	450		4	$	731

Mortgages Held for Sale

Residential mortgages originated by the bank and held for sale in the secondary market are carried at the lower of cost or fair market value. Fair value is generally determined by the value of purchase commitments. Losses are recorded as a valuation allowance and charged to earnings. As of March 31, 2014, the Company had no mortgages held for sale compared to $1.2 million as of December 31, 2013.

Other Real Estate and Other Repossessed Assets

At March 31, 2014, the Company had other repossessed assets and other real estate owned of $59,000 and $639,000, respectively. At December 31, 2013, the Company had other repossessed assets and other real estate owned of $54,000 and $466,000, respectively.

Note 9. Employee Benefit Plans

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


	For the Three Months Ended March 31,
	2014			2013
	(in thousands)
Interest cost	$	23		$	22
Expected return on plan assets		(24	)		(18	)
Amortization of unrecognized net actuarial loss		10			21

Net periodic benefit expense	$	9		$	25

Note 10. Directors’ Retirement Plan

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


	For the Three Months Ended March 31,
	2014		2013
	(in thousands)
Service cost	$	7	$	7
Interest cost		10		9
Amortization of prior service cost		3		3
Amortization of unrecognized net actuarial loss		—		2

Net periodic benefit expense	$	20	$	21

The Company made contributions of $65,000 and $75,000 to the plan during the three month periods ended March 31, 2014 and 2013, respectively. The Company does not expect to make any more contributions for the remainder of 2014.

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

Fair Value Measurement

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

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

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

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

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

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

The following table sets forth the Company’s financial assets that were accounted for at fair value on a recurring basis as of the periods presented by level within the fair value hierarchy. During the three months ended March 31, 2014, 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:


March 31, 2014	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:
Investment securities, available for sale
U.S. treasury and government agencies	$	4,360	$	66,524	$	—	$	70,884
Mortgage backed securities		—		300,960		—		300,960
Obligations of states and political subdivisions		—		38,033		—		38,033
Corporate debt securities		—		3,459		—		3,459
Equity securities		3,416		13,025		—		16,441

Total securities available for sale		7,776		422,001		—		429,777

Non-hedging interest rate derivatives		—		407		—		407

Total Assets	$	7,776		422,408		—	$	430,184


Non-hedging interest rate derivatives	$	—	$	407	$	—	$	407

Total Liabilities	$	—	$	407	$	—	$	407


December 31, 2013
Assets:
Investment securities, available for sale
U.S. treasury and government agencies	$	4,330	$	65,835	$	—	$	70,165
Mortgage backed securities		—		304,502		—		304,502
Obligations of states and political subdivisions		—		36,873		—		36,873
Corporate debt securities		—		3,420		—		3,420
Equity securities		3,239		12,907		—		16,146

Total securities available for sale		7,569		423,537		—		431,106
Non-hedging interest rate derivatives		—		562		—		562
Total Assets	$	7,569	$	424,099	$	—	$	431,668


Non-hedging interest rate derivatives	$	—	$	562	$	—	$	562

Total Liabilities	$	—	$	562	$	—	$	562

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


March 31, 2014	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	$	—	$	—	$	24,718	$	24,718
Other real estate owned and other repossessed assets		—		—		698		698

December 31, 2013
Assets:
Impaired Loans and Leases	$	—	$	—	$	24,619	$	24,619
Loans held for sale		—		1,206		—		1,206
Other real estate owned and other repossessed assets		—		—		520		520

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

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

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

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

Fair Value of Certain Financial Instruments

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

The estimation methodologies used, the estimated fair values, and recorded book balances at March 31, 2014 and December 31, 2013 are outlined below.

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

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

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

The net loan portfolio at March 31, 2014 and December 31, 2013 has been valued using a present value discounted cash flow where market prices were not available. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk. The valuation of the Company’s loan portfolio is consistent with accounting guidance but does not fully incorporate the exit price approach.

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

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

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

The following table presents the carrying values, fair values and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2014 and December 31, 2013:


March 31, 2014	Carrying Value		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Financial Instruments - Assets
Investment securities held to maturity	$	95,451	$	95,041	$	—	$	89,837	$	5,204
Federal Home Loan Bank Stock		7,937		7,937		—		7,937		—
Loans and leases, net		2,473,777		2,468,467		—		—		2,468,467

Financial Instruments - Liabilities
Certificates of Deposit		290,150		290,133		—		290,133		—
Other borrowings		119,000		121,731		—		121,731		—
Subordinated debentures		41,238		31,134		—		—		31,134

