LAKELAND BANCORP INC - Quarter Report: 2017 March (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended March 31, 2017

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

For the transition period from to

Commission file number 000-17820

LAKELAND BANCORP, INC.

(Exact name of registrant as specified in its charter)


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

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

(973) 697-2000

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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 ☒ 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):

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 ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

As of April 28, 2017, there were 47,350,857 outstanding shares of Common Stock, no par value.

LAKELAND BANCORP, INC.

Form 10-Q Index


		PAGE
	Part I. Financial Information

Item 1.	Financial Statements:

	Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016		3
	Consolidated Statements of Income for the Three Months Ended March 31, 2017 and 2016 (unaudited)		4
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016 (unaudited)		5
	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2017 and 2016 (unaudited)		6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (unaudited)		7
	Notes to Consolidated Financial Statements		9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		38

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		50

Item 4.	Controls and Procedures		52

	Part II. Other Information

Item 1.	Legal Proceedings		53

Item 1A.	Risk Factors		53

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		53

Item 3.	Defaults Upon Senior Securities		53

Item 4.	Mine Safety Disclosures		53

Item 5.	Other Information		53

Item 6.	Exhibits		53

Signatures			54

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS


	March 31, 2017 (unaudited)			December 31, 2016
	(dollars in thousands)
ASSETS
Cash	$	141,757		$	169,149
Interest-bearing deposits due from banks		8,649			6,652

Total cash and cash equivalents		150,406			175,801

Investment securities available for sale, at fair value		687,352			606,704
Investment securities held to maturity; fair value of $148,083 at March 31, 2017 and $146,990 at December 31, 2016		148,409			147,614
Federal Home Loan Bank and other membership bank stock, at cost		12,072			15,099
Loans, net of deferred costs (fees)		3,971,154			3,870,598
Less: allowance for loan and lease losses		31,590			31,245

Net loans		3,939,564			3,839,353
Loans held for sale		767			1,742
Premises and equipment, net		51,286			52,236
Accrued interest receivable		13,345			12,557
Goodwill		135,747			135,747
Other identifiable intangible assets		3,149			3,344
Bank owned life insurance		72,823			72,384
Other assets		32,895			30,550

TOTAL ASSETS	$	5,247,815		$	5,093,131

LIABILITIES
Deposits:
Noninterest-bearing	$	924,581		$	927,270
Savings and interest-bearing transaction accounts		2,809,705			2,620,657
Time deposits $250 thousand and under		414,123			404,680
Time deposits over $250 thousand		144,984			140,228

Total deposits		4,293,393			4,092,835
Federal funds purchased and securities sold under agreements to repurchase		84,850			56,354
Other borrowings		173,425			260,866
Subordinated debentures		104,813			104,784
Other liabilities		33,692			28,248

TOTAL LIABILITIES		4,690,173			4,543,087

STOCKHOLDERS’ EQUITY
Common stock, no par value; authorized shares, 70,000,000; issued 47,350,165 shares at March 31, 2017 and 47,222,914 shares at December 31, 2016		511,575			510,861
Retained earnings		46,375			38,590
Accumulated other comprehensive (loss) income		(308	)		593

TOTAL STOCKHOLDERS’ EQUITY		557,642			550,044

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	5,247,815		$	5,093,131

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

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	For the Three Months Ended March 31,
	2017		2016
	(in thousands, except per share data)
INTEREST INCOME
Loans, leases and fees	$	40,411	$	34,121
Federal funds sold and interest-bearing deposits with banks		276		75
Taxable investment securities and other		3,599		2,962
Tax-exempt investment securities		510		413

TOTAL INTEREST INCOME		44,796		37,571

INTEREST EXPENSE
Deposits		3,334		2,205
Federal funds purchased and securities sold under agreements to repurchase		10		38
Other borrowings		2,129		1,478

TOTAL INTEREST EXPENSE		5,473		3,721

NET INTEREST INCOME		39,323		33,850
Provision for loan and lease losses		1,218		1,075

NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES		38,105		32,775
NONINTEREST INCOME
Service charges on deposit accounts		2,455		2,442
Commissions and fees		1,156		979
Gains on sales of investment securities		2,539		370
Gains on sales of loans		398		420
Income on bank owned life insurance		426		408
Other income		1,120		248

TOTAL NONINTEREST INCOME		8,094		4,867

NONINTEREST EXPENSE
Salaries and employee benefits		15,417		14,085
Net occupancy expense		2,836		2,688
Furniture and equipment		2,097		1,946
Stationery, supplies and postage		443		443
Marketing expense		401		309
FDIC insurance expense		318		590
Data processing expense		553		520
Telecommunications expense		404		424
ATM and debit card expense		441		346
Expenses on other real estate owned and other repossessed assets		37		39
Long-term debt prepayment fee		2,828		—
Merger related expenses		—		1,721
Core deposit intangible amortization		195		167
Other expenses		2,500		2,146

TOTAL NONINTEREST EXPENSE		28,470		25,424

Income before income tax expense		17,729		12,218
Income tax expense		5,417		4,110

NET INCOME	$	12,312	$	8,108

PER SHARE OF COMMON STOCK
Basic earnings	$	0.26	$	0.20

Diluted earnings	$	0.26	$	0.20

Dividends	$	0.095	$	0.085

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

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Months Ended March 31,
	2017			2016
	(in thousands)
NET INCOME	$	12,312		$	8,108

OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
Unrealized gains on securities available for sale		734			4,157
Reclassification for securities gains included in net income		(1,649	)		(233	)
Unrealized gains on derivatives		14			—
Change in pension liability, net		—			38

Other comprehensive (loss) income		(901	)		3,962

TOTAL COMPREHENSIVE INCOME	$	11,411		$	12,070

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

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

For the Three Months Ended March 31, 2017 and 2016


							Accumulated
							Other
	Common			Retained			Comprehensive
	Stock			Earnings			Income (Loss)			Total
	(in thousands)
At January 1, 2016	$	386,287		$	13,079		$	1,150		$	400,516

Net income		—			8,108			—			8,108
Other comprehensive income, net of tax		—			—			3,962			3,962
Stock based compensation		754			—			—			754
Issuance of stock for Pascack acquisition		37,221			—			—			37,221
Retirement of restricted stock		(161	)		—			—			(161	)
Cash dividends, common stock		—			(3,525	)		—			(3,525	)

At March 31, 2016	$	424,101		$	17,662		$	5,112		$	446,875


At January 1, 2017	$	510,861		$	38,590		$	593		$	550,044

Net income		—			12,312			—			12,312
Other comprehensive loss, net of tax		—			—			(901	)		(901	)
Stock based compensation		1,170			—			—			1,170
Exercise of stock options		300			—			—			300
Retirement of restricted stock		(756	)		—			—			(756	)
Cash dividends, common stock		—			(4,527	)		—			(4,527	)

At March 31, 2017	$	511,575		$	46,375		$	(308	)	$	557,642

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

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Three Months Ended March 31,
	2017			2016
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	12,312		$	8,108
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premiums, discounts and deferred loan fees and costs		1,296			757
Depreciation and amortization		1,012			878
Amortization of intangible assets		195			167
Provision for loan and lease losses		1,218			1,075
Loans originated for sale		(13,427	)		(14,786	)
Proceeds from sales of loans		14,800			15,289
Gains on sales of securities		(2,539	)		(370	)
Gains on sales of loans held for sale		(398	)		(420	)
Gains on other real estate and other repossessed assets		(339	)		(9	)
(Gains) losses on sales of premises and equipment		(367	)		66
Long-term debt prepayment penalty		2,828			—
Stock-based compensation		1,170			754
Excess tax benefits		573			—
Increase in other assets		(4,074	)		(3,138	)
Increase (decrease) in other liabilities		5,467			(912	)

NET CASH PROVIDED BY OPERATING ACTIVITIES		19,727			7,459

CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash acquired in acquisitions		—			40,942
Proceeds from repayments and maturities of available for sale securities		20,613			22,455
Proceeds from repayments and maturities of held to maturity securities		4,143			9,053
Proceeds from sales of available for sale securities		4,499			15,654
Purchase of available for sale securities		(105,475	)		(26,843	)
Purchase of held to maturity securities		(5,078	)		(8,218	)
Proceeds from redemptions of Federal Home Loan Bank stock		3,026			856
Net increase in loans and leases		(103,936	)		(83,387	)
Proceeds from sales of other real estate and repossessed assets		2,853			463
Proceeds from dispositions and sales of premises and equipment		849			10
Purchases of premises and equipment		(810	)		(977	)

NET CASH USED IN INVESTING ACTIVITIES		(179,316	)		(29,992	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		200,739			162,738
Increase (decrease) in federal funds purchased and securities sold under agreements to repurchase		28,496			(22,393	)
Repayments of other borrowings		(90,058	)		(19,000	)
Exercise of stock options		300			—
Retirement of restricted stock		(756	)		(161	)
Dividends paid		(4,527	)		(3,525	)

NET CASH PROVIDED BY FINANCING ACTIVITIES		134,194			117,659

Net (decrease) increase in cash and cash equivalents		(25,395	)		95,126
Cash and cash equivalents, beginning of period		175,801			118,493

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	150,406		$	213,619


	For the Three Months Ended March 31,
	2017		2016
	(in thousands)
Supplemental schedule of non-cash investing and financing activities:
Cash paid during the period for income taxes	$	6,250	$	4,575
Cash paid during the period for interest		6,667		3,569
Transfer of loans and leases into other repossessed assets and other real estate owned		2,152		263
Acquisition of Pascack:
Non-cash assets acquired:
Federal Home Loan Bank stock		—		2,962
Investment securities held for maturity		—		3,925
Loans, including loans held for sale				319,575
Goodwill and other intangible assets, net		—		16,983
Other assets		—		21,110
Total non-cash assets acquired		—		364,555
Liabilities assumed:		—
Deposits				(304,466	)
Other borrowings		—		(57,308	)
Other liabilities		—		(6,502	)
Total liabilities assumed		—		(368,276	)
Common stock issued and fair value of stock options converted to Lakeland Bancorp stock options		—		37,221

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

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 three months ended March 31, 2017 do not necessarily indicate the results that the Company will achieve for all of 2017.

