Document


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 
 
June 30, 2018
 
OR
 
[   ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number
 000-17820
 
LAKELAND BANCORP, INC.
(Exact name of registrant as specified in its charter)
New Jersey          
 22-2953275
(State or other jurisdiction of
 incorporation  or organization) 
 (I.R.S. Employer
Identification No.)
 
 
250 Oak Ridge Road, Oak Ridge, New Jersey 
07438
 (Address of principal executive offices)
(Zip Code)
 
 
(973) 697-2000
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  [X]    No  [  ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act: (Check one):
Large accelerated filer [X]    Accelerated filer []    Non-accelerated filer [  ]  Smaller reporting company [  ]  Emerging growth company [  ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [  ]
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 July 27, 2018, there were 47,485,283 outstanding shares of Common Stock, no par value.

1

Table of Contents


LAKELAND BANCORP, INC.
Form 10-Q Index
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017
 
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)
 
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)
 
Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2018 and 2017 (unaudited)
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents


PART I. FINANCIAL INFORMATION
 
Item 1.        Financial Statements

3

Table of Contents


Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS 
 
June 30, 2018
 
December 31, 2017
 
(unaudited)
 
 
 
(dollars in thousands)
ASSETS
 
 
 
Cash
$
139,438

 
$
114,138

Interest-bearing deposits due from banks
3,374

 
28,795

Total cash and cash equivalents
142,812

 
142,933

Investment securities available for sale, at fair value
606,231

 
628,046

Equity securities, at fair value
16,798

 
18,089

Investment securities held to maturity; fair value of $155,316 at June 30, 2018 and $138,688 at December 31, 2017
158,832

 
139,685

Federal Home Loan Bank and other membership bank stock, at cost
16,235

 
12,576

Loans, net of deferred costs (fees)
4,277,539

 
4,152,720

Less: allowance for loan and lease losses
36,604

 
35,455

Net loans
4,240,935

 
4,117,265

Loans held for sale
1,692

 
456

Premises and equipment, net
50,409

 
50,313

Accrued interest receivable
14,612

 
14,416

Goodwill
136,433

 
136,433

Other identifiable intangible assets
2,052

 
2,362

Bank owned life insurance
108,952

 
107,489

Other assets
38,495

 
35,576

TOTAL ASSETS
$
5,534,488

 
$
5,405,639

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
LIABILITIES
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
967,911

 
$
967,335

Savings and interest-bearing transaction accounts
2,625,325

 
2,663,985

Time deposits $250 thousand and under
611,777

 
556,863

Time deposits over $250 thousand
195,006

 
180,565

Total deposits
4,400,019

 
4,368,748

Federal funds purchased and securities sold under agreements to repurchase
197,870

 
124,936

Other borrowings
196,376

 
192,011

Subordinated debentures
104,963

 
104,902

Other liabilities
37,396

 
31,920

TOTAL LIABILITIES
4,936,624

 
4,822,517

STOCKHOLDERS’ EQUITY
 
 
 
Common stock, no par value; authorized shares, 100,000,000 at June 30, 2018 and 70,000,000 at December 31, 2017; issued shares, 47,484,057 at June 30, 2018 and 47,353,864 at December 31, 2017
513,756

 
512,734

Retained earnings
95,586

 
72,737

Accumulated other comprehensive income
(11,478
)
 
(2,349
)
TOTAL STOCKHOLDERS’ EQUITY
597,864

 
583,122

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
5,534,488

 
$
5,405,639

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

4

Table of Contents


Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands, except per share data)
 
(in thousands, except per share data)
INTEREST INCOME
 
 
 
 
 
 
 
Loans, leases and fees
$
47,659

 
$
42,740

 
$
93,203

 
$
83,151

Federal funds sold and interest-bearing deposits with banks
145

 
132

 
311

 
408

Taxable investment securities and other
4,027

 
3,818

 
8,019

 
7,417

        Tax-exempt investment securities
429

 
522

 
872

 
1,032

TOTAL INTEREST INCOME
52,260

 
47,212

 
102,405

 
92,008

INTEREST EXPENSE
 
 
 
 
 
 
 
Deposits
6,501

 
3,784

 
12,256

 
7,118

Federal funds purchased and securities sold under agreements to repurchase
233

 
98

 
367

 
108

Other borrowings
2,033

 
1,909

 
4,053

 
4,038

TOTAL INTEREST EXPENSE
8,767

 
5,791

 
16,676

 
11,264

NET INTEREST INCOME
43,493

 
41,421

 
85,729

 
80,744

Provision for loan and lease losses
1,492

 
1,827

 
2,776

 
3,045

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES
42,001

 
39,594

 
82,953

 
77,699

NONINTEREST INCOME
 
 
 
 
 
 
 
Service charges on deposit accounts
2,545

 
2,674

 
5,156

 
5,129

Commissions and fees
1,410

 
1,135

 
2,682

 
2,291

Income on bank owned life insurance
711

 
500

 
1,430

 
926

Gains on sales of loans
300

 
471

 
546

 
869

Gains on sales of investment securities, net

 
(15
)
 

 
2,524

Other income
743

 
1,346

 
1,229

 
2,466

TOTAL NONINTEREST INCOME
5,709

 
6,111

 
11,043

 
14,205

NONINTEREST EXPENSE
 
 
 
 
 
 
 
Salaries and employee benefits
16,708

 
15,096

 
33,569

 
30,513

Net occupancy expense
2,603

 
2,507

 
5,341

 
5,343

Furniture and equipment
2,011

 
1,996

 
4,217

 
4,093

FDIC insurance expense
400

 
425

 
825

 
743

Stationery, supplies and postage
443

 
572

 
859

 
1,015

Marketing expense
456

 
508

 
817

 
909

Data processing expense
976

 
502

 
1,442

 
1,055

Telecommunications expense
462

 
372

 
883

 
776

ATM and debit card expense
558

 
517

 
1,068

 
958

Core deposit intangible amortization
153

 
190

 
310

 
385

Other real estate and repossessed asset expense
21

 
4

 
67

 
41

Long-term debt prepayment fee

 

 

 
2,828

Other expenses
2,783

 
2,677

 
5,313

 
5,177

TOTAL NONINTEREST EXPENSE
27,574

 
25,366

 
54,711

 
53,836

Income before provision for income taxes
20,136

 
20,339

 
39,285

 
38,068

Provision for income taxes
4,298

 
6,969

 
8,192

 
12,386

NET INCOME
$
15,838

 
$
13,370

 
$
31,093

 
$
25,682

PER SHARE OF COMMON STOCK
 
 
 
 
 
 
 
Basic earnings
$
0.33

 
$
0.28

 
$
0.65

 
$
0.54

Diluted earnings
$
0.33

 
$
0.28

 
$
0.65

 
$
0.53

Dividends
$
0.115

 
$
0.100

 
$
0.215

 
$
0.195

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

5

Table of Contents


Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
 
(in thousands)
NET INCOME
$
15,838

 
$
13,370

 
$
31,093

 
$
25,682

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
 
 
 
 
 
 
 
Unrealized (losses) gains on securities available for sale
(1,690
)
 
1,029

 
(7,422
)
 
1,763

Reclassification for securities losses (gains) included in net income

 
9

 

 
(1,640
)
Unrealized gains (losses) on derivatives
53

 
(121
)
 
336

 
(107
)
Other comprehensive (loss) income

(1,637
)
 
917

 
(7,086
)
 
16

TOTAL COMPREHENSIVE INCOME
$
14,201

 
$
14,287

 
$
24,007

 
$
25,698

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

6

Table of Contents


Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
For the Six Months Ended June 30, 2018 and 2017
 
 
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
 
(in thousands)
At January 1, 2017
$
510,861

 
$
38,590

 
$
593

 
$
550,044

Net income

 
25,682

 

 
25,682

Other comprehensive income, net of tax

 

 
16

 
16

Stock based compensation
1,566

 

 

 
1,566

Exercise of stock options
313

 

 

 
313

Retirement of restricted stock
(773
)
 

 

 
(773
)
Cash dividends, common stock

 
(9,303
)
 

 
(9,303
)
At June 30, 2017
$
511,967

 
$
54,969

 
$
609

 
$
567,545

 
 
 
 
 
 
 
 
At January 1, 2018
$
512,734

 
$
72,737

 
$
(2,349
)
 
$
583,122

Cumulative adjustment for adoption of ASU 2016-01

 
2,043

 
(2,043
)
 

January 1, 2018, as adjusted
512,734

 
74,780

 
(4,392
)
 
583,122

Net income

 
31,093

 

 
31,093

Other comprehensive loss, net of tax

 

 
(7,086
)
 
(7,086
)
Stock based compensation
1,459

 

 

 
1,459

Exercise of stock options
307

 

 

 
307

Retirement of restricted stock
(744
)
 

 

 
(744
)
Cash dividends, common stock

 
(10,287
)
 

 
(10,287
)
At June 30, 2018
$
513,756

 
$
95,586

 
$
(11,478
)
 
$
597,864

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

7

Table of Contents


Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
For the Six Months Ended June 30,
 
2018
 
2017
 
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
31,093

 
$
25,682

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net amortization of premiums, discounts and deferred loan fees and costs
2,022

 
2,413

Depreciation and amortization
2,693

 
2,080

Amortization of intangible assets
310

 
385

Provision for loan and lease losses
2,776

 
3,045

Loans originated for sale
(22,018
)
 
(27,197
)
Proceeds from sales of loans held for sale
21,328

 
28,931

Gains on sales of securities

 
(2,524
)
Change in market value of equity securities
(33
)
 

Gains on sales of loans held for sale
(546
)
 
(869
)
Gains on other real estate and other repossessed assets
(46
)
 
(500
)
Gains on sales of premises and equipment

 
(672
)
Long-term debt prepayment penalty

 
2,828

Stock-based compensation
1,459

 
1,566

Excess tax benefits
313

 
582

Increase in other assets
(1,354
)
 
(4,672
)
Increase in other liabilities
5,900

 
1,988

NET CASH PROVIDED BY OPERATING ACTIVITIES
43,897

 
33,066

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from repayments and maturities of available for sale securities
43,026

 
43,726

Proceeds from repayments and maturities of held to maturity securities
13,720

 
18,624

Proceeds from sales of equity securities
1,734

 

Proceeds from sales of available for sale securities

 
4,484

Purchase of available for sale securities
(32,800
)
 
(113,724
)
Purchase of held to maturity securities
(33,235
)
 
(9,754
)
Purchase of equity securities
(409
)
 

Purchase of bank owned life insurance

 
(16,000
)
Proceeds from redemptions of Federal Home Loan Bank stock
2,939

 
3,477

Purchases of Federal Home Loan Bank stock
(6,598
)
 
(7,278
)
Net increase in loans and leases
(128,718
)
 
(186,328
)
Proceeds from sales of other real estate and repossessed assets
918

 
3,583

Proceeds from dispositions and sales of premises and equipment

 
1,262

Purchases of premises and equipment
(2,746
)
 
(1,324
)
NET CASH USED IN INVESTING ACTIVITIES
(142,169
)
 
(259,252
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in deposits
31,504

 
134,719

Increase in federal funds purchased and securities sold under agreements to repurchase
72,934

 
62,133

Proceeds from other borrowings
39,437

 
164,036

Repayments of other borrowings
(35,000
)
 
(115,058
)
Exercise of stock options
307

 
313

Retirement of restricted stock
(744
)
 
(773
)
Dividends paid
(10,287
)
 
(9,303
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
98,151

 
236,067

Net (decrease) increase in cash and cash equivalents
(121
)
 
9,881

Cash and cash equivalents, beginning of period
142,933

 
175,801

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
142,812

 
$
185,682


8

Table of Contents


 
For the Six Months Ended June 30,
 
2018
 
2017
 
(in thousands)
Supplemental schedule of non-cash investing and financing activities:
 
 
 
Cash paid during the period for income taxes
$
2,909

 
$
11,703

Cash paid during the period for interest
16,153

 
11,310

Transfer of loans and leases into other repossessed assets and other real estate owned
2,214

 
3,425

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

9

Table of Contents


Lakeland Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
This quarterly report presents the consolidated financial statements of Lakeland Bancorp, Inc. and its subsidiaries, including Lakeland Bank (“Lakeland”) and the Bank’s wholly owned subsidiaries (collectively, the “Company”). The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and predominant practices within the banking industry. The Company’s unaudited interim financial statements reflect all adjustments, such as normal recurring accruals that are, in the opinion of management, necessary for the fair presentation of the results of the interim periods. The results of operations for the six months ended June 30, 2018 do not necessarily indicate the results that the Company will achieve for all of 2018.
Certain information and footnote disclosures required under U.S. GAAP have been condensed or omitted, as permitted by rules and regulations of the Securities and Exchange Commission. These unaudited interim financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes that are presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Certain reclassifications have been made in the consolidated financial statements to conform with current year classifications.
NOTE 2 – REVENUE RECOGNITION
The Company’s primary source of revenue is interest income generated from loans, leases and investment securities. Interest income is recognized according to the terms of the financial instrument agreement over the life of the loan, lease or investment security unless it is determined that the counterparty is unable to continue making interest payments. Interest income also includes prepaid interest fees from commercial customers, which approximates the interest foregone on the balance of the loan prepaid.
The Company’s additional source of income, also referred to as noninterest income, is generated from deposit related fees, interchange fees, loan and lease fees, merchant fees, loan sales and other miscellaneous income and is largely based on contracts with customers. In these cases, the Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The Company considers a customer to be any party to which the Company will provide goods or services that are an output of the Company’s ordinary activities in exchange for consideration. There is little seasonality with regards to revenue from contracts with customers and all inter-company revenue is eliminated when the Company’s financial statements are consolidated.
Generally, the Company enters into contracts with customers that are short-term in nature where the performance obligations are fulfilled and payment is processed at the same time. Such examples include revenue related to merchant fees, interchange fees and investment services income. In addition, revenue generated from existing customer relationships such as deposit accounts are also considered short-term in nature, because the relationship may be terminated at any time and payment is processed at the time performance obligations are fulfilled. As a result, the Company does not have contract assets, contract liabilities or related receivable accounts for contracts with customers. In cases where collectability is a concern, the Company does not record revenue.
Generally, the pricing of transactions between the Company and each customer is either (i) established within a legally enforceable contract between the two parties, as is the case with the loan sales, or (ii) disclosed to the customer at a specific point in time, as is the case when a deposit account is opened or before a new loan is underwritten. Fees are usually fixed at a specific amount or as a percentage of a transaction amount. No judgment or estimates by management are required to record revenue related to these transactions and pricing is clearly identified within these contracts.
The Company primarily operates in one geographic region, Northern and Central New Jersey and contiguous areas. Therefore, all significant operating decisions are based upon analysis of the Company as one operating segment or unit.
We disaggregate our revenue from contracts with customers by contract-type and timing of revenue recognition, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Noninterest income not generated from customers during the Company’s ordinary activities primarily relates to mortgage servicing rights, gains/losses on the sale of investment securities, gains/losses on the sale of other real estate owned, gains/losses

