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LAKELAND BANCORP INC - Quarter Report: 2019 March (Form 10-Q)



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended 
 
March 31, 2019
 
OR
 
[   ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number
 000-17820
 
LAKELAND BANCORP, INC.
(Exact name of registrant as specified in its charter)
New Jersey          
 22-2953275
(State or other jurisdiction of
 incorporation  or organization) 
 (I.R.S. Employer
Identification No.)
 
 
250 Oak Ridge Road, Oak Ridge, New Jersey 
07438
 (Address of principal executive offices)
(Zip Code)
 
 
(973) 697-2000
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  [X]    No  [  ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes  [ X ]    No  [  ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer [X]    Accelerated filer []    Non-accelerated filer [  ]  Smaller reporting company [  ]  Emerging growth company [  ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [  ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes  [  ]    No  [X]
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of exchange on which registered
Common Stock, no par value
LBAI
The NASDAQ Stock Market

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 May 1, 2019, there were 50,441,279 outstanding shares of Common Stock, no par value.

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LAKELAND BANCORP, INC.
Form 10-Q Index
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018
 
Consolidated Statements of Income for the Three Months Ended March 31, 2019 and 2018 (unaudited)
 
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and 2018 (unaudited)
 
Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018 (unaudited)
 
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART I. FINANCIAL INFORMATION
Item 1.        Financial Statements
Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
 
March 31, 2019
 
December 31, 2018
 
(unaudited)
 
ASSETS
(dollars in thousands)
 
 
 
 
Cash
$
205,322

 
$
205,199

Interest-bearing deposits due from banks
21,037

 
3,400

Total cash and cash equivalents
226,359

 
208,599

Investment securities available for sale, at fair value
659,238

 
638,618

Equity securities, at fair value
15,232

 
15,921

Investment securities held to maturity; fair value of $158,219 at March 31, 2019 and $150,932 at December 31, 2018
159,308

 
153,646

Federal Home Loan Bank and other membership bank stock, at cost
16,951

 
13,301

Loans, net of deferred costs (fees)
4,921,391

 
4,456,733

Less: allowance for loan losses
37,979

 
37,688

Net loans
4,883,412

 
4,419,045

Loans held for sale
600

 
1,113

Premises and equipment, net
51,703

 
49,175

Operating lease right-of-use assets
19,239

 

Accrued interest receivable
17,515

 
16,114

Goodwill
154,153

 
136,433

Other identifiable intangible assets
5,192

 
1,768

Bank owned life insurance
110,430

 
110,052

Other assets
45,731

 
42,308

TOTAL ASSETS
$
6,365,063

 
$
5,806,093

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
LIABILITIES
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
1,071,890

 
$
950,218

Savings and interest-bearing transaction accounts
3,046,322

 
2,913,414

Time deposits $250 thousand and under
753,126

 
589,737

Time deposits over $250 thousand
193,246

 
167,301

Total deposits
5,064,584

 
4,620,670

Federal funds purchased and securities sold under agreements to repurchase
261,266

 
233,905

Other borrowings
175,783

 
181,118

Subordinated debentures
118,193

 
105,027

Operating lease liabilities
20,823

 

Other liabilities
43,071

 
41,634

TOTAL LIABILITIES
5,683,720

 
5,182,354

STOCKHOLDERS’ EQUITY
 
 
 
Common stock, no par value; authorized shares, 100,000,000 at March 31, 2019 and December 31, 2018; issued shares, 50,435,663 at March 31, 2019 and 47,486,250 at December 31, 2018
558,245

 
514,703

Retained earnings
126,787

 
116,874

Accumulated other comprehensive loss
(3,689
)
 
(7,838
)
TOTAL STOCKHOLDERS’ EQUITY
681,343

 
623,739

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
6,365,063

 
$
5,806,093

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

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Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
For the Three Months Ended March 31,
 
2019
 
2018
 
(in thousands, except per share data)
INTEREST INCOME
 
 
 
Loans and fees
$
57,642

 
$
45,544

Federal funds sold and interest-bearing deposits with banks
254

 
166

Taxable investment securities and other
4,873

 
3,992

        Tax-exempt investment securities
408

 
443

TOTAL INTEREST INCOME
63,177

 
50,145

INTEREST EXPENSE
 
 
 
Deposits
11,497

 
5,755

Federal funds purchased and securities sold under agreements to repurchase
608

 
134

Other borrowings
2,466

 
2,020

TOTAL INTEREST EXPENSE
14,571

 
7,909

NET INTEREST INCOME
48,606

 
42,236

Provision for loan losses
508

 
1,284

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
48,098

 
40,952

NONINTEREST INCOME
 
 
 
Service charges on deposit accounts
2,573

 
2,611

Commissions and fees
1,412

 
1,272

Income on bank owned life insurance
683

 
719

Gain (loss) on equity securities
353

 
(18
)
Gains on sales of loans
371

 
246

Other income
331

 
504

TOTAL NONINTEREST INCOME
5,723

 
5,334

NONINTEREST EXPENSE
 
 
 
Salaries and employee benefits
19,231

 
16,861

Net occupancy expense
2,954

 
2,738

Furniture and equipment
2,116

 
2,206

FDIC insurance expense
450

 
425

Stationery, supplies and postage
447

 
416

Marketing expense
469

 
361

Data processing expense
1,327

 
466

Telecommunications expense
493

 
421

ATM and debit card expense
602

 
510

Core deposit intangible amortization
304

 
157

Other real estate and repossessed asset expense
86

 
46

Merger related expenses
2,860

 

Other expenses
2,645

 
2,530

TOTAL NONINTEREST EXPENSE
33,984

 
27,137

Income before provision for income taxes
19,837

 
19,149

Provision for income taxes
4,211

 
3,894

NET INCOME
$
15,626

 
$
15,255

PER SHARE OF COMMON STOCK
 
 
 
Basic earnings
$
0.31

 
$
0.32

Diluted earnings
$
0.31

 
$
0.32

Dividends
$
0.115

 
$
0.100

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

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Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
For the Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
NET INCOME
$
15,626

 
$
15,255

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
 
 
 
Unrealized gains (losses) on securities available for sale
4,363

 
(5,732
)
Unrealized (losses) gains on derivatives
(214
)
 
283

Other comprehensive income (loss)
4,149

 
(5,449
)
TOTAL COMPREHENSIVE INCOME
$
19,775

 
$
9,806

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

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Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
For the Three Months Ended March 31, 2019 and 2018
 
 
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
 
(in thousands)
At January 1, 2018
$
512,734

 
$
72,737

 
$
(2,349
)
 
$
583,122

Cumulative adjustment for adoption of ASU 2016-01

 
2,043

 
(2,043
)
 

January 1, 2018, as adjusted
512,734

 
74,780

 
(4,392
)
 
583,122

Net income

 
15,255

 

 
15,255

Other comprehensive loss, net of tax

 

 
(5,449
)
 
(5,449
)
Stock based compensation
994

 

 

 
994

Exercise of stock options
248

 

 

 
248

Retirement of restricted stock
(744
)
 

 

 
(744
)
Cash dividends, common stock

 
(4,778
)
 

 
(4,778
)
At March 31, 2018
$
513,232


$
85,257


$
(9,841
)

$
588,648

 
 
 
 
 
 
 
 
At January 1, 2019
$
514,703

 
$
116,874

 
$
(7,838
)
 
$
623,739

Cumulative adjustment for adoption of ASU 842

 
125

 

 
125

January 1, 2019, as adjusted
514,703

 
116,999

 
(7,838
)
 
623,864

Net income

 
15,626

 

 
15,626

Other comprehensive income, net of tax

 

 
4,149

 
4,149

Stock based compensation
696

 

 

 
696

Issuance of stock for Highlands acquisition
43,417

 

 

 
43,417

Retirement of restricted stock
(571
)
 

 

 
(571
)
Cash dividends, common stock

 
(5,838
)
 

 
(5,838
)
At March 31, 2019
$
558,245


$
126,787


$
(3,689
)

$
681,343

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

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Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
For the Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
15,626

 
$
15,255

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net amortization of premiums, discounts and deferred loan fees and costs
497

 
1,250

Depreciation and amortization
2,138

 
1,323

Amortization of intangible assets
304

 
157

Amortization of operating lease right-of-use assets
652

 

Provision for loan losses
508

 
1,284

Loans originated for sale
(8,931
)
 
(8,473
)
Proceeds from sales of loans held for sale
10,928

 
9,175

Change in market value of equity securities
(353
)
 
18

Gains on sales of loans held for sale
(371
)
 
(246
)
Gains on other real estate and other repossessed assets
(36
)
 
(25
)
Losses on sales of premises and equipment
85

 

Stock-based compensation
696

 
994

Excess tax benefits
131

 
298

Increase in other assets
(2,590
)
 
(2,388
)
Increase in other liabilities
959

 
1,262

NET CASH PROVIDED BY OPERATING ACTIVITIES
20,243

 
19,884

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Net cash acquired in acquisitions
13,454

 

Proceeds from repayments and maturities of available for sale securities
42,074

 
20,928

Proceeds from repayments and maturities of held to maturity securities
4,153

 
5,820

Proceeds from sales of equity securities
1,138

 

Purchase of available for sale securities
(36,085
)
 
(24,589
)
Purchase of held to maturity securities
(8,510
)
 
(18,461
)
Purchase of equity securities
(95
)
 
(326
)
Proceeds from redemptions of Federal Home Loan Bank stock
25,792

 
688

Purchases of Federal Home Loan Bank stock
(27,675
)
 

Net increase in loans
(38,506
)
 
(73,247
)
Proceeds from sales of other real estate and repossessed assets
253

 
145

Proceeds from dispositions and sales of premises and equipment
953

 

Purchases of premises and equipment
(1,793
)
 
(1,354
)
NET CASH USED IN INVESTING ACTIVITIES
(24,847
)
 
(90,396
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in deposits
34,545

 
79,339

Increase in federal funds purchased and securities sold under agreements to repurchase
27,361

 
1,549

Repayments of other borrowings
(33,133
)
 
(15,000
)
Exercise of stock options

 
248

Retirement of restricted stock
(571
)
 
(744
)
Dividends paid
(5,838
)
 
(4,778
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
22,364

 
60,614

Net increase (decrease) in cash and cash equivalents
17,760

 
(9,898
)
Cash and cash equivalents, beginning of period
$
208,599

 
142,933

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
226,359

 
$
133,035


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For the Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
Supplemental schedule of non-cash investing and financing activities:
 
 
 
Cash paid during the period for income taxes
$
230

 
$
2,046

Cash paid during the period for interest
13,001

 
6,716

Transfer of loans into other repossessed assets and other real estate owned
102

 
669

Initial recognition of operating lease right-of-use assets
18,651

 

Initial recognition of operating lease liabilities
20,203

 

Acquisitions:
 
 
 
Non-cash assets acquired:
 
 
 
Federal Home Loan Bank stock
1,767

 

Investment securities available for sale
22,734

 

Loans, including loans held for sale
428,072

 

Goodwill and other intangible assets, net
21,448

 

Other assets
8,602

 

Total non-cash assets acquired
482,623

 

Liabilities assumed:
 
 
 
Deposits
409,638

 

Other borrowings
40,957

 

Other liabilities
2,065

 

Total liabilities assumed
452,660

 

Common stock issued and fair value of stock options converted to Lakeland Bancorp stock options
43,417

 

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

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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, 2019 do not necessarily indicate the results that the Company will achieve for all of 2019.
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, 2018. Certain reclassifications have been made in the consolidated financial statements to conform with current year classifications.
NOTE 2 – ACQUISITIONS
On January 4, 2019, the Company completed its acquisition of Highlands Bancorp, Inc. ("Highlands"), a bank holding company headquartered in Vernon, New Jersey. Highlands was the parent of Highlands State Bank, which operated four branches in Sussex, Passaic and Morris Counties in New Jersey. This acquisition enabled the Company to broaden its presence in those counties. Effective as of the close of business on January 4, 2019, Highlands merged into the Company and Highlands State Bank merged into Lakeland. Pursuant to the merger agreement, the shareholders of Highlands received for each outstanding share of Highlands common stock that they owned at the effective time of the merger, 1.015 shares of Lakeland Bancorp, Inc. common stock. The Company issued 2,837,524 shares of its common stock in the merger. Outstanding Highlands options were paid out in cash at the difference between $14.71 and an average strike price of $8.09 for a total cash payment of $797,000.
The acquisition was accounted for under the acquisition method of accounting and accordingly, the assets acquired and liabilities assumed in the acquisition were recorded at their estimated fair values as of the acquisition date. Highlands' assets were recorded at their preliminary estimated fair values as of January 4, 2019 and Highlands' results of operations will be included in the Company's Consolidated Statements of Income from that date forward.
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.