December 31, 2013
Financial Instruments - Assets
Investment securities held to maturity	$	101,744	$	100,394	$	—	$	95,194	$	5,200
Federal Home Loan Bank Stock		7,938		7,938		—		7,938		—
Loans and leases, net		2,439,195		2,432,447		—		—		2,432,447

Financial Instruments - Liabilities
Certificates of Deposit		296,086		296,237		—		296,237		—
Other borrowings		119,000		121,870		—		121,870		—
Subordinated debentures		41,238		27,835		—		—		27,835

Note 12. Derivatives

Lakeland is a party to interest rate derivatives that are not designated as hedging instruments. These derivatives relate to interest rate swaps that the Company enters into with customers to allow customers to convert variable rate loans to a fixed rate. Lakeland pays interest to the customer at a floating rate on the notional amount and receives interest from the customer at a fixed rate for the same notional amount. At the same time the interest rate swap is entered into with the customer, an offsetting interest rate swap is entered into with another financial institution. Lakeland pays the other financial institution interest at the same fixed rate on the same notional amount as the swap entered into with the customer, and receives interest from the financial institution for the same floating rate on the same notional amount. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss of given default for all counterparties. As of March 31, 2014 and December 31, 2013, Lakeland had $480,000 and $1.5 million, respectively, in securities pledged for collateral on its interest rate swaps with the financial institution.

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


March 31, 2014	Notional Amount			Average Maturity (Years)		Weighted Average Rate Fixed			Weighted Average Variable Rate	Fair Value
3rd party interest rate swaps	$	17,588			6.5		3.840	%	1 Mo Libor + 2.21	($	407	)
Customer interest rate swaps		(17,588	)		6.5		3.840	%	1 Mo Libor + 2.21		407


December 31, 2013
	Notional Amount			Average Maturity (Years)		Weighted Average Rate Fixed			Weighted Average Variable Rate	Fair Value
3rd party interest rate swaps	$	17,691			6.7		3.830	%	1 Mo Libor + 2.21	($	562	)
Customer interest rate swaps		(17,691	)		6.7		3.830	%	1 Mo Libor + 2.21	$	562

The following shows the Company’s transactions that are subject to an enforceable master netting arrangement or other such similar agreements for the periods presented:


March 31, 2014
Offsetting of Financial Assets and Derivative Assets						Gross Amounts not Offset in the Balance Sheet
						Net Amounts
	Gross Amounts		Gross Amounts			of Assets
	of Recognized		Offset in the			Presented in the		Financial		Cash Collateral
	Assets		Balance Sheet			Balance Sheet		Instruments		Received		Net Amount
Description	(in thousands)
Customer interest rate swaps	$	17,588	($	17,181	)	$	407	$	—	$	—	$	407

Total	$	17,588	($	17,181	)	$	407	$	—	$	—	$	407


Offsetting of Financial Liabilities and Derivative Liabilities						Gross Amounts not Offset in the Balance Sheet
						Net Amounts
	Gross Amounts		Gross Amounts			of Liabilities
	of Recognized		Offset in the			Presented in the		Financial		Cash Collateral
	Liabilities		Balance Sheet			Balance Sheet		Instruments		Received		Net Amount
Description	(in thousands)
Third party interest rate swaps	$	17,588	($	17,181	)	$	407	$	—	$	—	$	407

Total	$	17,588	($	17,181	)	$	407	$	—	$	—	$	407


December 31, 2013
Offsetting of Financial Assets and Derivative Assets						Gross Amounts not Offset in the Balance Sheet
						Net Amounts
	Gross Amounts		Gross Amounts			of Assets
	of Recognized		Offset in the			Presented in the		Financial		Cash Collateral
	Assets		Balance Sheet			Balance Sheet		Instruments		Received		Net Amount
Description	(in thousands)
Customer interest rate swaps	$	17,691	($	17,129	)	$	562	$	—	$	—	$	562

Total	$	17,691	($	17,129	)	$	562	$	—	$	—	$	562


Offsetting of Financial Liabilities and Derivative Liabilities						Gross Amounts not Offset in the Balance Sheet
						Net Amounts
	Gross Amounts		Gross Amounts			of Liabilities
	of Recognized		Offset in the			Presented in the		Financial		Cash Collateral
	Liabilities		Balance Sheet			Balance Sheet		Instruments		Received		Net Amount
Description	(in thousands)
Third party interest rate swaps	$	17,691	($	17,129	)	$	562	$	—	$	—	$	562

Total	$	17,691	($	17,129	)	$	562	$	—	$	—	$	562

Note 13. Goodwill and Intangible Assets

The Company has recorded goodwill of $110.0 million at March 31, 2014 and December 31, 2013 which includes $22.9 million from the Somerset Hills acquisition and $87.1 million from prior acquisitions. The Company reviews its goodwill and intangible assets annually, on November 30, or more frequently if conditions warrant, for impairment. In testing goodwill for impairment, the Company compares the estimated fair value of each reporting unit to their respective carrying amounts, including goodwill. The Company has determined that it has one reporting unit, Community Banking.