10

Table of Contents


on the sale of property, plant and equipment, and income from bank owned life insurance. The following table sets forth the components of noninterest income for the three and six months ended June 30, 2018 and 2017:

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Deposit Related Fees and Charges
 
 
 
 
 
 
 
  Debit card interchange income
$
1,277

 
$
1,146

 
$
2,395


$
2,136

  Overdraft charges
900

 
1,145

 
2,009


2,298

  ATM service charges
217

 
199

 
407


361

  Demand deposit fees and charges
121

 
158

 
279


294

  Savings service charges
30

 
26

 
66


40

Total
2,545

 
2,674

 
5,156


5,129

Commissions and Fees
 
 
 
 



  Loan and lease fees
363

 
199

 
685


435

  Wire transfer charges
274

 
246

 
522


473

  Investment services income
311

 
296

 
539


537

  Merchant fees
174

 
163

 
390


405

  Commissions from sales of checks
112

 
116

 
220


233

  Safe deposit income
104

 
63

 
188


127

  Other income
65

 
44

 
128


67

Total
1,403

 
1,127

 
2,672


2,277

Gains on Sale of Loans
300

 
471

 
546


869

Other Income
 
 
 
 



  Gains on customer swap transactions
527

 
455

 
859


814

  Title insurance income
73

 
75

 
122


103

  Other income
58

 
377

 
155


415

Total
658

 
907

 
1,136


1,332

Revenue not from contracts with customers
803

 
932

 
1,533


4,598

Total Noninterest Income
5,709

 
6,111

 
11,043


14,205

Timing of Revenue Recognition
 
 
 
 



  Products and services transferred at a point in time
4,888

 
5,164

 
9,473


9,577

  Products and services transferred over time
18

 
15

 
37


30

  Revenue not from contracts with customers
803

 
932

 
1,533


4,598

Total Noninterest Income
$
5,709

 
$
6,111

 
$
11,043


$
14,205


NOTE 3 – EARNINGS PER SHARE
The following schedule shows the Company’s earnings per share calculations for the periods presented:

11

Table of Contents


 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands, except per share data)
 
(in thousands, except per share data)
Net income available to common shareholders
$
15,838

 
$
13,370

 
$
31,093

 
$
25,682

Less: earnings allocated to participating securities
146

 
119

 
287

 
239

Net income allocated to common shareholders
$
15,692

 
$
13,251

 
$
30,806

 
$
25,443

Weighted average number of common shares outstanding - basic
47,600

 
47,465

 
47,552

 
47,410

Share-based plans
170

 
209

 
201

 
236

Weighted average number of common shares outstanding - diluted
47,770

 
47,674

 
47,753

 
47,646

Basic earnings per share
$
0.33

 
$
0.28

 
$
0.65

 
$
0.54

Diluted earnings per share
$
0.33

 
$
0.28

 
$
0.65

 
$
0.53

There were no antidilutive options to purchase common stock excluded from the computation for the three and six months ended June 30, 2018 and 2017.
NOTE 4 – INVESTMENT SECURITIES
 
June 30, 2018
 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in thousands)
 
(in thousands)
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and U.S. government agencies
$
149,859

 
$

 
$
(3,514
)
 
$
146,345

 
$
148,968

 
$
78

 
$
(1,791
)
 
$
147,255

Mortgage-backed securities, residential
404,880

 
105

 
(12,270
)
 
392,715

 
419,538

 
479

 
(5,763
)
 
414,254

Mortgage-backed securities, multifamily
13,181

 

 
(307
)
 
12,874

 
10,133

 
7

 
(63
)
 
10,077

Obligations of states and political subdivisions
49,898

 
167

 
(843
)
 
49,222

 
51,289

 
448

 
(417
)
 
51,320

Debt securities
5,000

 
75

 

 
5,075

 
5,000

 
140

 

 
5,140

 
$
622,818

 
$
347

 
$
(16,934
)
 
$
606,231

 
$
634,928

 
$
1,152

 
$
(8,034
)
 
$
628,046

 
June 30, 2018
 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in thousands)
 
(in thousands)
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
$
38,437

 
$

 
$
(943
)
 
$
37,494

 
$
33,415

 
$
24

 
$
(402
)
 
$
33,037

Mortgage-backed securities, residential
73,538

 
127

 
(2,355
)
 
71,310

 
54,991

 
249

 
(978
)
 
54,262

Mortgage-backed securities, multifamily
1,905

 

 
(56
)
 
1,849

 
1,957

 

 
(22
)
 
1,935

Obligations of states and political subdivisions
39,452

 
133

 
(421
)
 
39,164

 
43,318

 
306

 
(188
)
 
43,436

Debt securities
5,500

 

 
(1
)
 
5,499

 
6,004

 
14

 

 
6,018

 
$
158,832

 
$
260

 
$
(3,776
)
 
$
155,316

 
$
139,685

 
$
593

 
$
(1,590
)
 
$
138,688


12

Table of Contents


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):
 
Available for Sale
 
Held to Maturity
June 30, 2018
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
21,258

 
$
21,170

 
$
13,063

 
$
13,074

Due after one year through five years
114,026

 
111,549

 
41,523

 
40,979

Due after five years through ten years
41,818

 
40,686

 
25,533

 
24,926

Due after ten years
27,655

 
27,237

 
3,270

 
3,178

 
204,757

 
200,642

 
83,389

 
82,157

Mortgage-backed securities
418,061

 
405,589

 
75,443

 
73,159

Total securities
$
622,818

 
$
606,231

 
$
158,832

 
$
155,316

The following table shows proceeds from sales of securities and gross gains and losses on sales of securities for the periods indicated (in thousands):
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Sale proceeds
$

 
$

 
$

 
$
4,499

Gross gains

 

 

 
2,539

Gross losses

 
(15
)
 

 
(15
)
There were no other-than-temporary impairments during the six months ended June 30, 2018 or 2017.
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 $363.9 million and $400.4 million at June 30, 2018 and December 31, 2017, respectively, were pledged to secure public deposits and for other purposes required by applicable laws and regulations.

13

Table of Contents


The following table indicates the length of time individual securities have been in a continuous unrealized loss position for the periods presented:
 
Less Than 12 Months
 
12 Months or Longer
 
Total
June 30, 2018
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Number of
Securities
 
Fair Value
 
Unrealized
Losses
 
(dollars in thousands)
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and U.S. government agencies
$
92,272

 
$
1,781

 
$
54,073

 
$
1,733

 
28

 
$
146,345

 
$
3,514

Mortgage-backed securities, residential
213,396

 
5,296

 
161,111

 
6,974

 
142

 
374,507

 
12,270

Mortgage-backed securities, multifamily
7,872

 
189

 
5,002

 
118

 
3

 
12,874

 
307

Obligations of states and political subdivisions
20,367

 
265

 
12,656

 
578

 
60

 
33,023

 
843

 
$
333,907

 
$
7,531

 
$
232,842

 
$
9,403

 
233

 
$
566,749

 
$
16,934

HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
$
30,948

 
$
464

 
$
6,546

 
$
479

 
7

 
$
37,494

 
$
943

Mortgage-backed securities, residential
45,533

 
1,302

 
19,894

 
1,053

 
35

 
65,427

 
2,355

Mortgage-backed securities, multifamily
1,849

 
56

 

 

 
2

 
1,849

 
56

Obligations of states and political subdivisions
15,394

 
199

 
5,894

 
222

 
33

 
21,288

 
421

Debt securities
4,000

 
1

 

 

 
1

 
4,000

 
1

 
$
97,724

 
$
2,022

 
$
32,334

 
$
1,754

 
78

 
$
130,058

 
$
3,776

 
Less Than 12 Months
 
12 Months or Longer
 
Total
December 31, 2017
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Number of
Securities
 
Fair Value
 
Unrealized
Losses
 
(dollars in thousands)
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and U.S. government agencies
$
80,391

 
$
646

 
$
54,769

 
$
1,145

 
27

 
$
135,160

 
$
1,791

Mortgage-backed securities, residential
199,387

 
1,723

 
157,739

 
4,040

 
118

 
357,126

 
5,763

Mortgage-backed securities, multifamily

 

 
5,088

 
63

 
1

 
5,088

 
63

Obligations of states and political subdivisions
9,612

 
77

 
12,970

 
340

 
39

 
22,582

 
417

 
$
289,390

 
$
2,446

 
$
230,566

 
$
5,588

 
185

 
$
519,956

 
$
8,034

HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
$
15,371

 
$
95

 
$
6,720

 
$
307

 
4

 
$
22,091

 
$
402

Mortgage-backed securities, residential
26,090

 
426

 
19,203

 
552

 
25

 
45,293

 
978

Mortgage-backed securities, multifamily
1,935

 
22

 

 

 
2

 
1,935

 
22

Obligations of states and political subdivisions
15,353

 
56

 
6,028

 
132

 
23

 
21,381

 
188

 
$
58,749

 
$
599

 
$
31,951

 
$
991

 
54

 
$
90,700

 
$
1,590

Management has evaluated the securities in the above table and has concluded that none of the securities are other-than-temporarily impaired. The fair values being below cost is due to interest rate movements and is deemed temporary. All investment securities are evaluated on a periodic basis to identify any factors that would require a further analysis. In evaluating the Company’s securities, management considers the following items:
The Company’s ability and intent to hold the securities, including an evaluation of the need to sell the security to meet certain liquidity measures, or whether the Company has sufficient levels of cash to hold the identified security in order to recover the entire amortized cost of the security;
The financial condition of the underlying issuer;

14

Table of Contents


The credit ratings of the underlying issuer and if any changes in the credit rating have occurred;
The length of time the security’s fair value has been less than amortized cost; and
Adverse conditions related to the security or its issuer if the issuer has failed to make scheduled payments or other factors.
If the above factors indicate that an additional analysis is required, management will perform and consider the results of a discounted cash flow analysis.
Equity securities at fair value
The Company has an equity securities portfolio which consists of investments in other financial institutions for market appreciation purposes, and investments in Community Reinvestment funds. The market value of these investments was $16.8 million and $18.1 million as of June 30, 2018 and December 31, 2017, respectively. Upon implementation of Accounting Standards Update 2016-01 - Financial Instruments ("ASU 2016-01"), the Company made a cumulative adjustment of $2.0 million from other comprehensive income to retained earnings as of January 1, 2018. In the first six months of 2018, the Company recorded $33,000 in market value gain on equity securities in other income.
As of June 30, 2018, the equity investments in other financial institutions and Community Reinvestment funds had a market value of $3.7 million and $13.1 million, respectively.
The Community Reinvestment funds include $9.5 million that are invested in government guaranteed loans, mortgage-backed securities, small business loans and other instruments supporting affordable housing and economic development. The Company may redeem these funds at the net asset value calculated at the end of the current business day less any unpaid management fees. 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 these investments.
The investment funds also include $3.5 million that are primarily invested in community development loans that are guaranteed by the Small Business Administration (“SBA”). Because the funds are primarily guaranteed by the federal government there are minimal changes in market value between accounting periods. These funds can be redeemed with 60 days notice at the net asset value less unpaid management fees with the approval of the fund manager. As of June 30, 2018, the net amortized cost equaled the market value of the investment. There are no unfunded commitments related to these investments.
NOTE 5 – LOANS, LEASES AND OTHER REAL ESTATE
The following sets forth the composition of the Company’s loan and lease portfolio:
 
June 30,
2018
 
December 31,
2017
 
(in thousands)
Commercial, secured by real estate
$
2,925,104

 
$
2,831,184

Commercial, industrial and other
339,974

 
340,400

Leases
82,006

 
75,039

Real estate - residential mortgage
321,717

 
322,880

Real estate - construction
297,357

 
264,908

Home equity and consumer
315,144

 
322,269

Total loans and leases
4,281,302

 
4,156,680

Less: deferred fees
(3,763
)
 
(3,960
)
Loans and leases, net of deferred fees
$
4,277,539

 
$
4,152,720

At June 30, 2018 and December 31, 2017, home equity and consumer loans included overdraft deposit balances of $356,000 and $966,000, respectively. At June 30, 2018 and December 31, 2017, the Company had $1.2 billion and $1.1 billion, respectively, in loans pledged for actual and potential borrowings at the Federal Home Loan Bank of New York (“FHLB”).
Purchased Credit Impaired Loans
The carrying value of loans acquired in the Pascack Community Bank ("Pascack") acquisition and accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” was $175,000 at