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The following table summarizes the estimated fair value of the acquired assets and liabilities assumed at the date of acquisition for Highlands.
(in thousands)
 
Cash and cash equivalents
13,454

Securities, available for sale
22,734

Federal Home Loan Bank stock
1,767

Loans held for sale
1,113

Loans
426,959

Premises and equipment
3,253

Goodwill
17,720

Identifiable intangible assets
3,728

Accrued interest receivable and other assets
5,349

    Total assets acquired
496,077

 
 
Deposits
(409,638
)
Other borrowings
(27,800
)
Subordinated debt
(13,157
)
Other liabilities
(2,065
)
    Total liabilities assumed
(452,660
)
Net assets acquired
$
43,417

Loans acquired in the Highlands acquisition were recorded at fair value and subsequently accounted for in accordance with ASC Topic 310. There was no carryover related allowance for loan losses. The fair values of loans acquired from Highlands 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 credit impaired loans acquired in the Highlands acquisition as of the closing date.
(in thousands)
 
Contractually required principal and interest at acquisition
$
20,025

Contractual cash flows not expected to be collected (non-accretable difference)
4,758

Expected cash flows at acquisition
$
15,267

Interest component of expected cash flows (accretable difference)
1,420

Fair value of acquired loans
$
13,847

The core deposit intangible totaled $3.7 million and is being amortized over its estimated useful life of approximately ten years using an accelerated method. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes.
The fair values of deposit liabilities with no stated maturities such as checking, money market and savings accounts, were assumed to equal the carrying amounts since these deposits are payable on demand. The fair values of certificates of deposits and IRAs represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit.
Direct costs related to the acquisition were expensed as incurred. During the three months ended March 31, 2019, the Company incurred $2.9 million of merger and acquisition integration-related expenses, which have been separately stated in the Company's Consolidated Statements of Income.

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Supplemental Pro Forma Financial Information
The following table provides unaudited condensed pro forma financial information assuming that the Highlands acquisition had been completed as of January 1, 2019, for the three months ended March 31, 2019 and as of January 1, 2018 for the three months ended March 31, 2018. The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisitions occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings or the impact of conforming certain accounting policies of the acquired companies to the Company’s policies that may have occurred as a result of the integration and consolidation of Highlands' operations. The pro forma information shown reflects adjustments related to certain purchase accounting fair value adjustments; amortization of core deposit and other intangibles; and related income tax effects. The Company has not provided separate information regarding revenue and earnings of Highlands since the acquisition because of the manner in which Highlands' branches and lending team were immediately merged into Lakeland’s branches and lending team making such information impracticable to provide.
 
Pro Forma
 
Pro Forma
(in thousands)
March 31, 2019
 
March 31, 2018
Net interest income
$
48,753

 
$
46,787

Provision for loan losses
508

 
1,382

Noninterest income
5,694

 
6,198

Noninterest expense
31,205

 
30,501

Net income
17,784

 
16,687

Earnings per share:
 
 
 
  Fully diluted
$
0.35

 
$
0.33


NOTE 3 – REVENUE RECOGNITION
The Company’s primary source of revenue is interest income generated from loans and investment securities. Interest income is recognized according to the terms of the financial instrument agreement over the life of the loan or investment security unless it is determined that the counterparty is unable to continue making interest payments. Interest income also includes prepaid interest fees from commercial customers, which approximates the interest foregone on the balance of the loan prepaid.
The Company’s additional source of income, also referred to as noninterest income, is generated from deposit related fees, interchange fees, loan fees, merchant fees, loan sales and other miscellaneous income and is largely based on contracts with customers. In these cases, the Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The Company considers a customer to be any party to which the Company will provide goods or services that are an output of the Company’s ordinary activities in exchange for consideration. There is little seasonality with regards to revenue from contracts with customers and all inter-company revenue is eliminated when the Company’s financial statements are consolidated.
Generally, the Company enters into contracts with customers that are short-term in nature where the performance obligations are fulfilled and payment is processed at the same time. Such examples include revenue related to merchant fees, interchange fees and investment services income. In addition, revenue generated from existing customer relationships such as deposit accounts are also considered short-term in nature, because the relationship may be terminated at any time and payment is processed at the time performance obligations are fulfilled. As a result, the Company does not have contract assets, contract liabilities or related receivable accounts for contracts with customers. In cases where collectability is a concern, the Company does not record revenue.
Generally, the pricing of transactions between the Company and each customer is either (i) established within a legally enforceable contract between the two parties, as is the case with the loan sales, or (ii) disclosed to the customer at a specific point in time, as is the case when a deposit account is opened or before a new loan is underwritten. Fees are usually fixed at a specific amount or as a percentage of a transaction amount. No judgment or estimates by management are required to record revenue related to these transactions and pricing is clearly identified within these contracts.
The Company primarily operates in one geographic region, Northern and Central New Jersey and contiguous areas. Therefore, all significant operating decisions are based upon analysis of the Company as one operating segment or unit.

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We disaggregate our revenue from contracts with customers by contract-type and timing of revenue recognition, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Noninterest income not generated from customers during the Company’s ordinary activities primarily relates to mortgage servicing rights, gains/losses on the sale of investment securities, gains/losses on the sale of other real estate owned, gains/losses on the sale of property, plant and equipment, and income from bank owned life insurance.
The following table sets forth the components of noninterest income for the three months ended March 31, 2019 and 2018:
 
For the Three Months Ended March 31,
(in thousands)
2019
 
2018
 
 
 
 
Deposit Related Fees and Charges
 
 
 
  Debit card interchange income
$
1,218

 
$
1,118

  Overdraft charges
996

 
1,109

  ATM service charges
184

 
190

  Demand deposit fees and charges
143

 
158

  Savings service charges
32

 
36

Total
2,573

 
2,611

Commissions and Fees

 

  Loan fees
348

 
322

  Wire transfer charges
267

 
248

  Investment services income
352

 
228

  Merchant fees
184

 
216

  Commissions from sales of checks
103

 
108

  Safe deposit income
91

 
84

  Other income
61

 
63

Total
1,406

 
1,269

Gains on Sale of Loans
371

 
246

Other Income

 

  Gains on customer swap transactions
199

 
332

  Title insurance income
90

 
49

  Other income
61

 
97

Total
350

 
478

Revenue not from contracts with customers
1,023

 
730

Total Noninterest Income
5,723

 
5,334

Timing of Revenue Recognition

 

  Products and services transferred at a point in time
4,681

 
4,585

  Products and services transferred over time
19

 
19

  Revenue not from contracts with customers
1,023

 
730

Total Noninterest Income
$
5,723

 
$
5,334


12

Table of Contents


NOTE 4 – 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,
(in thousands, except per share data)
2019
 
2018
 
 
 
 
Net income available to common shareholders
$
15,626

 
$
15,255

Less: earnings allocated to participating securities
141

 
141

Net income allocated to common shareholders
$
15,485

 
$
15,114

Weighted average number of common shares outstanding - basic
50,275

 
47,503

Share-based plans
167

 
233

Weighted average number of common shares outstanding - diluted
50,442

 
47,736

Basic earnings per share
$
0.31

 
$
0.32

Diluted earnings per share
$
0.31

 
$
0.32

There were no antidilutive options to purchase common stock excluded from the computation for the three months ended March 31, 2019 and 2018.
NOTE 5 – INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and the fair value of the Company's available for sale and held to maturity investment securities are as follows:
 
March 31, 2019
 
December 31, 2018
(in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and U.S. government agencies
$
141,088

 
$
94

 
$
(1,601
)
 
$
139,581

 
$
143,495

 
$

 
$
(2,568
)
 
$
140,927

Mortgage-backed securities, residential
442,358

 
1,473

 
(5,204
)
 
438,627

 
434,208

 
779

 
(8,843
)
 
426,144

Mortgage-backed securities, multifamily
30,956

 
135

 
(82
)
 
31,009

 
21,087

 
67

 
(204
)
 
20,950

Obligations of states and political subdivisions
44,850

 
362

 
(195
)
 
45,017

 
45,951

 
140

 
(586
)
 
45,505

Debt securities
5,000

 
4

 

 
5,004

 
5,000

 
92

 

 
5,092

 
$
664,252

 
$
2,068

 
$
(7,082
)
 
$
659,238

 
$
649,741

 
$
1,078

 
$
(12,201
)
 
$
638,618

 
March 31, 2019
 
December 31, 2018
(in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
$
32,461

 
$

 
$
(360
)
 
$
32,101

 
$
33,025

 
$

 
$
(677
)
 
$
32,348

Mortgage-backed securities, residential
82,070

 
246

 
(1,033
)
 
81,283

 
75,859

 
169

 
(1,838
)
 
74,190

Mortgage-backed securities, multifamily
1,827

 

 
(19
)
 
1,808

 
1,853

 

 
(35
)
 
1,818

Obligations of states and political subdivisions
36,450

 
274

 
(127
)
 
36,597

 
37,909

 
113

 
(328
)
 
37,694

Debt securities
6,500

 

 
(70
)
 
6,430

 
5,000

 

 
(118
)
 
4,882

 
$
159,308

 
$
520

 
$
(1,609
)
 
$
158,219

 
$
153,646

 
$
282

 
$
(2,996
)
 
$
150,932


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The following table lists contractual maturities of investment securities classified as available for sale and held to maturity as of March 31, 2019. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Available for Sale
 
Held to Maturity
(in thousands)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
March 31, 2019
 
 
 
 
 
 
 
Due in one year or less
$
24,755

 
$
24,636

 
$
5,924

 
$
5,929

Due after one year through five years
116,056

 
115,089

 
42,423

 
42,361

Due after five years through ten years
32,550

 
32,602

 
24,379

 
24,144

Due after ten years
17,577

 
17,275

 
2,685

 
2,694

 
190,938

 
189,602

 
75,411

 
75,128

Mortgage-backed securities
473,314

 
469,636

 
83,897

 
83,091

Total securities
$
664,252

 
$
659,238

 
$
159,308

 
$
158,219

There were no sales of available for sale or held to maturity securities during the three months ended March 31, 2019 and 2018.
Securities with a carrying value of approximately $511.3 million and $476.3 million at March 31, 2019 and December 31, 2018, respectively, were pledged to secure public deposits and for other purposes required by applicable laws and regulations.
The following tables 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
(dollars in thousands)
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Number of
Securities
 
Fair Value
 
Unrealized
Losses
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and U.S. government agencies
$
12,112

 
$
78

 
$
116,126

 
$
1,523

 
25

 
$
128,238

 
$
1,601

Mortgage-backed securities, residential
719

 
1

 
289,307

 
5,203

 
126

 
290,026

 
5,204

Mortgage-backed securities, multifamily
4,979

 
9

 
12,993

 
73

 
4

 
17,972

 
82

Obligations of states and political subdivisions

 

 
16,088

 
195

 
30

 
16,088

 
195

 
$
17,810

 
$
88

 
$
434,514

 
$
6,994

 
185

 
$
452,324

 
$
7,082

HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
$

 
$

 
$
32,101

 
$
360

 
6

 
$
32,101

 
$
360

Mortgage-backed securities, residential
9,012

 
27

 
47,210

 
1,006

 
31

 
56,222

 
1,033

Mortgage-backed securities, multifamily

 

 
1,808

 
19

 
2

 
1,808

 
19

Obligations of states and political subdivisions

 

 
8,222

 
127

 
7

 
8,222

 
127

Debt securities
3,930

 
70

 

 

 
1

 
3,930

 
70

 
$
12,942

 
$
97

 
$
89,341

 
$
1,512

 
47

 
$
102,283

 
$
1,609


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Less Than 12 Months
 
12 Months or Longer
 
Total
(dollars in thousands)
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Number of
Securities
 
