LAKELAND BANCORP INC - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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


For the quarterly period ended		September 30, 2020
	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 and zip code)

(973) 697-2000

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant has submitted electronically 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 ☒ 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 ☒ 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 ☒

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 November 3, 2020, there were 50,468,835 outstanding shares of Common Stock, no par value.

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LAKELAND BANCORP, INC.

Form 10-Q Index


		PAGE
	Part I. Financial Information

Item 1.	Financial Statements:

	Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (unaudited)	8
	Notes to Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51

Item 4.	Controls and Procedures	52

	Part II. Other Information

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	52

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

Item 3.	Defaults Upon Senior Securities	53

Item 4.	Mine Safety Disclosures	53

Item 5.	Other Information	53

Item 6.	Exhibits	54

Signatures		55

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS


	September 30, 2020		December 31, 2019
(dollars in thousands)	(unaudited)

ASSETS
Cash	$	314,591	$	275,794
Interest-bearing deposits due from banks	31,337		6,577
Total cash and cash equivalents	345,928		282,371
Investment securities available for sale, at fair value	783,331		755,900
Equity securities, at fair value	14,076		16,473
Investment securities held to maturity; fair value of $101,205 at September 30, 2020 and $124,904 at December 31, 2019	97,893		123,975
Federal Home Loan Bank and other membership bank stock, at cost	14,235		22,505
Loans held for sale	4,197		1,743
Loans, net of deferred fees	5,843,591		5,137,823
Less: Allowance for loan losses	65,242		40,003
Net loans	5,778,349		5,097,820
Premises and equipment, net	47,810		47,608
Operating lease right-of-use assets	17,028		18,282
Accrued interest receivable	21,480		16,832
Goodwill	156,277		156,277
Other identifiable intangible assets	3,538		4,314
Bank owned life insurance	114,418		112,392
Other assets	123,624		54,744
TOTAL ASSETS	$	7,522,184	$	6,711,236
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing	$	1,474,847	$	1,124,121
Savings and interest-bearing transaction accounts	3,647,328		3,298,854
Time deposits $250 thousand and under	961,402		652,144
Time deposits over $250 thousand	182,939		218,660
Total deposits	6,266,516		5,293,779
Federal funds purchased and securities sold under agreements to repurchase	97,874		328,658
Other borrowings	135,111		165,816
Subordinated debentures	118,248		118,220
Operating lease liabilities	18,471		19,814
Other liabilities	132,392		59,686
TOTAL LIABILITIES	6,768,612		5,985,973
STOCKHOLDERS’ EQUITY
Common stock, no par value; authorized shares, 100,000,000; issued shares 50,598,670 and outstanding shares 50,467,635 at September 30, 2020 and issued and outstanding shares 50,498,410 at December 31, 2019	561,817		560,263
Retained earnings	182,329		162,752
Treasury shares, at cost, 131,035 shares at September 30, 2020 and no shares at December 31, 2019	(1,452)		—
Accumulated other comprehensive income	10,878		2,248
TOTAL STOCKHOLDERS’ EQUITY	753,572		725,263
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	7,522,184	$	6,711,236

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 September 30,				For the Nine Months Ended September 30,
(in thousands, except per share data)	2020		2019		2020		2019
INTEREST INCOME
Loans and fees	$	56,801	$	58,563	$	170,483	$	175,324
Federal funds sold and interest-bearing deposits with banks	92		695		287		1,297
Taxable investment securities and other	4,139		5,007		14,131		14,865
Tax-exempt investment securities	401		361		1,082		1,165
TOTAL INTEREST INCOME	61,433		64,626		185,983		192,651
INTEREST EXPENSE
Deposits	7,012		13,267		25,969		37,526
Federal funds purchased and securities sold under agreements to repurchase	27		231		531		1,333
Other borrowings	2,260		2,446		6,931		7,306
TOTAL INTEREST EXPENSE	9,299		15,944		33,431		46,165
NET INTEREST INCOME	52,134		48,682		152,552		146,486
Provision for loan losses	8,000		536		26,223		1,044
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	44,134		48,146		126,329		145,442
NONINTEREST INCOME
Service charges on deposit accounts	2,288		2,851		6,663		8,179
Commissions and fees	1,667		1,545		4,503		4,682
Income on bank owned life insurance	670		691		2,000		2,064
(Loss) gain on equity securities	(170)		72		(625)		525
Gains on sales of loans	1,437		486		2,562		1,285
Gains on sales of investment securities, net	—		—		342		—
Swap income	624		730		4,234		1,585
Other income	257		325		586		492
TOTAL NONINTEREST INCOME	6,773		6,700		20,265		18,812
NONINTEREST EXPENSE
Salaries and employee benefits	19,694		19,062		60,198		57,672
Net occupancy expense	2,692		2,767		8,016		8,350
Furniture and equipment	2,890		2,084		8,233		6,365
FDIC insurance expense	625		(420)		1,373		431
Stationery, supplies and postage	488		366		1,268		1,214
Marketing expense	381		423		840		1,430
Data processing expense	1,211		1,248		3,900		3,800
Telecommunications expense	501		480		1,399		1,451
ATM and debit card expense	615		588		1,738		1,773
Core deposit intangible amortization	250		288		776		893
Other real estate and repossessed asset expense (income)	(2)		29		53		223
Long-term debt prepayment fee	—		—		356		—
Merger related expenses	—		—		—		3,178
Other expenses	2,752		2,648		7,913		8,453
TOTAL NONINTEREST EXPENSE	32,097		29,563		96,063		95,233
Income before provision for income taxes	18,810		25,283		50,531		69,021
Provision for income taxes	4,383		6,409		11,861		17,064
NET INCOME	$	14,427	$	18,874	$	38,670	$	51,957
PER SHARE OF COMMON STOCK
Basic earnings	$	0.28	$	0.37	$	0.76	$	1.02
Diluted earnings	0.28		0.37		0.76		1.02
Dividends	0.125		0.125		0.375		0.365

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 September 30,				For the Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019

NET INCOME	$	14,427	$	18,874	$	38,670	$	51,957
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized (losses) gains on securities available for sale	(576)		1,480		9,220		11,619
Reclassification for securities gains included in net income	—		—		(254)		—
Unrealized gains (losses) on derivatives	37		(78)		(336)		(571)

Other comprehensive (loss) income	(539)		1,402		8,630		11,048
TOTAL COMPREHENSIVE INCOME	$	13,888	$	20,276	$	47,300	$	63,005

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 September 30, 2020 and 2019


(in thousands, except per share data)	Common Stock		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total

June 30, 2019	$	558,768	$	137,887	$	—	$	1,808	$	698,463


Net income	—		18,874		—		—		18,874
Other comprehensive income, net of tax	—		—		—		1,402		1,402

Stock based compensation	558		—		—		—		558

Retirement of restricted stock	(38)		—		—		—		(38)
Exercise of stock options	307		—		—		—		307
Cash dividends on common stock of $0.125 per share	—		(6,362)		—		—		(6,362)
September 30, 2019	$	559,595	$	150,399	$	—	$	3,210	$	713,204

June 30, 2020	$	561,257	$	174,267	$	(1,452)	$	11,417	$	745,489


Net income	—		14,427		—		—		14,427
Other comprehensive loss, net of tax	—		—		—		(539)		(539)

Stock based compensation	585		—		—		—		585

Retirement of restricted stock	(25)		—		—		—		(25)

Cash dividends on common stock of $0.125 per share	—		(6,365)		—		—		(6,365)
September 30, 2020	$	561,817	$	182,329	$	(1,452)	$	10,878	$	753,572

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 Nine Months Ended September 30, 2020 and 2019


(in thousands, except per share data)	Common Stock		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total

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	—		51,957		—		—		51,957
Other comprehensive income, net of tax	—		—		—		11,048		11,048

Stock based compensation	1,822		—		—		—		1,822
Issuance of stock for Highlands acquisition	43,417		—		—		—		43,417
Retirement of restricted stock	(654)		—		—		—		(654)
Exercise of stock options	307		—		—		—		307
Cash dividends on common stock of $0.37 per share	—		(18,557)		—		—		(18,557)
September 30, 2019	$	559,595	$	150,399	$	—	$	3,210	$	713,204

January 1, 2020	$	560,263	$	162,752	$	—	$	2,248	$	725,263


Net income	—		38,670		—		—		38,670
Other comprehensive income, net of tax	—		—		—		8,630		8,630
Purchase of treasury stock, 131,035 shares	—		—		(1,452)		—		(1,452)
Stock based compensation	2,046		—		—		—		2,046

Retirement of restricted stock	(492)		—		—		—		(492)

Cash dividends on common stock of $0.38 per share	—		(19,093)		—		—		(19,093)
September 30, 2020	$	561,817	$	182,329	$	(1,452)	$	10,878	$	753,572

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 Nine Months Ended September 30,
(in thousands)	2020		2019

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	38,670	$	51,957
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premiums, discounts and deferred loan fees and costs	209		1,533
Depreciation and amortization	2,588		1,162
Amortization of intangible assets	776		893
Amortization of operating lease right-of-use assets	1,995		1,938
Provision for loan losses	26,223		1,044
Loans originated for sale	(78,204)		(40,074)
Proceeds from sales of loans held for sale	78,312		40,508
Gains on sales of securities	(342)		—
Change in market value of equity securities	625		(525)

Gains on sales of loans held for sale	(2,562)		(1,285)
(Gains) losses on other real estate and other repossessed assets	(76)		87
Losses on sales of premises and equipment	54		486
Long-term debt prepayment penalty	356		—
Stock-based compensation	2,046		1,822

Excess tax (deficiencies) benefits	(128)		183
Increase in other assets	(79,414)		(20,386)
Increase in other liabilities	70,544		21,935
NET CASH PROVIDED BY OPERATING ACTIVITIES	61,672		61,278
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash acquired in acquisitions	—		13,454
Proceeds from repayments and maturities of available for sale securities	633,574		102,133
Proceeds from repayments and maturities of held to maturity securities	26,816		22,330
Proceeds from sales of equity securities	3,000		1,153
Proceeds from sales of available for sale securities	94,696		—
Purchase of available for sale securities	(746,035)		(149,182)
Purchase of held to maturity securities	(1,160)		(18,897)
Purchase of equity securities	(1,228)		(259)

Death benefit proceeds from bank owned life insurance policy	—		121
Proceeds from redemptions of Federal Home Loan Bank stock	97,127		79,217
Purchases of Federal Home Loan Bank stock	(88,857)		(82,155)
Net increase in loans	(702,010)		(38,308)
Proceeds from sales of other real estate and repossessed assets	1,032		399
Proceeds from dispositions and sales of premises and equipment	49		1,827
Purchases of premises and equipment	(5,155)		(4,166)
NET CASH USED IN INVESTING ACTIVITIES	(688,151)		(72,333)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	972,917		180,990
Decrease in federal funds purchased and securities sold under agreements to repurchase	(230,784)		(34,579)
Proceeds from other borrowings	25,000		46,260
Repayments of other borrowings	(56,060)		(89,353)
Purchase of treasury stock	(1,452)		—
Exercise of stock options	—		307
Retirement of restricted stock	(492)		(654)
Dividends paid	(19,093)		(18,557)
NET CASH PROVIDED BY FINANCING ACTIVITIES	690,036		84,414
Net increase in cash and cash equivalents	63,557		73,359
Cash and cash equivalents, beginning of period	282,371		208,599
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	345,928	$	281,958

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Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)


	For the Nine Months Ended September 30,
(in thousands)	2020		2019

Supplemental schedule of non-cash investing and financing activities:
Cash paid during the period for income taxes	$	17,386	$	10,847
Cash paid during the period for interest	35,472		46,532
Transfer of loans into other repossessed assets and other real estate owned	393		599
Initial recognition of operating lease right-of-use assets	—		18,651
Initial recognition of operating lease liabilities	—		20,203
Right-of-use assets obtained in exchange for new lease liabilities	741		765
Acquisitions:
Non-cash assets acquired:
Federal Home Loan Bank stock	—		1,767

Investment securities	—		22,734
Loans, including loans held for sale	—		426,118
Goodwill and other intangible assets, net	—		23,125
Other assets	—		9,304
Total non-cash assets acquired	—		483,048
Liabilities assumed:
Deposits	—		409,638
Other borrowings	—		40,957
Other liabilities	—		2,490
Total liabilities assumed	—		453,085
Common stock issued	$	—	$	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 Lakeland’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 nine months ended September 30, 2020 do not necessarily indicate the results that the Company will achieve for all of 2020.

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/A for the year ended December 31, 2019. 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 stock 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 have been 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.

During the second quarter of 2019, the Company revised the estimated fair value of the acquired assets as of the acquisition date as the result of additional information obtained. The adjustment related to credit-impaired loans acquired in the acquisition that were recorded at fair value and subsequently accounted for in accordance with Accounting Standards Codification ("ASC") Subtopic 310-30 and resulted in a $1.7 million increase in goodwill.