15

Table of Contents


June 30, 2018, which was $642,000 less than the balance at the time of acquisition on January 7, 2016. In first quarter 2017, one of the Pascack purchased credit impaired (“PCI”) loans totaling $127,000 experienced further credit deterioration and was fully charged off. In the second quarter of 2017, a loan with a net value of $218,000 was fully paid off. The carrying value of loans acquired in the Harmony Bank ("Harmony") acquisition was $511,000 at June 30, 2018 which was $258,000 less than the balance at acquisition date on July 1, 2016. In the second quarter of 2017, a loan with a net value of $247,000 was fully paid off.
The following table presents changes in the accretable yield for PCI loans:
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(in thousands)
 
(in thousands)
Balance, beginning of period
$
113

 
$
180

 
$
129

 
$
145

Acquisitions

 

 

 

Accretion
(43
)
 
(47
)
 
(87
)
 
(98
)
Net reclassification non-accretable difference
30

 

 
58

 
86

Balance, end of period
$
100

 
$
133

 
$
100

 
$
133

Non-Performing Assets and Past Due Loans
The following schedule sets forth certain information regarding the Company’s non-performing assets and its accruing troubled debt restructurings, excluding PCI loans:
 
June 30,
2018
 
December 31,
2017
 
(in thousands)
Commercial, secured by real estate
$
7,353

 
$
5,890

Commercial, industrial and other
1,171

 
184

Leases
834

 
144

Real estate - residential mortgage
2,992

 
3,860

Real estate - construction

 
1,472

Home equity and consumer
1,917

 
2,105

Total non-accrual loans and leases
$
14,267

 
$
13,655

Other real estate and other repossessed assets
2,184

 
843

TOTAL NON-PERFORMING ASSETS
$
16,451

 
$
14,498

Troubled debt restructurings, still accruing
$
7,926

 
$
11,462

Non-accrual loans included $4.9 million and $2.7 million of troubled debt restructurings for the periods ended June 30, 2018 and December 31, 2017, respectively. Non-accrual real estate-construction loans declined from December 31, 2017 to June 30, 2018 due to a foreclosure in a property which resulted in the property moving into other real estate at the end of June 2018. At June 30, 2018 and December 31, 2017, the Company had $2.3 million and $2.7 million, respectively, in residential mortgages and consumer home equity loans that were in the process of foreclosure.

16

Table of Contents


An age analysis of past due loans, segregated by class of loans as of June 30, 2018 and December 31, 2017, is as follows:
 
30-59 Days Past Due
 
60-89 Days Past Due
 
Greater Than 89 Days Past Due
 
Total Past Due
 
Current
 
Total Loans and Leases
 
Recorded Investment Greater than 89 Days and Still Accruing
 
(in thousands)
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
$
3,727

 
$
826

 
$
3,124

 
$
7,677

 
$
2,917,427

 
$
2,925,104

 
$

Commercial, industrial and other
119

 

 
1,100

 
1,219

 
338,755

 
339,974

 

Leases
129

 
77

 
834

 
1,040

 
80,966

 
82,006

 

Real estate - residential mortgage
1,506

 
311

 
2,992

 
4,809

 
316,908

 
321,717

 

Real estate - construction

 

 

 

 
297,357

 
297,357

 

Home equity and consumer
1,202

 
3

 
1,918

 
3,123

 
312,021

 
315,144

 

 
$
6,683

 
$
1,217

 
$
9,968

 
$
17,868

 
$
4,263,434

 
$
4,281,302

 
$

December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
$
3,663

 
$
1,082

 
$
3,817

 
$
8,562

 
$
2,822,622

 
$
2,831,184

 
$

Commercial, industrial and other
80

 
121

 
56

 
257

 
340,143

 
340,400

 

Leases
496

 
139

 
144

 
779

 
74,260

 
75,039

 

Real estate - residential mortgage
939

 
908

 
3,137

 
4,984

 
317,896

 
322,880

 

Real estate - construction

 

 
1,472

 
1,472

 
263,436

 
264,908

 

Home equity and consumer
1,258

 
310

 
1,386

 
2,954

 
319,315

 
322,269

 
200

 
$
6,436

 
$
2,560

 
$
10,012

 
$
19,008

 
$
4,137,672

 
$
4,156,680

 
$
200


17

Table of Contents


Impaired Loans
The Company defines impaired loans as all non-accrual loans and leases with recorded investments of $500,000 or greater. Impaired loans also include all loans that have been modified in troubled debt restructurings. Impaired loans as of June 30, 2018 and December 31, 2017 are as follows:
June 30, 2018
Recorded
Investment in
Impaired Loans
 
Contractual
Unpaid
Principal
Balance
 
Specific
Allowance
 
Average
Investment in
Impaired Loans
 
Interest
Income
Recognized
 
(in thousands)
Loans without specific allowance:
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
$
7,398

 
$
7,715

 
$

 
$
6,730

 
$
89

Commercial, industrial and other
1,525

 
1,526

 

 
1,381

 
10

Leases

 

 

 

 

Real estate - residential mortgage

 

 

 
478

 
4

Real estate - construction

 

 

 
1,463

 

Home equity and consumer

 

 

 

 

Loans with specific allowance:
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
7,787

 
8,129

 
452

 
8,178

 
172

Commercial, industrial and other
228

 
228

 
8

 
228

 
6

Leases
663

 
663

 
393

 
279

 

Real estate - residential mortgage
757

 
902

 
4

 
557

 
10

Real estate - construction

 

 

 

 

Home equity and consumer
946

 
977

 
8

 
951

 
17

Total:
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
$
15,185

 
$
15,844

 
$
452

 
$
14,908

 
$
261

Commercial, industrial and other
1,753

 
1,754

 
8

 
1,609

 
16

Leases
663

 
663

 
393

 
279

 

Real estate - residential mortgage
757

 
902

 
4

 
1,035

 
14

Real estate - construction

 

 

 
1,463

 

Home equity and consumer
946

 
977

 
8

 
951

 
17

 
$
19,304

 
$
20,140

 
$
865

 
$
20,245

 
$
308


18

Table of Contents


December 31, 2017
Recorded
Investment in
Impaired Loans
 
Contractual
Unpaid
Principal
Balance
 
Specific
Allowance
 
Average
Investment in
Impaired Loans
 
Interest
Income
Recognized
 
(in thousands)
Loans without specific allowance:
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
$
12,155

 
$
12,497

 

 
$
12,774

 
$
366

Commercial, industrial and other
618

 
618

 

 
618

 
25

Leases

 

 

 

 

Real estate - residential mortgage
963

 
980

 

 
996

 
15

Real estate - construction
1,471

 
1,471

 

 
1,471

 

Home equity and consumer

 

 

 
6

 

Loans with specific allowance:
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
5,381

 
5,721

 
454

 
5,029

 
206

Commercial, industrial and other
164

 
164

 
9

 
283

 
14

Leases
65

 
65

 
30

 
29

 

Real estate - residential mortgage
781

 
919

 
4

 
940

 
27

Real estate - construction

 

 

 

 

Home equity and consumer
993

 
1,026

 
8

 
1,090

 
52

Total:
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
$
17,536

 
$
18,218

 
$
454

 
$
17,803

 
$
572

Commercial, industrial and other
782

 
782

 
9

 
901

 
39

Leases
65

 
65

 
30

 
29

 

Real estate - residential mortgage
1,744

 
1,899

 
4

 
1,936

 
42

Real estate - construction
1,471

 
1,471

 

 
1,471

 

Home equity and consumer
993

 
1,026

 
8

 
1,096

 
52

 
$
22,591

 
$
23,461

 
$
505

 
$
23,236

 
$
705

Interest income recognized on impaired loans was $308,000 and $336,000 for the six months ended June 30, 2018 and 2017, respectively. Interest that would have been accrued on impaired loans during the first six months of 2018 and 2017 had the loans been performing under original terms would have been $566,000 and $813,000, respectively.

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

19

Table of Contents


The following table shows the Company’s commercial loan portfolio as of June 30, 2018 and December 31, 2017, by the risk ratings discussed above (in thousands):
June 30, 2018
Commercial,
Secured by
Real Estate
 
Commercial,
Industrial
and Other
 
Real Estate -
Construction
RISK RATING
 
 
 
 
 
1
$

 
$
331

 
$

2

 
16,766

 

3
67,445

 
44,690

 

4
907,615

 
99,290

 
23,012

5
1,841,406

 
149,975

 
262,623

5W - Watch
43,375

 
14,796

 
10,632

6 - Other assets especially mentioned
40,607

 
5,509

 

7 - Substandard
24,656

 
8,617

 
1,090

8 - Doubtful

 

 

9 - Loss

 

 

Total
$
2,925,104

 
$
339,974

 
$
297,357

December 31, 2017
Commercial,
Secured by
Real Estate
 
Commercial,
Industrial
and Other
 
Real Estate -
Construction
RISK RATING
 
 
 
 
 
1
$

 
$
392

 
$

2

 
26,968

 

3
76,824

 
35,950

 

4
862,537

 
96,426

 
15,502

5
1,779,908

 
150,928

 
246,806

5W - Watch
47,178

 
8,779

 

6 - Other assets especially mentioned
40,245

 
8,670

 

7 - Substandard
24,492

 
12,287

 
2,600

8 - Doubtful

 

 

9 - Loss

 

 

Total
$
2,831,184

 
$
340,400

 
$
264,908

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

20

Table of Contents



Allowance for Loan and Lease Losses
The following table details activity in the allowance for loan and lease losses by portfolio segment for the three and six months ended June 30, 2018 and 2017:
Three Months Ended June 30, 2018
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
$
25,817

 
$
1,768

 
$
1,042

 
$
1,589

 
$
2,932

 
$
2,496

 
$
35,644

Charge-offs
(210
)
 
(289
)
 
(72
)
 

 
(248
)
 
(144
)
 
(963
)
Recoveries
274

 
76

 
3

 
3

 
3

 
72

 
431

Provision
293

 
457

 
291

 
(7
)
 
376

 
82

 
1,492

Ending Balance
$
26,174

 
$
2,012

 
$
1,264

 
$
1,585

 
$
3,063

 
$
2,506

 
$
36,604

Three Months Ended June 30, 2017
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
$
22,083

 
$
1,792

 
$
502

 
$
1,825

 
$
2,378

 
$
3,010

 
$
31,590

Charge-offs
(83
)
 
(71
)
 
(120
)
 
(169
)
 

 
(427
)
 
(870
)
Recoveries
145

 
27

 
28

 

 
5

 
71

 
276

Provision
1,199

 
(60
)
 
119

 
98

 
213

 
258

 
1,827

Ending Balance
$
23,344

 
$
1,688

 
$
529

 
$
1,754

 
$
2,596

 
$
2,912

 
$
32,823

Six Months Ended June 30, 2018
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
$
25,704

 
$
2,313

 
$
630

 
$
1,557

 
$
2,731

 
$
2,520

 
$
35,455

Charge-offs
(232
)
 
(1,301
)
 
(95
)
 
(93
)
 
(248
)
 
(244
)
 
(2,213
)
Recoveries
305

 
96

 
5

 
5

 
8

 
167

 
586

Provision
397

 
904

 
724

 
116

 
572

 
63

 
2,776

Ending Balance
$
26,174

 
$
2,012

 
$
1,264

 
$
1,585

 
$
3,063

 
$
2,506

 
$
36,604

Six Months Ended June 30, 2017
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
$
21,223

 
$
1,723

 
$
548

 
$
1,964

 
$
2,352

 
$
3,435

 
$
31,245

Charge-offs
(303
)
 
(234
)
 
(163
)
 
(310
)
 
(609
)
 
(611
)
 
(2,230
)
Recoveries
364

 
122

 
32

 

 
20

 
225

 
763

Provision
2,060

 
77

 
112

 
100

 
833

 
(137
)
 
3,045

Ending Balance
$
23,344

 
$
1,688

 
$
529

 
$
1,754

 
$
2,596

 
$
2,912

 
$
32,823



21

Table of Contents


Loans receivable summarized by portfolio segment and impairment method are as follows:
June 30, 2018
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
$
15,185

 
$
1,753

 
$
663

 
$
757

 
$

 
$
946

 
$
19,304

Ending Balance: Collectively evaluated for impairment
2,909,234

 
338,221

 
81,343

 
320,960

 
297,357

 
314,197

 
4,261,312

Ending Balance: Loans acquired with deteriorated credit quality
685

 

 

 

 

 
1

 
686

Ending Balance (1)
$
2,925,104

 
$
339,974

 
$
82,006

 
$
321,717

 
$
297,357

 
$
315,144

 
$
4,281,302

December 31, 2017
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
$
17,536

 
$
782

 
$
65

 
$
1,744

 
$
1,471

 
$
993

 
$
22,591

Ending Balance: Collectively evaluated for impairment
2,812,941

 
339,618

 
74,974

 
321,136

 
263,437

 
321,273

 
4,133,379

Ending balance: Loans acquired with deteriorated credit quality
707

 

 

 

 

 
3

 
710

Ending Balance (1)
$
2,831,184

 
$
340,400

 
$
75,039

 
$
322,880

 
$
264,908

 
$
322,269

 
$
4,156,680

(1)
Excludes deferred fees
The allowance for loan and lease losses is summarized by portfolio segment and impairment classification as follows:
June 30, 2018
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
$
452