Fair Value
 
Unrealized
Losses
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and U.S. government agencies
$
20,588

 
$
216

 
$
120,338

 
$
2,352

 
27

 
$
140,926

 
$
2,568

Mortgage-backed securities, residential
10,119

 
58

 
316,851

 
8,785

 
139

 
326,970

 
8,843

Mortgage-backed securities, multifamily
1,977

 
2

 
12,911

 
202

 
4

 
14,888

 
204

Obligations of states and political subdivisions
1,289

 
2

 
26,522

 
584

 
50

 
27,811

 
586

 
$
33,973

 
$
278

 
$
476,622

 
$
11,923

 
220

 
$
510,595

 
$
12,201

HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
$

 
$

 
$
32,348

 
$
677

 
6

 
$
32,348

 
$
677

Mortgage-backed securities, residential
8,325

 
59

 
53,761

 
1,779

 
36

 
62,086

 
1,838

Mortgage-backed securities, multifamily

 

 
1,818

 
35

 
2

 
1,818

 
35

Obligations of states and political subdivisions
1,764

 
8

 
15,580

 
320

 
27

 
17,344

 
328

Debt securities
3,882

 
118

 

 

 
1

 
3,882

 
118

 
$
13,971

 
$
185

 
$
103,507

 
$
2,811

 
72

 
$
117,478

 
$
2,996

Management has evaluated the securities in the above table and has concluded that none of the securities with unrealized losses has impairments that are other-than-temporary. Fair value below cost is solely due to interest rate movements and is deemed temporary.
Investment securities, including the mortgage-backed securities and corporate securities, are evaluated on a periodic basis to determine if factors are identified that would require further analysis. In evaluating the Company’s securities, management considers the following items:
The Company’s ability and intent to hold the securities, including an evaluation of the need to sell the security to meet certain liquidity measures, or whether the Company has sufficient levels of cash to hold the identified security in order to recover the entire amortized cost of the security;
The financial condition of the underlying issuer;
The credit ratings of the underlying issuer and if any changes in the credit rating have occurred;
The length of time the security’s fair value has been less than amortized cost; and
Adverse conditions related to the security or its issuer if the issuer has failed to make scheduled payments or other factors.
If the above factors indicate that an additional analysis is required, management will perform a discounted cash flow analysis evaluating the security.
Equity securities at fair value
The Company has an equity securities portfolio which consists of investments in other financial institutions for market appreciation purposes and investments in Community Reinvestment funds. The market value of these investments was $15.2 million and $15.9 million at March 31, 2019 and December 31, 2018, respectively. Upon implementation of Accounting Standards Update 2016-01 - Financial Instruments ("ASU 2016-01"), the Company made a cumulative adjustment of $2.0 million from other comprehensive income to retained earnings as of January 1, 2018. In the first three months of 2019, the Company recorded proceeds from sales of equity securities of $1.1 million while recording no sales in the first three months of 2018. The Company also recorded $353,000 in market value gain on equity securities in noninterest income for the first quarter of 2019 and $18,000 in market value loss in the same period of 2018.
As of March 31, 2019, the equity investments in other financial institutions and Community Reinvestment funds had a market value of $1.9 million and $13.4 million, respectively. The Community Reinvestment funds include $3.5 million that are primarily invested in community development loans that are guaranteed by the Small Business Administration (“SBA”). Because the funds are primarily guaranteed by the federal government there are minimal changes in market value between accounting periods. These funds can be redeemed with 60 days notice at the net asset value less unpaid management fees with the approval of the fund manager. As of March 31, 2019, the net amortized cost equaled the market value of the investment. There are no unfunded commitments related to these investments.

15

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The Community Reinvestment funds include $9.8 million that are primarily invested in government guaranteed loans, mortgage-backed securities, small business loans and other instruments supporting affordable housing and economic development. The Company may redeem these funds at the net asset value calculated at the end of the current business day less any unpaid management fees. There are no restrictions on redemptions for the holdings in these investments other than the notice required by the fund manager. There are no unfunded commitments related to these investments.
NOTE 6 – LOANS AND OTHER REAL ESTATE
The following sets forth the composition of the Company’s loan portfolio:
(in thousands)
March 31, 2019
 
December 31, 2018
 
 
 
 
Commercial, secured by real estate
$
3,436,550

 
$
3,057,779

Commercial, industrial and other
389,230

 
336,735

Equipment finance
90,791

 
87,925

Real estate - residential mortgage
335,290

 
329,854

Real estate - construction
332,995

 
319,545

Home equity and consumer
339,815

 
328,609

Total loans
4,924,671

 
4,460,447

Less: deferred fees
(3,280
)
 
(3,714
)
Loans, net of deferred fees
$
4,921,391

 
$
4,456,733

At March 31, 2019 and December 31, 2018, home equity and consumer loans included overdraft deposit balances of $368,000 and $452,000, respectively. At March 31, 2019 and December 31, 2018, the Company had $1.32 billion and $1.16 billion, respectively, in loans pledged for actual and potential borrowings at the Federal Home Loan Bank of New York (“FHLB”).
Purchased Credit Impaired Loans
The carrying value of loans acquired in the Highlands merger and accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” was $13.7 million which was substantially the same as the balance at acquisition on January 4, 2019. The carrying value of the purchased credit impaired ("PCI") loans acquired in the Pascack Community Bank ("Pascack") acquisition was $145,000 at March 31, 2019 compared to $157,000 at December 31, 2018. The carrying value of PCI loans acquired in the Harmony Bank ("Harmony") acquisition was $485,000 at March 31, 2019 compared to $495,000 at December 31, 2018.
The following table presents changes in the accretable yield for PCI loans:
 
For the Three Months Ended
(in thousands)
March 31, 2019
 
March 31, 2018
 
 
 
 
Balance, beginning of period
$
81

 
$
129

Acquisitions
1,420

 

Accretion
(193
)
 
(44
)
Net reclassification non-accretable difference
30

 
28

Balance, end of period
$
1,338

 
$
113


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Table of Contents


Non-Performing Assets and Past Due Loans
The following schedule sets forth certain information regarding the Company’s non-performing assets and its accruing troubled debt restructurings, excluding PCI loans:
(in thousands)
March 31, 2019
 
December 31, 2018
 
 
 
 
Commercial, secured by real estate
$
9,817

 
$
7,192

Commercial, industrial and other
2,202

 
1,019

Equipment finance
383

 
501

Real estate - residential mortgage
1,740

 
1,986

Home equity and consumer
1,581

 
1,432

Total non-accrual loans
$
15,723

 
$
12,130

Other real estate and other repossessed assets
715

 
830

TOTAL NON-PERFORMING ASSETS
$
16,438

 
$
12,960

Troubled debt restructurings, still accruing
$
6,352

 
$
9,293

Non-accrual loans included $2.8 million and $3.6 million of troubled debt restructurings for the periods ended March 31, 2019 and December 31, 2018, respectively. At March 31, 2019 and December 31, 2018, the Company had $1.2 million and $1.5 million, respectively, in residential mortgages and consumer home equity loans that were in the process of foreclosure which are included in non-accrual loans in the above table.
An age analysis of past due loans, segregated by class of loans as of March 31, 2019 and December 31, 2018, is as follows:
(in thousands)
30-59 Days Past Due
 
60-89 Days Past Due
 
Greater Than 89 Days Past Due
 
Total Past Due
 
Current
 
Total Loans
 
Recorded Investment Greater than 89 Days and Still Accruing
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
$
14,944

 
$
3,060

 
$
3,913

 
$
21,917

 
$
3,414,633

 
$
3,436,550

 
$

Commercial, industrial and other
1,084

 
220

 
377

 
1,681

 
387,549

 
389,230

 

Equipment finance
358

 
210

 
383

 
951

 
89,840

 
90,791

 

Real estate - residential mortgage
2,406

 

 
1,146

 
3,552

 
331,738

 
335,290

 

Real estate - construction

 

 
3,423

 
3,423

 
329,572

 
332,995

 

Home equity and consumer
1,845

 
365

 
1,297

 
3,507

 
336,308

 
339,815

 
78

 
$
20,637

 
$
3,855

 
$
10,539

 
$
35,031

 
$
4,889,640

 
$
4,924,671

 
$
78

December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
$
1,477

 
$
639

 
$
2,237

 
$
4,353

 
$
3,053,426

 
$
3,057,779

 
$

Commercial, industrial and other
173

 
243

 
750

 
1,166

 
335,569

 
336,735

 

Equipment finance
533

 
13

 
501

 
1,047

 
86,878

 
87,925

 

Real estate - residential mortgage
743

 
111

 
1,776

 
2,630

 
327,224

 
329,854

 

Real estate - construction

 

 

 

 
319,545

 
319,545

 

Home equity and consumer
1,917

 
216

 
850

 
2,983

 
325,626

 
328,609

 

 
$
4,843

 
$
1,222

 
$
6,114

 
$
12,179

 
$
4,448,268

 
$
4,460,447

 
$


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Table of Contents


Impaired Loans
The Company defines impaired loans as all non-accrual loans with recorded investments of $500,000 or greater. Impaired loans also include all loans that have been modified in troubled debt restructurings, but excludes PCI loans. Impaired loans as of March 31, 2019 and December 31, 2018 are as follows:
(in thousands)
Recorded
Investment in
Impaired Loans
 
Contractual
Unpaid
Principal
Balance
 
Specific
Allowance
 
Average
Investment in
Impaired Loans
 
Interest
Income
Recognized
March 31, 2019
 
 
 
 
 
 
 
 
 
Loans without specific allowance:
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
$
12,188

 
$
12,883

 
$

 
$
8,878

 
$
52

Commercial, industrial and other
2,309

 
2,633

 

 
1,142

 
4

Equipment finance
301

 
597

 

 
301

 

Real estate - residential mortgage

 

 

 

 

Real estate - construction

 

 

 

 

Home equity and consumer

 

 

 

 

Loans with specific allowance:
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
3,797

 
4,070

 
229

 
6,642

 
72

Commercial, industrial and other
200

 
199

 
8

 
199

 
3

Equipment finance
26

 
26

 
12

 
26

 

Real estate - residential mortgage
715

 
875

 
4

 
718

 
5

Real estate - construction

 

 

 

 

Home equity and consumer
700

 
741

 
6

 
697

 
8

Total:
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
$
15,985

 
$
16,953

 
$
229

 
$
15,520

 
$
124

Commercial, industrial and other
2,509

 
2,832

 
8

 
1,341

 
7

Equipment finance
327

 
623

 
12

 
327

 

Real estate - residential mortgage
715

 
875

 
4

 
718

 
5

Real estate - construction

 

 

 

 

Home equity and consumer
700

 
741

 
6

 
697

 
8

 
$
20,236

 
$
22,024

 
$
259

 
$
18,603

 
$
144


18

Table of Contents


(in thousands)
Recorded
Investment in
Impaired Loans
 
Contractual
Unpaid
Principal
Balance
 
Specific
Allowance
 
Average
Investment in
Impaired Loans
 
Interest
Income
Recognized
December 31, 2018
 
 
 
 
 
 
 
 
 
Loans without specific allowance:
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
$
9,284

 
$
9,829

 

 
$
7,369

 
$
188

Commercial, industrial and other
1,151

 
1,449

 

 
1,834

 
19

Equipment finance
301

 
597

 

 
376

 

Real estate - residential mortgage

 

 

 
242

 
4

Real estate - construction

 

 

 
726

 

Home equity and consumer

 

 

 

 

Loans with specific allowance:
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
7,270

 
7,597

 
307

 
7,594

 
317

Commercial, industrial and other
209

 
209

 
7

 
209

 
12

Equipment finance
30

 
30

 
14

 
19

 

Real estate - residential mortgage
730

 
884

 
4

 
745

 
20

Real estate - construction

 

 

 

 

Home equity and consumer
727

 
765

 
6

 
898

 
32

Total:
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
$
16,554

 
$
17,426

 
$
307

 
$
14,963

 
$
505

Commercial, industrial and other
1,360

 
1,658

 
7

 
2,043

 
31

Equipment finance
331

 
627

 
14

 
395

 

Real estate - residential mortgage
730

 
884

 
4

 
987

 
24

Real estate - construction

 

 

 
726

 

Home equity and consumer
727

 
765

 
6

 
898

 
32

 
$
19,702

 
$
21,360

 
$
338

 
$
20,012

 
$
592

Interest income recognized on impaired loans was $144,000 and $177,000 for the three months ended March 31, 2019 and 2018, respectively. Interest that would have been accrued on impaired loans during the first three months of 2019 and 2018 had the loans been performing under original terms would have been $268,000 and $307,000, 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 assesses the quantitative and qualitative risks arising from the credit quality of its loans. 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, guarantor support, industry conditions and economic conditions. Management categorizes commercial loans and commitments into a one (1) to nine (9) numerical structure with rating 1 being the strongest rating and rating 9 being the weakest. Ratings 1 through 5W are considered ‘Pass’ ratings.