As stated above, the Company recorded $2.7 million in core deposit intangible for the Somerset Hills acquisition. Year-to-date, it has amortized $123,000 in core deposit intangible. The estimated future amortization expense for each of the succeeding five years ended December 31 is as follows (dollars in thousands):


For the year ended:
2014	$	341
2015		415
2016		366
2017		316
2018		267

Note 14. Recent Accounting Pronouncements

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

In July 2013, the FASB issued an accounting pronouncement to improve the reporting for unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The pronouncement is expected to reduce diversity in practice by providing guidance on the presentation of unrecognized tax benefits and will better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The pronouncement is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this pronouncement did not have a material impact on the Company’s financial statements.

PART I – ITEM 2

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

This section should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

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 the Company’s lending and leasing activities, customers’ acceptance of the Company’s products and services, competition, and the failure to realize anticipated efficiencies and synergies of the merger of Somerset Hills Bank into Lakeland Bank and of Somerset Hills Bancorp into the Company.

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

Critical Accounting Policies, Judgments and Estimates

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

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

Management Overview

The quarter ended March 31, 2014 represented a period of continued growth for the Company. As discussed in this Management’s Discussion and Analysis:

•

Net income available to common stockholders increased $2.1 million, or 40%, from the first three months of 2013 to the same period in 2014. Included in 2013 first quarter earnings were $631,000 in pre-tax merger related expenses due to the Somerset Hills acquisition.

•

Diluted earnings per share increased from $0.17 in the first quarter of 2013 to $0.20 for the first quarter of 2014.

•

The Company reported strong growth in both loans and non-interest bearing demand deposits in the first quarter of 2014. Loans totaling $2.50 billion at March 31, 2014 increased by $34.3 million from December 31, 2013, including a 3% increase in commercial loans secured by real estate. Non-interest bearing demand deposits at $630.5 million increased by $29.8 million, or 5%, from year-end 2013 and represented 23% of total deposits at March 31, 2014.

•

Non-performing assets totaled $22.6 million on March 31, 2014 compared to $25.8 million reported at March 31, 2013 and $17.4 million on December 31, 2013. In April, 2014, non-performing loans totaling $3.5 million were paid off requiring no additional specific reserve allocation or charge-offs.

•

As a result of improving loan quality from March 31, 2013 to March 31, 2014, the provision for loan and lease losses was reduced from $3.2 million in the first quarter of 2013 to $1.5 million in the first quarter of 2014.

•

The Company’s net interest margin has been stable for the last six quarters. In the first quarter of 2014 net interest margin was 3.72%, which was two basis points higher than the net interest margin for the fourth quarter of 2013 and one basis point higher than the first quarter of 2013.

•

The Somerset Hills acquisition, which was consummated on May 31, 2013, added six full service branches, $356.1 million in total assets, $10.4 million in investment securities, $246.5 million in loans (including $2.5 million in residential mortgages held for sale), and $311.8 million in deposits ($80.8 million in non-interest bearing demand deposits and $231.0 million in interest-bearing deposits) at fair value. For more information on the Somerset Hills acquisition, please see Note 2 – Acquisitions in this Quarterly Report on Form 10-Q.

Results of Operations

(First Quarter 2014 Compared to First Quarter 2013)

Net Income

Net income was $7.2 million in the first quarter of 2014 compared to net income of $5.1 million for the first quarter of 2013. Diluted earnings per share was $0.20 for the first quarter of 2014, compared to diluted earnings per share of $0.17 for the same period last year. Net interest income at $27.8 million for the first quarter of 2014 increased $3.9 million compared to the first quarter of 2013 due to a $3.4 million increase in interest income and a $548,000 reduction in interest expense. The increase in net interest income reflects an increase in interest earning assets resulting from the Somerset acquisition 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 first quarter of 2014 was $28.1 million, compared to $24.2 million for the first quarter of 2013. The net interest margin increased from 3.71% in the first quarter of 2013 to 3.72% in the first quarter of 2014 primarily as a result of a 15 basis point decrease in the yield on interest bearing liabilities partially offset by a 12 basis point decline in the yield on interest earning assets. The increase in the net interest margin was augmented by an increase in income earned on free funds (interest earning assets funded by non-interest bearing liabilities) resulting from an increase in average non-interest bearing deposits of $116.7 million. The components of net interest income will be discussed in greater detail below.