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, 2016.

NOTE 2 – ACQUISITIONS

Harmony Bank

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

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


	On July 1, 2016
	(in thousands)
Cash and cash equivalents	$	27,809
Securities available for sale		7,474
Securities held to maturity		6,885
Federal Home Loan Bank stock		780
Loans		260,815
Premises and equipment		3,125
Goodwill		10,462
Identifiable intangible assets		1,416
Accrued interest receivable and other assets		7,673

Total assets acquired		326,439

Deposits		(278,060	)
Other borrowings		(9,314	)
Other liabilities		(2,411	)

Total liabilities assumed		(289,785	)

Net assets acquired	$	36,654

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

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


	Acquired
	Credit
	Impaired
	Loans
	(in thousands)
Contractually required principal and interest at acquisition	$	1,264
Contractual cash flows not expected to be collected (non-accretable difference)		398

Expected cash flows at acquisition		866
Interest component of expected cash flows (accretable difference)		97

Fair value of acquired loans	$	769

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

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

Pascack Bancorp

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

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


	On Janaury 7, 2016
	(in thousands)
Cash and cash equivalents	$	40,942
Securities held to maturity		3,925
Federal Home Loan Bank stock		2,962
Loans		319,575
Premises and equipment		14,438
Goodwill		15,311
Identifiable intangible assets		1,514
Accrued interest receivable and other assets		6,672

Total assets acquired		405,339

Deposits		(304,466	)
Other borrowings		(57,308	)
Other liabilities		(6,344	)

Total liabilities assumed		(368,118	)

Net assets acquired	$	37,221

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

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


	Acquired
	Credit
	Impaired
	Loans
	(in thousands)
Contractually required principal and interest at acquisition	$	4,932
Contractual cash flows not expected to be collected (non-accretable difference)		4,030

Expected cash flows at acquisition		902
Interest component of expected cash flows (accretable difference)		85

Fair value of acquired loans	$	817

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

Direct costs related to the Pascack and Harmony acquisitions were expensed as incurred. During the three months ended March 31, 2016, the Company incurred $1.7 million of merger and acquisition integration-related expenses, which have been separately stated in the Company’s consolidated statements of income.

NOTE 3 – EARNINGS PER SHARE

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


	For the Three Months Ended March 31,
	2017		2016
	(in thousands, except per share data)
Net income available to common shareholders	$	12,312	$	8,108
Less: earnings allocated to participating securities		121		58

Net income allocated to common shareholders	$	12,191	$	8,050

Weighted average number of common shares outstanding - basic		47,354		40,931
Share-based plans		269		161

Weighted average number of common shares outstanding - diluted		47,623		41,092

Basic earnings per share	$	0.26	$	0.20

Diluted earnings per share	$	0.26	$	0.20

There were no antidilutive options to purchase common stock excluded from the computation for the three months ended March 31, 2017 and 2016.

NOTE 4 – INVESTMENT SECURITIES


	March 31, 2017									December 31, 2016
	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	$	136,058	$	108	$	(1,120	)	$	135,046	$	118,537	$	102	$	(1,280	)	$	117,359
Mortgage-backed securities, residential		468,194		1,227		(4,160	)		465,261		406,851		1,174		(4,487	)		403,538
Mortgage-backed securities, multifamily		10,177		39		(37	)		10,179		10,192		30		(35	)		10,187
Obligations of states and political subdivisions		54,258		549		(678	)		54,129		48,868		391		(933	)		48,326
Debt securities		5,000		151		—			5,151		5,350		63		(1	)		5,412
Equity securities		15,428		2,602		(444	)		17,586		17,314		5,000		(432	)		21,882

	$	689,115	$	4,676	$	(6,439	)	$	687,352	$	607,112	$	6,760	$	(7,168	)	$	606,704


	March 31, 2017									December 31, 2016
	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	$	33,519	$	159	$	(354	)	$	33,324	$	33,553	$	144	$	(430	)	$	33,267
Mortgage-backed securities, residential		39,917		341		(610	)		39,648		38,706		369		(598	)		38,477
Mortgage-backed securities, multifamily		2,034		—		(32	)		2,002		2,059		—		(44	)		2,015
Obligations of states and political subdivisions		70,929		402		(277	)		71,054		71,284		269		(385	)		71,168
Debt securities		2,010		45		—			2,055		2,012		51		—			2,063

	$	148,409	$	947	$	(1,273	)	$	148,083	$	147,614	$	833	$	(1,457	)	$	146,990

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
March 31, 2017	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	2,283	$	2,303	$	37,144	$	37,100
Due after one year through five years		103,618		103,824		30,755		30,937
Due after five years through ten years		72,107		70,971		34,034		33,876
Due after ten years		17,308		17,228		4,525		4,520

		195,316		194,326		106,458		106,433
Mortgage-backed securities		478,371		475,440		41,951		41,650
Equity securities		15,428		17,586		—		—

Total securities	$	689,115	$	687,352	$	148,409	$	148,083

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


	For the Three Months Ended March 31,
	2017		2016
Sale proceeds	$	4,499	$	15,654
Gross gains		2,539		370

There were no other-than-temporary impairments during the three months ended March 31, 2017 or 2016.

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 $499.7 million and $443.4 million at March 31, 2017 and December 31, 2016, respectively, were pledged to secure public deposits and for other purposes required by applicable laws and regulations.

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


	Less Than 12 Months				12 Months or Longer				Total
			Unrealized				Unrealized		Number of				Unrealized
March 31, 2017	Fair Value		Losses		Fair Value		Losses		Securities		Fair Value		Losses
					(dollars in thousands)
AVAILABLE FOR SALE
U.S. government agencies	$	102,370	$	1,120	$	—	$	—		19	$	102,370	$	1,120
Mortgage-backed securities, residential		318,895		3,774		14,574		386		93		333,469		4,160
Mortgage-backed securities, multifamily		5,160		37		—		—		1		5,160		37
Obligations of states and political subdivisions		26,837		678		—		—		47		26,837		678
Equity securities		—		—		9,514		444		2		9,514		444

	$	453,262	$	5,609	$	24,088	$	830		162	$	477,350	$	6,439

HELD TO MATURITY

U.S. government agencies	$	12,180	$	354	$	—	$	—		2	$	12,180	$	354
Mortgage-backed securities, residential		29,330		545		1,049		65		19		30,379		610
Mortgage-backed securities, multifamily		2,002		32		—		—		2		2,002		32
Obligations of states and political subdivisions		42,516		277		—		—		28		42,516		277

	$	86,028	$	1,208	$	1,049	$	65		51	$	87,077	$	1,273


	Less Than 12 Months				12 Months or Longer				Total
			Unrealized				Unrealized		Number of				Unrealized
December 31, 2016	Fair Value		Losses		Fair Value		Losses		Securities		Fair Value		Losses
					(dollars in thousands)
AVAILABLE FOR SALE
U.S. Treasury and U.S. government agencies	$	94,153	$	1,280	$	—	$	—		18	$	94,153	$	1,280
Mortgage-backed securities, residential		292,873		4,078		15,453		409		91		308,326		4,487
Mortgage-backed securities, multifamily		5,178		35		—		—		1		5,178		35
Obligations of states and political subdivisions		29,904		933		—		—		54		29,904		933
Other debt securities		350		1		—		—		1		350		1
Equity securities		6,030		94		4,720		338		2		10,750		432

	$	428,488	$	6,421	$	20,173	$	747		167	$	448,661	$	7,168

HELD TO MATURITY

U.S. government agencies	$	17,147	$	430	$	—	$	—		3	$	17,147	$	430
Mortgage-backed securities, residential		27,909		535		1,061		63		15		28,970		598
Mortgage-backed securities, multifamily		2,015		44		—		—		2		2,015		44
Obligations of states and political subdivisions		50,302		384		401		1		43		50,703		385

	$	97,373	$	1,393	$	1,462	$	64		63	$	98,835	$	1,457

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;

•

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

•

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

•

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

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

As of March 31, 2017, the equity securities include investments in other financial institutions for market appreciation purposes. These equities had a purchase price of $2.1 million and a market value of $4.7 million as of March 31, 2017.