As a result of new information obtained during the third quarter of 2019, about facts and circumstances that existed as of the acquisition date, the Company revised the estimated fair value on two Highlands branches acquired. The adjustment resulted in an increase in goodwill of $447,000.

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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)
Assets acquired:
Cash and cash equivalents	$	13,454
Securities, available for sale	21,234
Securities, held to maturity	1,500
Federal Home Loan Bank stock	1,767
Loans held for sale	1,113
Loans	425,005
Premises and equipment	2,613
Goodwill	19,844
Identifiable intangible assets	3,728
Accrued interest receivable and other assets	6,244
Total assets acquired	496,502
Liabilities assumed:
Deposits	(409,638)
Other borrowings	(27,800)
Subordinated debt	(13,157)
Other liabilities	(2,490)
Total liabilities assumed	(453,085)
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	$	22,363
Contractual cash flows not expected to be collected (non-accretable difference)	7,129
Expected cash flows at acquisition	$	15,234
Interest component of expected cash flows (accretable difference)	1,431
Fair value of acquired loans	$	13,803

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 deposit and IRAs represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit and IRAs.

Direct costs related to the acquisition were expensed as incurred. The Company incurred no merger and acquisition integration-related expenses during the third quarter of 2019 and $3.2 million of merger and acquisition integration-related expenses during the nine months ended September 30, 2019, which have been separately stated in the Company's Consolidated Statements of Income. There were no merger or acquisition integration-related expenses in 2020.

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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, investment services 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 loan sales, or (ii) disclosed to the customer at a specific point in time, as is the case when a deposit account is opened or before a new loan is underwritten. Fees are usually fixed at a specific amount or as a percentage of a transaction amount. No judgment or estimates by management are required to record revenue related to these transactions and pricing is clearly identified within these contracts.

The Company primarily operates in one geographic region, Northern and Central New Jersey and contiguous areas. Therefore, all significant operating decisions are based upon analysis of the Company as one operating segment or unit.

We disaggregate our revenue from contracts with customers by contract-type and timing of revenue recognition, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Noninterest income not generated from customers during the Company’s ordinary activities primarily relates to income from bank owned life insurance, 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 mortgage servicing rights.

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The following table sets forth the components of noninterest income for the three and nine months ended September 30, 2020 and 2019:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019

Deposit Related Fees and Charges:
Debit card interchange income	$	1,472	$	1,429	$	3,910	$	4,059
Overdraft charges	533		1,047		1,935		3,024
ATM service charges	138		226		367		626
Demand deposit fees and charges	129		124		394		389
Savings service charges	16		25		57		81
Total	2,288		2,851		6,663		8,179
Commissions and Fees:
Loan fees	510		303		1,063		1,182
Wire transfer charges	372		316		1,021		888
Investment services income	392		474		1,231		1,253
Merchant fees	184		202		598		586
Commissions from sales of checks	73		85		216		299
Safe deposit income	85		94		256		275
Other income	51		66		138		187
Total	1,667		1,540		4,523		4,670
Gains on sales of loans	1,437		486		2,562		1,285
Other Income:
Gains on customer swap transactions	624		730		4,234		1,585
Title insurance income	46		9		126		128
Other income	200		627		370		755
Total	870		1,366		4,730		2,468
Revenue not from contracts with customers	511		457		1,787		2,210
Total Noninterest Income	$	6,773	$	6,700	$	20,265	$	18,812
Timing of Revenue Recognition:
Products and services transferred at a point in time	6,243		6,224		18,422		16,546
Products and services transferred over time	19		19		56		56
Revenue not from contracts with customers	511		457		1,787		2,210
Total Noninterest Income	$	6,773	$	6,700	$	20,265	$	18,812

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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 September 30,				For the Nine Months Ended September 30,
(in thousands, except per share data)	2020		2019		2020		2019
Net income available to common shareholders	$	14,427	$	18,874	$	38,670	$	51,957
Less: earnings allocated to participating securities	131		156		342		443
Net income allocated to common shareholders	$	14,296	$	18,718	$	38,328	$	51,514

Weighted average number of common shares outstanding - basic	50,526		50,553		50,544		50,447
Share-based plans	94		141		101		148
Weighted average number of common shares outstanding - diluted	50,620		50,694		50,645		50,595

Basic earnings per share	$	0.28	$	0.37	$	0.76	$	1.02
Diluted earnings per share	$	0.28	$	0.37	$	0.76	$	1.02

There were no antidilutive options to purchase common stock excluded from the computation for the three and nine months ended September 30, 2020 and 2019.

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:


	September 30, 2020								December 31, 2019
(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	$	71,953	$	1,640	$	(318)	$	73,275	$	135,361	$	722	$	(436)	$	135,647
Mortgage-backed securities, residential	421,453		10,583		(246)		431,790		500,245		3,185		(1,551)		501,879
Mortgage-backed securities, multifamily	42,943		2,107		(13)		45,037		48,675		633		(123)		49,185
Asset-backed securities	41,354		—		(643)		40,711		—		—		—		—
Obligations of states and political subdivisions	162,296		2,859		(445)		164,710		58,979		1,077		(35)		60,021
Debt securities	27,559		250		(1)		27,808		9,000		168		—		9,168
	$	767,558	$	17,439	$	(1,666)	$	783,331	$	752,260	$	5,785	$	(2,145)	$	755,900

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	September 30, 2020								December 31, 2019
(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	$	25,805	$	853	$	—	$	26,658	$	31,335	$	182	$	(8)	$	31,509
Mortgage-backed securities, residential	60,737		2,133		(1)		62,869		76,229		734		(176)		76,787
Mortgage-backed securities, multifamily	717		54		—		771		1,750		4		(2)		1,752
Obligations of states and political subdivisions	8,134		273		—		8,407		12,161		195		—		12,356
Debt securities	2,500		—		—		2,500		2,500		—		—		2,500
	$	97,893	$	3,313	$	(1)	$	101,205	$	123,975	$	1,115	$	(186)	$	124,904

The following table lists contractual maturities of investment securities classified as available for sale and held to maturity as of September 30, 2020. 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
Due in one year or less	$	14,138	$	14,207	$	8,697	$	8,791
Due after one year through five years	73,990		76,199		21,870		22,847
Due after five years through ten years	45,274		46,617		5,872		5,927
Due after ten years	128,406		128,770		—		—
	261,808		265,793		36,439		37,565
Mortgage-backed and asset-backed securities	505,750		517,538		61,454		63,640
Total securities	$	767,558	$	783,331	$	97,893	$	101,205

There were no sales of available-for-sale securities for the three months ended September 30, 2020 and 2019 or for the nine months ended September 30, 2019. For the nine months ended September 30, 2020, proceeds from sales of available-for-sale securities totaled $94.7 million with gross gains on sales of securities of $569,000 and gross losses on sales of securities of $227,000. Gains or losses on sales of securities are based on the net proceeds and the adjusted carrying amount of the securities sold using the specific identification method.

Securities with a carrying value of approximately $578.5 million and $581.1 million at September 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits and for other purposes required by applicable laws and regulations.

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


September 30, 2020	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
AVAILABLE FOR SALE
U.S. Treasury and U.S. government agencies	$	4,993	$	2	$	21,228	$	316	7		$	26,221	$	318
Mortgage-backed securities, residential	57,063		175		6,021		71		27		63,084		246
Mortgage-backed securities, multifamily	2,557		13		—		—		2		2,557		13
Asset-backed securities	40,711		643		—		—		6		40,711		643
Obligations of states and political subdivisions	51,342		445		—		—		31		51,342		445
Debt securities	1,055		1		—		—		1		1,055		1
	$	157,721	$	1,279	$	27,249	$	387	$	74	$	184,970	$	1,666
HELD TO MATURITY

Mortgage-backed securities, residential	$	119	$	1	$	25	—		$	5	144		$	1



	$	119	$	1	$	25	$	—	5		$	144	$	1

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December 31, 2019	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
AVAILABLE FOR SALE
U.S. Treasury and U.S. government agencies	$	11,625	$	39	$	41,617	$	397	11	$	53,242	$	436
Mortgage-backed securities, residential	125,782		561		99,489		990		86	225,271		1,551
Mortgage-backed securities, multifamily	7,651		118		4,878		5		3	12,529		123

Obligations of states and political subdivisions	373		2		6,559		33		5	6,932		35

	$	145,431	$	720	$	152,543	$	1,425	105	$	297,974	$	2,145
HELD TO MATURITY
U.S. government agencies	$	3,195	$	6	$	5,102	$	2	2	$	8,297	$	8
Mortgage-backed securities, residential	12,462		46		10,592		130		16	23,054		176
Mortgage-backed securities, multifamily	—		—		998		2		1	998		2


	$	15,657	$	52	$	16,692	$	134	19	$	32,349	$	186

Management has evaluated the securities in the above tables 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 mortgage-backed securities, asset-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 $14.1 million and $16.5 million at September 30, 2020 and December 31, 2019, respectively. The Company recorded purchases of $1.2 million and $259,000 for the nine months ended September 30, 2020 and 2019, respectively. For the three and nine months ended September 30, 2020 and for the three months ended September 30, 2019, the Company recorded no sales of equity securities and recorded proceeds from sales of equity securities of $1.2 million for the nine months ended September 30, 2019. The Company recorded a market value loss of $170,000 for the third quarter of 2020 and $72,000 in market value gain for the third quarter of 2019 on equity securities. For the nine months ended September 30, 2020, the Company recorded $625,000 in market value losses and $525,000 in market value gains for the nine months ended September 30, 2019 on equity securities. Market value gain or loss on equity securities are recorded in noninterest income.

As of September 30, 2020, the equity investments in other financial institutions and Community Reinvestment funds had a market value of $898,000 and $13.2 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 September 30, 2020, the net amortized cost equaled the market value of the investment. There are no unfunded commitments related to these investments.

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The Community Reinvestment funds also include $9.7 million of investment in government guaranteed loans, mortgage-backed securities, small business loans and other instruments supporting affordable housing and economic development as of September 30, 2020. 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)	September 30, 2020		December 31, 2019
Commercial, secured by real estate	$	4,049,331	$	3,589,593
Commercial, industrial and other	426,821		431,934
Paycheck Protection Program ("PPP")	325,115		—
Equipment finance	116,410		111,076
Real estate - residential mortgage	342,583		335,191
Real estate - construction	276,743		335,169
Home equity and consumer	318,021		337,977
Total loans	5,855,024		5,140,940
Less: deferred fees	(11,433)		(3,117)
Loans, net of deferred fees	$	5,843,591	$	5,137,823

At September 30, 2020 and December 31, 2019, home equity and consumer loans included overdraft deposit balances of $254,000 and $789,000, respectively. At September 30, 2020 and December 31, 2019, the Company had $2.15 billion and $1.29 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 following sets forth the carrying value of the purchased credit impaired ("PCI") loans acquired in mergers:


(in thousands)	September 30, 2020		December 31, 2019
Acquisition
Highlands	$	7,236	$	8,194
Pascack Community Bank ("Pascack")	98		113
Harmony Bank ("Harmony")	430		441
Total	$	7,764	$	8,748

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


	For the Three Months Ended				For the Nine Months Ended
(in thousands)	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019

Balance, beginning of period	$	183	$	1,191	$	363	$	81
Acquisitions	—		—		—		1,431
Accretion	(186)		(306)		(600)		(687)
Net reclassification non-accretable difference	89		16		323		76
Balance, end of period	$	86	$	901	$	86	$	901

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Non-Performing Assets and Past Due Loans

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


(in thousands)	September 30, 2020		December 31, 2019
Commercial, secured by real estate	$	25,238	$	12,314
Commercial, industrial and other	1,484		1,539
Equipment finance	444		284
Real estate - residential mortgage	2,695		3,428
Real estate - construction	907		967
Home equity and consumer	2,322		2,606
Total non-accrual loans	$	33,090	$	21,138
Other real estate and other repossessed assets	—		563
TOTAL NON-PERFORMING ASSETS	$	33,090	$	21,701
Troubled debt restructurings, still accruing	$	4,299	$	5,650

Non-accrual loans included $1.3 million and $1.6 million of troubled debt restructurings at September 30, 2020 and December 31, 2019, respectively. At September 30, 2020 and December 31, 2019, the Company had $1.8 million and $2.0 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 aging analysis of past due loans, excluding PCI loans which are accounted for on a pool basis, segregated by class of loans as of September 30, 2020 and December 31, 2019, 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