 
$
8

 
$
393

 
$
4

 
$

 
$
8

 
$
865

Ending Balance: Collectively evaluated for impairment
25,722

 
2,004

 
871

 
1,581

 
3,063

 
2,498

 
35,739

Ending Balance
$
26,174

 
$
2,012

 
$
1,264

 
$
1,585

 
$
3,063

 
$
2,506

 
$
36,604

December 31, 2017
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
$
454

 
$
9

 
$
30

 
$
4

 
$

 
$
8

 
$
505

Ending Balance: Collectively evaluated for impairment
25,250

 
2,304

 
600

 
1,553

 
2,731

 
2,512

 
34,950

Ending Balance
$
25,704

 
$
2,313

 
$
630

 
$
1,557

 
$
2,731

 
$
2,520

 
$
35,455

Lakeland also maintains a reserve for unfunded lending commitments which is included in other liabilities. This reserve was $2.5 million for each of the periods ended June 30, 2018 and December 31, 2017. The Company analyzes the adequacy of the reserve for unfunded lending commitments quarterly.
Troubled Debt Restructurings
Loans are classified as troubled debt restructured loans in cases where borrowers experience financial difficulties and Lakeland makes certain concessionary modifications to contractual terms. 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

22

Table of Contents


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 and six months ended June 30, 2018 and 2017:
 
For the Three Months Ended June 30, 2018
 
For the Three Months Ended June 30, 2017
 
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)
Commercial, secured by real estate
1

 
$
170

 
$
170

 
2

 
$
159

 
$
159

Commercial, industrial and other
1

 
950

 
950

 
2

 
124

 
124

 
2

 
$
1,120

 
$
1,120

 
4

 
$
283

 
$
283

 
For the Six Months Ended June 30, 2018
 
For the Six Months Ended June 30, 2017
 
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)
Commercial, secured by real estate
3

 
$
1,827

 
$
1,827

 
4

 
$
3,038

 
$
3,038

Commercial, industrial and other
1

 
950

 
950

 
2

 
124

 
124

 
4

 
$
2,777

 
$
2,777

 
6

 
$
3,162

 
$
3,162


The following table summarizes as of June 30, 2018 and 2017, loans that were restructured within the previous twelve months that have subsequently defaulted:
 
June 30, 2018
 
June 30, 2017
 
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
 
(dollars in thousands)
Commercial, secured by real estate
2

 
$
1,234

 

 
$

Commercial, industrial and other
1

 
950

 

 

Leases
1

 
11

 

 

Real estate - residential mortgage

 
$

 
1

 
$
254

 
4

 
$
2,195

 
1

 
$
254


Other Real Estate and Other Repossessed Assets
At June 30, 2018, the Company had other real estate owned and other repossessed assets of $2.2 million and $0, respectively. At December 31, 2017, the Company had other real estate owned and other repossessed assets of $843,000 and $0, respectively. Included in other real estate owned was residential property acquired as a result of foreclosure proceedings totaling $1.9 million and $843,000 that the Company held at the periods ended June 30, 2018 and December 31, 2017, respectively.
NOTE 6 – DERIVATIVES
Lakeland is a party to interest rate derivatives that are not designated as hedging instruments. Under a program, Lakeland executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Lakeland executes with a third party, such that Lakeland minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the

23

Table of Contents


offsetting swaps are recognized directly in earnings. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties. Lakeland had $487,000 and $492,000, respectively, in available for sale securities pledged for collateral on its interest rate swaps with the financial institution for June 30, 2018 and December 31, 2017.
In June 2016, the Company entered into two cash flow hedges in order to hedge the variable cash outflows associated with its subordinated debentures. The notional value of these hedges was $30.0 million. The Company’s objectives in using the cash flow hedge are to add stability to interest expense and to manage its exposure to interest rate movements. The Company used interest rate swaps designated as cash flow hedges which involved the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. In these particular hedges the Company is paying a third party an average of 1.10% in exchange for a payment at 3 month LIBOR. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the six months ended June 30, 2018, the Company did not record any hedge ineffectiveness. The Company recognized $132,000 and $(4,000) of accumulated other comprehensive income (loss) that was reclassified into interest expense for the first six months of 2018 and 2017, respectively.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s debt. During the next twelve months, the Company estimates that $371,000 will be reclassified as a decrease to interest expense should the rate environment remain the same.
The following table presents summary information regarding these derivatives for the periods presented (dollars in thousands):
June 30, 2018
Notional Amount
 
Average
Maturity (Years)
 
Weighted Average
Fixed Rate
 
Weighted Average
Variable Rate
 
Fair
 Value
Classified in Other Assets:
 
 
 
 
 
 
 
 
 
3rd Party interest rate swaps
$
190,679

 
9.4
 
4.25
%
 
1 Mo. LIBOR + 2.15%
 
$
8,675

Customer interest rate swaps
58,754

 
10.8
 
5.15
%
 
1 Mo. LIBOR + 2.12%
 
996

Interest rate swap (cash flow hedge)
30,000

 
3.0
 
1.10
%
 
3 Mo. LIBOR
 
1,516

Classified in Other Liabilities:
 
 
 
 
 
 
 
 
 
Customer interest rate swaps
$
190,679

 
9.4
 
4.25
%
 
1 Mo. LIBOR + 2.15%
 
$
(8,675
)
3rd Party interest rate swaps
58,754

 
10.8
 
5.15
%
 
1 Mo. LIBOR + 2.12%
 
(996
)
December 31, 2017
Notional
 Amount
 
Average
Maturity (Years)
 
Weighted 
Average
Fixed Rate
 
Weighted Average
Variable Rate
 
Fair
 Value
Classified in Other Assets:
 
 
 
 
 
 
 
 
 
      3rd Party interest rate swaps
$
110,076

 
8.8
 
3.87
%
 
1 Mo. LIBOR + 2.11%
 
$
3,634

      Customer interest rate swaps
82,760

 
11.5
 
4.74
%
 
1 Mo. LIBOR + 2.21%
 
1,831

      Interest rate swap (cash flow hedge)
30,000

 
3.5
 
1.10
%
 
3 Mo. LIBOR
 
1,090

Classified in Other Liabilities:
 
 
 
 
 
 
 
 
 
      Customer interest rate swaps
$
110,076

 
8.8
 
3.87
%
 
1 Mo. LIBOR + 2.11%
 
$
(3,634
)
      3rd party interest rate swaps
82,760

 
11.5
 
4.74
%
 
1 Mo. LIBOR + 2.21%
 
(1,831
)
NOTE 7 – GOODWILL AND INTANGIBLE ASSETS
The Company had goodwill of $136.4 million for both of the periods ended June 30, 2018 and December 31, 2017. The Company reviews its goodwill and intangible assets annually, on November 30, or more frequently if conditions warrant, for impairment. In testing goodwill for impairment, the Company compares the estimated fair value of its reporting unit to its carrying amount, including goodwill. The Company has determined that it has one reporting unit, Community Banking.
The Company had core deposit intangible of $2.1 million and $2.4 million for the periods ended June 30, 2018 and December 31, 2017, respectively. The estimated future amortization expense for the remainder of 2018 and for each of the succeeding five years ended December 31 is as follows (dollars in thousands):

24

Table of Contents


For the Year Ended
 
2018
$
284

2019
505

2020
415

2021
326

2022
236

2023
147

NOTE 8 – BORROWINGS
Repurchase Agreements
At June 30, 2018, the Company had federal funds purchased and securities sold under agreements to repurchase of $166.3 million and $31.6 million, respectively. The securities sold under agreements to repurchase are overnight sweep arrangement accounts with our customers. As of June 30, 2018, the Company had $35.0 million in mortgage backed securities pledged for its securities sold under agreements to repurchase.
At times the market values of securities collateralizing our securities sold under agreements to repurchase may decline due to changes in interest rates and may necessitate our lenders to issue a “margin call” which requires Lakeland to pledge additional collateral to meet that margin call.
Repayment of Borrowings
In the second quarter of 2018, the Company repaid all of its $20.0 million in maturing long-term securities sold under agreements to repurchase.
In the first quarter of 2017, the Company prepaid an aggregate of $20.0 million in long-term securities sold under agreements to repurchase and recorded $2.2 million in long-term debt prepayment fees. The Company also prepaid an aggregate of $34.0 million in borrowings from the Federal Home Loan Bank of New York and recorded $638,000 in long-term debt prepayment fees.
NOTE 9 – SHARE-BASED COMPENSATION
The Company grants restricted stock, restricted stock units (“RSUs”) and stock options under the 2018 Omnibus Equity Incentive Plan and previously granted such awards under the 2009 Equity Compensation Program. The Company recognized share based compensation expense on its restricted stock of $118,000 and $165,000 for the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, there was unrecognized compensation cost of $113,000 related to unvested restricted stock that is expected to be recognized over a weighted average period of approximately 0.55 years. The Company recognized share based compensation expense of $1.3 million and $1.4 million on RSU's for the six months ended June 30, 2018 and 2017, respectively. Unrecognized compensation expense related to RSUs was approximately $3.2 million as of June 30, 2018, and that cost is expected to be recognized over a period of 1.63 years. There was no unrecognized compensation expense related to unvested stock options as of June 30, 2018.
In the first six months of 2018, the Company granted 10,945 shares of restricted stock to non-employee directors at a grant date fair value of $20.55 per share under the 2009 Equity Compensation Program. The restricted stock vests one year from the date it was granted. Compensation expense on this restricted stock is expected to be $225,000 over a one year period. In the first six months of 2017, the Company granted 13,176 shares of restricted stock to non-employee directors at a grant date fair value of $18.20 per share under the 2009 Equity Compensation Program. The restricted stock vested one year from the date it was granted. Compensation expense on this restricted stock was $240,000 over a one year period.

The following is a summary of the Company’s restricted stock activity during the six months ended June 30, 2018:

25

Table of Contents


 
Number of
Shares
 
Weighted
Average
Price
Outstanding, January 1, 2018
22,982

 
$
14.44

Granted
10,945

 
20.55

Vested
(22,856
)
 
14.46

Forfeited

 

Outstanding, June 30, 2018
11,071

 
$
20.44

In the first six months of 2018, the Company granted 151,733 RSUs to certain officers at a weighted average grant date fair value of $19.13 per share under the Company’s 2009 Equity Compensation Program. These units vest within a range of two to three years. A portion of these RSUs will vest subject to certain performance conditions in the restricted stock unit agreement. There are also certain provisions in the compensation program which state that if a recipient of the RSUs reaches a certain age and years of service, the person has effectively earned a portion of the RSUs at that time. Compensation expense on the restricted stock units issued in the first six months of 2018 is expected to average approximately $968,000 per year over a three year period. In the first six months of 2017, the Company granted 117,673 RSUs at a weighted average grant date fair value of $19.96 per share under the Company’s 2009 Equity Compensation Program. Compensation expense on these restricted stock units is expected to average approximately $783,000 per year over a three year period.
The following is a summary of the Company’s RSU activity during the six months ended June 30, 2018:
 
Number of
Shares
 
Weighted
Average
Price
Outstanding, January 1, 2018
267,732

 
$
13.93

Granted
151,733

 
19.13

Vested
(116,921
)
 
13.80

Forfeited
(4,650
)
 
18.61

Outstanding, June 30, 2018
297,894

 
$
16.56

There were no grants of stock options in the first six months of 2018 or 2017. 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, 2018
102,216

 
$
8.49

 
4.27
 
$
1,101,806

Granted

 

 
 
 
 
Exercised
(34,728
)
 
8.84

 
 
 
 
Forfeited

 

 
 
 
 
Expired

 

 
 
 
 
Outstanding, June 30, 2018
67,488

 
$
8.31

 
3.36
 
$
780,627

Options exercisable at June 30, 2018
67,488

 
$
8.31

 
3.36
 
$
780,627

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 period and the exercise price, multiplied by the number of in-the-money options).
There were 34,728 and 31,769 stock options exercised during the first six months of 2018 and 2017, respectively. The aggregate intrinsic value of stock options exercised during the six months ended June 30, 2018 and 2017 was $406,000 and $318,000, respectively. Exercise of stock options during the first six months of 2018 and 2017, resulted in cash receipts of $307,000 and $313,000, respectively.