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


	For the Three Months Ended,								For the Three Months Ended,
	March 31, 2014								March 31, 2013
	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)	$	2,486,990		$	26,898		4.39	%	$	2,136,254		$	24,407		4.63	%
Taxable investment securities and other		465,159			2,546		2.19	%		404,582			1,719		1.70	%
Tax-exempt securities		76,562			728		3.80	%		71,241			662		3.71	%
Federal funds sold (B)		32,844			13		0.16	%		30,585			13		0.17	%

Total interest-earning assets		3,061,555			30,185		3.99	%		2,642,662			26,801		4.11	%

Noninterest-earning assets:
Allowance for loan and lease losses		(30,290	)							(29,485	)
Other assets		281,444								254,833

TOTAL ASSETS	$	3,312,709							$	2,868,010


Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Savings accounts	$	385,007		$	51		0.05	%	$	357,709		$	66		0.08	%
Interest-bearing transaction accounts		1,440,770			802		0.23	%		1,226,112			982		0.32	%
Time deposits		293,225			410		0.56	%		302,159			614		0.81	%
Borrowings		202,182			822		1.63	%		183,089			971		2.12	%

Total interest-bearing liabilities		2,321,184			2,085		0.36	%		2,069,069			2,633		0.51	%

Noninterest-bearing liabilities:
Demand deposits		618,944								502,214
Other liabilities		15,630								13,931
Stockholders’ equity		356,951								282,796

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,312,709							$	2,868,010

Net interest income/spread					28,100		3.63	%					24,168		3.60	%
Tax equivalent basis adjustment					255								232

NET INTEREST INCOME				$	27,845							$	23,936

Net interest margin (C)							3.72	%							3.71	%

(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 $26.8 million in the first quarter of 2013 to $30.2 million in the first quarter of 2014, an increase of $3.4 million, or 13%. The increase in interest income was primarily a result of a $350.7 million increase in average loans and leases partially offset by a 12 basis point decrease in the yield on interest earning assets. The increase in average loans and leases is due primarily to the acquisition of Somerset Hills’ loans and leases which totaled $246.5 million at the time of acquisition. The yield on average loans and leases at 4.39% in the first quarter of 2014 was 24 basis points lower than the first quarter of 2013. The yield on average taxable and tax exempt investment securities increased by 49 basis points and nine basis points, respectively, compared to the first quarter of 2013.

Total interest expense decreased from $2.6 million in the first quarter of 2013 to $2.1 million in the first quarter of 2014, a decrease of $548,000, or 21%. The cost of average interest-bearing liabilities decreased from 0.51% in the first quarter of 2013 to 0.36% in 2014. The decrease in yield was due primarily to the continuing low rate environment which resulted in a nine basis point reduction in the cost of interest-bearing transaction accounts, a 25 basis point reduction in the cost of time deposits and a 49 basis point reduction in the cost of borrowings. The cost of borrowings declined as a result of the extinguishment of $9 million in subordinated debentures in the second quarter of 2013 as well as restructurings of other long-term borrowings in 2013. From the first quarter of 2013 to the first quarter of 2014, average savings accounts and interest-bearing transaction accounts increased by $27.3 million and $214.7 million, respectively.

Provision for Loan and Lease Losses

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

In the first quarter of 2014, a $1.5 million provision for loan and lease losses was recorded, which was $1.7 million lower than the provision for the same period last year. During the first quarter of 2014, the Company charged off loans and leases of $2.5 million and recovered $665,000 in previously charged off loans and leases compared to $2.7 million and $219,000, respectively, during the same period in 2013. The lower provision resulted from lower net charge-offs during the quarter. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income at $4.1 million in the first quarter of 2014 decreased by $978,000 compared to the first quarter of 2013. Gains on sales and calls of securities totaled $2,000 and $505,000 in the first quarter of 2014 and 2013, respectively. Commissions and fees at $1.0 million in the first quarter of 2014 decreased $200,000 compared to the same period last year due primarily to a decrease in investment commission income. Income on bank owned life insurance at $360,000 increased $47,000 or 15% compared to the first quarter of 2013 primarily resulting from the addition of policies acquired in the Somerset Hills merger. Other income totaling $139,000 in the first quarter of 2014 was $359,000 lower than the same period in 2013. Within other income, the Company recorded no swap income and $83,000 in gains on residential mortgages in the first quarter of 2014 compared to $181,000 in swap income and $152,000 in gains on sales of mortgages in the first quarter of 2013.