September 30, 2020
Commercial, secured by real estate	$	4,623	$	6,071	$	22,423	$	33,117	$	4,010,888	$	4,044,005	$	—
Commercial, industrial and other (including PPP)	4,892		630		966		6,488		744,690		751,178		—
Equipment finance	246		—		443		689		115,721		116,410		—
Real estate - residential mortgage	429		167		1,494		2,090		340,074		342,164		—
Real estate - construction	—		—		694		694		275,291		275,985		—
Home equity and consumer	970		187		1,220		2,377		315,141		317,518		165
	$	11,160	$	7,055	$	27,240	$	45,455	$	5,801,805	$	5,847,260	$	165
December 31, 2019
Commercial, secured by real estate	$	3,578	$	1,200	$	9,702	$	14,480	$	3,569,008	$	3,583,488	$	—
Commercial, industrial and other	353		71		1,064		1,488		429,502		430,990		—
Equipment finance	166		80		284		530		110,546		111,076		—
Real estate - residential mortgage	1,138		251		2,075		3,464		331,337		334,801		—
Real estate - construction	—		—		967		967		333,418		334,385		—
Home equity and consumer	1,573		287		1,533		3,393		334,059		337,452		—
	$	6,808	$	1,889	$	15,625	$	24,322	$	5,107,870	$	5,132,192	$	—

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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 September 30, 2020 and December 31, 2019 are as follows:


(in thousands)	Recorded Investment in Impaired Loans		Contractual Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
September 30, 2020
Loans without specific allowance:
Commercial, secured by real estate	$	24,396	$	25,015	$	—	$	20,863	$	119
Commercial, industrial and other	1,632		1,628		—		1,312		11
Equipment finance	—		—		—		—		—
Real estate - residential mortgage	1,503		1,640		—		1,570		—
Real estate - construction	694		694		—		926		10
Home equity and consumer	—		—		—		—		—
Loans with specific allowance:
Commercial, secured by real estate	3,183		3,434		207		3,248		110
Commercial, industrial and other	94		94		4		94		4
Equipment finance	15		15		6		16		—
Real estate - residential mortgage	337		525		2		582		12
Real estate - construction	—		—		—		—		—
Home equity and consumer	595		689		4		603		22
Total:
Commercial, secured by real estate	$	27,579	$	28,449	$	207	$	24,111	$	229
Commercial, industrial and other	1,726		1,722		4		1,406		15
Equipment finance	15		15		6		16		—
Real estate - residential mortgage	1,840		2,165		2		2,152		12
Real estate - construction	694		694		—		926		10
Home equity and consumer	595		689		4		603		22
	$	32,449	$	33,734	$	223	$	29,214	$	288

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(in thousands)	Recorded Investment in Impaired Loans		Contractual Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
December 31, 2019
Loans without specific allowance:
Commercial, secured by real estate	$	12,478	$	12,630	$	—	$	10,386	$	164
Commercial, industrial and other	1,391		1,381		—		1,334		16
Equipment finance	—		—		—		—		—
Real estate - residential mortgage	803		815		—		233		—
Real estate - construction	1,663		1,661		—		82		2
Home equity and consumer	—		—		—		—		—
Loans with specific allowance:
Commercial, secured by real estate	3,470		3,706		228		4,554		190
Commercial, industrial and other	113		113		5		113		6
Equipment finance	23		23		10		21		—
Real estate - residential mortgage	1,512		1,682		104		926		19
Real estate - construction	—		—		—		—		—
Home equity and consumer	671		765		5		693		29
Total:
Commercial, secured by real estate	$	15,948	$	16,336	$	228	$	14,940	$	354
Commercial, industrial and other	1,504		1,494		5		1,447		22
Equipment finance	23		23		10		21		—
Real estate - residential mortgage	2,315		2,497		104		1,159		19
Real estate - construction	1,663		1,661		—		82		2
Home equity and consumer	671		765		5		693		29
	$	22,124	$	22,776	$	352	$	18,342	$	426

Interest income recognized on impaired loans was $288,000 and $342,000 for the nine months ended September 30, 2020 and 2019, respectively. Interest that would have been accrued on impaired loans during the first nine months of 2020 and 2019 had the loans been performing under original terms would have been $1.3 million and $703,000, 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.

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The following table shows the Company’s commercial loan portfolio as of September 30, 2020 and December 31, 2019, by the risk ratings discussed above (in thousands):


September 30, 2020	Commercial, Secured by Real Estate		Commercial, Industrial and Other (including PPP)		Real Estate - Construction		Total Commercial Loans
RISK RATING
1	$	—	$	325,510	$	—	$	325,510
2	—		16,344		—		16,344
3	72,698		26,492		—		99,190
4	955,104		91,708		18,901		1,065,713
5	1,954,831		205,623		221,750		2,382,204
5W - Watch	796,979		51,092		21,924		869,995
6 - Other assets especially mentioned	147,407		22,476		12,503		182,386
7 - Substandard	122,312		12,691		1,665		136,668
8 - Doubtful	—		—		—		—
9 - Loss	—		—		—		—
Total	$	4,049,331	$	751,936	$	276,743	$	5,078,010


December 31, 2019	Commercial, Secured by Real Estate		Commercial, Industrial and Other		Real Estate - Construction		Total Commercial Loans
RISK RATING
1	$	—	$	898	$	—	$	898
2	—		17,988		—		17,988
3	74,072		39,112		—		113,184
4	965,825		107,376		17,941		1,091,142
5	2,332,863		215,975		307,824		2,856,662
5W - Watch	100,347		30,192		6,959		137,498
6 - Other assets especially mentioned	55,438		11,328		—		66,766
7 - Substandard	61,048		9,065		2,445		72,558
8 - Doubtful	—		—		—		—
9 - Loss	—		—		—		—
Total	$	3,589,593	$	431,934	$	335,169	$	4,356,696

The risk rating tables above do not include residential mortgage loans, consumer loans, or equipment finance loans because they are evaluated on their payment status. Included in the Commercial, Industrial and Other column for Risk Rating 1 are the PPP balances at September 30, 2020.

Allowance for Loan Losses

The Coronavirus Aid, Relief and Economic Security ("CARES") Act, a stimulus package signed into law on March 27, 2020 to address economic disruption caused by the COVID-19 pandemic, provided financial institutions with the option to defer adoption of the Financial Accounting Standards Board's Accounting Standard Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326) until the earlier of the end of the pandemic or December 31, 2020. The Company elected to defer adoption of ASU 2016-13 and its Current Expected Credit Loss methodology ("CECL").

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The following table details activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2020 and 2019:


(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 September 30, 2020
Beginning Balance	$	43,280	$	4,698	$	2,971	$	1,436	$	3,119	$	2,335	$	57,839
Charge-offs	(329)		(204)		(96)		—		—		(53)		(682)
Recoveries	10		31		1		1		21		21		85
Provision	7,305		460		8		256		(37)		8		8,000
Ending Balance	$	50,266	$	4,985	$	2,884	$	1,693	$	3,103	$	2,311	$	65,242


(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 September 30, 2019
Beginning Balance	$	28,095	$	2,633	$	1,055	$	1,606	$	2,708	$	2,565	$	38,662
Charge-offs	(314)		(425)		—		—		—		(70)		(809)
Recoveries	72		32		—		55		39		68		266
Provision	672		218		55		(57)		(186)		(166)		536
Ending Balance	$	28,525	$	2,458	$	1,110	$	1,604	$	2,561	$	2,397	$	38,655


(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
Nine Months Ended September 30, 2020
Beginning Balance	$	28,950	$	3,289	$	957	$	1,725	$	2,672	$	2,410	$	40,003
Charge-offs	(498)		(204)		(194)		(116)		—		(294)		(1,306)
Recoveries	57		74		39		21		69		62		322
Provision	21,757		1,826		2,082		63		362		133		26,223
Ending Balance	$	50,266	$	4,985	$	2,884	$	1,693	$	3,103	$	2,311	$	65,242


(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
Nine Months Ended September 30, 2019
Beginning Balance	$	27,881	$	1,742	$	987	$	1,566	$	3,015	$	2,497	$	37,688
Charge-offs	(501)		(610)		(380)		(50)		—		(197)		(1,738)
Recoveries	212		1,076		2		66		104		201		1,661
Provision	933		250		501		22		(558)		(104)		1,044
Ending Balance	$	28,525	$	2,458	$	1,110	$	1,604	$	2,561	$	2,397	$	38,655

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


(in thousands)	Commercial, Secured by Real Estate		Commercial, Industrial and Other (including PPP)		Equipment Finance		Real Estate- Residential Mortgage		Real Estate- Construction		Home Equity and Consumer		Total
September 30, 2020
Ending Balance: Individually evaluated for impairment	$	27,579	$	1,726	$	15	$	1,840	$	694	$	595	$	32,449
Ending Balance: Collectively evaluated for impairment	4,016,426		749,452		116,395		340,324		275,291		316,923		5,814,811
Ending Balance: Loans acquired with deteriorated credit quality	5,326		758		—		419		758		503		7,764
Ending Balance (1)	$	4,049,331	$	751,936	$	116,410	$	342,583	$	276,743	$	318,021	$	5,855,024

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(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, 2019
Ending Balance: Individually evaluated for impairment	$	15,948	$	1,504	$	23	$	2,315	$	1,663	$	671	$	22,124
Ending Balance: Collectively evaluated for impairment	3,567,540		429,486		111,053		332,486		332,722		336,781		5,110,068
Ending balance: Loans acquired with deteriorated credit quality	6,105		944		—		390		784		525		8,748
Ending Balance (1)	$	3,589,593	$	431,934	$	111,076	$	335,191	$	335,169	$	337,977	$	5,140,940

(1)Excludes deferred fees

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
September 30, 2020
Ending Balance: Individually evaluated for impairment	$	207	$	4	$	6	$	2	$	—	$	4	$	223
Ending Balance: Collectively evaluated for impairment	50,059		4,981		2,878		1,691		3,103		2,307		65,019
Ending Balance	$	50,266	$	4,985	$	2,884	$	1,693	$	3,103	$	2,311	$	65,242


(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, 2019
Ending Balance: Individually evaluated for impairment	$	228	$	5	$	10	$	104	$	—	$	5	$	352
Ending Balance: Collectively evaluated for impairment	28,722		3,284		947		1,621		2,672		2,405		39,651
Ending Balance	$	28,950	$	3,289	$	957	$	1,725	$	2,672	$	2,410	$	40,003

Lakeland has not allocated a reserve for loan losses on PPP loans as these loans are 100% guaranteed by the SBA. In addition to the allowances described above, Lakeland also maintains a reserve for unfunded lending commitments which is included in other liabilities. This reserve was $2.0 million and $1.8 million as of September 30, 2020 and December 31, 2019, respectively. The Company analyzes the adequacy of the reserve for unfunded lending commitments quarterly.

Troubled Debt Restructurings

Loans are classified as troubled debt restructured loans ("TDR") 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.

Section 4013 of the CARES Act, as interpreted by the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (Revised)" (“Revised Statement”), dated April 17, 2020, includes criteria that enable financial institutions to exclude from TDR status loans that are modified in connection with COVID-19. Under these provisions, TDR status is not required for the term of a loan modification if (i) the loan modification is made in connection with COVID-19, (ii) the loan was not past due more than 30 days as of December 31, 2019 and (iii) the loan modification is entered into during the period between March 1, 2020, and the earlier of (a) 60 days after COVID-19 is no longer characterized as a National Emergency or (b) December 31, 2020. Furthermore, pursuant to the Revised Statement, for loan modifications that do not meet these criteria but are made in connection with COVID-19, such loans may be presumed not to be TDR if the loan was current at the time the loan modification program was implemented and the modifications are short-term (e.g., six months). If the criteria are not met under either Section 4013 or the Revised Statement, banks are required to follow their existing accounting policies to determine whether COVID-related modifications should be accounted for as a TDR. The Company has elected to suspend the classification of loan modifications as TDR if they qualify under Section 4013 or the Revised Statement. For past due status, the CARES Act also provides for lenders to continue

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to report loans in the same delinquency bucket they were in at the time of modification. The Company has applied this guidance related to modifications during the first half of 2020.

As of June 30, 2020, commercial loans totaling $927.0 million were granted 90-day, COVID-related payment deferments, of which 91% were commercial real estate loans. In addition, payment deferments on equipment finance loans totaled $40.0 million and residential and consumer loans totaled $53.0 million at June 30, 2020. During the third quarter of 2020, new payment deferments were granted to six loan relationships totaling $6.4 million. At September 30, 2020, approximately $149.0 million in commercial loans, $3.0 million in equipment finance loans and $3.0 million in residential mortgage and consumer loans remained on COVID-related deferral. During the third quarter, many 90-day loan deferments expired and borrowers began paying their pre-deferral loan payments. For most commercial loans, borrowers are paying their pre-deferral loan payments plus an additional monthly amount to catch up on the payments that were deferred.