19

Table of Contents


The following table shows the Company’s commercial loan portfolio as of March 31, 2019 and December 31, 2018, by the risk ratings discussed above (in thousands):
March 31, 2019
Commercial,
Secured by
Real Estate
 
Commercial,
Industrial
and Other
 
Real Estate -
Construction
RISK RATING
 
 
 
 
 
1
$

 
$
2,450

 
$

2

 
18,444

 

3
68,756

 
36,739

 

4
933,390

 
88,551

 
18,204

5
2,247,650

 
205,999

 
302,190

5W - Watch
89,295

 
19,381

 
5,873

6 - Other assets especially mentioned
46,466

 
3,988

 
2,267

7 - Substandard
50,993

 
13,678

 
4,461

8 - Doubtful

 

 

9 - Loss

 

 

Total
$
3,436,550

 
$
389,230

 
$
332,995

December 31, 2018
Commercial,
Secured by
Real Estate
 
Commercial,
Industrial
and Other
 
Real Estate -
Construction
RISK RATING
 
 
 
 
 
1
$

 
$
1,119

 
$

2

 
18,462

 

3
69,995

 
36,367

 

4
933,577

 
91,145

 
17,375

5
1,910,423

 
168,474

 
297,625

5W - Watch
61,626

 
7,798

 
3,493

6 - Other assets especially mentioned
38,844

 
2,033

 

7 - Substandard
43,314

 
11,337

 
1,052

8 - Doubtful

 

 

9 - Loss

 

 

Total
$
3,057,779

 
$
336,735

 
$
319,545

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

20

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Allowance for Loan Losses
The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2019 and 2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Commercial,
Secured by
Real Estate
 
Commercial,
Industrial
and Other
 
Equipment Finance
 
Real Estate-
Residential
Mortgage
 
Real Estate-
Construction
 
Home
Equity and
Consumer
 
Total
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
27,881

 
$
1,742

 
$
987

 
$
1,566

 
$
3,015

 
$
2,497

 
$
37,688

Charge-offs
(187
)
 
(147
)
 
(87
)
 
(50
)
 

 
(45
)
 
(516
)
Recoveries
115

 
97

 
2

 
9

 
5

 
71

 
299

Provision
(294
)
 
900

 
45

 
39

 
(133
)
 
(49
)
 
508

Ending Balance
$
27,515

 
$
2,592

 
$
947

 
$
1,564

 
$
2,887

 
$
2,474

 
$
37,979

(in thousands)
Commercial,
Secured by
Real Estate
 
Commercial,
Industrial
and Other
 
Equipment Finance
 
Real Estate-
Residential
Mortgage
 
Real Estate-
Construction
 
Home
Equity and
Consumer
 
Total
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
25,704

 
$
2,313

 
$
630

 
$
1,557

 
$
2,731

 
$
2,520

 
$
35,455

Charge-offs
(22
)
 
(1,012
)
 
(23
)
 
(93
)
 

 
(100
)
 
(1,250
)
Recoveries
31

 
20

 
2

 
2

 
5

 
95

 
155

Provision
104

 
447

 
433

 
123

 
196

 
(19
)
 
1,284

Ending Balance
$
25,817

 
$
1,768

 
$
1,042

 
$
1,589

 
$
2,932

 
$
2,496

 
$
35,644


Loans receivable summarized by portfolio segment and impairment method are as follows:
(in thousands)
Commercial,
Secured by
Real Estate
 
Commercial,
Industrial
and Other
 
Equipment Finance
 
Real Estate-
Residential
Mortgage
 
Real Estate-
Construction
 
Home
Equity and
Consumer
 
Total
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance: Individually evaluated for impairment
$
15,985

 
$
2,509

 
$
327

 
$
715

 
$

 
$
700

 
$
20,236

Ending Balance: Collectively evaluated for impairment
3,413,062

 
384,213

 
90,464

 
334,177

 
329,566

 
338,573

 
4,890,055

Ending Balance: Loans acquired with deteriorated credit quality
7,503

 
2,508

 

 
398

 
3,429

 
542

 
14,380

Ending Balance (1)
$
3,436,550

 
$
389,230

 
$
90,791

 
$
335,290

 
$
332,995

 
$
339,815

 
$
4,924,671

(in thousands)
Commercial,
Secured by
Real Estate
 
Commercial,
Industrial
and Other
 
Equipment Finance
 
Real Estate-
Residential
Mortgage
 
Real Estate-
Construction
 
Home
Equity and
Consumer
 
Total
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance: Individually evaluated for impairment
$
16,554

 
$
1,360

 
$
331

 
$
730

 
$

 
$
727

 
$
19,702

Ending Balance: Collectively evaluated for impairment
3,040,573

 
335,375

 
87,594

 
329,124

 
319,545

 
327,882

 
4,440,093

Ending balance: Loans acquired with deteriorated credit quality
652

 

 

 

 

 

 
652

Ending Balance (1)
$
3,057,779

 
$
336,735

 
$
87,925

 
$
329,854

 
$
319,545

 
$
328,609

 
$
4,460,447

(1)
Excludes deferred fees

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Table of Contents


The allowance for loan losses is summarized by portfolio segment and impairment classification as follows:
(in thousands)
Commercial,
Secured by
Real Estate
 
Commercial,
Industrial
and Other
 
Equipment Finance
 
Real Estate-
Residential
Mortgage
 
Real Estate-
Construction
 
Home
Equity and
Consumer
 
Total
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance: Individually evaluated for impairment
$
229

 
$
8

 
$
12

 
$
4

 
$

 
$
6

 
$
259

Ending Balance: Collectively evaluated for impairment
27,286

 
2,584

 
935

 
1,560

 
2,887

 
2,468

 
37,720

Ending Balance
$
27,515

 
$
2,592

 
$
947

 
$
1,564

 
$
2,887

 
$
2,474

 
$
37,979

(in thousands)
Commercial,
Secured by
Real Estate
 
Commercial,
Industrial
and Other
 
Equipment Finance
 
Real Estate-
Residential
Mortgage
 
Real Estate-
Construction
 
Home
Equity and
Consumer
 
Total
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance: Individually evaluated for impairment
$
307

 
$
7

 
$
14

 
$
4

 
$

 
$
6

 
$
338

Ending Balance: Collectively evaluated for impairment
27,574

 
1,735

 
973

 
1,562

 
3,015

 
2,491

 
37,350

Ending Balance
$
27,881

 
$
1,742

 
$
987

 
$
1,566

 
$
3,015

 
$
2,497

 
$
37,688

Lakeland also maintains a reserve for unfunded lending commitments which is included in other liabilities. This reserve was $2.3 million as of March 31, 2019 and December 31, 2018. The Company analyzes the adequacy of the reserve for unfunded lending commitments quarterly.
Troubled Debt Restructurings
Loans are classified as troubled debt restructured loans in cases where borrowers experience financial difficulties and Lakeland makes certain concessionary modifications to contractual terms. Restructured loans typically involve a modification of terms such as a reduction of the stated interest rate, a moratorium of principal payments and/or an extension of the maturity date 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 losses.
The following table summarizes loans that have been restructured during the three months ended March 31, 2019 and 2018:
 
For the Three Months Ended March 31, 2019
 
For the Three Months Ended March 31, 2018
(dollars in thousands)
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
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate

 
$

 
$

 
2

 
$
1,657

 
$
1,657

 

 
$

 
$

 
2

 
$
1,657

 
$
1,657

There were no loans as of March 31, 2019 and 2018 that were restructured within the previous twelve months that have subsequently defaulted.
Other Real Estate and Other Repossessed Assets
At March 31, 2019 and December 31, 2018, the Company had other real estate owned of $715,000 and $830,000, respectively. Included in other real estate owned was residential property acquired as a result of foreclosure proceedings totaling $624,000 and $702,000 at March 31, 2019 and December 31, 2018, respectively. There were no balances of other repossessed assets at both March 31, 2019 and December 31, 2018.

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NOTE 7 – LEASES
The Company leases certain premises and equipment under operating leases. Portions of certain properties are subleased for terms extending through 2024. At March 31, 2019, the Company had lease liabilities totaling $20.8 million and right-of-use assets totaling $19.2 million related to these leases. The calculated amount of the right-of-use asset and lease liabilities are impacted by the length of the lease term and the discount rate used to calculate the present value of the minimum lease payments. The Company's lease agreements often include one or more options to renew at the Company's discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the right-of-use asset and lease liability. The Company uses its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used.
For the three months ended March 31, 2019, the weighted average remaining lease term for operating leases was 10.86 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.49%.
As the Company elected not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities. Lease costs were as follows:
(in thousands)
 
Three Months Ended
March 31, 2019
 
 
 
Operating lease cost
 
$
820

Variable lease cost
 
35

Sublease income
 
(31
)
Net lease cost
 
$
824

Rent expense for the three months ended March 31, 2018, prior to the adoption of ASU 2016-02, was $758,000.
Other information (in thousands)
 
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
660

 
 
Right-of-use asset obtained in exchange for new operating lease liabilities
$
765

There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the three months ended March 31, 2019. At March 31, 2019, the Company had no leases that had not yet commenced.
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability at March 31, 2019 is as follows:
(in thousands)
 
 
Within one year
 
$
3,273

After one year but within two years
 
3,036

After two year but within three years
 
2,786

After three year but within four years
 
2,283

After four year but within five years
 
2,058

After 5 years
 
12,061

Total undiscounted cash flows
 
25,497

Discount on cash flows
 
(4,674
)
Total lease liability
 
$
20,823


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Table of Contents


NOTE 8 – 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 $11.2 million and $498,000, respectively, in available for sale securities pledged for collateral on its interest rate swaps with the financial institution for March 31, 2019 and December 31, 2018.
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, 2019, the Company did not record any hedge ineffectiveness. The Company recognized $124,000 and $43,000 of accumulated other comprehensive income (loss) that was reclassified into interest expense for the first three months of 2019 and 2018, respectively.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s debt. During the next twelve months, the Company estimates that $448,000 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, 2019
Notional Amount
 
Average
Maturity (Years)
 
Weighted Average
Fixed Rate
 
Weighted Average
Variable Rate
 
Fair
 Value
Classified in Other Assets:
 
 
 
 
 
 
 
 
 
3rd Party interest rate swaps
$
88,842

 
7.5
 
3.80
%
 
1 Mo. LIBOR + 2.13%
 
$
2,939

Customer interest rate swaps
253,922

 
10.8
 
4.83
%
 
1 Mo. LIBOR + 2.04%
 
11,411

Interest rate swap (cash flow hedge)
30,000

 
2.3
 
1.10
%
 
3 Mo. LIBOR
 
828

Classified in Other Liabilities:
 
 
 
 
 
 
 
 
 
Customer interest rate swaps
$
88,842

 
7.5
 
3.80
%
 
1 Mo. LIBOR + 2.13%
 
$
(2,939
)
3rd Party interest rate swaps
253,922

 
10.8
 
4.83
%
 
1 Mo. LIBOR + 2.04%
 
(11,411
)
December 31, 2018
Notional
 Amount
 
Average
Maturity (Years)
 
Weighted 
Average
Fixed Rate
 
Weighted Average
Variable Rate
 
Fair
 Value
Classified in Other Assets:
 
 
 
 
 
 
 
 
 