26

Table of Contents


NOTE 10 – COMPREHENSIVE INCOME
The components of other comprehensive income (loss) are as follows:
 
June 30, 2018
 
June 30, 2017
For the three months ended:
Before
Tax Amount
 
Tax Benefit
(Expense)
 
Net of
Tax Amount
 
Before
Tax Amount
 
Tax Benefit
(Expense)
 
Net of
Tax Amount
 
(in thousands)
 
(in thousands)
Net unrealized gains (losses) on available for sale securities
 
 
 
 
 
 
 
 
 
 
 
Net unrealized holding (losses) gains arising during period
$
(2,203
)
 
$
513

 
$
(1,690
)
 
$
1,661

 
$
(632
)
 
$
1,029

Reclassification adjustment for net gains arising during the period

 

 

 
15

 
(6
)
 
9

Net unrealized losses (income)
(2,203
)
 
513

 
(1,690
)
 
1,676

 
(638
)
 
1,038

Unrealized gains (losses) on derivatives
67

 
(14
)
 
53

 
(186
)
 
65

 
(121
)
Other comprehensive (loss) income, net
$
(2,136
)
 
$
499

 
$
(1,637
)
 
$
1,490

 
$
(573
)
 
$
917

 
June 30, 2018
 
June 30, 2017
For the six months ended:
Before
Tax Amount
 
Tax Benefit
(Expense)
 
Net of
Tax Amount
 
Before
Tax Amount
 
Tax Benefit
(Expense)
 
Net of
Tax Amount
 
(in thousands)
 
(in thousands)
Net unrealized gains (losses) on available for sale securities
 
 
 
 
 
 
 
 
 
 
 
Net unrealized holding (losses) gains arising during period
$
(9,705
)
 
$
2,283

 
$
(7,422
)
 
$
2,845

 
$
(1,082
)
 
$
1,763

Reclassification adjustment for net gains arising during the period

 

 

 
(2,524
)
 
884

 
(1,640
)
Net unrealized losses (gains)
(9,705
)
 
2,283

 
(7,422
)
 
321

 
(198
)
 
123

Unrealized gains (losses) on derivatives
425

 
(89
)
 
336

 
(165
)
 
58

 
(107
)
Other comprehensive (loss) income, net
$
(9,280
)
 
$
2,194

 
$
(7,086
)
 
$
156

 
$
(140
)
 
$
16


The following table shows the changes in the balances of each of the components of other comprehensive income for the periods presented, net of tax (in thousands):
 
For the Three Months Ended June 30, 2018
 
For the Three Months Ended June 30, 2017
 
Unrealized
Losses on
Available for Sale
Securities
 
Unrealized
Gains
on Derivatives
 
Pension Items
 
Total
 
Unrealized
Gains (Losses) on
Available for Sale
Securities
 
Unrealized
Gains 
on Derivatives
 
Pension Items
 
Total
Beginning balance
$
(11,007
)
 
$
1,145

 
$
21

 
$
(9,841
)
 
$
(1,032
)
 
$
686

 
$
38

 
$
(308
)
Other comprehensive (loss) income before classifications
(1,690
)
 
53

 

 
(1,637
)
 
1,029

 
(121
)
 

 
908

Amounts reclassified from accumulated other comprehensive income

 

 

 

 
9

 

 

 
9

Net current period other comprehensive (loss) income
(1,690
)
 
53

 

 
(1,637
)
 
1,038

 
(121
)
 

 
917

Ending balance
$
(12,697
)
 
$
1,198

 
$
21

 
$
(11,478
)
 
$
6

 
565

 
$
38

 
$
609


27

Table of Contents


 
For the Six Months Ended June 30, 2018

For the Six Months Ended June 30, 2017
 
Unrealized
Losses on
Available for Sale
Securities
 
Unrealized
Gains
on Derivatives
 
Pension Items
 
Total
 
Unrealized
Gains (Losses) on
Available for Sale
Securities
 
Unrealized
Gains 
on Derivatives
 
Pension Items
 
Total
Beginning balance
$
(3,232
)
 
$
862

 
$
21

 
$
(2,349
)
 
$
(117
)
 
$
672

 
$
38

 
$
593

Adjustment for implementation of ASU 2016-01
(2,043
)
 

 

 
(2,043
)
 

 

 

 

Adjusted beginning balance
(5,275
)
 
862

 
21

 
(4,392
)
 
(117
)
 
672

 
38

 
593

Other comprehensive (loss) income before classifications
(7,422
)
 
336

 

 
(7,086
)
 
1,763

 
(107
)
 

 
1,656

Amounts reclassified from accumulated other comprehensive income

 

 

 

 
(1,640
)
 

 

 
(1,640
)
Net current period other comprehensive (loss) income
(7,422
)
 
336

 

 
(7,086
)
 
123

 
(107
)
 

 
16

Ending balance
$
(12,697
)
 
$
1,198

 
$
21

 
$
(11,478
)
 
$
6

 
565

 
$
38

 
$
609



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 it’s available for sale investment securities and its equity 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.

28

Table of Contents


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 six months ended June 30, 2018, 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:
 
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)
June 30, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investment securities, available for sale
 
 
 
 
 
 
 
U.S. Treasury and government agencies
$
4,885

 
$
141,460

 
$

 
$
146,345

Mortgage-backed securities

 
405,589

 

 
405,589

Obligations of states and political subdivisions

 
49,222

 

 
49,222

Other debt securities

 
5,075

 

 
5,075

Total securities available for sale
4,885

 
601,346

 

 
606,231

Equity securities, at fair value
3,735

 
13,063

 

 
16,798

Derivative assets

 
11,187

 

 
11,187

Total Assets
$
8,620

 
$
625,596

 
$

 
$
634,216

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
9,671

 
$

 
$
9,671

Total Liabilities
$

 
$
9,671

 
$

 
$
9,671

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investment securities, available for sale
 
 
 
 
 
 
 
U.S. Treasury and government agencies
$
5,415

 
$
141,840

 
$

 
$
147,255

Mortgage-backed securities

 
424,331

 

 
424,331

Obligations of states and political subdivisions

 
51,320

 

 
51,320

Other debt securities

 
5,140

 

 
5,140

Total securities available for sale
5,415

 
622,631

 

 
628,046

Equity securities, at fair value
5,147

 
12,942

 

 
18,089

Derivative assets

 
6,555

 

 
6,555

Total Assets
$
10,562

 
$
642,128

 
$

 
$
652,690

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
5,465

 
$

 
$
5,465

Total Liabilities
$

 
$
5,465

 
$

 
$
5,465


29

Table of Contents


The following table sets forth the Company’s assets subject to fair value adjustments (impairment) on a non-recurring basis. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
Fair Value
 
 
 
(in thousands)
 
 
June 30, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Impaired loans and leases
$

 
$

 
$
19,304

 
$
19,304

Loans held for sale

 
1,692

 

 
1,692

Other real estate owned and other repossessed assets

 

 
2,184

 
2,184

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Impaired loans and leases
$

 
$

 
$
22,591

 
$
22,591

Loans held for sale

 
456

 

 
456

Other real estate owned and other repossessed assets

 

 
843

 
843

Impaired loans are evaluated and valued at the time the loan is identified as impaired at the lower of cost or market value of the underlying collateral. Because most of Lakeland’s impaired loans are collateral dependent, fair value is generally measured based on the value of the collateral, less estimated costs to sell, securing these loans and leases and is classified at a level 3 in the fair value hierarchy. Collateral may be real estate, accounts receivable, inventory, equipment and/or other business assets. The value of real estate is assessed based on appraisals by qualified third party licensed appraisers. The appraisers may use the sales comparison approach, the cost approach and/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 re-measured 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 and/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. 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 June 30, 2018 and December 31, 2017 are outlined below.

30

Table of Contents


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 $7.2 million in short-term municipal bond anticipation notes and $1.0 million in subordinated debt that are non-rated and do not have an active secondary market or information readily available on standard financial systems. As a result, the securities are classified as Level 3 securities. Management performs a credit analysis before investing in these securities.
FHLB stock is an equity interest that can be sold to the issuing FHLB, to other Federal Home Loan Banks, or to other member banks at its par value. Because ownership of these securities is restricted, they do not have a readily determinable fair value. As such, the Company’s FHLB stock is recorded at cost or par value and is evaluated for impairment each reporting period by considering the ultimate recoverability of the investment rather than temporary declines in value. The Company’s evaluation primarily includes an evaluation of liquidity, capitalization, operating performance, commitments, and regulatory or legislative events.
The net loan portfolio at June 30, 2018 has been valued using an exit price approach incorporating discounts for credit and liquidity. This is not comparable with the fair values used for December 31, 2017, which are based on entrance prices. For December 31, 2017, the loan portfolio was valued using a present value discounted cash flow where market prices are not available. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk.
For fixed maturity certificates of deposit, fair value is estimated based on the present value of discounted cash flows using the rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.
The fair value of long-term debt is based upon the discounted value of contractual cash flows. The Company estimates the discount rate using the rates currently offered for similar borrowing arrangements. The fair value of subordinated debentures is based on bid/ask prices from brokers for similar types of instruments.
The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The fair value of commitments to extend credit and standby letters of credit are deemed immaterial.

31

Table of Contents


The following table presents the carrying values, fair values and placement in the fair value hierarchy of the Company’s financial instruments as of June 30, 2018 and December 31, 2017:
 
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)
June 30, 2018
 
 
 
 
 
 
 
 
 
Financial Assets:
 
 
 
 
 
 
 
 
 
Investment securities held to maturity
$
158,832

 
$
155,316

 
$

 
$
147,130

 
$
8,186

Federal Home Loan Bank and other membership bank stocks
16,235

 
16,235

 

 
16,235

 

Loans and leases, net
4,240,935

 
4,212,454

 

 

 
4,212,454

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Certificates of deposit
806,783

 
799,476

 

 
799,476

 

Other borrowings
196,376

 
191,649

 

 
191,649

 

Subordinated debentures
104,963

 
102,958

 

 

 
102,958

December 31, 2017
 
 
 
 
 
 
 
 
 
Financial Assets:
 
 
 
 
 
 
 
 
 
Investment securities held to maturity
$
139,685

 
$
138,688

 
$

 
$
127,901

 
$
10,787

Federal Home Loan Bank and other membership bank stocks
12,576

 
12,576

 

 
12,576

 

Loans and leases, net
4,117,265

 
4,114,516

 

 

 
4,114,516

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Certificates of deposit
737,428

 
732,417

 

 
732,417

 

Other borrowings
192,011

 
189,080

 

 
189,080

 

Subordinated debentures
104,902

 
97,244

 

 

 
97,244

NOTE 12 – RECENT ACCOUNTING PRONOUNCMENTS
In June 2018, the Financial Accounting Standards Board ("FASB") issued an update expanding earlier guidance on stock compensation to include share-based payments issued to nonemployees for goods and services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially the same. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2018. Earlier adoption is permitted. Because the Company does not have share-based payments issued to nonemployees, the adoption of this update is not expected to have a material impact on the Company's financial statements.

In March 2018, the FASB issued an update regarding the accounting implications of the recently issued Tax Cuts and Jobs Act (the "Tax Act"). The update clarifies that in a company's financial statements that include the reporting period in which the Tax Act was enacted, a company must first reflect the income tax effects of the Tax Act in which the accounting under U.S. GAAP is complete. Those amounts would not be provisional amounts. The company would also report provisional amounts for those specific income tax effects for which the accounting under U.S. GAAP will be incomplete but for which a reasonable estimate can be determined. If there are income tax effects for the Tax Act for which a reasonable estimate cannot be determined, the company would not report provisional amounts and would continue to apply U.S. GAAP based on the tax laws that were in effect immediately prior to the Tax Act being enacted. This accounting update is effective immediately. The Company believes its accounting for the the income tax effects of the Tax Act is complete. Technical corrections or other forthcoming guidance could change how we interpret provisions of the Tax Act, which may impact our effective tax rate and could affect our deferred tax assets, tax positions and/or our tax liabilities.

In February 2018, the FASB issued an update (ASU 2018-02) regarding the reclassification of certain tax effects from accumulated other comprehensive income. This update requires a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate tax rate. The amount of the reclassification would be the difference between the historical 35% corporate income tax rate and the newly enacted 21% corporate tax rate. This update eliminates the stranded tax effects associated with the change in the federal corporate income tax rate in the

32

Table of Contents


Tax Act and improves the usefulness of information reported to financial statement users. The amendments are effective for all entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption of the amendments is permitted including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued and all other entities for reporting periods for which financial statements have not yet been made available for issuance. An entity may apply the amendments in the update retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. The Company elected to adopt this update in December 2017, and recorded a $420,000 increase to retained earnings and reduction to accumulated other comprehensive income in December 2017.

In August 2017, the FASB issued an update intended to improve and simplify accounting rules around hedge accounting. Amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this update also make certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2019. The Company is still evaluating the impact that this guidance will have on its financial statements.

In July 2017, the FASB issued guidance which simplifies the accounting for certain financial instruments with down round features, a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings. The provisions of the new guidance related to down rounds are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this update is not expected to have a material impact on the Company’s financial statements because the Company does not have any equity-linked financial instruments that have such down round features.
    
In May 2017, the FASB issued an update which provides clarity and reduces diversity in practice when accounting for the modification of terms and conditions for share-based payment awards. Previous accounting guidance did not distinguish between modifications which were substantive from modifications that were merely administrative. The accounting standards update requires entities to account for the effects of a modification unless the following three conditions are met: the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. This update will be effective for annual and interim periods beginning after December 15, 2017. The adoption of this update did not have an impact on the Company’s financial statements.

In March 2017, the FASB issued an update which shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. Under current GAAP, entities amortize the premium as an adjustment of yield over the contractual life of the instrument even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. The update shortens the amortization period for certain callable debt securities held at a premium and requires the premium be amortized to the earliest call date. This update will be effective for annual and interim periods beginning after December 15, 2018. Entities are required to apply the amendments on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of this update is not expected to have a material impact on the Company’s financial statements.

In March 2017, the FASB issued an update which changes the presentation of net periodic pension cost and net periodic postretirement benefit cost in a company’s income statement. The amendment requires that an employer report the service cost component in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendment is effective for annual and interim periods beginning after December 15, 2017. Because the Company has minimal benefit plans that require the measurement of net periodic pension cost and net periodic post retirement benefit cost, the adoption of this update did not have an impact on the Company’s financial statements.

In January 2017, the FASB issued an update to simplify the test for goodwill impairment. This amendment eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. This update will be effective for the Company’s financial statements for

33

Table of Contents


annual years beginning after December 15, 2019. The adoption of this update is not expected to have a material impact on the Company’s financial statements.

In January 2017, the FASB issued an update that clarifies the definition of a business as it pertains to business combinations. This amendment affects all companies and other reporting organizations that must determine whether they have sold or acquired a business. This update will be effective for the Company’s financial statements for fiscal years beginning after December 15, 2017. The adoption of this update did not have an impact on the Company’s financial statements.

In September 2016, the FASB issued an accounting standards update to address diversity in presentation in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2017. The adoption of this update did not have an impact on the Company’s financial statements.
In June 2016, the FASB issued an accounting standards update pertaining to the measurement of credit losses on financial instruments. This update requires the measurement of all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. This update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2019. The Company is currently evaluating its existing systems and data to support the new standard as well as assessing the impact that the guidance will have on the Company's consolidated financial statements. The Company has formed a working group under the direction of the chief risk officer that is comprised of individuals from the credit, risk management, finance and project management areas. In early 2018, the Company contracted with a software and advisory service provider to aid in implementation. The Company continues to work with this service provider in assessing its data and preparing for implementation.