Noninterest Expense

Noninterest expense totaling $19.7 million increased $1.5 million in the first quarter of 2014 from the first quarter of 2013. Salary and employee benefits at $10.8 million increased by $860,000, or 9%, primarily as a result of increased staffing levels from the six new Somerset Hills’ branches, as well as the retention of some administrative personnel from the Somerset Hills acquisition. Net occupancy expense at $2.6 million in the first quarter of 2014 increased $643,000 from the same period last year, due primarily to expenses relating to the six new branch locations acquired in the Somerset Hills acquisition and a $370,000 increase in snow removal costs. Furniture and equipment at $1.7 million increased $288,000 from the same period last year due primarily to the new branches previously mentioned and increased service contract expenses. Marketing expense at $386,000 in the first quarter of 2014 increased $98,000 compared to the first quarter of 2013 due primarily to the timing of marketing campaigns. Legal expense at $273,000 increased $31,000 compared to the same period last year. There were no long term debt prepayment fees or merger related expenses in the first quarter of 2014 compared to $526,000 and $631,000, respectively, in the first quarter of 2013. Other expenses at $3.0 million increased $661,000 compared to the first quarter of 2013, due primarily to an increase in professional fees, an increase in data processing expenses reflecting technological improvements, and an increase in donation expense. The Company’s efficiency ratio, a non-GAAP financial measure, was 60.90% in the first quarter of 2014, compared to 59.85% for the same period last year. The increase was primarily due to an increase in noninterest expense as adjusted partially offset by an increase in tax-equivalent revenue. The Company uses this ratio because it believes that the ratio provides a good comparison of period-to-period performance and because the ratio is widely accepted in the banking industry. The following table shows the calculation of the efficiency ratio for the periods presented:


	For the Three Months Ended March 31,
	2014			2013
	(dollars in thousands)
Calculation of efficiency ratio:
Total noninterest expense	$	19,742		$	18,227
Less:
Amortization of core deposit intangibles		(123	)		—
Other real estate owned and other repossessed asset expense		(15	)		(19	)
Long term debt prepayment fee					(526	)
Merger related expenses		—			(631	)
Provision for unfunded lending commitments		(11	)		135

Noninterest expense, as adjusted	$	19,593		$	17,186


Net interest income	$	27,845		$	23,936
Noninterest income		4,073			5,051

Total revenue		31,918			28,987
Plus: Tax-equivalent adjustment on municipal securities		255			232
Less:
Gains on sales of investment securities		(2	)		(505	)

Total revenue, as adjusted	$	32,171		$	28,714


Efficiency ratio		60.90	%		59.85	%

Income Tax Expense

The effective tax rate increased from 32.6% in the first quarter of 2013 to 33.0% in the first quarter of 2014 primarily as a result of increased taxable earnings because of a reduction of tax advantaged items as a percent of pre-tax income. Tax advantaged income items include interest income on tax-exempt securities and income on bank owned life insurance.

In first quarter 2014, the State of New York lowered its corporate franchise tax rate from 7.1% to 6.5% as well as changed some of its tax law governing nexus into the state. The Company has evaluated its deferred tax assets and liabilities in relation to these changes in tax law and has determined that there is no material change to its deferred tax assets and liabilities.

Financial Condition

The Company’s total assets increased $68.9 million from $3.32 billion at December 31, 2013, to $3.39 billion at March 31, 2014. Total loans were $2.50 billion, an increase of $34.3 million from $2.47 billion at December 31, 2013. Total deposits were $2.74 billion, an increase of $27.5 million from December 31, 2013.

Loans and Leases

Gross loans and leases at $2.50 billion increased by $34.3 million from December 31, 2013 primarily in the commercial loans secured by real estate category. Commercial loans secured by real estate increased $42.7 million or 3% from December 31, 2013 to March 31, 2014. Leases also increased $2.4 million or 6% resulting from increased demand for equipment financing and from broadening our market area. Commercial, industrial and other and consumer and home equity decreased $5.8 million and $3.3 million, respectively. Real Estate-Residential mortgages declined $2.3 million as the Company is selling a larger percentage of its residential mortgage originations than it has in past years. The increase in long-term rates since the beginning of 2013 has also caused the level of residential refinancings to decline. For more information on the loan portfolio, see Note 8 in Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Risk Elements

Non-performing assets increased from $17.5 million, or 0.53% of total assets, on December 31, 2013 to $22.7 million, or 0.67% of total assets, on March 31, 2014. Non-performing assets increased primarily in commercial loans secured by real estate, which increased by $3.9 million. However, in April 2014, non-performing commercial real estate loans totaling $3.5 million were paid off requiring no additional specific reserve allocation or charge-offs. Commercial loan non-accruals at March 31, 2014 included 3 loan relationships with balances $1.0 million or over, totaling $4.6 million, and 4 loan relationships between $500,000 and $1.0 million, totaling $2.6 million.