As of March 31, 2017, the equity securities also included $12.9 million in investment funds that do not have a quoted market price, but use net asset value per share or its equivalent to measure fair value.

The investment funds include $9.6 million that are invested in government guaranteed loans, mortgage-backed securities, small business loans and other instruments supporting affordable housing and economic development. The Company may redeem these funds at the net asset value calculated at the end of the current business day less any unpaid management fees. As of March 31, 2017, the amortized cost of these securities was $10.1 million and the fair value was $9.6 million. There are no restrictions on redemptions for the holdings in these investments other than the notice required by the fund manager. There are no unfunded commitments related to these investments.

The investment funds also include $3.3 million that are primarily invested in community development loans that are guaranteed by the Small Business Administration (“SBA”). Because the funds are primarily guaranteed by the federal government there are minimal changes in market value between accounting periods. These funds can be redeemed with 60 days notice at the net asset value less unpaid management fees with the approval of the fund manager. As of March 31, 2017, the net amortized cost equaled the market value of the investment. There are no unfunded commitments related to this investment.

NOTE 5 – LOANS, LEASES AND OTHER REAL ESTATE

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


	March 31,			December 31,
	2017			2016
	(in thousands)
Commercial, secured by real estate	$	2,650,542		$	2,556,601
Commercial, industrial and other		342,264			350,228
Leases		67,488			67,016
Real estate - residential mortgage		344,890			349,581
Real estate - construction		231,430			211,109
Home equity and consumer		338,104			339,360

Total loans and leases		3,974,718			3,873,895

Less: deferred fees		(3,564	)		(3,297	)

Loans and leases, net of deferred fees	$	3,971,154		$	3,870,598

At March 31, 2017 and December 31, 2016, home equity and consumer loans included overdraft deposit balances of $339,000 and $364,000, respectively. At March 31, 2017 and December 31, 2016, the Company had $908.4 million and $942.0 million, 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 acquisition and accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” was $444,000 at March 31, 2017, which was $372,000 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. The carrying value of loans acquired in the Harmony acquisition was $779,000 at March 31, 2017 which was substantially the same as the balance at acquisition date on July 1, 2016.

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


	Three Months Ended
	March 31, 2017
	(in thousands)
Balance, beginning of period	$	145
Acquisitions		—
Accretion		(51	)
Net reclassification non-accretable difference		86

Balance, end of period	$	180

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:


	March 31,		December 31,
	2017		2016
	(in thousands)
Commercial, secured by real estate	$	8,971	$	10,413
Commercial, industrial and other		136		167
Leases, including leases held for sale		179		153
Real estate - residential mortgage		4,715		6,048
Real estate - construction		1,472		1,472
Home equity and consumer		2,270		2,151

Total non-accrual loans and leases	$	17,743	$	20,404
Other real estate and other repossessed assets		710		1,072

TOTAL NON-PERFORMING ASSETS	$	18,453	$	21,476

Troubled debt restructurings, still accruing	$	11,553	$	8,802

Non-accrual loans included $2.2 million and $2.4 million of troubled debt restructurings at March 31, 2017 and December 31, 2016, respectively. The Company had $3.7 million in residential mortgages and consumer home equity loans that were in the process of foreclosure at each of March 31, 2017 and December 31, 2016.

An age analysis of past due loans, segregated by class of loans as of March 31, 2017 and December 31, 2016, is as follows:


					Greater								Recorded
					Than						Total		Investment Greater
	30-59 Days		60-89 Days		89 Days		Total				Loans		than 89 Days and
	Past Due		Past Due		Past Due		Past Due		Current		and Leases		Still Accruing
	(in thousands)
March 31, 2017

Commercial, secured by real estate	$	4,288	$	1,263	$	8,241	$	13,792	$	2,636,750	$	2,650,542	$	—
Commercial, industrial and other		87		74		109		270		341,994		342,264		—
Leases		347		29		179		555		66,933		67,488		—
Real estate - residential mortgage		3,622		—		3,827		7,449		337,441		344,890		—
Real estate - construction		1,029		—		1,471		2,500		228,930		231,430		—
Home equity and consumer		468		122		1,814		2,404		335,700		338,104		—

	$	9,841	$	1,488	$	15,641	$	26,970	$	3,947,748	$	3,974,718	$	—

December 31, 2016

Commercial, secured by real estate	$	6,082	$	1,234	$	9,313	$	16,629	$	2,539,972	$	2,556,601	$	—
Commercial, industrial and other		1,193		213		42		1,448		348,780		350,228		—
Leases		132		78		153		363		66,653		67,016		—
Real estate - residential mortgage		2,990		1,057		5,330		9,377		340,204		349,581		—
Real estate - construction		3,409		—		1,472		4,881		206,228		211,109		—
Home equity and consumer		1,260		129		2,049		3,438		335,922		339,360		10

	$	15,066	$	2,711	$	18,359	$	36,136	$	3,837,759	$	3,873,895	$	10

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 March 31, 2017 and December 31, 2016 are as follows:


			Contractual
	Recorded		Unpaid				Average		Interest
	Investment in		Principal		Specific		Investment in		Income
March 31, 2017	Impaired Loans		Balance		Allowance		Impaired Loans		Recognized
	(in thousands)
Loans without specific allowance:
Commercial, secured by real estate	$	15,093	$	15,484	$	—	$	12,859	$	67
Commercial, industrial and other		583		583		—		583		6
Real estate - residential mortgage		974		991		—		838		4
Real estate - construction		1,472		1,472		—		1,471		—
Home equity and consumer		—		—		—		26		—

Loans with specific allowance:
Commercial, secured by real estate		4,970		5,249		282		4,981		49
Commercial, industrial and other		327		377		10		327		4
Real estate - residential mortgage		1,018		1,095		37		1,022		7
Real estate - construction		—		—		—		—		—
Home equity and consumer		1,170		1,193		106		1,170		14

Total:
Commercial, secured by real estate	$	20,063	$	20,733	$	282	$	17,840	$	116
Commercial, industrial and other		910		960		10		910		10
Real estate - residential mortgage		1,992		2,086		37		1,860		11
Real estate - construction		1,472		1,472		—		1,471		—
Home equity and consumer		1,170		1,193		106		1,196		14

	$	25,607	$	26,444	$	435	$	23,277	$	151


			Contractual
	Recorded		Unpaid				Average		Interest
	Investment in		Principal		Specific		Investment in		Income
December 31, 2016	Impaired Loans		Balance		Allowance		Impaired Loans		Recognized
	(in thousands)
Loans without specific allowance:
Commercial, secured by real estate	$	12,764	$	13,195	$	—	$	13,631	$	229
Commercial, industrial and other		603		603		—		1,109		24
Leases		—		—		—		—		—
Real estate - residential mortgage		1,880		3,146		—		2,430		16
Real estate - construction		1,471		1,471		—		12		—
Home equity and consumer		139		139		—		388		—

Loans with specific allowance:
Commercial, secured by real estate		5,860		6,142		392		6,549		273
Commercial, industrial and other		349		349		12		360		17
Leases		—		—		—		1		—
Real estate - residential mortgage		1,031		1,100		31		1,011		30
Real estate - construction		—		—		—		—		—
Home equity and consumer		1,188		1,211		94		1,184		59

Total:
Commercial, secured by real estate	$	18,624	$	19,337	$	392	$	20,180	$	502
Commercial, industrial and other		952		952		12		1,469		41
Leases		—		—		—		1		—
Real estate - residential mortgage		2,911		4,246		31		3,441		46
Real estate - construction		1,471		1,471		—		12		—
Home equity and consumer		1,327		1,350		94		1,572		59

	$	25,285	$	27,356	$	529	$	26,675	$	648

Interest income recognized on impaired loans was $151,000 and $173,000 for the three months ended March 31, 2017 and 2016, respectively. Interest that would have been accrued on impaired loans during the first three months of 2017 and 2016 had the loans been performing under original terms would have been $345,000 and $450,000, 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.