In February 2016, FASB issued accounting guidance that requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period, with early adoption permitted. A modified retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently assessing the impact of the new guidance on its consolidated financial statements by reviewing its existing lease contracts and service contracts that may include embedded leases. It is also considering various software providers to aid it in implementation. The Company expects to record an increase in assets and liabilities as a result of recognizing a right-of-use asset and a lease liability for its operating lease commitments.

In January 2016, the FASB issued an accounting standards update intended to improve the recognition and measurement of financial instruments. Specifically, the accounting standards update requires all equity instruments, with the exception of those that are accounted for under the equity method of accounting, to be measured at fair value with changes in the fair value recognized through net income. Additionally, public business entities are required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The amendments in this update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In February 2018, the FASB issued further guidance that provided technical corrections to this update. Those technical corrections included clarification on accounting for equity securities without a readily determinable fair value, remeasurement requirements on forward contracts and purchased options, and presentation requirements for certain fair value option liabilities. This amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this update required an adjustment on January 1, 2018 from other comprehensive income to retained earnings for the amount of the unrealized gain on equity securities as of December 31, 2017. Thereafter, any increases or decreases to the market value on these equity securities will be recorded through the consolidated statements of income. Please see the Consolidated Statement of Changes in Stockholders' Equity, Note 4-Investment Securities and Note 10-Comprehensive Income for more information.

In May 2014, the FASB issued an accounting standards update that clarifies the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

34

Table of Contents


In 2016, the FASB issued further implementation guidance regarding revenue recognition. This additional guidance included clarification on certain principal versus agent considerations within the implementation of the guidance as well as clarification related to identifying performance obligations and licensing. The guidance also requires new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations. The guidance along with its updates is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. In evaluating this standard, management has determined that the majority of revenue earned by the Company is from revenue streams not included in the scope of this standard. The Company has assessed its revenue streams and reviewed contracts potentially affected by the guidance including deposit related fees, interchange fees, investment commissions, merchant fee income and other noninterest income sources to determine the potential impact the new guidance is expected to have on the Company’s consolidated financial statements. The Company adopted the guidance on January 1, 2018 using the modified retrospective method. The Company did not have a cumulative-effect adjustment to opening retained earnings as a result of adopting this standard. Please see Note 2 - Revenue Recognition for more information.


35

Table of Contents


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, 2017.
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), the Company's future tax expense, 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 and regulation affecting the financial services industry, government intervention in the U.S. financial system, changes in federal and state tax laws, changes in levels of market interest rates, pricing pressures on loan and deposit products, credit risks of Lakeland’s lending and leasing activities, successful implementation, deployment and upgrades of new and existing technology, systems, services and products, customers’ acceptance of Lakeland’s products and services, and competition.
The above-listed risk factors are not necessarily exhaustive, particularly as to possible future events, and new risk factors may emerge from time to time. Certain events may occur that could cause the Company’s actual results to be materially different than those described in the Company’s periodic filings with the Securities and Exchange Commission. Any statements made by the Company that are not historical facts should be considered to be forward-looking statements. The Company is not obligated to update and does not undertake to update any of its forward-looking statements made herein.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America and predominant practices within the banking industry. The consolidated financial statements include the accounts of the Company, Lakeland, Lakeland NJ Investment Corp., Lakeland Investment Corp., Lakeland Equity, Inc. and Lakeland Preferred Equity, 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 and six months ended June 30, 2018 represented a period of continued growth for the Company. As discussed in this Management’s Discussion and Analysis:
For the second quarter of 2018, net income of $15.8 million increased from $13.4 million in the second quarter of 2017. Diluted earnings per share of $0.33 represents a 18% increase over $0.28 for the same period in 2017.
For the second quarter of 2018, annualized return on average assets was 1.17%, annualized return on average common equity was 10.71%, and annualized return on average tangible common equity was 13.97% compared to 1.02%, 9.49%, and 12.58%, respectively, for the second quarter of 2017.

36

Table of Contents


For the first six months of 2018, net income of $31.1 million increased from $25.7 million in the first six months of 2017. Diluted earnings per share of $0.65 represents a 23% increase over $0.53 for the same period in 2017.
For the first six months of 2018, annualized return on average assets was 1.16%, annualized return on average common equity was 10.65%, and annualized return on average tangible common equity was 13.94% compared to 1.00%, 9.26%, and 12.31%, respectively, for the first six months of 2017.
Net interest margin (“NIM”) was 3.43% in the second quarter of 2018 compared to 3.41% in the second quarter of 2017.
Total loans net of deferred fees grew $124.8 million, or 3%, to $4.28 billion during the first six months of 2018, with commercial loans secured by real estate and construction loans growing $93.9 million and $32.4 million, or 3% and 12%, respectively.
Total deposits increased $31.3 million, or 1%, from December 31, 2017 to June 30, 2018, to $4.40 billion.
Comparison of Operating Results for the Three Months Ended June 30, 2018 and 2017
Net Income
Net income was $15.8 million, or $0.33 per diluted share, for the second quarter of 2018 compared to net income of $13.4 million, or $0.28 per diluted share, for the second quarter of 2017. Net income increased as a result of an increase in net interest income and as a result of a decrease in tax expense relating to the Tax Cuts and Jobs Act of 2017. Net interest income of $43.5 million for the second quarter of 2018 increased $2.1 million from the second quarter of 2017 resulting from organic growth and an increase in market interest rates.
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 second quarter of 2018 was $43.6 million, compared to $41.7 million for the second quarter of 2017. The net interest margin increased from 3.41% in the second quarter of 2017 to 3.43% in the second quarter of 2018 primarily as a result of a 24 basis point increase in the yield on interest-earning assets. The increase in yield on interest-earning assets primarily resulted from an increase in rates caused by the recent increases in the federal funds rate and prime rate. The increase in net interest margin was augmented by an increase in interest income earned on free funds (interest-earning assets funded by noninterest-bearing liabilities) resulting from an increase in average noninterest-bearing deposits of $15.0 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 for the three months ended June 30, 2018 are computed on a tax equivalent basis using a tax rate of 21%, while rates for the three months ended June 30, 2017 are computed on a tax equivalent basis using a tax rate of 35%.
 

37

Table of Contents


 
For the Three Months Ended June 30, 2018
 
For the Three Months Ended June 30, 2017
 
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 (1)
$
4,247,443

 
$
47,659

 
4.50
%
 
$
4,011,325

 
$
42,740

 
4.27
%
Taxable investment securities and other
729,684

 
4,027

 
2.21
%
 
724,675

 
3,818

 
2.11
%
Tax-exempt securities
81,677

 
543

 
2.66
%
 
112,400

 
803

 
2.86
%
Federal funds sold (2)
35,244

 
145

 
1.65
%
 
59,088

 
132

 
0.89
%
Total interest-earning assets
5,094,048

 
52,374

 
4.12
%
 
4,907,488

 
47,493

 
3.88
%
Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses
(36,324
)
 
 
 
 
 
(32,234
)
 
 
 
 
Other assets
379,816

 
 
 
 
 
365,901

 
 
 
 
TOTAL ASSETS
$
5,437,540

 
 
 
 
 
$
5,241,155

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings accounts
$
496,630

 
$
74

 
0.06
%
 
$
492,991

 
$
71

 
0.06
%
Interest-bearing transaction accounts
2,195,553

 
3,772

 
0.69
%
 
2,295,256

 
2,513

 
0.44
%
Time deposits
792,270

 
2,655

 
1.34
%
 
559,665

 
1,200

 
0.86
%
Borrowings
356,511

 
2,266

 
2.54
%
 
344,833

 
2,007

 
2.30
%
Total interest-bearing liabilities
3,840,964

 
8,767

 
0.91
%
 
3,692,745

 
5,791

 
0.63
%
Noninterest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
969,965

 
 
 
 
 
954,966

 
 
 
 
Other liabilities
23,223

 
 
 
 
 
28,233

 
 
 
 
Stockholders’ equity
593,388

 
 
 
 
 
565,211

 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
5,427,540

 
 
 
 
 
$
5,241,155

 
 
 
 
Net interest income/spread
 
 
43,607

 
3.21
%
 
 
 
41,702

 
3.25
%
Tax equivalent basis adjustment
 
 
114

 
 
 
 
 
281

 
 
NET INTEREST INCOME
 
 
$
43,493

 
 
 
 
 
$
41,421

 
 
Net interest margin (3)
 
 
 
 
3.43
%
 
 
 
 
 
3.41
%

(1)
Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.
(2)
Includes interest-bearing cash accounts.
(3)
Net interest income divided by interest-earning assets.
Interest income on a tax equivalent basis increased from $47.5 million in the second quarter of 2017 to $52.4 million in the second quarter of 2018, an increase of $4.9 million, or 10%. The increase in interest income was primarily a result of an increase in rates caused by the recent increases in the federal funds rate and prime rate as well as organic growth in loans, as average loans and leases increased $236.1 million compared to the second quarter of 2017. The yield on average loans and leases at 4.50% in the second quarter of 2018 was 23 basis points higher than the second quarter of 2017. The yield on average taxable investment securities increased 10 basis points, while the yield on average tax-exempt investment securities decreased 20 basis points. The decrease in yield on average tax-exempt investment securities was due primarily to a reduction in tax equivalent income resulting from the Tax Cut and Jobs Act of 2017.

38

Table of Contents


Total interest expense of $8.8 million in the second quarter of 2018 was $3.0 million greater than the $5.8 million reported for the same period in 2017. The cost of average interest-bearing liabilities increased from 0.63% in the second quarter of 2017 to 0.91% in the second quarter of 2018. The increase in the cost of interest-bearing liabilities was due primarily to an increasingly competitive market for deposits resulting from a higher interest rate environment as well as an increase in the cost of borrowings. The cost of interest-bearing transaction accounts and time deposits increased by 25 basis points and 48 basis points, respectively. Average time deposits increased 42% from $559.7 million in the second quarter of 2017 to $792.3 million in the second quarter of 2018 primarily as a result of the Company's certificate of deposit promotion during 2017.
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 charge-offs and the results of independent third party loan review.
In the second quarter of 2018, a $1.5 million provision for loan and lease losses was recorded, compared to $1.8 million for the same period last year. The Company charged off $1.0 million and recovered $431,000 in the second quarter of 2018 compared to $870,000 and $276,000, respectively, in the second quarter of 2017. For more information regarding the determination of the provision, see “Risk Elements” below.
Noninterest Income
Noninterest income of $5.7 million in the second quarter of 2018 decreased by $402,000 from $6.1 million in the second quarter of 2017. Commissions and fees increased $275,000 compared to the second quarter of 2017 due primarily to increased loan fees. Income on bank owned life insurance of $711,000 for the second quarter of 2018 increased $211,000 compared to the same period last year primarily as a result of an increase in the number of policies. Gains on sales of loans decreased $171,000 due to a decline in sales of mortgage loans. Other income decreased $603,000 compared to the same period in 2017 due primarily to $337,000 in gains on the sale of a former branch and a $324,000 gain on the payoff of an acquired loan recorded during the second quarter of 2017.
Noninterest Expense
Noninterest expense in the second quarter of 2018 totaled $27.6 million, which was $2.2 million greater than the $25.4 million reported for the second quarter of 2017. Salaries and employee benefits expense of $16.7 million increased $1.6 million, or 11%, from the same period last year, as a result of additions to our staff to support continued growth, as well as normal merit increases. Data processing expense increased $474,000 in the second quarter of 2018 compared to the same period in 2017 due primarily to the expansion and improvement of the Company's digital infrastructure. Stationary, supplies and postage expense decreased $129,000 due primarily to consumer deposit mailings in the second quarter of 2017. The Company’s efficiency ratio, a non-GAAP financial measure, was 55.6% in the second quarter of 2018, compared to 52.6% for the same period last year, primarily due to an increase in noninterest expenses. The Company uses this ratio because it believes that the ratio provides a good comparison of period-to-period performance and because the ratio is widely accepted in the banking industry. The following table shows the calculation of the efficiency ratio for the periods presented:

39

Table of Contents


 
For the Three Months Ended June 30,
 
2018
 
2017
 
(dollars in thousands)
Calculation of Efficiency Ratio
 
 
 
Total noninterest expense
$
27,574

 
$
25,366

Amortization of core deposit intangibles
(153
)
 
(190
)
Noninterest expense, as adjusted
$
27,421

 
$
25,176

Net interest income
$
43,493

 
$
41,421

Noninterest income
5,709

 
6,111

Total revenue
49,202

 
47,532

Tax-equivalent adjustment on municipal securities
114

 
281

(Gains) losses on sales of investment securities

 
15

Total revenue, as adjusted
$
49,316

 
$
47,828

Efficiency ratio
55.6
%
 
52.6
%
Income Tax Expense
The effective tax rate in the second quarter of 2018 was 21.3% compared to 34.3% during the same period last year primarily due to the change in tax rates resulting from the Tax Cuts and Jobs Act of 2017 (the "Tax Act").
On July 1, 2018, the State of New Jersey enacted new legislation that created a temporary surtax effective for tax years 2018 through 2021 and will require companies to file combined tax returns beginning in 2019. Management is currently evaluating the effect of the new legislation on our net deferred tax asset and future tax expense. We anticipate an impact to our deferred taxes in the third quarter of 2018 due to the change in state rate and, prospectively, our state tax expense will increase.