      3rd Party interest rate swaps
$
153,909

 
8.3
 
4.10
%
 
1 Mo. LIBOR + 2.13%
 
$
5,329

      Customer interest rate swaps
164,427

 
12.0
 
5.04
%
 
1 Mo. LIBOR + 2.05%
 
5,707

      Interest rate swap (cash flow hedge)
30,000

 
2.5
 
1.10
%
 
3 Mo. LIBOR
 
1,099

Classified in Other Liabilities:
 
 
 
 
 
 
 
 
 
      Customer interest rate swaps
$
153,909

 
8.3
 
4.10
%
 
1 Mo. LIBOR + 2.13%
 
$
(5,329
)
      3rd party interest rate swaps
164,427

 
12.0
 
5.04
%
 
1 Mo. LIBOR + 2.05%
 
(5,707
)

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NOTE 9 – GOODWILL AND INTANGIBLE ASSETS
The Company had goodwill of $154.2 million and $136.4 million at March 31, 2019 and December 31, 2018, respectively. The Company recorded $17.7 million in goodwill from the Highlands merger in January 2019. 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 intangibles of $5.2 million and $1.8 million at March 31, 2019 and December 31, 2018, respectively. The Company recorded core deposit intangible of $3.7 million for the Highlands acquisition. The estimated future amortization expense for the remainder of 2019 and for each of the succeeding five years ended December 31 is as follows (in thousands):
For the Year Ended
 
2019
$
878

2020
1,025

2021
868

2022
711

2023
554

2024
425

NOTE 10 – BORROWINGS
At March 31, 2019, the Company had federal funds purchased and securities sold under agreements to repurchase of $220.0 million and $41.3 million, respectively, compared to federal funds purchased and securities sold under agreements to repurchase of $192.1 million and $41.8 million, respectively, at December 31, 2018. The securities sold under agreements to repurchase are overnight sweep arrangement accounts with our customers. As of March 31, 2019, the Company had $56.2 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.
NOTE 11 – SHARE-BASED COMPENSATION
The Company grants restricted stock, restricted stock units (“RSUs”) and stock options under the 2018 Omnibus Equity Incentive Plan and previously granted such awards under the 2009 Equity Compensation Program. The Company recognized share based compensation expense on its restricted stock of $55,000 and $56,000 for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, there was unrecognized compensation cost of $156,000 related to unvested restricted stock that is expected to be recognized over a weighted average period of approximately 0.80 years. The Company recognized share based compensation expense of $640,000 and $938,000 on RSUs for the three months ended March 31, 2019 and 2018, respectively. Unrecognized compensation expense related to RSUs was approximately $3.9 million as of March 31, 2019, and that cost is expected to be recognized over a period of 1.78 years. There was no unrecognized compensation expense related to unvested stock options as of March 31, 2019.
In the first three months of 2019, the Company granted 13,052 shares of restricted stock to non-employee directors at a grant date fair value of $15.96 per share under the 2018 Omnibus Equity Incentive Program. The restricted stock vests one year from the date it was granted. Compensation expense on this restricted stock is expected to be $208,000 over a one year period. In the first three months of 2018, the Company granted 10,945 shares of restricted stock to non-employee directors at a grant date fair value of $20.55 per share under the 2009 Equity Compensation Program. The restricted stock vested one year from the date it was granted. Compensation expense on this restricted stock was $225,000 over a one year period.

25

Table of Contents


The following is a summary of the Company’s restricted stock activity during the three months ended March 31, 2019:
 
Number of
Shares
 
Weighted
Average
Price
Outstanding, January 1, 2019
11,701

 
$
20.18

Granted
13,052

 
15.96

Vested
(11,643
)
 
20.24

Forfeited

 

Outstanding, March 31, 2019
13,110

 
$
15.93

In the first three months of 2019, the Company granted 127,559 RSUs under the 2018 Omnibus Equity Incentive Plan at a weighted average grant date fair value of $16.66 per share. 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 2019 is expected to average approximately $708,000 per year over a three year period. In the first three months of 2018, the Company granted 146,233 RSUs at a weighted average grant date fair value of $19.11 per share under the Company’s 2009 Equity Compensation Program. Compensation expense on these restricted stock units is expected to average approximately $932,000 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, 2019:
 
Number of
Shares
 
Weighted
Average
Price
Outstanding, January 1, 2019
299,347

 
$
16.60

Granted
127,559

 
16.66

Vested
(83,396
)
 
12.53

Forfeited
(2,717
)
 
17.38

Outstanding, March 31, 2019
340,793

 
$
17.61

There were no grants of stock options in the first three months of 2019 or 2018. Option activity under the Company’s stock option plans is as follows:
 
Number of
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
(in years)
 
Aggregate
Intrinsic
Value
Outstanding, January 1, 2019
67,488

 
$
8.28

 
2.86
 
$
440,483

Granted

 

 
 
 
 
Exercised

 

 
 
 
 
Forfeited

 

 
 
 
 
Expired

 

 
 
 
 
Outstanding, March 31, 2019
67,488

 
$
8.28

 
2.61
 
$
448,581

Options exercisable at March 31, 2019
67,488

 
$
8.28

 
2.61
 
$
448,581

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options).
There were no stock options exercised during the first three months of 2019 and 26,250 stock options exercised during the first three months of 2018. The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2019 and 2018 was $0 and $297,000, respectively. Exercise of stock options during the first three months of 2019 and 2018, resulted in cash receipts of $0 and $248,000, respectively.

26

Table of Contents


NOTE 12 – COMPREHENSIVE INCOME
The components of other comprehensive income (loss) are as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended
 
March 31, 2019
 
March 31, 2018
(in thousands)
Before Tax Amount
 
Tax Benefit (Expense)
 
Net of Tax Amount
 
Before Tax Amount
 
Tax Benefit
(Expense)
 
Net of Tax Amount
Net unrealized gains (losses) on available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized holding (losses) gains arising during period
$
6,109

 
$
(1,746
)
 
$
4,363

 
$
(7,502
)
 
$
1,770

 
$
(5,732
)
Reclassification adjustment for net gains arising during the period

 

 

 

 

 

Net unrealized losses (gains)
6,109

 
(1,746
)
 
4,363

 
(7,502
)
 
1,770

 
(5,732
)
Unrealized gains (losses) on derivatives
(271
)
 
57

 
(214
)
 
358

 
(75
)
 
283

Other comprehensive (loss) income, net
$
5,838

 
$
(1,689
)
 
$
4,149

 
$
(7,144
)
 
$
1,695

 
$
(5,449
)

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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended March 31, 2019
 
For the Three Months Ended March 31, 2018
(in thousands)
Unrealized
Losses on
Available for  Sale
Securities
 
Unrealized
Gains
on Derivatives
 
Pension Items
 
Total
 
Unrealized
Gains (Losses) on
Available for  Sale
Securities
 
Unrealized
Gains 
on Derivatives
 
Pension Items
 
Total
Beginning balance
(8,782
)
 
903

 
41

 
(7,838
)
 
$
(3,232
)
 
$
862

 
$
21

 
$
(2,349
)
Adjustment for implementation of ASU 2016-01

 

 

 

 
(2,043
)
 

 

 
(2,043
)
Adjusted beginning balance
(8,782
)
 
903

 
41

 
(7,838
)
 
(5,275
)
 
862

 
21

 
(4,392
)
Net current period other comprehensive (loss) income
4,363

 
(214
)
 

 
4,149

 
(5,732
)
 
283

 

 
(5,449
)
Ending balance
(4,419
)
 
689

 
41

 
(3,689
)
 
$
(11,007
)
 
$
1,145

 
$
21

 
$
(9,841
)
NOTE 13 – 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.

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Table of Contents


The Company’s assets that are measured at fair value on a recurring basis are its available for sale investment securities and its interest rate swaps. 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, broker-dealer quotes, 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, 2019, 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:
(in thousands)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair Value
March 31, 2019
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investment securities, available for sale
 
 
 
 
 
 
 
U.S. Treasury and government agencies
$
16,293

 
$
123,288

 
$

 
$
139,581

Mortgage-backed securities

 
469,636

 

 
469,636

Obligations of states and political subdivisions

 
45,017

 

 
45,017

Other debt securities

 
5,004

 

 
5,004

Total securities available for sale
16,293

 
642,945

 

 
659,238

Equity securities, at fair value
1,864

 
13,368

 

 
15,232

Derivative assets

 
15,178

 

 
15,178

Total Assets
$
18,157

 
$
671,491

 
$

 
$
689,648

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
14,350

 
$

 
$
14,350

Total Liabilities
$

 
$
14,350

 
$

 
$
14,350

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investment securities, available for sale
 
 
 
 
 
 
 
U.S. Treasury and government agencies
$
4,920

 
$
136,007

 
$

 
$
140,927

Mortgage-backed securities

 
447,094

 

 
447,094

Obligations of states and political subdivisions

 
45,505

 

 
45,505

Corporate debt securities

 
5,092

 

 
5,092

Total securities available for sale
4,920

 
633,698

 

 
638,618

Equity securities, at fair value
2,731

 
13,190

 

 
15,921

Derivative assets

 
12,135

 

 
12,135

Total Assets
$
7,651

 
$
659,023

 
$

 
$
666,674

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
11,036

 
$

 
$
11,036

Total Liabilities
$

 
$
11,036

 
$

 
$
11,036


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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:
(in thousands)
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
Fair Value
March 31, 2019
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Impaired loans
$

 
$

 
$
20,236

 
$
20,236

Loans held for sale

 
600

 

 
600

Other real estate owned and other repossessed assets

 

 
715

 
715

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Impaired loans
$

 
$

 
$
19,702

 
$
19,702

Loans held for sale

 
1,113

 

 
1,113

Other real estate owned and other repossessed assets

 

 
830

 
830

Impaired loans are evaluated and valued at the time the loan is identified as impaired at the lower of cost or market value. Because most of Lakeland’s impaired loans are collateral dependent, fair value is generally measured based on the value of the collateral, less estimated costs to sell, securing these loans 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 income approach to value the collateral using discount rates (with ranges of 5-11%) or capitalization rates (with ranges of 4-9%) to evaluate the property. The value of the equipment may be determined by an appraiser, if significant, inquiry through a recognized valuation resource, or by the value on the borrower’s financial statements. Field examiner reviews on business assets may be conducted based on the loan exposure and reliance on this type of collateral. Appraised and reported values may be adjusted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. 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 or deed in lieu of foreclosure, are carried at fair value less estimated disposal costs of the acquired property. Fair value on other real estate owned is based on the appraised value of the collateral using discount rates or capitalization rates similar to those used in impaired loan valuation. The fair value of other repossessed assets is estimated by inquiry through recognized valuation resources.
Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Changes in economic conditions, locally or nationally, could impact the value of the estimated amounts of impaired loans, OREO and other repossessed assets.
Fair Value of Certain Financial Instruments
Estimated fair values have been determined by the Company using the best available data and an estimation methodology suitable for each category of financial instruments. Management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.
The estimation methodologies used, the estimated fair values and recorded book balances at March 31, 2019, and December 31, 2018, 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 purchased 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.