The following table shows the Company’s commercial loan portfolio as of March 31, 2017 and December 31, 2016, by the risk ratings discussed above (in thousands):


	Commercial,		Commercial,
	Secured by		Industrial		Real Estate -
March 31, 2017	Real Estate		and Other		Construction
RISK RATING
1	$	—	$	473	$	—
2		—		29,814		—
3		83,095		36,051		—
4		778,932		124,448		30,291
5		1,677,338		125,912		197,268
5W - Watch		49,190		8,809		1,245
6 - Other assets especially mentioned		34,019		8,012		—
7 - Substandard		27,968		8,745		2,626
8 - Doubtful		—		—		—
9 - Loss		—		—		—

Total	$	2,650,542	$	342,264	$	231,430


	Commercial,		Commercial,
	Secured by		Industrial		Real Estate -
December 31, 2016	Real Estate		and Other		Construction
RISK RATING
1	$	—	$	1,449	$	—
2		—		26,743		—
3		82,102		36,644		—
4		729,281		135,702		28,177
5		1,615,331		129,366		175,595
5W - Watch		68,372		6,395		1,223
6 - Other assets especially mentioned		33,015		5,242		—
7 - Substandard		28,500		8,687		6,114
8 - Doubtful		—		—		—
9 - Loss		—		—		—

Total	$	2,556,601	$	350,228	$	211,109

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

Allowance for Loan and Lease Losses

The following table details activity in the allowance for loan and lease losses by portfolio segment for the three months ended March 31, 2017 and 2016:


	Commercial,			Commercial,						Real Estate-						Home
	Secured by			Industrial						Residential			Real Estate-			Equity and
Three Months Ended March 31, 2017	Real Estate			and Other			Leases			Mortgage			Construction			Consumer			Total
	(in thousands)
Beginning Balance	$	21,223		$	1,723		$	548		$	1,964		$	2,352		$	3,435		$	31,245
Charge-offs		(220	)		(163	)		(43	)		(141	)		(609	)		(184	)		(1,360	)
Recoveries		219			95			4			—			15			154			487
Provision		861			137			(7	)		2			620			(395	)		1,218

Ending Balance	$	22,083		$	1,792		$	502		$	1,825		$	2,378		$	3,010		$	31,590


	Commercial,			Commercial,						Real Estate-						Home
	Secured by			Industrial						Residential			Real Estate-			Equity and
Three Months Ended March 31, 2016	Real Estate			and Other			Leases			Mortgage			Construction			Consumer			Total
	(in thousands)
Beginning Balance	$	20,223		$	2,637		$	460		$	2,588		$	1,591		$	3,375		$	30,874
Charge-offs		(135	)		(625	)		(70	)		(93	)		—			(620	)		(1,543	)
Recoveries		55			42			1			3			—			46			147
Provision		(66	)		543			197			(232	)		(87	)		720			1,075

Ending Balance	$	20,077		$	2,597		$	588		$	2,266		$	1,504		$	3,521		$	30,553

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


	Commercial,		Commercial,				Real Estate-				Home
	Secured by		Industrial				Residential		Real Estate-		Equity and
March 31, 2017	Real Estate		and Other		Leases		Mortgage		Construction		Consumer		Total
	(in thousands)
Ending Balance: Individually evaluated for impairment	$	20,063	$	910	$	—	$	1,992	$	1,472	$	1,170	$	25,607
Ending Balance: Collectively evaluated for impairment		2,629,495		341,126		67,488		342,898		229,958		336,923		3,947,888
Ending Balance: Loans acquired with deteriorated credit quality		984		228		—		—		—		11		1,223

Ending Balance (1)	$	2,650,542	$	342,264	$	67,488	$	344,890	$	231,430	$	338,104	$	3,974,718


	Commercial,		Commercial,				Real Estate-				Home
	Secured by		Industrial				Residential		Real Estate-		Equity and
December 31, 2016	Real Estate		and Other		Leases		Mortgage		Construction		Consumer		Total
	(in thousands)
Ending Balance: Individually evaluated for impairment	$	18,624	$	952	$	—	$	2,911	$	1,471	$	1,327	$	25,285
Ending Balance: Collectively evaluated for impairment		2,536,858		349,001		67,016		346,670		209,638		338,019		3,847,202
Ending balance: Loans acquired with deteriorated credit quality		1,119		275		—		—		—		14		1,408

Ending Balance (1)	$	2,556,601	$	350,228	$	67,016	$	349,581	$	211,109	$	339,360	$	3,873,895

(1)	Excludes deferred fees

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


March 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	$	282	$	10	$	—	$	37	$	—	$	106	$	435
Ending Balance: Collectively evaluated for impairment		21,801		1,782		502		1,788		2,378		2,904	$	31,155

Ending Balance	$	22,083	$	1,792	$	502	$	1,825	$	2,378	$	3,010	$	31,590


December 31, 2016	Commercial, Secured by Real Estate		Commercial, Industrial and Other		Leases		Real Estate- Residential Mortgage		Real Estate- Construction		Home Equity and Consumer		Total
							(in thousands)
Ending Balance: Individually evaluated for impairment	$	392	$	12	$	—	$	31	$	—	$	94	$	529
Ending Balance: Collectively evaluated for impairment		20,831		1,711		548		1,933		2,352		3,341	$	30,716

Ending Balance	$	21,223	$	1,723	$	548	$	1,964	$	2,352	$	3,435	$	31,245

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 quarters ended March 31, 2017 and December 31, 2016. The Company analyzes the adequacy of the reserve for unfunded lending commitments quarterly.

Troubled Debt Restructurings

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

The following table summarizes loans that have been restructured during the three months ended March 31, 2017 and 2016:


	For the Three Months Ended						For the Three Months Ended
	March 31, 2017						March 31, 2016
	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		2	$	2,879	$	2,879		—	$	—	$	—
Home equity and consumer		—		—		—		3		285		285

		2	$	2,879	$	2,879		3	$	285	$	285

The following table summarizes as of March 31, 2017 and 2016, loans that were restructured within the previous twelve months that have subsequently defaulted:


	March 31, 2017				March 31, 2016
	Number of		Recorded		Number of		Recorded
	Contracts		Investment		Contracts		Investment
	(dollars in thousands)
Commercial, secured by real estate		—	$	—		1	$	635
Real estate - residential mortgage		1		226		—		—
Home equity and consumer		—		—		2		227

		1	$	226		3	$	862

Other Real Estate and Other Repossessed Assets

At March 31, 2017, the Company had other real estate owned and other repossessed assets of $710,000 and $0, respectively. At December 31, 2016, the Company had other real estate owned and other repossessed assets of $1.1 million and $9,000, respectively. The other real estate owned that the Company held at March 31, 2017 and December 31, 2016 included $710,000 and $1.1 million, respectively, in residential property acquired as a result of foreclosure proceedings or through a deed in lieu of foreclosure.

NOTE 6 – DERIVATIVES

Lakeland is a party to interest rate derivatives that are not designated as hedging instruments. Under a program, Lakeland executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Lakeland executes with a third party, such that Lakeland minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties. Lakeland had $7.5 million in available for sale securities pledged for collateral on its interest rate swaps with the financial institution at each of March 31, 2017 and December 31, 2016.

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 three months ended March 31, 2017, the Company did not record any hedge ineffectiveness. The Company recognized $8,000 of accumulated other comprehensive income that was reclassified into interest expense for the first three months of 2017.

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 $15,000 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):


March 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	$	88,190			9.7		3.78	%		1 Mo. LIBOR + 2.12	$	3,779
Customer interest rate swaps		63,539			12.8		4.61	%		1 Mo. LIBOR + 2.11		1,497
Interest rate swap (cash flow hedge)		30,000			4.3		1.10	%		3 Mo. LIBOR		1,055
Classified in Other Liabilities:
Customer interest rate swaps	$	88,190			9.7		3.78	%		1 Mo. LIBOR + 2.12	$	(3,779	)
3rd Party interest rate swaps		63,539			12.8		4.61	%		1 Mo. LIBOR + 2.11		(1,497	)

December 31, 2016	Notional Amount			Average Maturity (Years)		Weighted Average Fixed Rate			Weighted Average Variable Rate		Fair Value
Customer interest rate swaps	$	129,252			10.9		4.03	%		1 Mo. LIBOR + 2.10	$	(2,345	)
3rd party interest rate swaps		(129,252	)		10.9		4.03	%		1 Mo. LIBOR + 2.10		2,345
Interest rate swap (cash flow hedge)		30,000			4.5		1.10	%		3 Mo. LIBOR		1,033

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

The Company has goodwill of $135.7 million for each of the periods ended March 31, 2017 and December 31, 2016. 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 $3.1 million and $3.3 million for the periods ended March 31, 2017 and December 31, 2016, respectively. The estimated future amortization expense for the remainder of 2017 and for each of the succeeding five years ended December 31 is as follows (dollars in thousands):


For the Year Ended
2017	$	546
2018		645
2019		549
2020		454
2021		359
2022		263

NOTE 8 – BORROWINGS

Repurchase Agreements

At March 31, 2017, the Company had federal funds purchased and securities sold under agreements to repurchase of $60.0 million and $24.9 million respectively. The securities sold under agreements to repurchase are overnight sweep arrangement accounts with our customers. The Company also had $20.0 million in long-term securities sold under agreements to repurchase included in other borrowings which mature within 2 years. As of March 31, 2017, the Company had $55.0 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.

Prepayment of Borrowings

In February and March of 2017, the Company repaid 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 repaid 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 2009 Equity Compensation Program. Share-based compensation expense of $1.2 million and $754,000 was recognized for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, there was unrecognized compensation cost of $251,000 related to unvested restricted stock that is expected to be recognized over a weighted average period of approximately 0.84 years. Unrecognized compensation expense related to RSUs was approximately $2.5 million as of March 31, 2017, and that cost is expected to be recognized over a period of 1.76 years. There was $3,000 in unrecognized compensation expense related to unvested stock options as of March 31, 2017 and that cost is expected to be recognized over a period of 0.2 years.