Comparison of Operating Results for the Six Months Ended June 30, 2018 and 2017
Net Income
Net income was $31.1 million, or $0.65 per diluted share, for the first six months of 2018 compared to net income of $25.7 million, or $0.53 per diluted share, for the first six months of 2017. Net income increased as a result of an increase in net interest income and as a result of a decrease in tax expense relating to the Tax Cuts and Jobs Act of 2017. Net interest income of $85.7 million for the first six months of 2018 increased $5.0 million from the first six months of 2017 resulting from organic growth and an increase in market interest rates.
Net Interest Income
Net interest income on a tax equivalent basis for the first six months of 2018 was $86.0 million, compared to $81.3 million for the first six months of 2017. The net interest margin increased from 3.37% in the first six months of 2017 to 3.41% in the first six months of 2018 primarily as a result of a 24 basis point increase in the yield on interest-earning assets, partially offset by a 25 basis point increase in the cost of interest-bearing liabilities. The increase in yield on interest-earning assets primarily resulted from an increase in rates caused by the recent increases in the federal funds rate and prime rate, while the increase in the cost of interest-bearing liabilities was due primarily to a higher cost of deposits resulting from a CD promotion in the latter half of 2017 as well as an increasingly competitive market for deposits resulting from the higher interest rate environment. The increase in net interest margin was augmented by an increase in interest income earned on free funds (interest-earning assets funded by noninterest-bearing liabilities) resulting from an increase in average noninterest-bearing deposits of $28.8 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-

40

Table of Contents


bearing liabilities) and (5) the Company’s net interest margin. Rates for the six months ended June 30, 2018 are computed on a tax equivalent basis using a tax rate of 21%, while rates for the six months ended June 30, 2017 are computed on a tax equivalent basis using a tax rate of 35%.
 
 
For the Six Months Ended June 30, 2018
 
For the Six Months Ended June 30, 2017
 
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 (1)
$
4,220,972

 
$
93,203

 
4.45
%
 
$
3,958,564

 
$
83,151

 
4.24
%
Taxable investment securities and other
732,995

 
8,019

 
2.19
%
 
700,971

 
7,417

 
2.12
%
Tax-exempt securities
83,187

 
1,104

 
2.65
%
 
112,719

 
1,588

 
2.82
%
Federal funds sold (2)
41,271

 
311

 
1.51
%
 
94,643

 
408

 
0.86
%
Total interest-earning assets
5,078,425

 
102,637

 
4.07
%
 
4,866,897

 
92,564

 
3.83
%
Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses
(36,152
)
 
 
 
 
 
(32,063
)
 
 
 
 
Other assets
381,279

 
 
 
 
 
362,931

 
 
 
 
TOTAL ASSETS
$
5,423,552

 
 
 
 
 
$
5,197,765

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings accounts
$
492,173

 
$
143

 
0.06
%
 
$
491,890

 
$
139

 
0.06
%
Interest-bearing transaction accounts
2,217,676

 
7,115

 
0.65
%
 
2,268,752

 
4,631

 
0.41
%
Time deposits
776,929

 
4,998

 
1.29
%
 
557,479

 
2,348

 
0.84
%
Borrowings
347,696

 
4,420

 
2.54
%
 
352,926

 
4,146

 
2.34
%
Total interest-bearing liabilities
3,834,474

 
16,676

 
0.87
%
 
3,671,047

 
11,264

 
0.62
%
Noninterest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
967,246

 
 
 
 
 
938,460

 
 
 
 
Other liabilities
33,261

 
 
 
 
 
28,730

 
 
 
 
Stockholders’ equity
588,571

 
 
 
 
 
559,528

 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
5,423,552

 
 
 
 
 
$
5,197,765

 
 
 
 
Net interest income/spread
 
 
85,961

 
3.20
%
 
 
 
81,300

 
3.22
%
Tax equivalent basis adjustment
 
 
232

 
 
 
 
 
556

 
 
NET INTEREST INCOME
 
 
$
85,729

 
 
 
 
 
$
80,744

 
 
Net interest margin (3)
 
 
 
 
3.41
%
 
 
 
 
 
3.37
%

(1)
Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.
(2)
Includes interest-bearing cash accounts.
(3)
Net interest income divided by interest-earning assets.
Interest income on a tax equivalent basis increased from $92.6 million in the first six months of 2017 to $102.6 million in the first six months of 2018, an increase of $10.1 million, or 11%. The increase in interest income was primarily a result of an increase in rates caused by the recent increases in the federal funds rate and prime rate as well as organic growth in loans, as

41

Table of Contents


average loans and leases increased $262.4 million compared to the first six months of 2017. The yield on average loans and leases at 4.45% in the first six months of 2018 was 21 basis points higher than the first six months of 2017. The yield on average taxable investment securities increased 7 basis points, while the yield on average tax-exempt investment securities decreased 17 basis points. The decrease in yield on average tax-exempt investment securities was due primarily to a reduction in tax equivalent income resulting from the Tax Cut and Jobs Act of 2017.
Total interest expense of $16.7 million in the first six months of 2018 was $5.4 million greater than the $11.3 million reported for the same period in 2017. The cost of average interest-bearing liabilities increased from 0.62% in the first six months of 2017 to 0.87% in the first six months of 2018. The increase in the cost of interest-bearing liabilities was due primarily to an increasingly competitive market for deposits resulting from a higher interest rate environment as well as an increase in the cost of borrowings. The cost of interest-bearing transaction accounts and time deposits increased by 24 basis points and 45 basis points, respectively, while the cost of borrowings increased 20 basis points compared to the first six months of 2017. Average time deposits increased from $557.5 million in the first six months of 2017 to $776.9 million in the first six months of 2018 primarily as a result of the Company's certificate of deposit promotion beginning in the last half of 2017.
Provision for Loan and Lease Losses
In the first six months of 2018, a $2.8 million provision for loan and lease losses was recorded, compared to $3.0 million for the same period last year. The Company charged off $2.2 million and recovered $586,000 in the first six months of 2018 compared to $2.2 million and $763,000, respectively, in the first six months of 2017. For more information regarding the determination of the provision, see “Risk Elements” below.
Noninterest Income
Noninterest income of $11.0 million in the first six months of 2018 decreased by $3.2 million from $14.2 million in the first six months of 2017. Noninterest income for the first six months of 2017 included $2.5 million in gains on sales of investment securities compared to none during the first six months of 2018. Commissions and fees increased $391,000 compared to the first six months of 2017 due primarily to the same reason discussed in the quarterly comparison. Income on bank owned life insurance of $1.4 million for the second quarter of 2018 increased $504,000 compared to the same period last year, while gains on sales of loans decreased $323,000, both due primarily to the same reasons discussed in the quarterly comparison. Other income decreased $1.2 million compared to the same period in 2017 due primarily to $706,000 in gains on the sale of two former branches and a $324,000 gain on the payoff of an acquired loan recorded during the second quarter of 2017. Additionally, gains on sales of other real estate owned in the first half of 2018 decreased $413,000 compared to the same period in 2017.
Noninterest Expense
Noninterest expense in the first six months of 2018 totaled $54.7 million, which was $0.9 million more than the $53.8 million reported for the first six months of 2017. In the first six months of 2017, noninterest expense included $2.8 million in long-term debt prepayment fees compared to none in the first six months of 2018. Salaries and employee benefits expense of $33.6 million increased $3.1 million, or 10%, from the same period last year, as a result of additions to our staff to support continued growth, as well as normal merit increases. Data processing expense and telecommunications expense in the first six months of 2018 increased $387,000 and $107,000, respectively, compared to the same period in 2017 due primarily to the expansion and improvement of the Company's digital infrastructure. Stationary, supplies and postage decreased $156,000 due primarily to the same reason discussed in the quarterly comparison. The Company’s efficiency ratio, a non-GAAP financial measure, was 56.1% in the first six months of 2018, compared to 54.4% for the same period last year. 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:

42

Table of Contents


 
For the Six Months Ended June 30,
 
2018
 
2017
 
(dollars in thousands)
Calculation of Efficiency Ratio
 
 
 
Total noninterest expense
$
54,711

 
$
53,836

Amortization of core deposit intangibles
(310
)
 
(385
)
Long Term Debt prepayment fee

 
(2,828
)
Noninterest expense, as adjusted
$
54,401

 
$
50,623

Net interest income
$
85,729

 
$
80,744

Noninterest income
11,043

 
14,205

Total revenue
96,772

 
94,949

Tax-equivalent adjustment on municipal securities
232

 
556

(Gains) losses on sales of investment securities

 
(2,524
)
Total revenue, as adjusted
$
97,004

 
$
92,981

Efficiency ratio
56.1
%
 
54.4
%
Income Tax Expense
The effective tax rate in the first six months of 2018 was 20.9% compared to 32.5% during the same period last year primarily due to the change in tax rates resulting from the Tax Act.
Financial Condition
The Company’s total assets increased $128.8 million from December 31, 2017, to $5.53 billion at June 30, 2018. Total loans net of deferred fees were $4.28 billion, an increase of $124.8 million, or 3%, from $4.15 billion at December 31, 2017. Total deposits were $4.40 billion, an increase of $31.3 million, or 1%, from December 31, 2017.
Loans and Leases
Gross loans and leases of $4.28 billion at June 30, 2018 increased $124.6 million from December 31, 2017, primarily in the commercial loans secured by real estate category which increased $93.9 million, or 3%. Additionally, real estate construction loans increased $32.4 million, or 12%. For more information on the loan portfolio, see Note 5 in Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Risk Elements
Non-performing assets, excluding PCI loans, increased from $14.5 million at December 31, 2017 to $16.5 million at June 30, 2018. Non-accrual loans and leases in the commercial secured by real estate category, commercial, industrial and other category, and other real estate owned increased $1.5 million, $1.0 million, and $1.3 million, respectively, while real estate construction loans decreased $1.5 million. The percentage of non-performing assets to total assets was 0.30% at June 30, 2018 compared to 0.27% at December 31, 2017. Non-accrual loans at June 30, 2018 included three loan relationships with a balance of $1 million or greater, totaling $3.1 million, and four loan relationships between $500,000 and $1.0 million, totaling $2.5 million.
There were $0 in loans and leases past due ninety days or more and still accruing at June 30, 2018 compared to $200,000 at December 31, 2017. These loans primarily consist of open-end consumer loans secured by real estate 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 June 30, 2018, the Company had $7.9 million in loans that were troubled debt restructurings and accruing interest income compared to $11.5 million at December 31, 2017. On June 30, 2018, the Company had $4.9 million in troubled debt restructurings that were included in non-accrual loans compared to $2.7 million at December 31, 2017. 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.

43

Table of Contents


On June 30, 2018, the Company had $19.3 million in impaired loans (consisting primarily of non-accrual and restructured loans and leases) compared to $22.6 million at year-end 2017. The Company also had purchased credit impaired loans from the Pascack and Harmony acquisitions with carrying values of $175,000 and $511,000, respectively, at June 30, 2018. For more information on impaired loans and leases see Note 5 in Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. The valuation allowance for impaired loans is based primarily on the fair value of the underlying collateral. Based on such evaluation, $865,000 of the allowance for loan and lease losses has been allocated for impairment at June 30, 2018 compared to $505,000 at December 31, 2017. At June 30, 2018, the Company also had $23.3 million in loans and leases that were rated substandard that were not classified as non-performing or impaired compared to $28.3 million at December 31, 2017.
There were no loans and leases at June 30, 2018, 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)
For the Six Months Ended June 30, 2018
 
For the Six Months Ended June 30, 2017
 
For the Year Ended December 31, 2017
Balance of the allowance at the beginning of the year
$
35,455

 
$
31,245

 
$
31,245

Loans and leases charged off:
 
 
 
 
 
Commercial, secured by real estate
(232
)
 
(303
)
 
(762
)
Commercial, industrial and other
(1,301
)
 
(234
)
 
(477
)
Leases
(95
)
 
(163
)
 
(305
)
Real estate - mortgage
(93
)
 
(310
)
 
(441
)
Real estate - construction
(248
)
 
(609
)
 
(609
)
Home equity and consumer
(244
)
 
(611
)
 
(852
)
Total loans charged off
(2,213
)
 
(2,230
)
 
(3,446
)
Recoveries:
 
 
 
 
 
Commercial, secured by real estate
305

 
364

 
396

Commercial, industrial and other
96

 
122

 
172

Leases
5

 
32

 
59

Real estate - mortgage
5

 

 
5

Real estate - construction
8

 
20

 
31

Home equity and consumer
167

 
225

 
903

Total recoveries
586

 
763

 
1,566

Net charge-offs:
(1,627
)
 
(1,467
)
 
(1,880
)
Provision for loan and lease losses
2,776

 
3,045

 
6,090

Ending balance
$
36,604

 
$
32,823

 
$
35,455

Net charge-offs as a percentage of average loans and leases outstanding
0.08
%
 
0.07
%
 
0.05
%
Allowance as a percentage of total loans and leases outstanding
0.85
%
 
0.81
%
 
0.85
%
Allowance as a percentage of non-accrual loans
256.56
%
 
202.05
%
 
259.65
%
The determination of the adequacy of the allowance for loan and lease losses and the periodic provisioning for estimated losses included in the consolidated financial statements is the responsibility of management and the Board of Directors. Management performs a formal quarterly evaluation of the allowance for loan and lease losses. This quarterly process is performed by the credit administration department and approved by the Chief Credit Officer. All supporting documentation with regard to the evaluation process is maintained by the credit administration department. Each quarter, the evaluation along with the supporting documentation is reviewed by the finance department before approval by the Chief Credit Officer. The allowance evaluation is then presented to an Allowance for Loan and Lease Losses committee, which gives final approval to the allowance evaluation before presented to the Board of Directors for their approval.