The following table summarizes the loans that were restructured during the three and nine months ended September 30, 2020 and 2019 that met the definition of a TDR:


	Three Months Ended September 30, 2020					Three Months Ended September 30, 2019
(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


Home equity and consumer	—	$	—	$	—	2	$	83	$	83
	—	$	—	$	—	2	$	83	$	83


	Nine Months Ended September 30, 2020					Nine Months Ended September 30, 2019
(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



Home equity and consumer	—	$	—	$	—	2	$	83	$	83
	—	$	—	$	—	2	$	83	$	83

The following table summarizes as of September 30, 2020 and 2019, loans that were TDRs within the previous twelve months that have subsequently defaulted:


	September 30, 2020			September 30, 2019
(dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment





Construction	1	$	694	—	$	—
Home equity and consumer	—	—		2	83
	1	$	694	2	$	83

Other Real Estate and Other Repossessed Assets

At September 30, 2020 the Company had no other real estate owned and at December 31, 2019, the Company had other real estate owned of $563,000, consisting of residential property acquired as a result of foreclosure proceedings. There were no other repossessed assets at either September 30, 2020 or December 31, 2019.

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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 September 30, 2020, the Company had lease liabilities totaling $18.5 million and right-of-use assets totaling $17.0 million related to these leases. At December 31, 2019, the Company had lease liabilities totaling $19.8 million and right-of-use assets totaling $18.3 million. The calculated amount of the right-of-use assets 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 nine months ended September 30, 2020, the weighted average remaining lease term for operating leases was 9.87 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.41%.

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:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Operating lease cost	$	828	$	819	$	2,484	$	2,465
Short-term lease cost	—		—		—		—
Variable lease cost	22		32		87		100
Sublease income	$	(31)	$	(31)	(92)		(92)
Net lease cost	$	819	$	820	$	2,479	$	2,473

The table below presents other information on the Company's operating leases for the nine months ended September 30, 2020 and 2019:


	Nine Months Ended September 30,
(in thousands)	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	2,085	$	1,977
Right-of-use asset obtained in exchange for new operating lease liabilities	741		765

There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the three and nine months ended September 30, 2020. At September 30, 2020, the Company had no leases that had not yet commenced.

A maturity analysis of operating lease liabilities and a reconciliation of the undiscounted cash flows to the total operating lease liability at September 30, 2020 are as follows:


(in thousands)
Within one year	$	3,309
After one year but within three years	5,405
After three years but within five years	4,320
After 5 years	9,160
Total undiscounted cash flows	22,194
Discount on cash flows	(3,723)
Total lease liability	$	18,471

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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 financial institution, 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 $100.9 million and $30.0 million, respectively, in available for sale securities pledged for collateral on its interest rate swaps with financial institutions at September 30, 2020 and December 31, 2019.

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 cash flow hedges 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 nine months ended September 30, 2020, the Company did not record any hedge ineffectiveness. The Company recognized $17,000 and $334,000 of accumulated other comprehensive income that was reclassified into interest expense for the first nine months of 2020 and 2019, 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 $260,000 will be reclassified as an increase 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):


September 30, 2020	Notional Amount	Average Maturity (Years)	Weighted Average Fixed Rate		Weighted Average Variable Rate	Fair Value
Classified in Other Assets:

Customer interest rate swaps	919,460	9.2	3.78	%	1 Mo. LIBOR + 1.99	95,243

Classified in Other Liabilities:

3rd Party interest rate swaps	919,460	9.2	3.78	%	1 Mo. LIBOR + 1.99	(95,243)
Interest rate swap (cash flow hedge)	30,000	0.8	1.10	%	3 Mo. LIBOR	(206)


December 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	$	85,796	9.0	3.51	%	1 Mo. LIBOR + 1.95	$	947
Customer interest rate swaps	473,273		9.9	4.32	%	1 Mo. LIBOR + 1.93	25,905
Interest rate swap (cash flow hedge)	30,000		1.5	1.10	%	3 Mo. LIBOR	271
Classified in Other Liabilities:
Customer interest rate swaps	$	85,796	9.0	3.51	%	1 Mo. LIBOR + 1.95	$	(947)
3rd party interest rate swaps	473,273		9.9	4.32	%	1 Mo. LIBOR + 1.93	(25,905)

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NOTE 9 – GOODWILL AND INTANGIBLE ASSETS

The Company had goodwill of $156.3 million at both September 30, 2020 and December 31, 2019. The Company recorded $19.8 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. At September 30, 2020, the Company evaluated whether it is more likely than not that the fair value of our one reporting unit is less than its carrying amount, by assessing relevant events and circumstances as a result of the impact of COVID-19 and concluded that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount.

The Company had core deposit intangibles of $3.5 million and $4.3 million at September 30, 2020 and December 31, 2019, respectively. The Company recorded core deposit intangibles of $3.7 million for the Highlands acquisition in January 2019. The estimated future amortization expense for the remainder of 2020 and for each of the succeeding five years ended December 31 is as follows (in thousands):


For the Year Ended
2020	$	250
2021	868
2022	711
2023	554
2024	425
2025	317

NOTE 10 – BORROWINGS

At September 30, 2020 and December 31, 2019, the Company had overnight and short-term borrowings from the Federal Home Loan Bank ("FHLB") totaling $40.0 million and $200.0 million, respectively. In addition, there were no overnight and short-term borrowings from correspondent banks at September 30, 2020 and these borrowings totaled $85.0 million at December 31, 2019.

Other short-term borrowings at September 30, 2020 and December 31, 2019 consisted of short-term securities sold under agreements to repurchase of $57.9 million and $43.7 million, respectively. The securities sold under agreements to repurchase are overnight sweep arrangement accounts with our customers. As of September 30, 2020, the Company had $72.9 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.

Advances from the FHLB totaled $135.1 million at September 30, 2020 compared to $165.8 million at December 31, 2019 and were collateralized by first mortgage loans. The advances have prepayment penalties. In the first quarter of 2020, the Company repaid two advances totaling $10.0 million and recorded $356,000 in long-term debt prepayment fees.

NOTE 11 – SHARE-BASED COMPENSATION

The Company's shareholders approved the 2018 Omnibus Equity Incentive Plan (the "Plan"), which authorizes the granting of incentive stock options, supplemental stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), other stock-based awards and cash-based awards to officers, employees and non-employee directors of, and consultants and advisors to, the Company and its subsidiaries. The Company previously granted such awards under the 2009 Equity Compensation Program; however, no further awards may be granted from the 2009 program.

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Restricted Stock

The following is a summary of the Company’s restricted stock activity during the nine months ended September 30, 2020:


	Number of Shares	Weighted Average Price
Outstanding, January 1, 2020	13,110	$	15.93
Granted	13,041	16.87
Vested	(13,052)	15.96

Outstanding, September 30, 2020	13,099	$	16.83

In the first nine months of 2020, the Company granted 13,041 shares of restricted stock to non-employee directors at a grant date fair value of $16.87 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 $220,000 over a one year period. In the first nine 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. The restricted stock vested one year from the date it was granted with a compensation expense of $208,000 over such period.

The Company recognized share-based compensation expense on its restricted stock of $165,000 and $160,000 for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, there was unrecognized compensation cost of $55,000 related to unvested restricted stock that is expected to be recognized over a weighted average period of approximately 0.29 years.

Restricted Stock Units

The following is a summary of the Company’s RSU activity during the nine months ended September 30, 2020:


	Number of Shares	Weighted Average Price
Outstanding, January 1, 2020	300,629	$	18.13
Granted	175,869	15.37
Vested	(92,432)	18.80
Forfeited	(8,736)	18.03
Outstanding, September 30, 2020	375,330	$	16.67

In the first nine months of 2020, the Company granted 175,869 RSUs under the 2018 Omnibus Equity Incentive Plan at a weighted average grant date fair value of $15.37 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 applicable 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 RSUs issued in the first nine months of 2020 is expected to average approximately $901,000 per year over a three-year period. In the first nine months of 2019, the Company granted 141,059 RSUs under the Company’s 2018 Omnibus Equity Incentive Plan at a weighted average grant date fair value of $16.62 per share. Compensation expense on these RSUs is expected to average approximately $781,000 per year over a three-year period.

The Company recognized share based compensation expense of $1.9 million and $1.7 million on RSUs for the nine months ended September 30, 2020 and 2019, respectively. Unrecognized compensation expense related to RSUs was approximately $3.1 million as of September 30, 2020, and that cost is expected to be recognized over a period of 1.46 years.

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Stock Options

A summary of the activity under the Company’s stock option plans as of September 30, 2020 is as follows:


	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding, January 1, 2020	31,706	$	7.76	0.58	$	305,120



Expired	(28,940)	7.83
Outstanding, September 30, 2020	2,766	$	6.94	1.32	$	8,329
Options exercisable at September 30, 2020	2,766	$	6.94	1.32	$	8,329

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 option grants in the first nine months of 2020 or 2019. There were no stock options exercised during the first nine months of 2020 and 34,727 stock options were exercised during the first nine months of 2019. The aggregate intrinsic value of stock options exercised during the first nine months of 2019 was $255,000 and resulted in $307,000 in cash receipts. There was no unrecognized compensation expense related to unvested stock options as of September 30, 2020.

NOTE 12 – COMPREHENSIVE INCOME

The components of other comprehensive income are as follows:


	For the Three Months Ended
	September 30, 2020						September 30, 2019
(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 gains arising during period	$	(649)	$	73	$	(576)	$	1,911	$	(431)	$	1,480


Unrealized losses on derivatives	51		(14)		37		(111)		33		(78)

Other comprehensive income, net	$	(598)	$	59	$	(539)	$	1,800	$	(398)	$	1,402


	For the Nine Months Ended
	September 30, 2020						September 30, 2019
(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 gains arising during period	$	12,475	$	(3,255)	$	9,220	$	15,872	$	(4,253)	$	11,619
Reclassification adjustment for net gains arising during the period	(342)		88		(254)		—		—		—
Net unrealized gains	12,133		(3,167)		8,966		15,872		(4,253)		11,619
Unrealized losses on derivatives	(477)		141		(336)		(807)		236		(571)

Other comprehensive income, net	$	11,656	$	(3,026)	$	8,630	$	15,065	$	(4,017)	$	11,048

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The following tables show 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 September 30, 2020								For the Three Months Ended September 30, 2019
(in thousands)	Unrealized Gains (Losses) on Available for Sale Securities		Unrealized (Losses) on Derivatives		Pension Items		Total		Unrealized Losses on Available for Sale Securities		Unrealized Gains (Losses) on Derivatives		Pension Items		Total

Beginning balance	$	11,478	$	(56)	$	(5)	$	11,417	$	1,357	$	410	$	41	$	1,808
Net current period other comprehensive income (loss)	(576)		37		—		(539)		1,480		(78)		—		1,402


Ending balance	$	10,902	$	(19)	$	(5)	$	10,878	$	2,837	$	332	$	41	$	3,210


	For the Nine Months Ended September 30, 2020								For the Nine Months Ended September 30, 2019
(in thousands)	Unrealized Gains (Losses) on Available for Sale Securities		Unrealized Gains (Losses) on Derivatives		Pension Items		Total		Unrealized Losses on Available for Sale Securities		Unrealized Gains (Losses) on Derivatives		Pension Items		Total

Beginning balance	$	1,936	$	317	$	(5)	$	2,248	$	(8,782)	$	903	$	41	$	(7,838)


Other comprehensive income (loss) before classifications	9,220		(336)		—		8,884		11,619		(571)		—		11,048
Amounts reclassified from accumulated other comprehensive income	(254)		—		—		(254)		—		—		—		—
Net current period other comprehensive income (loss)	8,966		(336)		—		8,630		11,619		(571)		—		11,048
Ending balance	$	10,902	$	(19)	$	(5)	$	10,878	$	2,837	$	332	$	41	$	3,210

NOTE 13 – FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value Measurement

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

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

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

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

The Company’s assets that are measured at fair value on a recurring basis are its available for sale investment securities 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

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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 nine months ended September 30, 2020, 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
September 30, 2020
Assets:
Investment securities, available for sale
U.S. Treasury and government agencies	$	10,955	$	62,320	$	—	$	73,275
Mortgage-backed securities	—		476,827		—		476,827
Asset-backed securities	—		40,711		—		40,711
Obligations of states and political subdivisions	—		164,710		—		164,710
Debt securities	—		27,808		—		27,808
Total securities available for sale	10,955		772,376		—		783,331
Equity securities, at fair value	898		13,178		—		14,076
Derivative assets	—		95,243		—		95,243
Total Assets	$	11,853	$	880,797	$	—	$	892,650
Liabilities:
Derivative liabilities	$	—	$	95,449	$	—	$	95,449
Total Liabilities	$	—	$	95,449	$	—	$	95,449
December 31, 2019
Assets:
Investment securities, available for sale
U.S. Treasury and government agencies	$	12,580	$	123,067	$	—	$	135,647
Mortgage-backed securities	—		551,064		—		551,064
Obligations of states and political subdivisions	—		60,021		—		60,021
Debt securities	—		9,168		—		9,168
Total securities available for sale	12,580		743,320		—		755,900
Equity securities, at fair value	1,735		14,738		—		16,473
Derivative assets	—		27,123		—		27,123
Total Assets	$	14,315	$	785,181	$	—	$	799,496
Liabilities:
Derivative liabilities	$	—	$	26,852	$	—	$	26,852
Total Liabilities	$	—	$	26,852	$	—	$	26,852

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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
September 30, 2020
Assets:
Impaired loans	$	—	$	—	$	4,224	$	4,224
Loans held for sale	—		4,197		—		4,197



December 31, 2019
Assets:
Impaired loans	$	—	$	—	$	5,789	$	5,789
Loans held for sale	—		1,743		—		1,743
Other real estate owned and other repossessed assets	—		—		563		563

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 September 30, 2020, and December 31, 2019, 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 is 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 $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 FHLBs, or to other member banks at its par value. Because ownership of these securities is restricted, they do not have a readily determinable fair value. As such, the Company’s FHLB stock is recorded at cost or par value and is evaluated for impairment each reporting period by considering the ultimate recoverability of the investment rather than temporary declines in value. The Company’s evaluation primarily includes an evaluation of liquidity, capitalization, operating performance, commitments, and regulatory or legislative events.