In the first three 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 vests one year from the date it was granted. Compensation expense on this restricted stock is expected to be $240,000 over a one year period. In the first three months of 2016, the Company granted 23,952 shares of restricted stock to non-employee directors at a grant date fair value of $10.02 per share under the 2009 Equity Compensation Program. The restricted stock 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 three months ended March 31, 2017:


	Number of Shares			Weighted Average Price
Outstanding, January 1, 2017		42,875		$	9.72
Granted		13,176			18.20
Vested		(32,904	)		9.79
Forfeited		—			—

Outstanding, March 31, 2017		23,147		$	14.44

In the first three months of 2017, the Company granted 115,923 RSUs to certain officers at a weighted average grant date fair value of $19.97 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 three months of 2017 is expected to average approximately $772,000 per year over a three year period. In the first three months of 2016, the Company granted 139,726 RSUs at a weighted average grant date fair value of $10.04 per share under the Company’s 2009 Equity Compensation Program. Compensation expense on these restricted stock units is expected to average approximately $468,000 per year over a three year period.

The following is a summary of the Company’s RSU activity during the three months ended March 31, 2017:


	Number of Shares			Weighted Average Price
Outstanding, January 1, 2017		302,344		$	10.76
Granted		115,923			19.97
Vested		(146,485	)		13.05
Forfeited		(7,220	)		12.33

Outstanding, March 31, 2017		264,562		$	13.48

There were no grants of stock options in the first three months of 2017 or 2016. Option activity under the Company’s stock option plans is as follows:


						Weighted
						Average
				Weighted		Remaining
				Average		Contractual		Aggregate
	Number of			Exercise		Term		Intrinsic
	Shares			Price		(in years)		Value
Outstanding, January 1, 2017		135,250		$	8.79		4.18	$	1,450,533
Granted		—			—
Exercised		(30,387	)		9.87
Forfeited		—			—
Expired		—			—

Outstanding, March 31, 2017		104,863		$	8.47		4.96	$	1,168,463

Options exercisable at March 31, 2017		94,363		$	8.35		4.83	$	1,060,305

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

There were 30,387 stock options exercised during the first three months of 2017. The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2017 was $304,000. Exercise of stock options during the first three months of 2017 resulted in cash receipts of $300,000. There were no stock options exercised during the first three months of 2016.

NOTE 10 – COMPREHENSIVE INCOME

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


	March 31, 2017									March 31, 2016
For the quarter ended:	Before Tax Amount			Tax Benefit (Expense)			Net of Tax Amount			Before Tax Amount			Tax Benefit (Expense)			Net of Tax Amount
	(in thousands)									(in thousands)
Net unrealized gains (losses) on available for sale securities
Net unrealized holding gains arising during period	$	1,184		$	(450	)	$	734		$	6,563		$	(2,406	)	$	4,157
Reclassification adjustment for net gains arising during the period		(2,539	)		890			(1,649	)		(370	)		137			(233	)

Net unrealized gains (losses)		(1,355	)		440			(915	)		6,193			(2,269	)		3,924
Unrealized gain on derivatives		21			(7	)		14			—			—			—
Change in minimum pension liability		—			—			—			64			(26	)		38

Other comprehensive income (loss), net	$	(1,334	)	$	433		$	(901	)	$	6,257		$	(2,295	)	$	3,962

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 March 31, 2017										For the Three Months Ended March 31, 2016
	Unrealized										Unrealized Gains
	Gains (Losses) on			Unrealized							(Losses) on
	Available for Sale			Gains							Available for Sale
	Securities			on Derivatives		Pension Items		Total			Securities			Pension Items			Total
Beginning balance	$	(117	)	$	672	$	38	$	593		$	1,154		$	(4	)	$	1,150

Other comprehensive income before classifications		734			14		—		748			4,157			38			4,195
Amounts reclassified from accumulated other comprehensive income		(1,649	)		—		—		(1,649	)		(233	)		—			(233	)

Net current period other comprehensive income (loss)		(915	)		14		—		(901	)		3,924			38			3,962

Ending balance	$	(1,032	)	$	686	$	38	$	(308	)	$	5,078		$	34		$	5,112

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

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

The following table sets forth the Company’s financial assets that were accounted for at fair value on a recurring basis as of the periods presented by level within the fair value hierarchy. During the three months ended March 31, 2017, 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		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs		Total
	(Level 1)		(Level 2)		(Level 3)		Fair Value
	(in thousands)
March 31, 2017
Assets:
Investment securities, available for sale
U.S. Treasury and government agencies	$	5,938	$	129,108	$	—	$	135,046
Mortgage-backed securities		—		475,440		—		475,440
Obligations of states and political subdivisions		—		54,129		—		54,129
Other debt securities		—		5,151		—		5,151
Equity securities		4,688		12,898		—		17,586

Total securities available for sale		10,626		676,726		—		687,352

Derivative assets		—		6,331		—		6,331

Total Assets	$	10,626	$	683,057	$	—	$	693,683

Liabilities:
Derivative liabilities	$	—	$	5,276	$	—	$	5,276

Total Liabilities	$	—	$	5,276	$	—	$	5,276

December 31, 2016
Assets:
Investment securities, available for sale
U.S. Treasury and government agencies	$	5,931	$	111,428	$	—	$	117,359
Mortgage-backed securities		—		413,725		—		413,725
Obligations of states and political subdivisions		—		48,326		—		48,326
Other debt securities		—		5,412		—		5,412
Equity securities		7,748		14,134		—		21,882

Total securities available for sale		13,679		593,025		—		606,704
Derivative assets		—		3,378		—		3,378

Total Assets	$	13,679	$	596,403	$	—	$	610,082

Liabilities:
Derivative liabilities	$	—	$	2,345	$	—	$	2,345

Total Liabilities	$	—	$	2,345	$	—	$	2,345

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)
March 31, 2017
Assets:
Impaired loans and leases	$	—	$	—	$	25,607	$	25,607
Loans held for sale		—		767		—		767
Other real estate owned and other repossessed assets		—		—		710		710

December 31, 2016
Assets:
Impaired loans and leases	$	—	$	—	$	25,285	$	25,285
Loans held for sale		—		1,742		—		1,742
Other real estate owned and other repossessed assets		—		—		1,072		1,072

Impaired loans are evaluated and valued at the time the loan is identified as impaired at the lower of cost or market value of the underlying collateral. Because most of Lakeland’s impaired loans are collateral dependent, fair value is generally measured based on the value of the collateral, less estimated costs to sell, securing these loans and leases and is classified at a level 3 in the fair value hierarchy. Collateral may be real estate, accounts receivable, inventory, equipment and/or other business assets. The value of real estate is assessed based on appraisals by qualified third party licensed appraisers. The appraisers may use the sales comparison approach, the cost approach or the income approach to value the collateral using discount rates (with ranges of 5-11%) or capitalization rates (with ranges of 5-10%) 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 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 March 31, 2017 and December 31, 2016 are outlined below.

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

The fair value of investment securities held to maturity was measured using information from the same third-party servicer used for investment securities available for sale using the same methodologies discussed above. Investment securities held to maturity includes $34.8 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 March 31, 2017 and December 31, 2016 has been valued using a present value discounted cash flow where market prices are not available. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk. The valuation of the Company’s loan portfolio is consistent with accounting guidance but does not fully incorporate the exit price approach.

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

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

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

The following table presents the carrying values, fair values and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2017 and December 31, 2016:


	Carrying Value		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
March 31, 2017
Financial Assets:
Investment securities held to maturity	$	148,409	$	148,083	$	—	$	112,270	$	35,813
Federal Home Loan Bank and other membership bank stocks		12,072		12,072		—		12,072		—
Loans and leases, net		3,939,564		3,938,438		—		—		3,938,438

Financial Liabilities:
Certificates of deposit		559,107		557,035		—		557,035		—
Other borrowings		173,425		173,600		—		173,600		—
Subordinated debentures		104,813		95,191		—		—		95,191

December 31, 2016
Financial Assets:
Investment securities held to maturity	$	147,614	$	146,990	$	—	$	111,403	$	35,587
Federal Home Loan Bank and other membership bank stocks		15,099		15,099		—		15,099		—
Loans and leases, net		3,839,353		3,832,465		—		—		3,832,465

Financial Liabilities:
Certificates of deposit		544,908		543,399		—		543,399		—
Other borrowings		260,866		264,586		—		264,586		—
Subordinated debentures		104,784		94,476		—		—		94,476

NOTE 12 – RECENT ACCOUNTING PRONOUNCMENTS

In March 2017, the Financial Accounting Standards Board (“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 improves 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 items 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. 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 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 fiscal 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 is not expected to have a material 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 is not expected to have a material impact on the Company’s financial statements.

In June 2016, the FASB issued an accounting standards update pertaining to the measurement of credit losses on financial instruments. This update requires the measurement of all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable 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.

In March 2016, the FASB issued an accounting standards update to simplify employee share-based payment accounting. The areas for simplification in this update involve several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standard specifically requires excess tax benefits and tax deficiencies to be recorded in the income statement when awards vest or are settled. The Company adopted this accounting standards update in the first quarter of 2017. As a result, the Company recorded $573,000 in excess tax benefits in the income statement. The Company elected to continue its existing practice of estimating the number of awards that will be forfeited. The Company elected to apply the cash flow classification guidance prospectively, and therefore, prior periods have not been adjusted.

In March 2016, the FASB issued an accounting standards update that requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met, including the “clearly and closely related” criterion. The amendments in this update clarify the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The Company adopted this accounting standards update in the first quarter of 2017. The adoption of this update did not have a material impact on the Company’s financial statements.