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The fair value of investment securities held to maturity was measured using information from the same third-party servicer used for investment securities available for sale using the same methodologies discussed above. Investment securities held to maturity includes $5.0 million in short-term municipal bond anticipation notes and $2.5 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 has been valued using an exit price approach, which incorporates a buildup discount rate calculation that uses a swap rate adjusted for credit risk, servicing costs, a liquidity premium and a prepayment premium.
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, 2019 and December 31, 2018:
(in thousands)
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)
 
 
 
 
 
 
 
 
 
 
March 31, 2019
 
 
 
 
 
 
 
 
 
Financial Assets:
 
 
 
 
 
 
 
 
 
Investment securities held to maturity
$
159,308

 
$
158,219

 
$

 
$
150,700

 
$
7,519

Federal Home Loan Bank and other membership bank stocks
16,951

 
16,951

 

 
16,951

 

Loans, net
4,883,412

 
4,899,288

 

 

 
4,899,288

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Certificates of deposit
946,372

 
942,283

 

 
942,283

 

Other borrowings
175,783

 
174,569

 

 
174,569

 

Subordinated debentures
118,193

 
115,462

 

 

 
115,462

December 31, 2018
 
 
 
 
 
 
 
 
 
Financial Assets:
 
 
 
 
 
 
 
 
 
Investment securities held to maturity
$
153,646

 
$
150,932

 
$

 
$
143,913

 
$
7,019

Federal Home Loan Bank and other membership bank stocks
13,301

 
13,301

 

 
13,301

 

Loans, net
4,419,045

 
4,341,477

 

 

 
4,341,477

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Certificates of deposit
757,038

 
750,801

 

 
750,801

 

Other borrowings
181,118

 
176,921

 

 
176,921

 

Subordinated debentures
105,027

 
102,497

 

 

 
102,497


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NOTE 14 – RECENT ACCOUNTING PRONOUNCEMENTS
In August 2018, the Financial Accounting Standards Board ("FASB") issued an update to improve the effectiveness of fair value measurement disclosures. Among other provisions, the update removes requirements to disclose amounts and reasons of transfers between Level 1 and Level 2 in the fair value hierarchy, and it modifies the disclosures regarding transfers in and out of Level 3 of the fair value hierarchy. The update requires a discussion regarding the change in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2019. Because the Company does not typically have Level 3 fair value measurements, the update is not expected to have a material impact on the Company's financial statements.
In August 2018, the FASB issued an update which aligns the requirements for capitalizing implementation costs in a cloud-computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. Implementation costs incurred by customers in a cloud computing arrangement are to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2019. The Company is currently assessing the impact that the guidance will have on its financial statements.
In August 2018, the FASB issued an update which changes the disclosure of accounting and reporting requirements related to single-employer defined benefit pension or other postretirement benefit plans. The amendments in the update remove disclosures that are no longer considered cost-beneficial, clarify the specific requirements of disclosures and add disclosure requirements identified as relevant. For calendar-year public companies, the changes will be effective for annual periods, including interim periods within those annual periods, in 2020. Because the Company has minimal pension plans that require calculation of projected benefit obligations or accumulated benefit obligations, the update will not have a material impact on the Company's financial statements.
In June 2018, the FASB issued an update expanding earlier guidance on stock compensation to include share-based payments issued to nonemployees for goods and services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially the same. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2018. Earlier adoption was permitted. The adoption of this update did not have a significant impact on the Company's financial statements.
In August 2017, the FASB issued an update intended to improve and simplify accounting rules around hedge accounting. Amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this update also make certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2019. The Company is still evaluating the impact that this guidance will have on its financial statements.
In July 2017, the FASB issued guidance which simplifies the accounting for certain financial instruments with down round features, a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings. The provisions of the new guidance related to down rounds are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this update did not have a material impact on the Company’s financial statements because the Company does not have any equity-linked financial instruments that have such down round features.
In March 2017, the FASB issued an update which shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. Under current GAAP, entities amortize the premium as an adjustment of yield over the contractual life of the instrument even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. The update shortens the amortization period for certain callable debt securities held at a premium and requires the premium be amortized to the earliest call date. This update will be effective for annual and interim periods beginning after December 15, 2018. Entities are required to apply the amendments on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of this update did not have a material impact on the Company’s financial statements.

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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 annual years beginning after December 15, 2019. The adoption of this update is not expected to have a material impact on the Company’s financial statements.
In 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 formed a working group under the direction of the Chief Risk Officer that is comprised of individuals from the credit, risk management, finance and project management areas for implementation of this update. In 2018, the Company contracted with a software and advisory service provider to aid in implementation. The software provider has completed configuration of the software platform and the Company has completed initial data preparation for the software. The Company and software provider have begun evaluating results of initial scenario analysis and as a result have been reviewing and fine tuning assumptions in the model. The Company is still developing qualitative adjustments as well as metrics for determination of a reasonable and supportable forecast period. The Company has engaged a third-party firm to conduct a review and validation of our methodology and models.
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 retained the services of a software provider to aid in its implementation. In the third quarter of 2018, the FASB issued updates which included targeted improvements to the leasing guidance that is intended to reduce costs and ease implementation of the leases standard. The improvements include an optional transition method to adopt the new leases standard where the entity could initially apply the new leases standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity's reporting for comparative periods presented in the financial statements in which it adopts the new leases standard, will continue to be in accordance with Accounting Standards Codification ("ASC") Topic 840, Leases. An entity that adopts this additional transition method, must provide the required disclosures for all periods that continue to be in accordance with the current ASC 840. The lease update also includes a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead, to account for these components as a single component if the nonlease components otherwise would be accounted for under the new revenue guidance and both of the following conditions are met: 1) the timing and pattern of transfer of the nonlease component(s) and associated lease component are the same, and 2) the lease component, if accounted for separately, would be classified as an operating lease. Management used the optional transition method discussed above and also used the practical expedient to account for non-lease components with the associated lease component as a single component assuming the appropriate conditions are met. The FASB issued further clarification of the standard and addressed implementation and disclosure requirements. With the adoption of this update, the Company recorded an operating lease right-of-use asset of $18.7 million, a corresponding liability of $20.2 million and a cumulative adjustment to retained earnings of $125,000.

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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, 2018.
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 losses), the Company's future tax expense, corporate objectives, and other financial and business matters. The words “anticipates,” “projects,” “intends,” “estimates,” “expects,” “believes,” “plans,” “may,” “will,” “should,” “could,” and other similar expressions are intended to identify such forward-looking statements. The Company cautions that these forward-looking statements are necessarily speculative and speak only as of the date made, and are subject to numerous assumptions, risks and uncertainties, all of which may change over time. Actual results could differ materially from such forward-looking statements.
In addition to the risk factors disclosed elsewhere in this document, the following factors, among others, could cause the Company’s actual results to differ materially and adversely from such forward-looking statements: changes in the financial services industry and the U.S. and global capital markets, changes in economic conditions nationally, regionally and in the Company’s markets, the nature and timing of actions of the Federal Reserve Board and other regulators, the nature and timing of legislation 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, successful implementation, deployment and upgrades of new and existing technology, systems, services and products, customers’ acceptance of Lakeland’s products and services, competition and failure to realize anticipated efficiencies and synergies from the merger of Highlands Bancorp, Inc. into the Company and Highlands State Bank into Lakeland.
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 and their subsidiaries, including 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.
Financial Overview
During the first quarter, the Company completed the merger of Highlands Bancorp Inc. ("Highlands"), adding $496.1 million in total assets, including $428.1 million in total loans, including loans held for sale, and $409.6 million in total deposits. The Company's financial statements reflect the impact of the merger from the date of acquisition, which should be considered when comparing periods.
For the first quarter of 2019, the Company reported net income of $15.6 million and earnings per diluted share of $0.31 compared to net income of $15.3 million and earnings per diluted share of $0.32 for the first quarter of 2018. Excluding merger-related expenses pertaining to the Company's acquisition of Highlands, of $2.1 million, tax-effected, net income for the first quarter of 2019 was $17.8 million, or $0.35 per diluted share. For more information, please see "Reconciliation of Net Income" in "Non-GAAP Financial Measures" below. For the first quarter of 2019, annualized return on average assets was 1.02%, annualized return on average common equity was 9.41% and annualized return on average tangible common equity was 12.32% compared to 1.14%, 10.60%, and 13.90%, respectively, for the first quarter of 2018.
Net interest margin was 3.42% in the first quarter of 2019 compared to 3.39% in the first quarter of 2018.

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Total loans, net of deferred fees, grew $464.7 million, or 10%, to $4.92 billion during the first three months of 2019 and included $427.0 million of Highlands loan balances.
Total deposits increased $443.9 million, or 10%, from December 31, 2018 to March 31, 2019, to $5.06 billion and included $409.6 million of Highlands deposit balances.
Comparison of Operating Results for the Three Months Ended March 31, 2019 and 2018
Net Income
Net income was $15.6 million, or $0.31 per diluted share, for the first quarter of 2019 compared to net income of $15.3 million, or $0.32 per diluted share, for the first quarter of 2018. Net interest income of $48.6 million for the first quarter of 2019 increased $6.4 million from the first quarter of 2018 as a result of the merger, organic growth and an increase in market interest rates.
Net Interest Income
Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. The Company’s net interest income is determined by: (i) the volume of interest-earning assets that it holds and the yields that it earns on those assets, and (ii) the volume of interest-bearing liabilities that it has assumed and the rates that it pays on those liabilities.
Net interest income on a tax equivalent basis for the first quarter of 2019 was $48.7 million, compared to $42.4 million for the first quarter of 2018. The net interest margin increased to 3.42% in the first quarter of 2019 from 3.39% in the first quarter of 2018 primarily as a result of an increase in the yield on interest-earning assets partially offset by an increase in the cost of interest-bearing liabilities. The components of net interest income will be discussed in greater detail below.
The following table reflects the components of the Company’s net interest income, setting forth for the periods presented, (1) average assets, liabilities and stockholders’ equity, (2) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) the Company’s net interest spread (i.e., the average yield on interest-earning assets less the average cost of interest-bearing liabilities) and (5) the Company’s net interest margin. Rates for the three months ended March 31, 2019 and March 31, 2018 are computed on a tax equivalent basis using a tax rate of 21%.

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For the Three Months Ended March 31, 2019
 
For the Three Months Ended March 31, 2018
(dollars in thousands)
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/
Paid
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/
Paid
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans (1)
$
4,871,534

 
$
57,642

 
4.80
%
 
$
4,194,207

 
$
45,544

 
4.40
%
Taxable investment securities and other
782,699

 
4,873

 
2.49
%
 
736,342

 
3,992

 
2.17
%
Tax-exempt securities
75,347

 
516

 
2.74
%
 
84,713

 
561

 
2.65
%
Federal funds sold (2)
43,273

 
254

 
2.35
%
 
47,366

 
166

 
1.40
%
Total interest-earning assets
5,772,853

 
63,285

 
4.44
%
 
5,062,628

 
50,263

 
4.02
%
Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
(41,829
)
 
 
 
 
 
(35,979
)
 
 
 
 
Other assets
452,200

 
 
 
 
 
382,760

 
 
 
 
TOTAL ASSETS
$
6,183,224

 
 
 
 
 
$
5,409,409

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings accounts
$
513,270

 
$
94

 
0.07
%
 
$
487,666

 
$
69

 
0.06
%
Interest-bearing transaction accounts
2,554,865

 
7,417

 
1.18
%
 
2,240,044

 
3,343

 
0.61
%
Time deposits
890,070

 
3,986

 
1.79
%
 
761,418

 
2,343

 
1.23
%
Borrowings
435,501

 
3,074

 
2.82
%
 
338,782

 
2,154

 
2.54
%
Total interest-bearing liabilities
4,393,706

 
14,571

 
1.34
%
 
3,827,910

 
7,909

 
0.83
%
Noninterest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
1,056,060

 
 
 
 
 
964,498

 
 
 
 
Other liabilities
60,253

 
 
 
 
 
33,301

 
 
 
 
Stockholders’ equity
673,205

 
 
 
 
 
583,700

 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
6,183,224

 
 
 
 
 
$
5,409,409

 
 
 
 
Net interest income/spread
 
 
48,714

 
3.10
%
 
 
 
42,354

 
3.19
%
Tax equivalent basis adjustment
 
 
108

 
 
 
 
 
118

 
 
NET INTEREST INCOME
 
 
$
48,606

 
 
 
 
 
$
42,236

 
 
Net interest margin (3)
 
 
 
 
3.42
%
 
 
 
 
 
3.39
%
(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 $13.0 million, or 26% from $50.3 million in the first quarter of 2018 to $63.3 million in the first quarter of 2019, as a result of the continued increase in the loan portfolio yield as a result of the higher interest rate environment and $787,000 in accretion income on loans resulting from the Highlands acquisition. Average loans increased $677.3 million compared to the first quarter of 2018 while the yield on average loans increased 40 basis points to 4.80% in the first quarter of 2019 from the first quarter of 2018. Total average taxable investment securities increased $46.4 million to $782.7 million for the first quarter of 2019 from the first quarter of 2018, while average tax-exempt securities decreased $9.4 million to $75.3 million for the same periods. The yield on average taxable investment securities increased 32 basis points from the first quarter of 2018 to 2.49% for the first quarter of 2019, while the yield on average tax-exempt investment securities increased nine basis points to 2.74%.
Total interest expense of $14.6 million in the first quarter of 2019 was $6.7 million greater than the $7.9 million reported for the same period in 2018. Total average interest-bearing liabilities increased $565.8 million as a result of organic growth and the Highlands acquisition. The cost of average interest-bearing liabilities increased from 0.83% in the first quarter of 2018 to 1.34% in the first quarter of 2019. The increase in the cost of interest-bearing liabilities was due primarily to an increasingly competitive market for deposits resulting from a higher interest rate environment as well as an increase in the cost of borrowings.