The net loan portfolio 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 September 30, 2020 and December 31, 2019:


(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)

September 30, 2020
Financial Assets:
Investment securities held to maturity	$	97,893	$	101,205	$	—	$	98,705	$	2,500
Federal Home Loan Bank and other membership bank stocks	14,235		14,235		—		14,235		—
Loans, net	5,778,349		5,784,132		—		—		5,784,132
Financial Liabilities:
Certificates of deposit	1,144,341		1,144,945		—		1,144,945		—
Other borrowings	135,111		138,863		—		138,863		—
Subordinated debentures	118,248		116,697		—		—		116,697
December 31, 2019
Financial Assets:
Investment securities held to maturity	$	123,975	$	124,904	$	—	$	121,503	$	3,401
Federal Home Loan Bank and other membership bank stocks	22,505		22,505		—		22,505		—
Loans, net	5,097,820		5,194,065		—		—		5,194,065
Financial Liabilities:
Certificates of deposit	870,804		871,418		—		871,418		—
Other borrowings	165,816		166,505		—		166,505		—
Subordinated debentures	118,220		117,992		—		—		117,992

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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/A for the year ended December 31, 2019.

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, the anticipated impact of COVID-19 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 and in the Company's most recently filed Annual Report on Form 10-K/A, 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; public health crises (such as the governmental, social and economic effects of the novel coronavirus); the nature and timing of actions of the Federal Reserve Board and other regulators; the nature and timing of legislation and regulation affecting the financial services industry; government intervention in the U.S. financial system; changes in federal and state tax laws; changes in levels of market interest rates; pricing pressures on loan and deposit products; credit risks of Lakeland’s lending and equipment financing activities; successful implementation, deployment and upgrades of new and existing technology, systems, services and products; and customers’ acceptance of Lakeland’s products and services.

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/A.

Executive Summary

The coronavirus ("COVID-19") continues to have a significant, negative effect on families and businesses in New Jersey and in the United States. The prolonged COVID-19 outbreak, or any other epidemic that harms the global economy, the U.S. economy or the markets in which we operate could adversely affect our operations. If conditions worsen, we may again experience temporary closures of our offices and/or suspension of certain services until it is safe to open and return to work. The ultimate effect of COVID-19 on the Company's business will depend on numerous factors and future developments that are highly uncertain and cannot be predicted with confidence. At this time, it is unknown how long the COVID-19 pandemic will last or when all restrictions on individuals and businesses will be lifted and businesses and their employees will be able to fully resume normal activities. Further, additional information may emerge regarding the severity of COVID-19 and additional actions may be taken by federal, state and local governments to contain COVID-19 or treat its impact. Changes in the behavior of customers, businesses and their employees as a result of the COVID-19 pandemic, including social distancing practices, even after formal restrictions have been lifted, are also unknown. As a result of the COVID-19 pandemic and the actions taken to contain it or reduce its impact, the Company may experience changes in the value of collateral securing outstanding loans, reductions in the credit quality of borrowers and the inability of borrowers to repay loans in accordance with their terms. Management is actively managing credit risk in the Company's commercial loan portfolio, including reviewing the industries

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that the Company believes are most likely to be impacted by emerging COVID-19 events. These and similar factors and events may have substantial negative effects on the business, financial condition, and results of operations of the Company and its customers.

The Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law on March 27, 2020 and provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration ("SBA") to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program ("PPP"). As a qualified SBA lender, we were automatically authorized to originate PPP loans. An eligible business could apply for a PPP loan up to the lesser of (1) 2.5 times its average monthly payroll costs or (2) $10.0 million. PPP loans have (a) an interest rate of 1.00%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of the disbursement. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower's PPP loan is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses.

In June 2020, Congress passed the Paycheck Protection Program Flexibility Act ("PPP Flexibility") to ease provisions of PPP related to the time period permitted to use the proceeds of loans, the deferral period of principal and interest payments on loans not forgiven and an extension of the maturity date of loan and loan forgiveness on loans. Key changes include (a) extending from two to five years the minimum maturity of any remaining loan balance after an application for loan forgiveness (for those loans closed after the enactment of PPP Flexibility); (b) extending the “covered period” (i.e., when costs that are eligible for forgiveness must be paid or incurred) from eight weeks to 24 weeks (or December 31, 2020, whichever is earlier); (c) reducing from 75 percent to 60 percent the amount of loan proceeds that must be used for payroll costs although the remainder must continue to be allocated to interest on mortgages, rent, and utilities; (d) permitting an exemption from reductions in loan forgiveness amounts based on reductions in full-time equivalent employees if the borrower, in good faith, documents an inability to return to the same level of business activity due to standards for sanitation, social distancing, or other worker or customer safety requirements established by the Department of Health and Human Services ("HHS"), the Center for Disease Control ("CDC") or Occupational, Safety and Health Administration ("OSHA"); and (e) allowing deferral of payments until the amount of forgiveness is remitted by the SBA to the lender or, if the borrower has not applied for forgiveness, ten months after the expiration of the covered period. The provisions of PPP Flexibility became effective upon enactment and will apply to all loans made under the PPP. The SBA released guidance on PPP loan forgiveness, which presently includes three different application methods depending primarily on the size of the PPP loan, reductions in staffing or salaries, or a business’ inability to operate at pre-COVID levels due to compliance with certain federally imposed requirements related to COVID-19. To qualify for full forgiveness, businesses must document that at least 60% of the PPP loan amount was used towards payroll costs and that the remaining 40% was used for other eligible costs such as mortgage interest, rent payments and/or utilities. Forgiveness will be reduced by any Economic Injury Disaster Loan (“EIDL”) advance amount the business received.

Section 4013 of the CARES Act, as interpreted by the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (Revised)" (“Revised Statement”), dated April 17, 2020, includes criteria that enable financial institutions to exclude from TDR status loans that are modified in connection with COVID-19. Under these provisions, TDR status is not required for the term of a loan modification if (i) the loan modification is made in connection with COVID-19, (ii) the loan was not past due more than 30 days as of December 31, 2019 and (iii) the loan modification is entered into during the period between March 1, 2020, and the earlier of (a) 60 days after COVID-19 is no longer characterized as a National Emergency or (b) December 31, 2020. Furthermore, pursuant to the Revised Statement, for loan modifications that do not meet these criteria but are made in connection with COVID-19, such loans may be presumed not to be TDR if they are current at a time the loan modification program was implemented and the modifications are short-term (e.g., six months). If the criteria are not met under either Section 4013 or the Revised Statement, banks are required to follow their existing accounting policies to determine whether COVID-related modifications should be accounted for as a TDR. The Company has elected to suspend the classification of loan modifications as TDR if they qualify under Section 4013 or the Revised Statement.

The CARES Act also provided financial institutions with the option to defer adoption of the Financial Accounting Standards Board's Accounting Standard Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326) until the earlier of the end of the pandemic or December 31, 2020. The Company has elected to defer adoption of ASU 2016-13 and its Current Expected Credit Loss methodology ("CECL").

Management has identified that the COVID-19 pandemic could adversely affect the liquidity of the Company. As such, management has taken specific steps to raise awareness of the risk and taken action to minimize the risk. In addition to processes already in place to closely monitor changes in liquidity needs, including those that may result from the COVID-19 pandemic, the Company has increased collateral and expanded access to additional borrowings should it be necessary in order to meet liquidity needs. While the Company is unable to predict actual fluctuations in deposit or cash balances, management continues to monitor liquidity and believes that its current level of liquidity is sufficient to meet its current and future operational needs.

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In addition, the carrying value of investment securities, right-of-use assets, goodwill and other intangibles could decrease, resulting in future impairment losses. Management will continue to evaluate current economic conditions to determine if a triggering event would impact the current valuations for these assets. As a result, it is not currently possible to ascertain the overall impact of COVID-19 on the Company's business.

As the COVID-19 pandemic has advanced, Lakeland has made it a priority to safeguard the health of our associates and customers, while assisting customers impacted by the economic burdens of COVID-19 and providing support to our communities. Lakeland initiated remote working plans and encouraged the use of our mobile and online banking alternatives as we adjusted our branch hours, decreased lobby usage and temporarily closed branches. To assist COVID-19 impacted borrowers, we offered temporary payment deferrals on commercial, mortgage and consumer loans and we have assisted customers with the origination of PPP loans to help strengthen local businesses and preserve jobs in our communities. Additionally, to further support our customers, the Company decided to participate in the Main Street Lending Program established by the Federal Reserve to support lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. Despite this challenging environment, our associates show tireless professionalism, compassion and dedication to serving our customers under these unprecedented conditions. We remain open for business, continuing to lend to qualified businesses for working capital and general business purposes. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

Financial Overview

For the third quarter of 2020, the Company reported net income of $14.4 million and earnings per diluted share of $0.28 compared to net income of $18.9 million and earnings per diluted share of $0.37 for the third quarter of 2019. For the third quarter of 2020, annualized return on average assets was 0.76%, annualized return on average common equity was 7.64% and annualized return on average tangible common equity was 9.71% compared to 1.17%, 10.61%, and 13.74%, respectively, for the third quarter of 2019.

For the nine months ended September 30, 2020 the Company reported net income of $38.7 million, compared to $52.0 million for the same period in 2019. For the nine months ended September 30, 2020, the Company reported earnings per diluted share of $0.76, compared to $1.02 earnings per diluted share reported for the first nine months of 2019. For the first nine months of 2020, annualized return on average assets was 0.73%, annualized return on average common equity was 6.95%, and annualized return on average tangible common equity was 8.86% compared to 1.11%, 10.07% and 13.11%, respectively, for the same period in 2019.

The third quarter and year-to-date results were adversely impacted by provisions for loan losses of $8.0 million and $26.2 million, respectively, compared to $536,000 and $1.0 million for the same periods last year. Of the increased provision in the first nine months of 2020, 75% was primarily due to the impact of COVID-19 on certain qualitative factors and loans placed on COVID-related payment deferment. The remainder of the provision is attributable to loan growth, a change in the loan portfolio composition and a change in loss rates.

Net interest margin for the third quarter of 2020 of 2.96% decreased 29 and 10 basis points, respectively, from the third quarter of 2019 and the second quarter of 2020. Net interest margin for the first nine months of 2020 of 3.09% compared to 3.35% for the same period in 2019. The decrease in net interest margin was due primarily to a decrease in the yield on interest-earning assets partially offset by a decrease in the cost of interest-bearing liabilities.

Total loans, net of deferred fees, grew $705.8 million, or 14%, to $5.84 billion during the first nine months of 2020. The increase in loans includes $325.1 million in PPP loans.

Total deposits increased $972.7 million, or 18%, from December 31, 2019 to September 30, 2020, to $6.27 billion.

Comparison of Operating Results for the Three Months Ended September 30, 2020 and 2019

Net Income

Net income was $14.4 million, or $0.28 per diluted share, for the third quarter of 2020 compared to net income of $18.9 million, or $0.37 per diluted share, for the third quarter of 2019. The reduction in net income compared to the third quarter of 2019 was due primarily to the increased provision for loan losses mentioned above.

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.