There were $451,000 in loans and leases past due ninety days or more and still accruing at March 31, 2014 compared to $2.0 million at December 31, 2013. These loans consisted of consumer loans which are generally placed on non-accrual and reviewed for charge-off when principal and interest payments are four months in arrears unless the obligations are well-secured and in the process of collection.

On March 31, 2014, the Company had $6.1 million in loans that were troubled debt restructurings and still accruing interest income compared to $10.3 million on December 31, 2013. Two troubled debt restructurings totaling $4.0 million were fully paid off in the first quarter of 2014. Troubled debt restructurings are those loans where the Company has granted concessions to the borrower in payment terms, either in rate or in term, as a result of the financial condition of the borrower.

On March 31, 2014, the Company had $24.7 million in impaired loans (consisting primarily of non-accrual and restructured loans and leases) compared to $24.6 million at year-end 2013. For more information on impaired loans and leases see Note 8 in Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. The impairment of the loans and leases is measured using the present value of future cash flows on certain impaired loans and is based on the fair value of the underlying collateral for collateral dependent loans and leases. Based on such evaluation, $1.3 million has been allocated as a portion of the allowance for loan and lease losses for impairment at March 31, 2014. At March 31, 2014, the Company also had $58.3 million in loans and leases that were rated substandard that were not classified as non-performing or impaired compared to $62.5 million at December 31, 2013.

There were no loans and leases at March 31, 2014, other than those designated non-performing, impaired or substandard, where the Company was aware of any credit conditions of any borrowers or obligors that would indicate a strong possibility of the borrowers not complying with present terms and conditions of repayment and which may result in such loans and leases being included as non-accrual, past due or renegotiated at a future date. The following table sets forth for the periods presented, the historical relationships among the allowance for loan and lease losses, the provision for loan and lease losses, the amount of loans and leases charged-off and the amount of loan and lease recoveries:


(dollars in thousands)	Three Months Ended March 31, 2014			Three Months Ended March 31, 2013			Year Ended December 31, 2013

Balance of the allowance at the beginning of the year	$	29,821		$	28,931		$	28,931

Loans and leases charged off:
Commercial, secured by real estate		1,647			749			2,026
Commercial, industrial and other		13			177			1,324
Leases		39			112			206
Real estate-mortgage		155			565			1,257
Real estate-construction		—			652			3,854
Home equity and consumer		601			455			1,624

Total loans charged off		2,455			2,710			10,291


Recoveries:
Commercial, secured by real estate		34			44			1,061
Commercial, industrial and other		591			30			260
Leases		—			88			121
Real estate-mortgage		6			1			99
Real estate-construction		—			7			14
Home equity and consumer		34			49			283

Total Recoveries		665			219			1,838

Net charge-offs:		1,790			2,491			8,453
Provision for loan and lease losses		1,489			3,183			9,343

Ending balance	$	29,520		$	29,623		$	29,821


Ratio of annualized net charge-offs to average loans and leases outstanding		0.29	%		0.47	%		0.36	%
Ratio of allowance at end of period as a percentage of period end total loans and leases		1.18	%		1.36	%		1.21	%

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

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

•

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

•

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

•

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

•

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

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 losses decreased $301,000 to $29.5 million at March 31, 2014 compared to December 31, 2013. The allowance for loan losses for commercial real estate declined due to the resolution or impending resolution of non-performing loans. The allowance in certain other categories declined as a result of a decline in charge-offs from prior periods.

Non-performing loans and leases increased from $16.9 million on December 31, 2013 to $22.0 million on March 31, 2014. The allowance for loan and lease losses as a percent of total loans was 1.18% of total loans on March 31, 2014, compared to 1.21% as of December 31, 2013. Excluding the impact of the loans from the Somerset Hills acquisition which are accounted for under acquisition accounting, the allowance for loan and lease losses as a percent of total loans and leases was 1.29% and 1.34% as of March 31, 2014 and December 31, 2013, respectively. Management believes, based on appraisals and estimated selling costs, that its non-performing loans and leases are adequately secured and reserves on these loans and leases are adequate. Based upon the process employed and giving recognition to all accompanying factors related to the loan and lease portfolio, management considers the allowance for loan and lease losses to be adequate at March 31, 2014.

Investment Securities

For detailed information on the composition and maturity distribution of the Company’s investment securities portfolio, see the Notes to Consolidated Financial Statements contained in this Form 10-Q. Total investment securities decreased from $532.9 million on December 31, 2013 to $525.2 million on March 31, 2014, a decrease of $7.6 million, or 1%. Runoff on the investment portfolio was used to help fund loan growth.