In February 2016, FASB issued accounting guidance that requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period, with early adoption permitted. A modified retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently assessing the impact of the new guidance on its consolidated financial statements. The Company expects to recognize 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. This amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this update is not expected to have a material impact on the Company’s financial statements.

In May 2014, the FASB issued an accounting standards update that clarifies the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In 2016, the FASB issued further implementation guidance regarding revenue recognition. This additional guidance included clarification on certain principal versus agent considerations within the implementation of the guidance as well as clarification related to identifying performance obligations and licensing. The guidance along with its updates is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is still evaluating the potential impact on the Company’s financial statements. 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 and therefore management does not expect the new revenue recognition guidance to have a material impact on its consolidated financial statements.

Item 2.

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

This section should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Statements Regarding Forward Looking Information

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

In addition to the risk factors disclosed elsewhere in this document, the following factors, among others, could cause the Company’s actual results to differ materially and adversely from such forward-looking statements: changes in the financial services industry and the U.S. and global capital markets, changes in economic conditions nationally, regionally and in the Company’s markets, the nature and timing of actions of the Federal Reserve Board and other regulators, the nature and timing of legislation affecting the financial services industry, government intervention in the U.S. financial system, changes in levels of market interest rates, pricing pressures on loan and deposit products, credit risks of Lakeland’s lending and leasing activities, customers’ acceptance of Lakeland’s products and services, competition, and the failure to realize anticipated efficiencies and synergies following the Pascack and Harmony acquisitions.

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

Critical Accounting Policies, Judgments and Estimates

The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America and predominant practices within the banking industry. The consolidated financial statements include the accounts of the Company, Lakeland, Lakeland NJ Investment Corp., Lakeland Investment Corp., Lakeland Equity, Inc. 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 ended March 31, 2017 represented a period of continued growth for the Company. As discussed in this Management’s Discussion and Analysis:

•

Net income for the first quarter of 2017 of $12.3 million compared to $8.1 million for the same period in 2016. Diluted earnings per share of $0.26 represents a 30% increase over $0.20 for the same period in 2016.

•

For the first quarter of 2017, annualized return on average assets was 0.97%, annualized return on average common equity was 9.02%, and annualized return on average tangible common equity was 12.04% compared to 0.77%, 7.40%, and 10.40%, respectively, for the first quarter of 2016.

•

Commercial real estate loans, including construction loans, increased $114.3 million, or 4% since December 31, 2016, resulting in total loan growth of $100.8 million to $3.97 billion at March 31, 2017. Investment securities also grew $78.4 million, or 10%, to $847.8 million in that same time period.

•

The Company sold investment securities realizing a gain of $2.5 million. The Company elected to prepay $54.0 million in higher rate long-term borrowings and incurred a $2.8 million prepayment penalty.

•

Deposits increased $200.6 million, or 5%, since December 31, 2016 to $4.29 billion primarily due to growth in consumer accounts.

•

The efficiency ratio of 56.36% for the first quarter of 2017 compares favorably to 60.48% for the same period in 2016. The decrease in this ratio, in part, reflects the realization of cost savings from the Pascack and Harmony acquisitions and the closure of seven branches in 2016.

•

Net interest margin (“NIM”) was 3.33%, compared to 3.27% for the prior quarter and 3.48% for the first quarter of 2016. The increase from the fourth quarter of 2016 to the first quarter of 2017 was primarily due to the deployment of cash into higher yielding investments and loans as well as the pay-down of higher rate long-term debt. The decrease from the first quarter of 2016 to the first quarter of 2017 was primarily due to the $75.0 million subordinated debt issuance in the third quarter of 2016 and the increase in cost of deposits.

•

The Company implemented Accounting Standards Update 2016-09, “Compensation – Stock Compensation (Topic 718)” (“ASU 2016-09”), resulting in a tax benefit of $573,000.

•

The Company opened its first branch outside of New Jersey to support the continued penetration of the Hudson Valley market in New York State.

Comparison of Operating Results for the Three Months Ended March 31, 2017 and 2016

Net Income

Net income was $12.3 million, or $0.26 per diluted share, for the first quarter of 2017 compared to net income of $8.1 million, or $0.20 per diluted share, for the first quarter of 2016. Excluding the impact of merger related expenses, net income would have been $9.3 million, or $0.22 per diluted share, for the first quarter of 2016. Net interest income of $39.3 million for the first quarter of 2017 increased $5.5 million from the first quarter of 2016 due primarily to a $7.2 million increase in interest income, partially offset by an increase of $1.8 million in interest expense. The increase in interest income reflects an increase in interest-earning assets resulting primarily from the Harmony acquisition as well as organic growth.

Net Interest Income

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

Net interest income on a tax equivalent basis for the first quarter of 2017 was $39.6 million, compared to $34.1 million for the first quarter of 2016. The net interest margin decreased from 3.48% in the first quarter of 2016 to 3.33% in the first quarter of 2017 primarily as a result of an 8 basis point decrease in the yield on interest-earning assets, as well as an 11 basis point increase in the cost of interest-bearing liabilities. The decrease in yield on interest-earning assets was due primarily to a 26 and 62 basis point decrease in yield on taxable and tax-exempt securities, respectively. The reduction in yields on investment securities was due primarily to maturing securities at higher rates and new purchases at lower rates. The increase in the cost of interest-bearing liabilities was due primarily to an increase in the cost of borrowings resulting from the subordinated debt issuance in the third quarter of 2016 as well as a moderately higher cost of deposits. The decrease in net interest margin was somewhat mitigated 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 $161.6 million. The components of net interest income will be discussed in greater detail below.

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


	For the Three Months Ended,								For the Three Months Ended,
	March 31, 2017								March 31, 2016
						Average								Average
				Interest		Rates						Interest		Rates
	Average			Income/		Earned/			Average			Income/		Earned/
	Balance			Expense		Paid			Balance			Expense		Paid
	(dollars in thousands)
ASSETS
Interest-earning assets:
Loans and leases (1)	$	3,905,216		$	40,411		4.20	%	$	3,284,339		$	34,121		4.18	%
Taxable investment securities and other		677,005			3,599		2.13	%		495,887			2,962		2.39	%
Tax-exempt securities		113,041			785		2.78	%		74,694			635		3.40	%
Federal funds sold (2)		130,593			276		0.85	%		78,240			75		0.38	%

Total interest-earning assets		4,825,855			45,071		3.78	%		3,933,160			37,793		3.86	%

Noninterest-earning assets:
Allowance for loan and lease losses		(31,889	)							(31,128	)
Other assets		359,927								346,436

TOTAL ASSETS	$	5,153,893							$	4,248,468

LIABILITIES AND STOCKHOLDERS EQUITY
Interest-bearing liabilities:
Savings accounts	$	490,777		$	68		0.06	%	$	475,870		$	93		0.08	%
Interest-bearing transaction accounts		2,241,954			2,118		0.38	%		1,682,580			1,248		0.30	%
Time deposits		555,270			1,148		0.83	%		465,024			864		0.74	%
Borrowings		361,108			2,139		2.37	%		399,423			1,516		1.52	%

Total interest-bearing liabilities		3,649,109			5,473		0.60	%		3,022,897			3,721		0.49	%
Noninterest-bearing liabilities:
Demand deposits		921,770								760,198
Other liabilities		29,232								24,550
Stockholders’ equity		553,782								440,823

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	5,153,893							$	4,248,468

Net interest income/spread					39,598		3.18	%					34,072		3.37	%

Tax equivalent basis adjustment					275								222

NET INTEREST INCOME				$	39,323							$	33,850

Net interest margin (3)							3.33	%							3.48	%

(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 $37.8 million in the first quarter of 2016 to $45.1 million in the first quarter of 2017, an increase of $7.3 million, or 19%. The increase in interest income was primarily a result of the Harmony acquisition as well as organic growth in loans, as average loans and leases increased $620.9 million compared to the first quarter of 2016. The yield on average loans and leases at 4.20% in the first quarter of 2017 was 2 basis points higher than the first quarter of 2016. The yield on average taxable and tax-exempt investment securities decreased by 26 and 62 basis points, respectively, compared to the first quarter of 2016. As previously mentioned, the reduction in yields on investment securities was due primarily to maturing securities at higher rates and new purchases at lower rates. The yield on taxable securities in the first quarter of 2016 also includes the impact of income on called U.S. government agency securities.

Total interest expense of $5.5 million in the first quarter of 2017 was $1.8 million greater than the $3.7 million reported for the same period in 2016. The cost of average interest-bearing liabilities increased from 0.49% in the first quarter of 2016 to 0.60% in the first quarter of 2017. The increase in the cost of interest-bearing liabilities was due primarily to an increase in the cost of borrowings, higher costing deposits acquired in the Harmony acquisition as well as an increasingly competitive market for deposits. The 85 basis point increase in the cost of borrowings was due primarily to the $75.0 million issuance of subordinated debt in September 2016 bearing a rate of 5.125%. The prepayment of FHLB borrowings and term repurchase agreements mitigated the impact of the subordinated debt and will result in a reduction in the cost of funds going forward. Also impacting the cost of interest-bearing liabilities was an increase in the cost of interest-bearing transaction accounts and time deposits which increased by 8 basis points and 9 basis points, respectively.