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Net interest income on a tax equivalent basis for the third quarter of 2020 was $52.2 million, compared to $48.8 million for the third quarter of 2019. The increase in net interest income compared to the third quarter of 2019 was due primarily to the growth of interest-earning assets partially offset by a decrease in the yield on interest earning assets. The net interest margin decreased to 2.96% in the third quarter of 2020 from 3.25% in the third quarter of 2019 primarily as a result of a decrease in the yield on interest-earning assets, particularly a reduction in the yield on loans due to decreases in the prime rate and LIBOR during 2019 and 2020, an increase in lower yielding federal funds sold and the origination of PPP loans during the second quarter of 2020, which earn an effective yield of 2.50% including amortization of fees and costs. The components of net interest income are 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 September 30, 2020 and September 30, 2019 are computed on a tax equivalent basis using a tax rate of 21%.


	For the Three Months Ended September 30, 2020						For the Three Months Ended September 30, 2019
(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)	$	5,775,093	$	56,801	3.91	%	$	4,937,488	$	58,563	4.71	%
Taxable investment securities and other	793,370		4,139		2.09	%	801,828		5,007		2.50	%
Tax-exempt securities	79,696		509		2.55	%	67,906		458		2.70	%
Federal funds sold (2)	361,780		92		0.10	%	140,423		695		1.98	%
Total interest-earning assets	7,009,939		61,541		3.49	%	5,947,645		64,723		4.32	%
Noninterest-earning assets:
Allowance for loan losses	(60,882)						(39,254)
Other assets	567,012						471,284
TOTAL ASSETS	$	7,516,069					$	6,379,675

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Savings accounts	$	548,662	$	77	0.06	%	$	494,377	$	80	0.06	%
Interest-bearing transaction accounts	3,086,260		3,422		0.44	%	2,678,424		8,363		1.24	%
Time deposits	1,176,181		3,513		1.19	%	964,159		4,824		2.00	%
Borrowings	327,939		2,287		2.73	%	361,881		2,677		2.89	%
Total interest-bearing liabilities	5,139,042		9,299		0.72	%	4,498,841		15,944		1.41	%
Noninterest-bearing liabilities:
Demand deposits	1,475,422						1,100,413
Other liabilities	150,506						74,695
Stockholders' equity	751,099						705,726
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	7,516,069					$	6,379,675
Net interest income/spread			52,242		2.77	%			48,779		2.91	%
Tax equivalent basis adjustment			108						97
NET INTEREST INCOME			$	52,134					$	48,682
Net interest margin (3)					2.96	%					3.25	%

(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.

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Interest income on a tax equivalent basis decreased $3.2 million, or 5% from $64.7 million in the third quarter of 2019 to $61.5 million in the third quarter of 2020, as a result of a reduction in the yield on interest-earning assets due to the same reasons discussed above. Average federal funds sold in the third quarter of 2020 increased $221.4 million compared to the third quarter of 2019, while the yield decreased 188 basis points to 0.10% for the third quarter of 2020. Average loans increased $837.6 million compared to the third quarter of 2019 while the yield on average loans decreased 80 basis points to 3.91% in the third quarter of 2020 from the third quarter of 2019. Total average taxable investment securities decreased $8.5 million to $793.4 million for the third quarter of 2020 from the third quarter of 2019, while average tax-exempt securities increased $11.8 million to $79.7 million for the same periods. The yield on average taxable investment securities decreased 41 basis points from the third quarter of 2019 to 2.09% for the third quarter of 2020, while the yield on average tax-exempt investment securities decreased 15 basis points to 2.55%.

Total interest expense of $9.3 million in the third quarter of 2020 was $6.6 million less than the $15.9 million reported for the same period in 2019. Total average interest-bearing liabilities increased $640.2 million compared to the third quarter of 2019 primarily as a result of organic growth in money market accounts due to increased marketing efforts and to a change in customer behavior toward more traditional banking alternatives in the current economy. The cost of average interest-bearing liabilities decreased from 1.41% in the third quarter of 2019 to 0.72% in the third quarter of 2020 largely driven by reductions in market interest rates. For the third quarter of 2020, the cost of interest-bearing transaction accounts, time deposits and borrowings decreased by 80 basis points, 81 basis points and 16 basis points, respectively, when compared to the same period in 2019.

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 reviews.

In the third quarter of 2020, an $8.0 million provision for loan losses was recorded, compared to $536,000 provision for the same period last year. The increase in provision was due primarily to the impact of COVID-19 on certain qualitative factors and loans on payment deferment. The Company recorded charge-offs of $682,000 and recoveries of $85,000 in the third quarter of 2020 compared to charge-offs of $809,000 and recoveries of $266,000 in the third quarter of 2019. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income increased $73,000 to $6.8 million for the third quarter of 2020 compared to $6.7 million during the same period in 2019. Gains on sales of loans for the third quarter of 2020 increased $951,000 compared to the third quarter of 2019 due primarily to increased volume of sales of residential mortgages driven by lower interest rates, while commissions and fees for the third quarter of 2020 increased $122,000 due primarily to increases in mortgage application fees and commercial loan fees. Service charges on deposit accounts for the third quarter of 2020 decreased $563,000 compared to the third quarter of 2019 due primarily to changes in customer behavior resulting from the pandemic. Third quarter 2020 results also included losses on equity securities of $170,000 compared to gains of $72,000 during the same period in 2019.

Noninterest Expense

Noninterest expense in the third quarter of 2020 totaled $32.1 million compared to $29.6 million reported for the same quarter of 2019, an increase of $2.5 million. Salaries and employee benefits expense was $19.7 million for the third quarter of 2020, increasing $632,000, or 3%, from the same period last year, as a result of additions to staff to support continued growth and normal merit increases. Furniture and equipment expense increased $806,000 compared to the third quarter of 2019 due primarily to an increase in costs associated with the Company's digital strategy initiative. FDIC insurance expense totaled $625,000 for the third quarter of 2020 and increased $1.0 million compared to the same period in 2019. In the third quarter of 2019, $420,000 in previously recorded FDIC expense was reversed due to FDIC assessment credits and no third quarter 2019 accrual was made, resulting from the insurance fund reserve ratio exceeding the required level.

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The Company’s efficiency ratio, a non-GAAP financial measure, was 53.96% in the third quarter of 2020, compared to 52.77% 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 September 30,
(dollars in thousands)	2020			2019

Total noninterest expense	$	32,097		$	29,563
Amortization of core deposit intangibles	(250)			(288)


Noninterest expense, as adjusted	$	31,847		$	29,275

Net interest income	$	52,134		$	48,682
Noninterest income	6,773			6,700
Total revenue	58,907			55,382
Tax-equivalent adjustment on municipal securities	108			97

Total revenue, as adjusted	$	59,015		$	55,479
Efficiency ratio	53.96		%	52.77		%

Income Tax Expense

The effective tax rate in the third quarter of 2020 was 23.3% compared to 25.3% during the same period in 2019 primarily as a result of an increase in tax advantaged items as a percent of pretax income.

Comparison of Operating Results for the Nine Months Ended September 30, 2020 and 2019

Net Income

Net income was $38.7 million, or $0.76 per diluted share, for the first nine months of 2020 compared to net income of $52.0 million, or $1.02 per diluted share, for the first nine months of 2019. Net income decreased primarily as a result of the $25.2 million increase in provision for loan losses mentioned in the financial overview. Net interest income increased $6.1 million compared to the first nine months of 2019 resulting primarily from an increase in interest-earning assets and a decrease in the cost of interest-bearing liabilities, partially offset by a decrease in the yield on interest-earning assets.

Net Interest Income

Net interest income on a tax equivalent basis for the first nine months of 2020 was $152.8 million, compared to $146.8 million for the first nine months of 2019. The net interest margin of 3.09% in the first nine months of 2020 compared to 3.35% for the same period in 2019. The decrease in net interest margin resulted primarily from a 64 basis point decrease in the yield on interest-earning assets, partially offset by a 48 basis point decrease in the cost of interest-bearing liabilities. The components of net interest income are 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 nine months ended September 30, 2020 and September 30, 2019 are computed on a tax equivalent basis using a tax rate of 21%.


	For the Nine Months Ended September 30, 2020						For the Nine Months Ended September 30, 2019
(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)	$	5,519,621	$	170,483	4.13	%	$	4,908,952	$	175,324	4.78	%
Taxable investment securities and other	811,924		14,131		2.32	%	788,736		14,865		2.51	%
Tax-exempt securities	69,408		1,371		2.63	%	72,104		1,475		2.73	%
Federal funds sold (2)	198,528		287		0.19	%	83,127		1,297		2.08	%
Total interest-earning assets	6,599,481		186,272		3.77	%	5,852,919		192,961		4.41	%
Noninterest-earning assets:
Allowance for loan losses	(51,236)						(39,985)
Other assets	525,193						460,926
TOTAL ASSETS	$	7,073,438					$	6,273,860

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Savings accounts	$	523,653	$	248	0.06	%	$	503,260	$	253	0.07	%
Interest-bearing transaction accounts	2,942,307		14,204		0.64	%	2,599,004		23,742		1.22	%
Time deposits	1,048,115		11,517		1.47	%	938,751		13,531		1.92	%
Borrowings	373,870		7,462		2.62	%	396,897		8,639		2.87	%
Total interest-bearing liabilities	4,887,945		33,431		0.91	%	4,437,912		46,165		1.39	%
Noninterest-bearing liabilities:
Demand deposits	1,317,195						1,080,235
Other liabilities	124,980						66,175
Stockholders' equity	743,318						689,538
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	7,073,438					$	6,273,860
Net interest income/spread			152,841		2.86	%			146,796		3.02	%
Tax equivalent basis adjustment			289						310
NET INTEREST INCOME			$	152,552					$	146,486
Net interest margin (3)					3.09	%					3.35	%

(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 decreased from $193.0 million in the first nine months of 2019 to $186.3 million in the first nine months of 2020, a decrease of $6.7 million, or 3%. The decrease in interest income was primarily due to the same reasons discussed in the quarterly analysis. Average federal funds sold increased $115.4 million in the first nine months of 2020 compared to the same period in 2019, while the yield on federal funds sold decreased 189 basis points compared to the first nine months of 2019. Average loans increased $610.7 million compared to the first nine months of 2019, while the yield on average loans at 4.13% in the first nine months of 2020 was 65 basis points lower than the same period in 2019. The yield on average taxable and tax-exempt investment securities decreased 19 basis points and 10 basis points, respectively.

Total interest expense of $33.4 million in the first nine months of 2020 was $12.7 million less than the $46.2 million reported for the same period in 2019. Total average interest-bearing liabilities increased $450.0 million, while the cost of average interest-bearing liabilities decreased from 1.39% in the first nine months of 2019 to 0.91% in the first nine months of 2020. The increase in the balance and reduction in cost of interest-bearing liabilities was due primarily to the same reasons discussed in the quarterly analysis. The cost of interest-bearing transaction accounts and time deposits decreased by 58 basis points and 45 basis points, respectively, while the cost of borrowings decreased 25 basis points compared to the first nine months of 2019.

Provision for Loan Losses

In the first nine months of 2020, a $26.2 million provision for loan losses was recorded, compared to $1.0 million for the same period last year. As previously noted, approximately 75% of the increase in the provision was due to the impact of COVID-19 on certain qualitative factors as well as the downgrade of loans for which deferral of payments was granted. The remainder of the provision is attributable to loan growth, a change in the loan portfolio composition and a change in loss rates. The Company charged off $1.3 million and recovered $322,000 in the first nine months of 2020 compared to $1.7 million and $1.7 million, respectively, in the first nine months of 2019. For more information regarding the determination of the provision, see “Risk Elements” below.

Noninterest Income

Noninterest income of $20.3 million in the first nine months of 2020 increased by $1.5 million from $18.8 million in the first nine months of 2019 due primarily to a $2.6 million increase in swap income. Additionally, gains on sales of loans increased $1.3 million due to an increase in sales of residential mortgages. Noninterest income for the first nine months of 2020 included $342,000 in gains on sales of securities compared to none during the same period in 2019. Service charges on deposits decreased $1.5 million compared to the first nine months of 2019 due to the same reasons discussed in the quarterly comparison. Noninterest income for the first nine months of 2020 also included a $625,000 loss on equity securities compared to a gain of $525,000 during the same period in 2019.