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For the first quarter of 2019, the cost of interest-bearing transaction accounts and time deposits increased by 57 basis points and 56 basis points, respectively, when compared to the first quarter of 2018, due to a higher rate environment as well as the continuing impact of a money market deposit account promotion in the third quarter of 2018.
Provision for Loan Losses
In determining the provision for loan losses, management considers national and local economic conditions; trends in the portfolio including orientation to specific loan types or industries; experience, ability and depth of lending management in relation to the complexity of the portfolio; adequacy and adherence to policies, procedures and practices; levels and trends in delinquencies, impaired loans and charge-offs and the results of independent third-party loan review.
In the first quarter of 2019, a $508,000 provision for loan losses was recorded, compared to $1.3 million for the same period last year. The Company charged off $516,000 and recovered $299,000 in the first quarter of 2019 compared to $1.3 million and $155,000, respectively, in the first quarter of 2018. For more information regarding the determination of the provision, see “Risk Elements” below.
Noninterest Income
The Company recorded noninterest income of $5.7 million and $5.3 million in the first quarter of 2019 and 2018, respectively, an increase of $389,000, or 7%, from the prior year. Commissions and fees increased $140,000 compared to the first quarter of 2018 due primarily to increased investment services income. Gains on sales of loans increased $125,000 when compared to the first quarter of 2018 to $371,000 in the first quarter of 2019. Income on bank owned life insurance was $683,000 for the first quarter of 2019, decreasing $36,000 compared to the same period last year. Other income decreased $173,000 compared to the same period in 2018 due primarily to a loss on the disposal of premises and equipment and a decrease in swap income.
Noninterest Expense
Noninterest expense in the first quarter of 2019 totaled $34.0 million compared to $27.1 million reported for the same quarter of 2018, an increase of $6.8 million or 25%, and includes $2.9 million of expenses related to the merger with Highlands. In general, noninterest expense for the first quarter of 2019 is higher when compared to the same period last year as a result of the additional branches and staff from the Highlands merger. With the successful completion of the Highlands core conversion to our systems in April 2019, it is anticipated that we will begin to see synergies and cost reductions in the coming year. Salaries and employee benefits expense was $19.2 million for the first quarter of 2019, increasing $2.4 million, or 14%, from the same period last year, as a result of additions to our staff from the merger, additions to support continued growth, normal merit increases and increases in benefits costs. For the first quarters of 2019 and 2018, data processing expense was $1.3 million and $466,000, respectively, an increase of $861,000 compared to the prior year period due primarily to the expansion and improvement of the Company's digital infrastructure as well as increases related to the Highlands merger.
The Company’s efficiency ratio, a non-GAAP financial measure, was 56.62% in the first quarter of 2019, compared to 56.58% for the same period last year. The Company uses this ratio because it believes that the ratio provides a good comparison of period-to-period performance and because the ratio is widely accepted in the banking industry. The following table shows the calculation of the efficiency ratio for the periods presented:
 
For the Three Months Ended March 31,
(dollars in thousands)
2019
 
2018
 
 
 
 
Total noninterest expense
$
33,984

 
$
27,137

Amortization of core deposit intangibles
(304
)
 
(157
)
Merger-related expenses
(2,860
)
 

Noninterest expense, as adjusted
$
30,820

 
$
26,980

 
 
 
 
Net interest income
$
48,606

 
$
42,236

Noninterest income
5,723

 
5,334

Total revenue
54,329

 
47,570

Tax-equivalent adjustment on municipal securities
108

 
118

Total revenue, as adjusted
$
54,437

 
$
47,688

Efficiency ratio
56.62
%
 
56.58
%

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Income Tax Expense
The effective tax rate in the first quarter of 2019 was 21.23% compared to 20.34% during the same period in 2018 primarily due to the changes in New Jersey tax law during 2018.
Financial Condition
The Company’s total assets increased $559.0 million from December 31, 2018, to $6.37 billion at March 31, 2019. Total loans, net of deferred fees, were $4.92 billion, an increase of $464.7 million, or 10%, from $4.46 billion at December 31, 2018. Total deposits were $5.06 billion, an increase of $443.9 million, or 10%, from December 31, 2018.
With the completion of the Highlands merger in January 2019, the Company recorded the assets acquired and the liabilities assumed in the acquisition at their estimated fair values as of the acquisition date. Total assets acquired were $496.1 million, total loans and total deposits acquired were $428.1 million and $409.6 million, respectively.
Loans
Gross loans of $4.92 billion at March 31, 2019 increased $464.2 million from December 31, 2018, primarily in the commercial loans secured by real estate category which increased $378.8 million, or 12%, $333.7 million of which was from the Highlands acquisition. Commercial, industrial and other loans increased $52.5 million, or 16%, $45.3 million of which was from the Highlands acquisition. Additionally, real estate construction loans increased $13.5 million, or 4%. Construction loans from the Highlands acquisition were $26.3 million. For more information on the loan portfolio, see Note 6 in Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Risk Elements
Non-performing assets, excluding PCI loans, increased from $13.0 million at December 31, 2018 to $16.4 million at March 31, 2019, primarily as a result of one customer relationship being moved into non-accrual. Non-accrual loans in the commercial loans secured by real estate and commercial, industrial and other category increased $2.6 million and $1.2 million, respectively. The percentage of non-performing assets to total assets was 0.26% at March 31, 2019 compared to 0.22% at December 31, 2018. Non-accrual loans at March 31, 2019 included three loan relationships with a balance of $1 million or greater, totaling $7.3 million, and two loan relationships between $500,000 and $1.0 million, totaling $1.5 million.
There were $78,000 in loans past due ninety days or more and still accruing at March 31, 2019 compared to none at December 31, 2018. These loans consist of open-end consumer loans secured by real estate which are generally placed on non-accrual and reviewed for charge-off when principal and interest payments are four months in arrears unless the obligations are well-secured and in the process of collection.
On March 31, 2019, the Company had $6.4 million in loans that were troubled debt restructurings and accruing interest income compared to $9.3 million at December 31, 2018. The Company has troubled debt restructurings that are accruing interest on loans that are expected to be able to perform under the modified terms of the loan. On March 31, 2019, the Company had $2.8 million in troubled debt restructurings that were included in non-accrual loans compared to $3.6 million at December 31, 2018. 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, 2019, the Company had $20.2 million in impaired loans (consisting primarily of non-accrual and restructured loans) compared to $19.7 million at year-end 2018. The Company also had purchased credit impaired loans from the Highlands, Pascack and Harmony acquisitions with carrying values of $13.7 million, $145,000 and $485,000, respectively, at March 31, 2019. For more information on impaired loans see Note 6 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, $259,000 of the allowance for loan losses has been allocated for impairment at March 31, 2019 compared to $338,000 at December 31, 2018. At March 31, 2019, the Company also had $41.5 million in loans that were rated substandard that were not classified as non-performing or impaired compared to $41.8 million at December 31, 2018.
At March 31, 2019, there were commitments to lend $457,000 in additional funds on non-accrual loans. There were no loans at March 31, 2019, 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 being included as non-accrual, past due or renegotiated at a future date.

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The following table sets forth for the periods presented, the historical relationships among the allowance for loan losses, the provision for loan losses, the amount of loans charged-off and the amount of loan recoveries:
(dollars in thousands)
For the Three Months Ended March 31, 2019
 
For the Three Months Ended March 31, 2018
 
For the Year Ended December 31, 2018
Balance of the allowance at the beginning of the year
$
37,688

 
$
35,455

 
$
35,455

Loans charged off:
 
 
 
 
 
Commercial, secured by real estate
(187
)
 
(22
)
 
(421
)
Commercial, industrial and other
(147
)
 
(1,012
)
 
(1,452
)
Equipment finance
(87
)
 
(23
)
 
(507
)
Real estate - mortgage
(50
)
 
(93
)
 
(131
)
Real estate - construction

 

 
(248
)
Home equity and consumer
(45
)
 
(100
)
 
(588
)
Total loans charged off
(516
)
 
(1,250
)
 
(3,347
)
Recoveries:
 
 
 
 
 
Commercial, secured by real estate
115

 
31

 
468

Commercial, industrial and other
97

 
20

 
317

Equipment finance
2

 
2

 
23

Real estate - mortgage
9

 
2

 
10

Real estate - construction
5

 
5

 
17

Home equity and consumer
71

 
95

 
332

Total recoveries
299

 
155

 
1,167

Net charge-offs
(217
)
 
(1,095
)
 
(2,180
)
Provision for loan losses
508

 
1,284

 
4,413

Ending balance
$
37,979

 
$
35,644

 
$
37,688

 
 
 
 
 
 
Net charge-offs as a percentage of average loans outstanding
0.02
%
 
0.10
%
 
0.05
%
Allowance as a percentage of total loans outstanding
0.77
%
 
0.84
%
 
0.84
%
Allowance as a percentage of non-accrual loans
241.55
%
 
267.10
%
 
310.70
%
The determination of the adequacy of the allowance for loan losses and the periodic provisioning for estimated losses included in the consolidated financial statements is the responsibility of management and the Board of Directors. Management performs a formal quarterly evaluation of the allowance for loan losses. This quarterly process is performed by the credit administration department and approved by the Chief Credit Officer. All supporting documentation with regard to the evaluation process is maintained by the credit administration department. Each quarter, the evaluation along with the supporting documentation is reviewed by the finance department before approval by the Chief Credit Officer. The allowance evaluation is then presented to an Allowance for Loan Losses Committee, which gives final approval to the allowance evaluation before being presented to the Board of Directors for their approval.
The methodology employed for assessing the adequacy of the allowance consists of the following criteria:
The establishment of specific reserve amounts for impaired loans, including PCI loans.
The establishment of reserves for pools of homogeneous loans not subject to specific review, including impaired loans under $500,000, equipment finance, 1 - 4 family residential mortgages, and consumer loans.
The establishment of reserve amounts for pools of homogeneous loans are based upon the determination of historical loss rates, which are adjusted to reflect current conditions through the use of qualitative factors. The qualitative factors considered by the Company include an evaluation of the results of the Company’s independent loan review function, the Company's reporting capabilities, the adequacy and expertise of Lakeland’s lending staff, underwriting policies, loss histories, trends in the portfolio, delinquency trends, economic and business conditions and capitalization rates. Since many of Lakeland’s loans depend on the sufficiency of collateral as a secondary source of repayment, any adverse trends in the real estate market could affect the underlying values available to protect Lakeland from losses.
Additionally, management determines the loss emergence periods for each loan segment, which are used to define loss migration periods and establish appropriate ranges for qualitative adjustments for each loan segment. The loss emergence period

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is the estimated time from the date of a loss event (such as a personal bankruptcy) to the actual recognition of the loss (typically via the first partial or full loan charge-off), and is determined based upon a study of our past loss experience by loan segment. All of the factors considered in the analysis of the adequacy of the allowance for loan losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods.
The overall balance of the allowance for loan losses of $38.0 million at March 31, 2019 increased $291,000 from December 31, 2018, an increase of 1%. The change in the allowance within loan segments during the two comparable periods captures changes in the non-performing loan and charge-off statistics and the level of growth.
Non-performing loans of $15.7 million at March 31, 2019 increased $3.6 million from December 31, 2018. The allowance for loan losses as a percent of total loans was 0.77% at March 31, 2019 compared to 0.84% at December 31, 2018. The reduction in the percentage of the allowance for loan losses as a percent of total loans was primarily due to the loans resulting from the Highlands acquisition which are accounted for under acquisition accounting and have no allowance for loan loss. Excluding the loans from the Highlands acquisition, the allowance as a percent of total loans would be 0.84% as of March 31, 2019. Management believes, based on appraisals and estimated selling costs that the majority of its non-performing loans are adequately secured and reserves on its non-performing loans are adequate. Based upon the process employed and giving recognition to all accompanying factors related to the loan portfolio, management considers the allowance for loan losses to be adequate at March 31, 2019.
Investment Securities
For detailed information on the composition and maturity distribution of the Company’s investment securities portfolio, see Note 5 in Notes to Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q. Investment securities totaled $818.5 million at March 31, 2019 and $792.3 million at December 31, 2018, increasing $26.3 million from year-end and includes $22.7 million acquired in the Highlands merger.
Deposits
Total deposits increased from $4.62 billion at December 31, 2018 to $5.06 billion at March 31, 2019, an increase of $443.9 million, or 10%, including $409.6 million acquired in the Highlands merger. Savings and interest-bearing transaction accounts and time deposits increased $132.9 million and $189.3 million, respectively. Noninterest-bearing deposits increased $121.7 million during the first quarter of 2019.
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 $20.2 million for the first three months of 2019 compared to $19.9 million for the same period in 2018.
Deposits. Lakeland can offer new products or change its rate structure in order to increase deposits. In the first three months of 2019, Lakeland’s deposits increased $34.3 million excluding the impact of the Highlands acquisition.
Sales of securities. At March 31, 2019 the Company had $659.2 million in securities designated “available for sale.” Of these securities, $452.0 million were pledged to secure public deposits and for other purposes required by applicable laws and regulations.
Repayments on loans can also be a source of liquidity.
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 $75.0 million in overnight borrowings from the FHLB on March 31, 2019. Lakeland also has overnight federal funds lines available for it to borrow up to $220.0 million of which $145.0 million was outstanding at March 31, 2019. 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, 2019.
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.