Deposits

Total deposits increased from $2.71 billion on December 31, 2013 to $2.74 billion on March 31, 2014, an increase of $27.5 million, or 1% primarily resulting from a $29.8 million or 5% increase in noninterest bearing deposits. Savings and interest-bearing transaction accounts increased $3.6 million, while time deposits decreased $5.9 million.

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 $10.9 million for the first three months of 2014 compared to $11.7 million for the same period in 2013.

•

Deposits. Lakeland can offer new products or change its rate structure in order to increase deposits. In the first three months of 2014, Lakeland’s deposits increased $27.5 million.

•

Sales of securities and overnight funds. At March 31, 2014, the Company had $429.8 million in securities designated “available for sale.” Of these securities, $310.8 million were pledged to secure public deposits and for other purposes required by applicable laws and regulations.

•

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

•

Overnight credit lines. As a member of the Federal Home Loan Bank of New York (FHLB), Lakeland has the ability to borrow overnight based on the market value of collateral pledged. Lakeland had no overnight borrowings from the FHLB on March 31, 2014. Lakeland also has overnight federal funds lines available for it to borrow up to $162.0 million. Lakeland had borrowings against these lines of $67.5 million at March 31, 2014. Lakeland may also borrow from the discount window of the Federal Reserve Bank of New York based on the market value of collateral pledged. Lakeland had no borrowings with the Federal Reserve Bank of New York as of March 31, 2014.

•

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

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

The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statement for the three months ended March 31, 2014 follows.

Cash and cash equivalents totaling $147.6 million on March 31, 2014, increased $44.9 million from December 31, 2013. Operating activities provided $10.9 million in net cash. Investing activities used $25.2 million in net cash, primarily reflecting an increase in loans and leases. Financing activities provided $59.3 million in net cash primarily reflecting the increase in deposits and short-term borrowings of $27.6 million and $34.0 million, respectively. The Company anticipates that it will have sufficient funds available to meet its current loan commitments and deposit maturities. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of March 31, 2014. 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	$	19,406	$	2,533	$	4,160	$	2,711	$	10,002
Benefit plan commitments		5,493		209		408		624		4,252
Remaining contractual maturities of time deposits		290,150		213,611		61,550		14,848		141
Subordinated debentures		41,238		—		—		—		41,238
Loan commitments		636,629		531,683		57,760		629		46,557
Other borrowings		119,000		30,000		30,000		49,000		10,000
Interest on other borrowings*		30,145		3,228		6,087		4,216		16,614
Standby letters of credit		10,129		9,590		459		—		80

Total	$	1,152,190	$	790,854	$	160,424	$	72,028	$	128,884

*	Includes interest on other borrowings and subordinated debentures at a weighted rate of 2.08%.

Capital Resources

Total stockholders’ equity increased from $351.4 million on December 31, 2013 to $359.5 million on March 31, 2014, an increase of $8.1 million, or 2%. Book value per common share increased to $9.96 on March 31, 2014 from $9.74 on December 31, 2013. The increase in stockholders’ equity from December 31, 2013 to March 31, 2014 was primarily due to $7.2 million in net income and $3.0 million in other comprehensive income on the Company’s available for sale securities portfolio, partially offset by the payment of dividends on common stock of $2.4 million.

The Company and Lakeland are subject to various regulatory capital requirements that are monitored by federal banking agencies. Failure to meet minimum capital requirements can lead to certain supervisory actions by regulators; any supervisory action could have a direct material adverse effect on the Company or Lakeland’s financial statements. Management believes, as of March 31, 2014, that the Company and Lakeland meet all capital adequacy requirements to which they are subject.

The capital ratios for the Company and Lakeland at March 31, 2014 are as follows:


Capital Ratios:	Tier 1 Capital to Total Average Assets Ratio March 31, 2014			Tier 1 Capital to Risk-Weighted Assets Ratio March 31, 2014			Total Capital to Risk-Weighted Assets Ratio March 31, 2014
The Company		9.01	%		11.76	%		13.01	%
Lakeland Bank		8.45	%		11.04	%		12.29	%
“Well capitalized” institution under FDIC Regulations		5.00	%		6.00	%		10.00	%

Basel III

On July 2, 2013, the FRB approved the final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Company. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments. On July 9, 2013, the FDIC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the FRB. The FDIC’s rule is identical in substance to the final rules issued by the FRB. The phase-in period for the final rules will begin 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 through January 1, 2019. The Company believes that as of March 31, 2014, Lakeland Bancorp and Lakeland Bank would meet all the requirements under the new rules on a fully phase-in basis, if such requirements were fully in effect.