Noninterest Expense

Noninterest expense in the first nine months of 2020 totaled $96.1 million, which was $830,000 greater than the $95.2 million reported for the first nine months of 2019. The first nine months of 2019 included $3.2 million in merger related expenses related to the acquisition of Highlands Bancorp. Salaries and employee benefits increased $2.5 million, while furniture and equipment expense increased $1.9 million from the same period last year, both due to the same reasons discussed in the quarterly comparison. Marketing expense decreased $590,000 compared to the first nine months of 2019 due to the timing of marketing campaigns impacted by the pandemic. The Company’s efficiency ratio, a non-GAAP financial measure, was 54.95% in the first nine months of 2020, compared to 55.05% 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:


	Nine Months Ended September 30,
(dollars in thousands)	2020			2019

Total noninterest expense	$	96,063		$	95,233
Amortization of core deposit intangibles	(776)			(893)
Merger-related expenses	—			(3,178)
Long-term debt prepayment fee	(356)			—
Noninterest expense, as adjusted	$	94,931		$	91,162

Net interest income	$	152,552		$	146,486
Noninterest income	20,265			18,812
Total revenue	172,817			165,298
Tax-equivalent adjustment on municipal securities	289			310
(Gains) losses on sales of investment securities	(342)			—
Total revenue, as adjusted	$	172,764		$	165,608
Efficiency ratio	54.95		%	55.05		%

Income Tax Expense

The effective tax rate in the first nine months of 2020 was 23.5% compared to 24.7% during the same period last year due primarily to an increase in tax advantaged items as a percent of pretax income.

Financial Condition

The Company’s total assets increased $810.9 million from December 31, 2019, to $7.52 billion at September 30, 2020. Total loans, net of deferred fees, were $5.84 billion, an increase of $705.8 million, or 14%, from $5.14 billion at December 31, 2019. Total deposits were $6.27 billion, an increase of $972.7 million, or 18%, from December 31, 2019, while total borrowings decreased $261.5 million to $351.2 million at September 30, 2020.

Loans

Gross loans of $5.86 billion at September 30, 2020 increased $714.1 million from December 31, 2019, primarily in the commercial loans secured by real estate and paycheck protection program ("PPP") categories, which increased $459.7 million, and $325.1 million, respectively. 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 $21.7 million at December 31, 2019 to $33.1 million at September 30, 2020. The increase in non-performing assets primarily resulted from loans related to one loan relationship totaling $9.2 million moving into non-accrual status for reasons unrelated to COVID-19. Non-accrual loans in the commercial loans secured by real estate category increased $12.9 million, while the residential mortgage category decreased $733,000. The percentage of non-performing assets to total assets was 0.44% at September 30, 2020 compared to 0.32% at December 31, 2019. Non-accrual loans at September 30, 2020 included six loan relationships with a balance of $1 million or greater, totaling $18.4 million and eight loan relationships between $500,000 and $1.0 million, totaling $5.5 million. Loans past due ninety days or more and still accruing totaled $165,000 at September 30, 2020 compared to none at December 31, 2019.

Troubled debt restructurings are those loans where the Company has granted concessions to the borrower in payment terms, either in rate or in term, as a result of the financial condition of the borrower. On September 30, 2020, the Company had $4.3 million in loans that were troubled debt restructurings and accruing interest income compared to $5.7 million at December 31, 2019. These loans are expected to be able to perform under the modified terms of the loan. On September 30, 2020, the Company had $1.3 million in troubled debt restructurings that were included in non-accrual loans compared to $1.6 million at December 31, 2019.

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Since the end of March 2020, the Company has been working with borrowers negatively impacted by the COVID-19 pandemic. At September 30, 2020, we have on deferral, approximately $149.0 million in commercial loans (includes commercial loans secured by real estate, commercial and industrial and other loans), $3.0 million in equipment finance loans and $3.0 million in residential mortgage and consumer loans, compared to $927.0 million, $40.0 million and $53.0 million, respectively, at June 30, 2020.

On September 30, 2020, the Company had $32.4 million in impaired loans (consisting primarily of non-accrual and restructured loans) compared to $22.1 million at year-end 2019. The Company also had purchased credit impaired loans from prior acquisitions with carrying values of $7.8 million at September 30, 2020. 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 allowance for impaired loans is based primarily on the fair value of the underlying collateral. Based on such evaluation, $223,000 of the allowance for loan losses has been allocated for impairment at September 30, 2020 compared to $352,000 at December 31, 2019. At September 30, 2020 and December 31, 2019, the Company had $101.4 million and $47.7 million, respectively, in loans that were rated substandard that were not classified as non-performing or impaired. The increase in substandard loans that were not classified as non-performing or impaired relates to the COVID-19 pandemic and the resulting loans that are on deferral.

There were no loans at September 30, 2020, 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.

Allowance for loan losses

As noted earlier in this discussion, pursuant to the CARES Act, the Company has delayed implementation of ASU 2016-13, the CECL accounting standard. Upon the Company's future adoption of CECL, the change from the incurred loss methodology to the CECL methodology will be recognized through an adjustment to retained earnings, with an effective retrospective implementation date of January 1, 2020.

The overall balance of the allowance for loan losses of $65.2 million at September 30, 2020 increased $25.2 million from December 31, 2019, an increase of 63%. The change in the allowance within loan segments during the two comparable periods is principally due to factors relating to COVID-19 to the extent identified by the Company and gives effect to changes in the Company's level of loan growth and related credit downgrades.

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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 Nine Months Ended September 30, 2020			For the Nine Months Ended September 30, 2019			For the Year Ended December 31, 2019
Balance at the beginning of the year	$	40,003		$	37,688		$	37,688
Loans charged off:
Commercial, secured by real estate	(498)			(501)			(544)
Commercial, industrial and other	(204)			(610)			(645)
Equipment finance	(194)			(380)			(414)
Real estate - mortgage	(116)			(50)			(50)

Home equity and consumer	(294)			(197)			(283)
Total loans charged off	(1,306)			(1,738)			(1,936)
Recoveries:
Commercial, secured by real estate	57			212			251
Commercial, industrial and other	74			1,076			1,100
Equipment finance	39			2			332
Real estate - mortgage	21			66			66
Real estate - construction	69			104			126
Home equity and consumer	62			201			246
Total recoveries	322			1,661			2,121
Net recoveries (charge-offs)	(984)			(77)			185
Provision for loan losses	26,223			1,044			2,130
Ending balance	$	65,242		$	38,655		$	40,003

Net charge-offs as a percentage of average loans outstanding	0.02		%	—		%	—		%
Allowance as a percentage of total loans outstanding	1.11		%	0.78		%	0.78		%
Allowance as a percentage of non-accrual loans	197.17		%	242.85		%	189.25		%

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 its 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 is the estimated time from the date of a loss event (such as a personal bankruptcy) to the actual recognition of the loss

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(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.

Non-performing loans of $33.1 million at September 30, 2020 increased $12.0 million from December 31, 2019. The allowance for loan losses as a percent of total loans was 1.11% at September 30, 2020 compared to 0.78% at December 31, 2019. Excluding the loans from prior acquisitions and PPP loans, the allowance as a percent of total loans would be 1.28% as of September 30, 2020 compared to 0.88% at December 31, 2019. The increase in the percentage of the allowance for loan losses as a percent of total loans was primarily due to the $26.2 million provision recorded in the first nine months of 2020 primarily resulting from the impact of COVID-19. Management believes, based on appraisals and estimated selling costs, that the majority of the Company's non-performing loans are adequately secured and that 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 September 30, 2020.

Investment Securities

Investment securities totaled $881.2 million at September 30, 2020 and $879.9 million at December 31, 2019, increasing $1.3 million from year-end. 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.

Deposits

Total deposits increased from $5.29 billion at December 31, 2019 to $6.27 billion at September 30, 2020, an increase of $972.7 million, or 18%. Time deposits increased $273.5 million, due primarily to an increase in brokered deposits of $261.2 million, while savings and interest-bearing transaction accounts increased $348.5 million due primarily to an increase in money market deposit accounts resulting from increased marketing efforts and a change in customer behavior towards more traditional banking alternatives in the current economy. Noninterest-bearing deposits increased $350.7 million during the first nine months of 2020 due in part to deposits of PPP loan proceeds.

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 $61.7 million for the first nine months of 2020 compared to $61.3 million for the same period in 2019.

•Deposits. Lakeland can offer new products or change its rate structure in order to increase deposits. In the first nine months of 2020, Lakeland’s deposits increased $972.7 million compared to an increase of $181.0 million during the first nine months of 2019.

•Sales of securities. At September 30, 2020 the Company had $783.3 million in securities designated “available for sale.” Of these securities, $499.1 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 $40.0 million in overnight borrowings from the FHLB on September 30, 2020. Lakeland also has overnight federal funds lines available for it to borrow up to $215.0 million, of which none were outstanding at September 30, 2020. Lakeland may also borrow from the discount window of the Federal Reserve Bank of New York based on the market value of collateral pledged. Lakeland had no borrowings with the Federal Reserve Bank of New York as of September 30, 2020.

•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. As noted in the Executive Summary, management is closely monitoring changes in liquidity needs, including those that may result from the COVID-19 pandemic. The Company has increased collateral and expanded access to additional borrowings should it be necessary in order to meet liquidity needs. While we are unable to predict actual fluctuations in deposit or cash balances, management continues to monitor liquidity and believes that its current level of liquidity is sufficient to meet its current and future operational needs.

The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statement for the nine months ended September 30, 2020 follows.

Cash and cash equivalents totaling $345.9 million on September 30, 2020 increased $63.6 million from December 31, 2019. Operating activities provided $61.7 million in net cash. Investing activities used $688.2 million in net cash, primarily reflecting an increase in loans. Financing activities provided $690.0 million in net cash primarily reflecting the net increase in deposits of $972.9 million, partially offset by a $230.8 million decrease in federal funds purchased and securities sold under agreements to repurchase. The Company anticipates that it will have sufficient funds available to meet its current loan commitments and deposit maturities. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of September 30, 2020. 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	$	22,194	$	3,309	$	5,405	$	4,320	$	9,160
Benefit plan commitments	5,017		397		818		755		3,047
Remaining contractual maturities of time deposits	1,144,341		912,653		223,994		7,694		—
Subordinated debentures	118,248		—		—		5,284		112,964
Loan commitments	1,204,412		889,292		151,560		14,449		149,111
Other borrowings	135,111		30,331		79,780		25,000		—
Interest on other borrowings*	44,204		8,189		13,512		11,021		11,482
Standby letters of credit	14,626		14,065		481		80		—
Total	$	2,688,153	$	1,858,236	$	475,550	$	68,603	$	285,764

*Includes interest on other borrowings and subordinated debentures at a weighted rate of 3.33%.

Capital Resources

Total stockholders’ equity increased to $753.6 million on September 30, 2020 from $725.3 million on December 31, 2019, an increase of $28.3 million. Book value per common share increased to $14.93 on September 30, 2020 from $14.36 on December 31, 2019. Tangible book value per share increased from $11.18 per share on December 31, 2019 to $11.77 per share on September 30, 2020, an increase of 5%. Please see “Non-GAAP Financial Measures” below. The increase in stockholders’ equity from December 31, 2019 to September 30, 2020 was primarily due to $38.7 million of net income and other comprehensive income of $8.6 million, which was partially offset by the payment of cash dividends on common stock of $19.1 million and purchase of treasury stock under the Company's stock buyback program of $1.5 million.

The Company and Lakeland are subject to various regulatory capital requirements that are monitored by federal banking agencies. Failure to meet minimum capital requirements can lead to certain supervisory actions by regulators; any supervisory action could have a direct material adverse effect on the Company or Lakeland or their financial statements. As of September 30, 2020, the Company and Lakeland met all capital adequacy requirements to which they are subject.

As of September 30, 2020, the Company’s capital levels remained characterized as “well-capitalized.”

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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
	September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
The Company	8.36	%	9.41	%	9.83	%	10.46	%	10.34	%	11.02	%	12.93	%	13.40	%
Lakeland Bank	9.05	%	10.16	%	11.19	%	11.89	%	11.19	%	11.89	%	12.33	%	12.67	%
Required capital ratios including conservation buffer	4.00	%	4.00	%	7.00	%	7.00	%	8.50	%	8.50	%	10.50	%	10.50	%
“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 average total consolidated assets) for banks with assets of less than $10 billion. Qualifying participating banks that exceed this ratio shall be deemed to comply with all other capital and leverage requirements. In September 2019, the FDIC approved a final rule allowing community banks with a leverage capital ratio of at least 9% to be considered in compliance with Basel III capital requirements and exempt from the Basel Calculation. Under the final rule, banks with less than $10 billion in assets may elect the community bank leverage ratio framework if they meet the 9% ratio and if they hold 25% or less of assets in off-balance sheet exposures, and 5% or less of assets in trading assets and liabilities. For institutions that fall below the 9% capital requirement but remain above 8%, the final rule establishes a two-quarter grace period to either meet the qualifying criteria again or comply with the generally applicable capital rule. Lakeland Bancorp and Lakeland Bank elected not to use the Community Bank Leverage Ratio framework.