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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, 2019 follows.
Cash and cash equivalents totaling $226.4 million on March 31, 2019 increased $17.8 million from December 31, 2018. Operating activities provided $20.2 million in net cash. Investing activities used $24.8 million in net cash, primarily reflecting an increase in loans and the purchase of securities. Financing activities provided $22.4 million in net cash primarily reflecting the net increase in deposits of $34.5 million offset by net repayments from federal funds purchased and other borrowings of $5.8 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, 2019. Interest on subordinated debentures and long-term borrowed funds is calculated based on current contractual interest rates.
(in thousands)
Total
 
Within
One Year
 
After One
But Within
Three Years
 
After Three
But Within
Five Years
 
After
Five Years
 
 
 
 
 
 
 
 
 
 
Minimum annual rentals on noncancellable operating leases
$
25,497

 
$
3,273

 
$
5,822

 
$
4,341

 
$
12,061

Benefit plan commitments
5,581

 
306

 
793

 
816

 
3,666

Remaining contractual maturities of time deposits
946,372

 
730,681

 
173,805

 
41,886

 

Subordinated debentures
118,193

 

 

 

 
118,193

Loan commitments
1,014,524

 
725,365

 
123,566

 
15,355

 
150,238

Other borrowings
175,783

 
50,028

 
85,752

 
40,003

 

Interest on other borrowings*
67,991

 
9,751

 
17,019

 
13,825

 
27,396

Standby letters of credit
19,837

 
18,375

 
1,382

 

 
80

Total
$
2,373,778

 
$
1,537,779

 
$
408,139

 
$
116,226

 
$
311,634

*Includes interest on other borrowings and subordinated debentures at a weighted rate of 3.45%.    
Capital Resources
Total stockholders’ equity increased to $681.3 million on March 31, 2019 from $623.7 million on December 31, 2018, an increase of $57.6 million. Book value per common share increased to $13.51 on March 31, 2019 from $13.14 on December 31, 2018. Tangible book value per share increased from $10.22 per share on December 31, 2018 to $10.35 per share on March 31, 2019, an increase of 1%. Please see “Non-GAAP Financial Measures” below. In addition to the equity acquired in the Highlands merger of $43.4 million, the increase in stockholders’ equity from December 31, 2018 to March 31, 2019 was primarily due to $15.6 million of net income and other comprehensive income on the Company's available for sale securities portfolio of $4.1 million, which was partially offset by the payment of cash dividends on common stock of $5.8 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, 2019, 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, occurring January 1, 2019. As of March 31, 2019, the Company’s capital levels remained characterized as “well-capitalized” under the new rules.

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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, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
The Company
9.23
%
 
9.39
%
 
10.38
%
 
10.62
%
 
10.98
%
 
11.27
%
 
13.48
%
 
13.71
%
Lakeland Bank
10.11
%
 
10.17
%
 
12.02
%
 
12.20
%
 
12.02
%
 
12.20
%
 
12.81
%
 
13.06
%
Required capital ratios including conservation buffer
4.00
%
 
4.00
%
 
7.00
%
 
6.375
%
 
8.50
%
 
7.875
%
 
10.50
%
 
9.875
%
“Well capitalized” institution under FDIC Regulations
5.00
%
 
5.00
%
 
6.50
%
 
6.50
%
 
8.00
%
 
8.00
%
 
10.00
%
 
10.00
%
The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”) was signed into law during the second quarter of 2018. The Act, among other matters, amends the Federal Deposit Insurance Act to require federal banking agencies to develop a specified Community Bank Leverage Ratio (the ratio of a bank's equity capital to its consolidated assets) for banks with assets of less than $10 billion. Banks that exceed this ratio shall be deemed to comply with all other capital and leverage requirements. The Act also expands the definition of qualified mortgages that may be held by a financial institution. We are unable to predict the specific impact the Act and the implementing rules and regulations, which have not yet been written, will have on the Company and Lakeland Bank.
Non-GAAP Financial Measures
Reported amounts are presented in accordance with U.S. GAAP. The Company’s management uses certain supplemental non-GAAP information in its analysis of the Company’s financial results. Specifically, the Company provides measurements and ratios based on tangible equity and tangible assets. These measures are utilized by regulators and market analysts to evaluate a company’s financial condition and therefore, such information is useful to investors.
The Company also provides measures based on what it believes are its operating earnings on a consistent basis, and excludes material non-routine operating items which affect the GAAP reporting of results of operations. The Company’s management believes that providing this information to analysts and investors allows them to better understand and evaluate the Company’s core financial results for the periods in question.
These disclosures should not be viewed as a substitute for financial results determined in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies.

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Table of Contents


(dollars in thousands, except per share amounts)
March 31, 2019
 
December 31, 2018
Calculation of Tangible Book Value per Common Share
 
 
 
Total common stockholders’ equity at end of period - GAAP
$
681,343

 
$
623,739

Less:
 
 
 
Goodwill
154,153

 
136,433

Other identifiable intangible assets, net
5,192

 
1,768

Total tangible common stockholders’ equity at end of period - Non-GAAP
$
521,998

 
$
485,538

Shares outstanding at end of period
50,436

 
47,486

Book value per share - GAAP
$
13.51

 
$
13.14

Tangible book value per share - Non-GAAP
$
10.35

 
$
10.22

 
 
 
 
Calculation of Tangible Common Equity to Tangible Assets
 
 
 
Total tangible common stockholders’ equity at end of period - Non-GAAP
$
521,998

 
$
485,538

Total assets at end of period
$
6,365,063

 
$
5,806,093

Less:
 
 
 
Goodwill
154,153

 
136,433

Other identifiable intangible assets, net
5,192

 
1,768

Total tangible assets at end of period - Non-GAAP
$
6,205,718

 
$
5,667,892

Common equity to assets - GAAP
10.70
%
 
10.74
%
Tangible common equity to tangible assets - Non-GAAP
8.41
%
 
8.57
%
 
For the Three Months Ended
(dollars in thousands)
March 31, 2019
 
March 31, 2018
Calculation of Return on Average Tangible Common Equity
 
 
 
Net income - GAAP
$
15,626

 
$
15,255

Total average common stockholders’ equity
$
673,205

 
$
583,700

Less:
 
 
 
Average goodwill
153,562

 
136,433

Average other identifiable intangible assets, net
5,254

 
2,300

Total average tangible common stockholders’ equity - Non-GAAP
$
514,389

 
$
444,967

Return on average common stockholders’ equity - GAAP
9.41
%
 
10.60
%
Return on average tangible common stockholders’ equity - Non-GAAP
12.32
%
 
13.90
%

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Table of Contents


 
For the Three Months Ended
(dollars in thousands, except per share amounts)
March 31, 2019
 
March 31, 2018
Reconciliation of Net Income
 
 
 
Net income - GAAP
$
15,626

 
$
15,255

Non-routine transactions, net of tax
 
 
 
Tax deductible merger related expenses
1,656

 

Non-tax deductible merger related expenses
491

 

  Net effect of non-routine transactions
2,147

 

 
 
 
 
Net income available to common shareholders excluding non-routine transactions
$
17,773

 
$
15,255

Less: Earnings allocated to participating securities
141

 
141

Net Income, excluding non-routine transactions
$
17,632

 
$
15,114

 
 
 
 
Weighted average shares - Basic
50,275

 
$
47,503

Weighted average shares - Diluted
50,442

 
$
47,736

 
 
 
 
Basic earnings per share - GAAP
$
0.31

 
$
0.32

Diluted earnings per share - GAAP
$
0.31

 
$
0.32

 
 
 
 
Basic earnings per share, adjusted for non-routine transactions
$
0.35

 
$
0.32

Diluted earnings per share, adjusted for non-routine transactions (Core EPS)
$
0.35

 
$
0.32

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 $198.0 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, 2019
(1.2
)%
 
(0.3
)%
December 31, 2018
(1.5
)%
 
(0.7
)%
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.

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Changes in Interest Rates
Rate Shock
+300 bp
 
+200 bp
 
+100 bp
 
-100 bp
-200 bp
Asset/Liability policy limit
(15.0
)%
 
(10.0
)%
 
(5.0
)%
 
(5.0
)%
(10.0
)%
March 31, 2019
0.4
 %
 
0.3
 %
 
0.3
 %
 
(2.3
)%
(5.6
)%
December 31, 2018
0.6
 %
 
0.4
 %
 
0.3
 %
 
(2.5
)%
(8.0
)%
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, 2019 (the base case) was $874.4 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
-200 bp
Asset/Liability policy limit
(25.0
)%
 
(20.0
)%
 
(10.0
)%
 
(10.0
)%
(20.0
)%
March 31, 2019
(7.1
)%
 
(4.5
)%
 
(1.9
)%
 
0.1
 %
(0.9
)%
December 31, 2018
(5.2
)%
 
(3.3
)%
 
(1.4
)%
 
(0.2
)%
(1.5
)%
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, 2018.
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, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Table of Contents


PART II. OTHER INFORMATION
Item 1.   Legal Proceedings
There are no pending legal proceedings involving the Company or Lakeland other than those arising in the normal course of business. Management does not anticipate that the potential liability, if any, arising out of such legal proceedings will have a material effect on the financial condition or results of operations of the Company and Lakeland on a consolidated basis.
Item 1A.   Risk Factors
There have been no material changes in risk factors from those disclosed under Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
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
On May 9, 2019, Lakeland Bancorp, Inc., Lakeland Bank and Ronald E. Schwarz entered into an Amendatory Agreement (the “Amendment”) to Mr. Schwarz’s Change in Control Agreement, dated as of May 29, 2009 (as amended from time to time, the “Agreement”).  The Agreement provides for certain terms and conditions of Mr. Schwarz’s employment in the event of a “change in control” (as defined in the Agreement). The Amendment amends the “Contract Period”, as defined in the Agreement, to commence the day immediately preceding a Change in Control and ending on the earlier of (i) the second anniversary of the Change in Control, (ii) February 7, 2022, or (iii) the death of the Executive.  Prior to the Amendment, Mr. Schwarz’s Agreement provided for the Contract Period to end on the earlier of (i) the second anniversary of the Change in Control, (ii) Mr. Schwarz’s attainment of age 65, or (iii) his death. The foregoing description of the Amendment does not purport to be complete and is qualified in its entirety by reference to the Amendment, which is filed with this Quarterly Report on Form 10-Q as Exhibit 10.2 and incorporated into this Item 5 by reference.

45



Item 6.   Exhibits
10.1
10.2
31.1
31.2
32.1
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 


46



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, 2019


47