Provision for Loan and Lease Losses

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

In the first quarter of 2017, a $1.2 million provision for loan and lease losses was recorded, which was $143,000 higher than the provision for the same period last year. The higher provision resulted from higher loan growth offset by lower charge-offs. The Company charged off $1.4 million and recovered $487,000 in the first quarter of 2017 compared to $1.5 million and $147,000, respectively, in the first quarter of 2016. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income at $8.1 million in the first quarter of 2017 increased by $3.2 million compared to $4.9 million in the first quarter of 2016. Included in noninterest income in the first quarter of 2017 was $2.5 million in gains on sales of investment securities, which compares to $370,000 during the same period last year. Commissions and fees at $1.2 million in the first quarter of 2017 increased $177,000 compared to the same period last year, due primarily to increases in commercial loan fees and credit card related merchant service fees. Other income at $1.1 million in the first quarter of 2017 was $872,000 higher than the same period in 2016 due primarily to a $259,000 increase in swap fee income, a $278,000 increase in gains on sales of other real estate owned, and $368,000 in gains on the sale of a former branch.

Noninterest Expense

Noninterest expense in the first quarter of 2017 totaled $28.5 million, which was $3.0 million greater than the $25.4 million reported for the first quarter of 2016. During the first quarter of 2017, the Company incurred $2.8 million in long-term debt prepayment penalties, and in the first quarter of 2016, the Company incurred $1.7 million in merger related expenses. Salaries and employee benefits expense of $15.4 million, increased $1.3 million from the same period last year, primarily due to the addition of Harmony employees during the second half of 2016 and year-over-year increases in employee salary and benefit costs. Net occupancy expense and furniture and equipment expense increased $148,000, and $151,000, respectively, compared to the first quarter of 2016, due primarily to the addition of the Harmony branches. Marketing expense of $401,000 in the first quarter of 2017 increased $92,000 compared to the same period last year due primarily to the timing of marketing campaigns. FDIC insurance expense of $318,000 in the first quarter of 2017 decreased $272,000 compared to the same period last year, due primarily to the decreased non-performing loans and increased capital levels. ATM and debit card expense of $441,000 increased $95,000 due primarily to the addition of the Harmony branches as well as the initiative to replace debit cards with the increased security EMV chip cards. Other expenses of $2.5 million in the first quarter of 2017 increased $354,000 compared to the first quarter of 2016 primarily due to higher correspondent, legal, collection, courier and consulting expenses. The Company’s efficiency ratio, a non-GAAP financial measure, was 56.4% in the first quarter of 2017, compared to 60.5% for the

same period last year. The decrease in this ratio reflects a 17.0% increase in revenue as well as the realization of cost savings from the Pascack and Harmony acquisitions, and the closure of seven branches in 2016. The Company uses this ratio because it believes that the ratio provides a good comparison of period-to-period performance and because the ratio is widely accepted in the banking industry. The following table shows the calculation of the efficiency ratio for the periods presented:


	For the Three Months Ended March 31,
	2017			2016
	(dollars in thousands)
Calculation of Efficiency Ratio
Total noninterest expense	$	28,470		$	25,424
Amortization of core deposit intangibles		(195	)		(167	)
Long-term debt prepayment penalty		(2,828	)		—
Merger related expenses		—			(1,721	)
Provision for unfunded lending commitments		—			(208	)

Noninterest expense, as adjusted	$	25,447		$	23,328

Net interest income	$	39,323		$	33,850
Noninterest income		8,094			4,867

Total revenue		47,417			38,717
Tax-equivalent adjustment on municipal securities		275			222
Less:
Gains on sales of investment securities		(2,539	)		(370	)

Total revenue, as adjusted	$	45,153		$	38,569

Efficiency ratio		56.4	%		60.5	%

Income Tax Expense

The effective tax rate in the first quarter of 2017 was 30.6% compared to 33.6% during the same period last year. The decrease in the effective tax rate was due primarily to the implementation of ASU 2016-09 which resulted in a $573,000 tax benefit related to excess tax benefits from the exercise of stock options and the vesting of restricted stock and RSUs.

Financial Condition

The Company’s total assets increased $154.7 million from December 31, 2016, to $5.25 billion at March 31, 2017. Total loans net of deferred fees were $3.97 billion, an increase of $100.6 million, or 3%, from $3.87 billion at December 31, 2016. Total deposits were $4.29 billion, an increase of $200.6 million, or 5%, from December 31, 2016.

Loans and Leases

Gross loans and leases of $3.97 billion at March 31, 2017 increased $100.8 million from December 31, 2016, primarily in the commercial loans secured by real estate category which increased $93.9 million, or 4%, during that time period. Real estate construction loans also increased $20.3 million, or 10%, while commercial industrial and other loans and residential mortgages decreased $8.0 million and $4.7 million, respectively. The decline in residential mortgages results from a decision to sell most of the residential loans that the Company originates. 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, decreased from $21.5 million at December 31, 2016 to $18.5 million at March 31, 2017, primarily in the commercial secured by real estate and residential mortgages categories, which decreased $1.4 million and $1.3 million, respectively. The percentage of non-performing assets to total assets decreased from 0.42% at December 31, 2016 to 0.35% at March 31, 2017. Non-accrual loans at March 31, 2017 included two loan relationships with a balance of $1.0 million or over, totaling $3.6 million, and seven loan relationships between $500,000 and $1.0 million, totaling $4.9 million.

There were no loans and leases past due ninety days or more and still accruing at March 31, 2017 compared to $10,000 at December 31, 2016. These loans primarily consist of consumer loans which are generally placed on non-accrual and reviewed for charge-off when principal and interest payments are four months in arrears unless the obligations are well-secured and in the process of collection.

On March 31, 2017, the Company had $11.6 million in loans that were troubled debt restructurings and accruing interest income compared to $8.8 million at December 31, 2016. Troubled debt restructurings are those loans where the Company has granted concessions to the borrower in payment terms, either in rate or in term, as a result of the financial condition of the borrower.

On March 31, 2017, the Company had $25.6 million in impaired loans (consisting primarily of non-accrual and restructured loans and leases) compared to $25.3 million at year-end 2016. The Company also had purchased credit impaired loans from the Pascack and Harmony acquisitions with carrying values of $444,000 and $779,000, respectively, at March 31, 2017. 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, $435,000 of the allowance for loan and lease losses has been allocated for impairment at March 31, 2017 compared to $529,000 at December 31, 2016. At March 31, 2017, the Company also had $26.6 million in loans and leases that were rated substandard that were not classified as non-performing or impaired compared to $28.7 million at December 31, 2016.

There were no loans and leases at March 31, 2017, 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:


	Three Months			Three Months			Year
	Ended			Ended			Ended
	March 31,			March 31,			December 31,
(dollars in thousands)	2017			2016			2016
Balance of the allowance at the beginning of the year	$	31,245		$	30,874		$	30,874

Loans and leases charged off:
Commercial, secured by real estate		(220	)		(135	)		(410	)
Commercial, industrial and other		(163	)		(625	)		(796	)
Leases		(43	)		(70	)		(366	)
Real estate - mortgage		(141	)		(93	)		(1,103	)
Real estate - construction		(609	)		—			—
Home equity and consumer		(184	)		(620	)		(1,980	)

Total loans charged off		(1,360	)		(1,543	)		(4,655	)

Recoveries:
Commercial, secured by real estate		219			55			297
Commercial, industrial and other		95			42			202
Leases		4			1			31
Real estate - mortgage		—			3			8
Real estate - construction		15			—			18
Home equity and consumer		154			46			247

Total recoveries		487			147			803

Net charge-offs:		(873	)		(1,396	)		(3,852	)
Provision for loan and lease losses		1,218			1,075			4,223

Ending balance	$	31,590		$	30,553		$	31,245

Net charge-offs as a percentage of average loans and leases outstanding		0.09	%		0.17	%		0.11	%
Allowance as a percentage of total loans and leases oustanding		0.79	%		0.91	%		0.81	%

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

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

•

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

•

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

•

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

Consideration is given to the results of ongoing credit quality monitoring processes, the adequacy and expertise of the Company’s lending staff, underwriting policies, loss histories, delinquency trends, and the cyclical nature of economic and business conditions. Since many of the Company’s loans depend on the sufficiency of collateral as a secondary means of repayment, any adverse trend in the real estate markets could affect underlying values available to protect the Company against loss.

The overall balance of the allowance for loan and lease losses of $31.6 million at March 31, 2017 increased $345,000, from December 31, 2016, an increase of 1%. The change in the allowance within segments of the loan portfolio reflects changes in the non-performing loan and charge-off statistics within each segment as well as the level of growth in each segment. Loan reserves are based on a combination of historical charge-off experience, estimating the appropriate loss emergence and pre-emergence periods and assigning qualitative factors based on general economic conditions and specific bank portfolio characteristics.

Non-performing loans and leases of $17.7 million at March 31, 2017 decreased $2.7 million from December 31, 2016. The allowance for loan and lease losses as a percent of total loans was 0.79% of total loans on March 31, 2017 compared to 0.81% as of December 31, 2016. Management believes, based on appraisals and estimated selling costs, that the majority of its non-performing loans and leases are adequately secured and reserves on its non-performing loans and leases are adequate. Based upon the process employed and giving recognition to all accompanying factors related to the loan and lease portfolio, management considers the allowance for loan and lease losses to be adequate at March 31, 2017.