44

Table of Contents


Additionally, the Company continually evaluates, through its governance process, the development of the allowance for loan and lease losses methodology. During 2017, the Company refined and enhanced its quantitative framework by implementing loss migration periods to determine historical loss rates. It also enhanced its qualitative framework to complement the loss migration historical loss rates. These enhancements were implemented to increase the level of precision in the allowance for loan and lease losses and did not result in a material change in the required allowance for loan and lease losses.
The methodology employed for assessing the adequacy of the allowance consists of the following criteria:
The establishment of specific reserve amounts for impaired loans and leases, including PCI loans.
The establishment of reserves for pools of homogeneous loans and leases not subject to specific review, including impaired loans under $500,000, leases, 1 - 4 family residential mortgages, and consumer loans.
The establishment of reserve amounts for pools of homogeneous loans and leases are based upon the determination of historical loss rates, which are adjusted to reflect current conditions through the use of qualitative factors. The qualitative factors considered by the Company include an evaluation of the results of the Company’s independent loan review function, the Company's reporting capabilities, the adequacy and expertise of Lakeland’s lending staff, underwriting policies, loss histories, trends in the portfolio, delinquency trends, economic and business conditions and capitalization rates. Since many of Lakeland’s loans depend on the sufficiency of collateral as a secondary source of repayment, any adverse trends in the real estate market could affect the underlying values available to protect Lakeland from losses.
Additionally, management determines the loss emergence periods for each loan segment, which are used to define loss migration periods and establish appropriate ranges for qualitative adjustments for each loan segment. The loss emergence period is the estimated time from the date of a loss event (such as a personal bankruptcy) to the actual recognition of the loss (typically via the first partial or full loan charge-off), and is determined based upon a study of our past loss experience by loan segment. All of the factors considered in the analysis of the adequacy of the allowance for loan and lease losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan and lease losses may be required that would adversely impact earnings in future periods.
The overall balance of the allowance for loan and lease losses of $36.6 million at June 30, 2018 increased $1.1 million, from December 31, 2017, an increase of 3%. The change in the allowance within loan segments during the two comparable periods captures changes in the non-performing loan and charge-off statistics, changes in the risk ratings of the loans and the level of growth.
Non-performing loans and leases of $14.3 million at June 30, 2018 increased $612,000 from December 31, 2017. The allowance for loan and lease losses as a percent of total loans was 0.85% at both June 30, 2018 and December 31, 2017. Management believes, based on appraisals and estimated selling costs that the majority of its non-performing loans and leases are adequately secured and reserves on its non-performing loans and leases are adequate. Based upon the process employed and giving recognition to all accompanying factors related to the loan and lease portfolio, management considers the allowance for loan and lease losses to be adequate at June 30, 2018.
Investment Securities
For detailed information on the composition and maturity distribution of the Company’s investment securities portfolio, see Note 4 in Notes to Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q. Total investment securities decreased $2.7 million, from $767.7 million at December 31, 2017 to $765.1 million at June 30, 2018.  
Deposits
Total deposits increased from $4.37 billion at December 31, 2017 to $4.40 billion at June 30, 2018, an increase of $31.3 million, or 1%. Time deposits increased $69.4 million, while savings and interest-bearing transaction accounts decreased $38.7 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.

45

Table of Contents


Lakeland funds loan demand and operation expenses from several sources:
Net income. Cash provided by operating activities was $43.9 million for the first six months of 2018 compared to $33.1 million for the same period in 2017.
Deposits. Lakeland can offer new products or change its rate structure in order to increase deposits. In the first six months of 2018, Lakeland’s deposits increased $31.3 million.
Sales of securities. At June 30, 2018 the Company had $606.2 million in securities designated “available for sale.” Of these securities, $320.3 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.
Credit lines. As a member of the FHLB, Lakeland has the ability to borrow overnight based on the market value of collateral pledged. Lakeland had $50.0 million in overnight borrowings from the FHLB on June 30, 2018. Lakeland also has overnight federal funds lines available for it to borrow up to $210.0 million of which $116.3 million was outstanding at June 30, 2018. 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 June 30, 2018.
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 six months ended June 30, 2018 follows.
Cash and cash equivalents totaling $142.8 million on June 30, 2018 decreased $121,000 from December 31, 2017. Operating activities provided $43.9 million in net cash. Investing activities used $142.2 million in net cash, primarily reflecting an increase in loans and leases and the purchase of securities. Financing activities provided $98.2 million in net cash primarily reflecting the net increase in deposits of $31.5 million and net proceeds from federal funds purchased and other borrowings of $77.4 million. The Company anticipates that it will have sufficient funds available to meet its current loan commitments and deposit maturities. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.
The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of June 30, 2018. Interest on subordinated debentures and long-term borrowed funds is calculated based on current contractual interest rates.
 

46

Table of Contents


 
Total
 
Within
One Year
 
After One
But Within
Three Years
 
After Three
But Within
Five Years
 
After
Five Years
 
(dollars in thousands)
Minimum annual rentals on noncancellable operating leases
$
29,794

 
$
3,235

 
$
5,978

 
$
4,949

 
$
15,632

Benefit plan commitments
5,811

 
306

 
793

 
855

 
3,857

Remaining contractual maturities of time deposits
806,783

 
570,881

 
194,736

 
41,166

 

Subordinated debentures
104,963

 

 

 

 
104,963

Loan commitments
986,829

 
681,689

 
113,716

 
40,165

 
151,259

Other borrowings
196,376

 
66,082

 
81,040

 
39,817

 
9,437

Interest on other borrowings*
65,751

 
8,794

 
15,142

 
12,182

 
29,633

Standby letters of credit
20,228

 
18,400

 
1,748

 

 
80

Total
$
2,216,535

 
$
1,349,387

 
$
413,153

 
$
139,134

 
$
314,861

*Includes interest on other borrowings and subordinated debentures at a weighted rate of 3.06%.    
Capital Resources
Total stockholders’ equity increased from $583.1 million on December 31, 2017 to $597.9 million on June 30, 2018, an increase of $14.7 million. Book value per common share increased to $12.59 on June 30, 2018 from $12.31 on December 31, 2017. Tangible book value per share increased from $9.38 per share on December 31, 2017 to $9.67 per share on June 30, 2018, an increase of 3%. Please see “Non-GAAP Financial Measures” below. The increase in stockholders’ equity from December 31, 2017 to June 30, 2018 was primarily due to $31.1 million of net income, partially offset by other comprehensive loss on the Company's available for sale securities portfolio of $7.1 million and the payment of cash dividends on common stock of $10.3 million.
The Company and Lakeland are subject to various regulatory capital requirements that are monitored by federal banking agencies. Failure to meet minimum capital requirements can lead to certain supervisory actions by regulators; any supervisory action could have a direct material adverse effect on the Company or Lakeland’s financial statements. As of June 30, 2018, the Company and Lakeland met all capital adequacy requirements to which they are subject.     
The final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks became effective for the Company on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019. As of June 30, 2018, the Company’s capital levels remained characterized as “well-capitalized” under the new rules.
The capital ratios for the Company and Lakeland for the periods presented are as follows: 
 
Tier 1 Capital to Total
Average Assets Ratio
 
Common Equity Tier 1 to
Risk-Weighted Assets
Ratio
 
Tier 1 Capital to Risk-
Weighted Assets Ratio
 
Total Capital to Risk-
Weighted Assets Ratio
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
The Company
9.43
%
 
9.12
%
 
10.49
%
 
10.18
%
 
11.16
%
 
10.87
%
 
13.67
%
 
13.40
%
Lakeland Bank
10.26
%
 
10.06
%
 
12.14
%
 
12.00
%
 
12.14
%
 
12.00
%
 
13.01
%
 
12.86
%
Required capital ratios including conservation buffer
4.00
%
 
4.00
%
 
6.38
%
 
5.750
%
 
7.88
%
 
7.250
%
 
9.88
%
 
9.250
%
“Well capitalized” institution under FDIC Regulations
5.00
%
 
5.00
%
 
6.50
%
 
6.50
%
 
8.00
%
 
8.00
%
 
10.00
%
 
10.00
%

47

Table of Contents


The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”) was signed into law during the second quarter of 2018. The Act, among other matters,  amends the Federal Deposit Insurance Act to require federal banking agencies to develop a specified Community Bank Leverage Ratio (the ratio of a bank's equity capital to its consolidated assets) for banks with assets of less than $10 billion.  Banks that exceed this ratio shall be deemed to comply with all other capital and leverage requirements.  The Act also expands the definition of qualified mortgages that may be held by a financial institution. We are unable to predict the specific impact the Act and the implementing rules and regulations, which have not yet been written, will have on the Company and Lakeland Bank.

Non-GAAP Financial Measures
Reported amounts are presented in accordance with U.S. GAAP. The Company’s management uses certain supplemental non-GAAP information in its analysis of the Company’s financial results. Specifically, the Company provides measurements and ratios based on tangible equity and tangible assets. These measures are utilized by regulators and market analysts to evaluate a company’s financial condition and therefore, such information is useful to investors.
The Company also provides measures based on what it believes are its operating earnings on a consistent basis, and excludes material non-routine operating items which affect the GAAP reporting of results of operations. The Company’s management believes that providing this information to analysts and investors allows them to better understand and evaluate the Company’s core financial results for the periods in question.
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)
June 30, 2018
 
December 31, 2017
Calculation of Tangible Book Value per Common Share
 
 
 
Total common stockholders’ equity at end of period - GAAP
$
597,864

 
$
583,122

Less:
 
 
 
Goodwill
136,433

 
136,433

Other identifiable intangible assets, net
2,052

 
2,362

Total tangible common stockholders’ equity at end of period - Non-GAAP
$
459,379

 
$
444,327

Shares outstanding at end of period
47,484

 
47,354

Book value per share - GAAP
$
12.59

 
$
12.31

Tangible book value per share - Non-GAAP
$
9.67

 
$
9.38

Calculation of Tangible Common Equity to Tangible Assets
 
 
 
Total tangible common stockholders’ equity at end of period - Non-GAAP
$
459,379

 
$
444,327

Total assets at end of period
$
5,534,488

 
$
5,405,639

Less:
 
 
 
Goodwill
136,433

 
136,433

Other identifiable intangible assets, net
2,052

 
2,362

Total tangible assets at end of period - Non-GAAP
$
5,396,003

 
$
5,266,844

Common equity to assets - GAAP
10.80
%
 
10.79
%
Tangible common equity to tangible assets - Non-GAAP
8.51
%
 
8.44
%

48

Table of Contents


 
For the Three Months Ended
 
For the Six Months Ended
(dollars in thousands)
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Calculation of Return on Average Tangible Common Equity
 
 
 
 
 
 
 
Net income - GAAP
$
15,838

 
$
13,370

 
$
31,093

 
$
25,682

Total average common stockholders’ equity
$
593,388

 
$
565,211

 
$
588,571

 
$
559,528

Less:
 
 
 
 
 
 
 
Average goodwill
136,433

 
135,755

 
136,433

 
135,751

Average other identifiable intangible assets, net
2,134

 
3,069

 
2,217

 
3,172

Total average tangible common stockholders’ equity - Non-GAAP
$
454,821

 
$
426,387

 
$
449,921

 
$
420,605

Return on average common stockholders’ equity - GAAP
10.71
%
 
9.49
%
 
10.65
%
 
9.26
%
Return on average tangible common stockholders’ equity - Non-GAAP
13.97
%
 
12.58
%
 
13.94
%
 
12.31
%

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 $173.6 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
)%
June 30, 2018
(1.3
)%
 
(2.0
)%
December 31, 2017
(1.1
)%
 
(3.6
)%
The Company’s review of interest rate risk also includes policy limits for net interest income changes in various “rate shock” scenarios. Rate shocks assume that current interest rates change immediately. The information provided for net interest income assumes fluctuations or “rate shocks” for changes in interest rates as shown in the table below.
 
Changes in Interest Rates
Rate Shock
+300 bp

 
+200 bp

 
+100 bp

 
-100 bp

Asset/Liability policy limit
(15.0
)%
 
(10.0
)%
 
(5.0
)%
 
(5.0
)%
June 30, 2018
(1.5
)%
 
(1.0
)%
 
(0.4
)%
 
(2.5
)%
December 31, 2017
0.3
 %
 
0.3
 %
 
0.3
 %
 
(5.9
)%
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 June 30, 2018 (the base case) was $833.8 million. The information provided for the net portfolio value assumes

49

Table of Contents


fluctuations or “rate shocks” 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

Asset/Liability policy limit
(25.0
)%
 
(20.0
)%
 
(10.0
)%
 
(10.0
)%
June 30, 2018
(5.4
)%
 
(3.4
)%
 
(1.6
)%
 
0.3
 %
December 31, 2017
(5.0
)%
 
(3.3
)%
 
(1.4
)%
 
(0.4
)%
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, 2017.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes in net interest income requires the making of certain assumptions regarding prepayment and deposit decay rates, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. While management believes such assumptions are reasonable, there can be no assurance that assumed prepayment rates and decay rates will approximate actual future loan prepayment and deposit withdrawal activity. Moreover, the net interest income table presented assumes that the composition of interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the net interest income table provides an indication of the Company’s interest rate risk exposure at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results.

50

Table of Contents


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 June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


51

Table of Contents


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, 2017.
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
3.1
31.1
31.2
32.1
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
 
 


52



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Lakeland Bancorp, Inc.
(Registrant)
 
/s/ Thomas J. Shara
Thomas J. Shara
President and Chief Executive Officer
(Principal Executive Officer)
 
/s/ Thomas F. Splaine
Thomas F. Splaine
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: August 8, 2018


53