Non-GAAP Financial Measures

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

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

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


(dollars in thousands, except per share amounts)	September 30, 2020			December 31, 2019
Calculation of Tangible Book Value per Common Share
Total common stockholders’ equity at end of period - GAAP	$	753,572		$	725,263
Less:
Goodwill	156,277			156,277
Other identifiable intangible assets, net	3,538			4,314
Total tangible common stockholders’ equity at end of period - Non-GAAP	$	593,757		$	564,672
Shares outstanding at end of period	50,468			50,498
Book value per share - GAAP	$	14.93		$	14.36
Tangible book value per share - Non-GAAP	$	11.77		$	11.18

Calculation of Tangible Common Equity to Tangible Assets
Total tangible common stockholders’ equity at end of period - Non-GAAP	$	593,757		$	564,672

Total assets at end of period	$	7,522,184		$	6,711,236
Less:
Goodwill	156,277			156,277
Other identifiable intangible assets, net	3,538			4,314
Total tangible assets at end of period - Non-GAAP	$	7,362,369		$	6,550,645
Common equity to assets - GAAP	10.02		%	10.81		%
Tangible common equity to tangible assets - Non-GAAP	8.06		%	8.62		%


	For the Three Months Ended September 30,						For the Nine Months Ended September 30
(dollars in thousands)	2020			2019			2020			2019
Calculation of Return on Average Tangible Common Equity
Net income - GAAP	$	14,427		$	18,874		$	38,670		$	51,957
Total average common stockholders’ equity	$	751,099		$	705,726		$	743,318		$	689,538
Less:
Average goodwill	156,277			155,835			156,277			154,531
Average other identifiable intangible assets, net	3,689			4,761			3,944			5,022
Total average tangible common stockholders’ equity - Non-GAAP	$	591,133		$	545,130		$	583,097		$	529,985
Return on average common stockholders’ equity - GAAP	7.64		%	10.61		%	6.95		%	10.07		%
Return on average tangible common stockholders’ equity - Non-GAAP	9.71		%	13.74		%	8.86		%	13.11		%

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Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board ("FASB") issued Update 2020-04, an update to Topic 848, Reference Rate Reform. The update provides guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The update provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met and only applies to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In addition, the update provides optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification for contracts that are modified because of reference rate reform and contemporaneous modifications of other contract terms related to the replacement of the reference rate. The ASU allows companies to apply the standard as of the beginning of the interim period that includes March 12, 2020 or any date thereafter. The Company is currently assessing the impact to its financial statements; however, the impact is not expected to be material.

In January 2020, FASB issued Update 2020-01, an update to Topic 321, Investments, Topic 323, Joint Ventures and Topic 815, Derivatives and Hedging. The update clarifies the accounting for certain equity securities upon the application or discontinuation of the equity method of accounting in accordance with Topic 321. In addition, the update clarifies scope considerations for forward contracts and purchased options on certain securities. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2020. The Company does not expect the update to have a material impact on the Company's financial statements.

In December 2019, FASB issued Update 2019-12, an update to Topic 740, Income Taxes, as part of an initiative to reduce complexity in accounting standards for income taxes. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2021 with early adoption permitted. The Company does not expect the update to have a material impact on the Company's financial statements.

In August 2018, the FASB issued Update 2018-13, an update to Topic 820, Fair Value Measurement, to improve the effectiveness of fair value measurement disclosures. Among other provisions, the update removes requirements to disclose amounts of and reasons for 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 is 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 did not have a material impact on the Company's financial statements.

In August 2018, the FASB issued Update 2018-15, an update to Subtopic 350-40, Intangibles - Goodwill and Other - Internal-Use Software, 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 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2019. The adoption of this update did not have a material impact on the Company’s financial statements.

In August 2018, the FASB issued Update 2018-14, an update to Subtopic 715-20, Compensation - Retirement Benefits - Defined Benefit Plans - General, 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 did not have a material impact on the Company's financial statements.

In August 2017, the FASB issued Update 2017-05, an update to Subtopic 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets, 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 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2019. 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 Update 2017-04, an update to Topic 350, Intangibles - Goodwill and Other, 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 is effective for the Company’s financial statements for annual years beginning after December 15, 2019. The update was adopted by the Company as of January 1, 2020 with prospective application and did not impact the year-to-date September 30, 2020 results. The future impact of the update will depend upon the performance of the Company and the market conditions impacting the fair value of the Company going forward.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL"), further amended by ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. Topic 326 pertains 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 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2019; however, the Company has elected to defer implementation of the update as allowed as part of the CARES Act, which allows for an optional delay in implementation until President Trump declares the COVID-19 national emergency to be over or the end of 2020, whichever comes first. The Company elected to delay CECL because of the rapidly changing economic forecast and uncertainty surrounding the economic impact of COVID-19 at the time of the Company's election. The additional time has allowed the Company to better understand the impact of the pandemic and various U.S. government stimulus programs. Upon the Company's future adoption of CECL, the change from the incurred loss methodology to the CECL methodology will be recognized through an adjustment to retained earnings, with an effective retrospective implementation date of January 1, 2020. Once final, the calculation will require approval by the Company's Allowance for Credit Losses Committee and governance in accordance with the Company’s internal controls over financial reporting.

When we adopt Topic 326, we anticipate using a modified retrospective approach. Our CECL methodology includes the following key factors and assumptions for all loan portfolio segments: a) the calculation of a baseline lifetime loss by applying a segment-specific historical average annual loss rate, calculated using an open pool method, applied over the remaining life of each instrument; b) a single set of economic forecast inputs for the reasonable and supportable period; c) an initial reasonable and supportable forecast period, which reflects management's expectations of losses based on forward-looking economic scenarios over that time; d) baseline lifetime loss rates adjusted for changes in macroeconomic conditions over the reasonable and supportable forecast period via a series of adjustment factors developed using a third-party developed and supported top-down statistical model suite that uses a set of relevant economic forecast inputs sourced from a leading global forecasting firm; e) a reversion period (after the reasonable and supportable forecast period) using a straight-line approach; f) a historical loss period which represents a full economic credit cycle (with the exception of equipment finance loans which will use a shorter time period due to circumstances unique to that segment); and g) expected prepayment rates estimated on more recent historical experience adjusted for refinance incentive, seasoning and burnout, as applicable. The Company expects that upon adoption of CECL, the allowance for loan losses and the reserve for unfunded commitments will increase, as a result of changing from an incurred loss model, which encompasses allowances for current known and inherent losses within the portfolio, to an expected loss model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. The future impact of CECL on the Company’s allowance for credit losses and provision expense subsequent to the initial adoption will depend on changes in the loan portfolio, economic conditions and refinements to key assumptions including forecasting and qualitative factors. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses for certain debt securities and other financial assets; however, we do not expect these allowances to be significant.

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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 this purpose for the next twelve months (the base case) is $207.9 million. The Company’s review of interest rate risk includes policy limits for net interest income changes in various “rate shock” scenarios. Rate shocks assume that current interest rates change immediately. The information provided for net interest income assumes fluctuations or “rate shocks” for changes in interest rates as shown in the table below.


	Changes in Interest Rates
Rate Shock	+300 bp		+200 bp		+100 bp		-100 bp
Asset/Liability policy limit	(15.0)	%	(10.0)	%	(5.0)	%	(5.0)	%
September 30, 2020	2.9	%	2.2	%	1.7	%	2.1	%
December 31, 2019	2.4	%	1.7	%	1.1	%	(3.3)	%

The base case for the following table is an estimate of the Company’s net portfolio value for the periods presented using current discount rates, and assuming the Company’s interest-sensitive assets and liabilities remain at period-end levels. The net portfolio value at September 30, 2020 (the base case) was $921.7 million. The information provided for the net portfolio value assumes fluctuations or “rate shocks” for changes in interest rates as shown in the table below. Rate shocks assume that current interest rates change immediately.


	Changes in Interest Rates
Rate Shock	+300 bp		+200 bp		+100 bp		-100 bp
Asset/Liability policy limit	(25.0)	%	(20.0)	%	(10.0)	%	(10.0)	%
September 30, 2020	6.3	%	6.4	%	6.0	%	(10.1)	%
December 31, 2019	(4.8)	%	(2.8)	%	(0.9)	%	(1.2)	%

The Company's net portfolio value in the -100 basis point scenario was -10.1% for the third quarter of 2020 compared to its policy limit of -10.0% resulting from the effects of the extremely low interest rate environment. Management has determined that no corrective action is necessary at this time and will continue to monitor this rate shock scenario. The information set forth in the above tables and the net interest income estimate set forth above are based on significant estimates and assumptions, and constitute forward-looking statements 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/A for the year ended December 31, 2019.

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.

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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 September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2019, except as described below.

The outbreak of the novel coronavirus ("COVID-19"), or other such epidemic, pandemic or outbreak of a highly contagious disease, occurring in the United States or in the geographies in which we conduct operations could materially adversely affect our business operations, financial condition, results of operations and cash flows.

The outbreak of COVID-19 or an outbreak of other highly infectious or contagious diseases, could materially adversely impact certain industries in which our customers operate and could materially impair their ability to fulfill their obligations to us. Further, the spread of the outbreak could lead to an economic recession or other severe disruptions in the U.S. economy and may disrupt banking and other financial activity in the areas in which we operate and could potentially create widespread business continuity issues for us.

Our business is dependent upon the willingness and ability of our employees and customers to conduct banking and other financial transactions. The spread of highly infectious or contagious diseases could cause severe disruptions in the U.S. economy at large, and for small businesses in particular, which could disrupt our operations and if the global response to contain COVID-19 is unsuccessful, we could experience a material adverse effect on our business, financial condition, results of operations and cash flows. COVID-19 or an outbreak of other highly infectious or contagious diseases may result in a decrease in our customers’ businesses, a decrease in consumer confidence and business generally or a disruption in the services provided by our vendors. Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, declines in wealth management revenues, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability and negatively impact the implementation of our growth strategy. Furthermore, COVID-19 could negatively impact the ability of our employees and customers to engage in banking and other financial transactions in the geographic areas in which we operate and could create widespread business continuity issues for us. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects of COVID-19 and the restrictions imposed to contain COVID-19 in our market areas. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

Moreover, we rely on many third parties in our business operations, including the appraisers of the real property collateral, vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and local and federal government agencies, offices, and courthouses. In light of the developing measures responding to the pandemic, many of these entities may limit the availability and access of their services. For example, loan origination could be delayed due to the limited availability of real estate appraisers for the collateral. Loan closings could be delayed related to reductions in available staff in recording offices or the closing of courthouses in certain counties, which slows the process for title work, mortgage and UCC filings in those

counties. If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.

Further, during the period from April 2020 through August 2020, when the program ended, we processed more than 2,000 applications for PPP loans, which resulted in significant demands and pressures on our operations. In light of the speed at which the PPP was implemented, particularly due to the “first come first served” nature of the program, the loans originated under this program may present potential fraud risk, increasing the risk that loan forgiveness may not be obtained by the borrowers and that the guaranty may not be honored. In addition, there is risk that the borrowers may not qualify for the loan forgiveness feature due to the conduct of the borrower after the loan is originated. These factors may result in us having to hold a significant amount of these low-yield loans on our books for a significant period of time. We will continue to face increased operational demands and pressures as we monitor and service our book of PPP loans, process applications for loan forgiveness and pursue recourse under the SBA guarantees and against borrowers for PPP loan defaults. As a result of participation in the PPP, we may be subject to litigation and claims by borrowers under the PPP loans that we have made, as well as investigation and scrutiny by our regulators, Congress, the Small Business Administration, the U.S. Treasury Department and other government agencies. Regardless of whether these claims and investigations are founded or unfounded, if such claims and investigations are not resolved in a timely manner favorable to us, they may result in significant costs and liabilities (including increased legal and professional services costs) and/or adversely affect the market perception of us and our products and services.


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

The following table presents information regarding shares of our common stock repurchased during the third quarter of 2020.


Period	Total Number of Shares (or Units) Purchased (1)	Weighted Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs









July 1 to July 31, 2020	—	$	—	—	2,393,423
August 1 to August 31, 2020	—	—		—	2,393,423
September 1 to September 30, 2020	—	—		—	2,393,423

(1)On October 24, 2019, the Company announced that its Board of Directors authorized a new share repurchase program. Under the repurchase program, the Company may repurchase up to 2,524,458 shares of its common stock, or approximately 5% of its outstanding shares of common stock at September 30, 2019. Repurchases may be made from time to time through a combination of open market and privately negotiated repurchases. The specific timing, price and quantity of repurchases will be at the discretion of the Company and will depend on a variety of factors, including general market conditions, the trading price of the common stock, legal and contractual requirements and the Company's financial performance.


Item 3. Defaults Upon Senior Securities			Not Applicable


Item 4. Mine Safety Disclosures			Not Applicable


Item 5. Other Information			Not applicable

Item 6. Exhibits


31.1			Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2			Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1			Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS			Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document)
101.SCH			Inline XBRL Taxonomy Extension Schema Document
101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB			Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101)

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: November 6, 2020