Investment Securities

For detailed information on the composition and maturity distribution of the Company’s investment securities portfolio, see Note 4 in Notes to Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q. Total investment securities increased from $754.3 million at December 31, 2016 to $835.8 million at March 31, 2017, an increase of $81.4 million.

Deposits

Total deposits increased from $4.09 billion at December 31, 2016 to $4.29 billion at March 31, 2017, an increase of $200.6 million, or 5%. Noninterest-bearing deposits decreased $2.7 million to $924.6 million, while savings and interest-bearing transaction accounts and time deposits increased $189.0 million and $14.2 million, respectively.

Liquidity

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

Lakeland funds loan demand and operation expenses from several sources:

•

Net income. Cash provided by operating activities was $19.7 million for the first three months of 2017 compared to $7.5 million for the same period in 2016.

•

Deposits. Lakeland can offer new products or change its rate structure in order to increase deposits. In the first three months of 2017, Lakeland’s deposits increased $200.6 million.

•

Sales of securities. At March 31, 2017 the Company had $687.4 million in securities designated “available for sale.” Of these securities, $448.7 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 no overnight borrowings from the FHLB on March 31, 2017. Lakeland also has overnight federal funds lines available for it to borrow up to $192.0 million of which $60.0 million was outstanding at March 31, 2017. Lakeland may also borrow from the discount window of the Federal Reserve Bank of New York based on the market value of collateral pledged. Lakeland had no borrowings with the Federal Reserve Bank of New York as of March 31, 2017.

•

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

Management and the Board monitor the Company’s liquidity through the Asset/Liability Committee, which monitors the Company’s compliance with certain regulatory ratios and other various liquidity guidelines.

The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statement for the three months ended March 31, 2017 follows.

Cash and cash equivalents totaling $150.4 million on March 31, 2017 decreased $25.4 million from December 31, 2016. Operating activities provided $19.7 million in net cash. Investing activities used $179.3 million in net cash, primarily reflecting an increase in loans and leases and the purchase of securities. Financing activities provided $134.2 million in net cash primarily reflecting the increase in deposits of $200.7 million, partially offset by repayments of other borrowings of $90.1 million. The Company anticipates that it will have sufficient funds available to meet its current loan commitments and deposit maturities. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of March 31, 2017. Interest on subordinated debentures and long-term borrowed funds is calculated based on current contractual interest rates.


					After One		After Three
			Within		But Within		But Within		After
	Total		One Year		Three Years		Five Years		Five Years
	(dollars in thousands)
Minimum annual rentals on noncancellable operating leases	$	31,163	$	3,148	$	5,880	$	5,023	$	17,112
Benefit plan commitments		6,203		339		793		793		4,278
Remaining contractual maturities of time deposits		559,107		386,260		139,091		33,756		—
Subordinated debentures		104,813		—		—		—		104,813
Loan commitments		955,063		660,607		150,788		10,378		133,290
Other borrowings		173,425		92,635		80,790		—		—
Interest on other borrowings*		59,596		7,264		10,899		10,021		31,412
Standby letters of credit		13,000		12,276		612		32		80

Total	$	1,902,370	$	1,162,529	$	388,853	$	60,003	$	290,985

*	Includes interest on other borrowings and subordinated debentures at a weighted rate of 2.91%.

Capital Resources

Total stockholders’ equity increased from $550.0 million on December 31, 2016 to $557.6 million on March 31, 2017, an increase of $7.6 million. Book value per common share increased to $11.78 on March 31, 2017 from $11.65 on December 31, 2016. Tangible book value per share increased from $8.70 per share on December 31, 2016 to $8.84 per share on March 31, 2017, an increase of 2%. Please see “Non-GAAP Financial Measures” below. The increase in stockholders’ equity from December 31, 2016 to March 31, 2017 was primarily due to $12.3 million of net income, partially offset by the payment of cash dividends on common stock of $4.5 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 March 31, 2017, 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 March 31, 2017, 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
	March 31,			December 31,			March 31,			December 31,			March 31,			December 31,			March 31,			December 31,
	2017			2016			2017			2016			2017			2016			2017			2016
The Company		8.97	%		9.07	%		10.01	%		10.11	%		10.73	%		10.85	%		13.29	%		13.48	%
Lakeland Bank		10.04	%		10.21	%		12.00	%		12.21	%		12.00	%		12.21	%		12.82	%		13.03	%
Required capital ratios including conservation buffer		4.00	%		4.00	%		5.75	%		5.125	%		7.25	%		6.625	%		9.25	%		8.625	%
“Well capitalized” institution under FDIC Regulations		5.00	%		5.00	%		6.50	%		6.50	%		8.00	%		8.00	%		10.00	%		10.00	%

Non-GAAP Financial Measures

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

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

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


	March 31,			December 31,
(dollars in thousands, except per share amounts)	2017			2016
Calculation of Tangible Book Value per Common Share

Total common stockholders’ equity at end of period - GAAP	$	557,642		$	550,044
Less:
Goodwill		135,747			135,747
Other identifiable intangible assets, net		3,149			3,344

Total tangible common stockholders’ equity at end of period - Non-GAAP	$	418,746		$	410,953

Shares outstanding at end of period		47,350			47,223

Book value per share - GAAP	$	11.78		$	11.65

Tangible book value per share - Non-GAAP	$	8.84		$	8.70

Calculation of Tangible Common Equity to Tangible Assets

Total tangible common stockholders’ equity at end of period - Non-GAAP	$	418,746		$	410,953

Total assets at end of period	$	5,247,815		$	5,093,131
Less:
Goodwill		135,747			135,747
Other identifiable intangible assets, net		3,149			3,344

Total tangible assets at end of period - Non-GAAP	$	5,108,919		$	4,954,040

Common equity to assets - GAAP		10.63	%		10.80	%

Tangible common equity to tangible assets - Non-GAAP		8.20	%		8.30	%


	For the Three Months Ended,
	March 31,			March 31,
	2017			2016
Calculation of Return on Average Tangible Common Equity

Net income - GAAP	$	12,312		$	8,108

Total average common stockholders’ equity	$	553,782		$	440,823
Less:
Average goodwill		135,747			124,423
Average other identifiable intangible assets, net		3,276			2,920

Total average tangible common stockholders’ equity - Non-GAAP	$	414,759		$	313,480

Return on average common stockholders’ equity - GAAP		9.02	%		7.40	%

Return on average tangible common stockholders’ equity - Non-GAAP		12.04	%		10.40	%


	For the Quarter Ended
	March 31,			March 31,
	2017			2016
	(in thousands, except per share amounts)
Reconciliation of Earnings per Share
Net income - GAAP	$	12,312		$	8,108

Non-routine transactions, net of tax
Tax deductible merger related expenses		—			819
Non-tax deductible merger related expenses		—			336

Net effect of non-routine transactions		—			1,155

Net income available to common shareholders excluding non-routine transactions		12,312			9,263
Less: Earnings allocated to participating securities		(121	)		(58	)

	$	12,191		$	9,205

Weighted average shares - Basic		47,354			40,931
Weighted average shares - Diluted		47,623			41,091

Basic earnings per share, GAAP	$	0.26		$	0.20
Diluted earnings per share, GAAP	$	0.26		$	0.20

Basic earnings per share, adjusted for non-routine transactions	$	0.26		$	0.22
Diluted earnings per share, adjusted for non-routine transactions	$	0.26		$	0.22

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 $162.7 million. The information provided for net interest income assumes that changes in interest rates of plus 200 basis points and minus 200 basis points change gradually in equal increments (“rate ramp”) over the twelve month period.


	Changes in Interest Rates
Rate Ramp		+200	bp	-200	bp
Asset/Liability policy limit		-5.0	%	-5.0	%

March 31, 2017		-1.2	%	-2.6	%
December 31, 2016		-0.5	%	-2.4	%

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	%

March 31, 2017		0.0	%	0.2	%	0.2	%	-5.4	%
December 31, 2016		1.9	%	1.4	%	0.9	%	-4.8	%

The base case for the following table is an estimate of the Company’s net portfolio value for the periods presented using current discount rates, and assuming the Company’s interest-sensitive assets and liabilities remain at period-end levels. The net portfolio value at March 31, 2017 (the base case) was $748.5 million. The information provided for the net portfolio value assumes fluctuations or “rate shocks” for changes in interest rates as shown in the table below. Rate shocks assume that current interest rates change immediately.


	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	%

March 31, 2017		-7.7	%	-4.9	%	-2.2	%	0.4	%
December 31, 2016		-7.5	%	-4.9	%	-2.2	%	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, 2016.

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

Item 4.

Controls and Procedures

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

(b) Changes in internal controls over financial reporting. There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

There have been no material changes in risk factors from those disclosed under Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.


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

Item 3. Defaults Upon Senior Securities		Not Applicable

Item 4. Mine Safety Disclosures		Not Applicable

Item 5. Other Information		Not Applicable

Item 6. Exhibits


31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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: May 9, 2017