Non-GAAP Financial Measures

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


(dollars in thousands, except per share amounts)	March 31, 2014			December 31, 2013
Calculation of tangible book value per common share
Total common stockholders’ equity at end of period - GAAP	$	359,539		$	351,424
Less:
Goodwill		109,974			109,974
Other identifiable intangible assets, net		2,301			2,424

Total tangible common stockholders’ equity at end of period - Non- GAAP	$	247,264		$	239,026


Shares outstanding at end of period		36,106			36,070


Book value per share - GAAP	$	9.96		$	9.74


Tangible book value per share - Non-GAAP	$	6.85		$	6.63


Calculation of tangible common equity to tangible assets
Total tangible common stockholders’ equity at end of period - Non- GAAP	$	247,264		$	239,026

Total assets at end of period	$	3,386,720		$	3,317,791
Less:
Goodwill		109,974			109,974
Other identifiable intangible assets, net		2,301			2,424

Total tangible assets at end of period - Non-GAAP	$	3,274,445		$	3,205,393


Common equity to assets - GAAP		10.62	%		10.59	%


Tangible common equity to tangible assets - Non-GAAP		7.55	%		7.46	%


	For the three months ended,
	March 31, 2014			March 31, 2013
Calculation of return on average tangible common equity
Net income - GAAP	$	7,163		$	5,108

Total average common stockholders’ equity	$	356,951		$	282,796
Less:
Average goodwill		109,974			87,111
Average other identifiable intangible assets, net		2,379			—

Total average tangible common stockholders’ equity - Non-GAAP	$	244,598		$	195,685


Return on average common stockholders’ equity - GAAP		8.14	%		7.33	%


Return on average tangible common stockholders’ equity - Non-GAAP		11.88	%		10.59	%

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 $110.8 million. The information provided for net interest income assumes that changes in interest rates of plus 200 basis points and minus 200 basis points change gradually in equal increments (“rate ramp”) over the twelve month period.


	Changes in interest rates
Rate Ramp	+200 bp			-200 bp
Asset/Liability Policy Limit		-5.0	%		-5.0	%

March 31, 2014		-3.5	%		-1.9	%

December 31, 2013		-3.9	%		-2.0	%

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


	Changes in interest rates
Rate Shock	+400 bp			+300 bp			+200 bp			+100 bp			-100 bp			-200 bp			-300 bp			-400 bp
Asset/Liability Policy Limit		-20.0	%		-15.0	%		-10.0	%		-5.0	%		-5.0	%		-10.0	%		-15.0	%		-20.0	%

March 31, 2014		-8.5	%		6.4	%		-4.1	%		-1.7	%		-4.5	%		-6.6	%		-7.7	%		-7.7	%

December 31, 2013		-11.2	%		-8.2	%		-5.1	%		-2.1	%		-4.8	%		-7.1	%		-8.2	%		-8.2	%

The base case for the following table is an estimate of the Company’s net portfolio value for the periods presented using current discount rates, and assuming the Company’s interest-sensitive assets and liabilities remain at period-end levels. The net portfolio value at March 31, 2014 (the base case) was $479.3 million. The information provided for the net portfolio value assumes fluctuations or “rate shocks” of plus 200 basis points and minus 200 basis points for changes in interest rates as shown in the table below. Rate shocks assume that current interest rates change immediately.


	Changes in interest rates
Rate Shock	+300 bp			+200 bp			+100 bp			-100 bp			-200 bp			-300 bp
Asset/Liability Policy Limit		-35.0	%		-25.0	%								-25.0	%		-35.0	%

March 31, 2014		-15.2	%		-9.8	%		-4.6	%		1.3	%		-2.5	%		-7.3	%

December 31, 2013		-17.8	%		-11.3	%		-5.0	%		1.6	%		-1.5	%		-6.0	%

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, 2013.

ITEM 4. Controls and Procedures

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

(b) Changes in internal controls over financial reporting. There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

Item 1.

Legal Proceedings

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, 2013.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		Not Applicable

Item 3. Defaults Upon Senior Securities		Not Applicable

Item 4. Mine Safety Disclosures		Not Applicable

Item 5. Other Information		Not Applicable

Item 6. Exhibits


31.1		Certification by Thomas J. Shara pursuant to Section 302 of the Sarbanes Oxley Act.

31.2		Certification by Joseph F. Hurley pursuant to Section 302 of the Sarbanes Oxley Act.

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

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

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

SIGNATURES

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

Lakeland Bancorp, Inc.

(Registrant)

/s/ Thomas J. Shara

Thomas J. Shara

President and Chief Executive Officer

/s/ Joseph F. Hurley

Joseph F. Hurley

Executive Vice President and

Chief Financial Officer

Date: May 12, 2014