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LAKELAND BANCORP INC - Quarter Report: 2022 June (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 
June 30, 2022
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 classTrading SymbolName of exchange on which registered
Common Stock, no par valueLBAIThe 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 August 1, 2022, there were 64,801,537 outstanding shares of Common Stock, no par value.
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LAKELAND BANCORP, INC.
Form 10-Q Index
 
  PAGE
Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)
Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (unaudited)
Item 5.
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PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
Lakeland Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2022December 31, 2021
(dollars in thousands)(unaudited)
Assets
Cash$195,701 $199,158 
Interest-bearing deposits due from banks49,765 29,372 
Total cash and cash equivalents245,466 228,530 
Investment securities available for sale, at fair value (allowance for credit losses of $2,802 at June 30, 2022 and $83 at December 31, 2021)
1,139,414 769,956 
Investment securities held to maturity (fair value of $808,663 at June 30, 2022 and $815,211 at December 31, 2021 and allowance for credit losses of $190 at June 30, 2022 and $181 at December 31, 2021)
941,558 824,956 
Equity securities, at fair value17,594 17,368 
Federal Home Loan Bank and other membership bank stock, at cost25,647 9,049 
Loans held for sale1,168 1,943 
Loans, net of deferred fees7,408,540 5,976,148 
Less: Allowance for credit losses68,836 58,047 
Total loans, net7,339,704 5,918,101 
Premises and equipment, net55,456 45,916 
Operating lease right-of-use assets26,244 15,222 
Accrued interest receivable26,339 19,209 
Goodwill271,829 156,277 
Other intangible assets10,250 2,420 
Bank owned life insurance156,496 117,356 
Other assets117,013 71,753 
Total Assets$10,374,178 $8,198,056 
Liabilities and Stockholders' Equity
Liabilities
Deposits8,501,804 6,965,823 
Federal funds purchased and securities sold under agreements to repurchase432,206 106,453 
Other borrowings25,000 25,000 
Subordinated debentures194,027 179,043 
Operating lease liabilities27,639 16,523 
Other liabilities103,357 78,200 
Total Liabilities9,284,033 7,371,042 
Stockholders' Equity
Common stock, no par value; authorized 100,000,000 shares; issued 64,924,576 shares and outstanding 64,793,541 shares at June 30, 2022 and issued 50,737,400 shares and outstanding 50,606,365 shares at December 31, 2021
853,206 565,862 
Retained earnings286,063 259,340 
Treasury shares, at cost, 131,035 shares at June 30, 2022 and December 31, 2021
(1,452)(1,452)
Accumulated other comprehensive (loss) income(47,672)3,264 
Total Stockholders' Equity1,090,145 827,014 
Total Liabilities and Stockholders' Equity$10,374,178 $8,198,056 
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 June 30,For the Six Months Ended June 30,
(in thousands, except per share data)2022202120222021
Interest Income
Loans and fees$76,973 $60,529 $144,782 $119,307 
Federal funds sold and interest-bearing deposits with banks235 52 417 89 
Taxable investment securities and other8,285 4,029 14,994 8,010 
Tax-exempt investment securities1,442 631 2,744 1,243 
Total Interest Income86,935 65,241 162,937 128,649 
Interest Expense
Deposits4,829 4,238 8,868 9,362 
Federal funds purchased and securities sold under agreements to repurchase150 16 170 39 
Other borrowings1,654 1,247 3,209 2,780 
Total Interest Expense6,633 5,501 12,247 12,181 
Net Interest Income80,302 59,740 150,690 116,468 
Provision for credit losses (benefit)3,644 (5,959)9,916 (8,601)
Net Interest Income after Provision for Credit Losses (benefit)76,658 65,699 140,774 125,069 
Noninterest Income
Service charges on deposit accounts2,711 2,445 5,337 4,741 
Commissions and fees2,555 1,755 4,661 3,353 
Income on bank owned life insurance820 643 1,650 1,277 
(Loss) gain on equity securities(364)11 (849)(133)
Gains on sales of loans held for sale715 607 2,141 1,315 
Gains on investment securities transactions, net— — 
Swap income399 72399 634 
Other income (loss)227 (273)504 (168)
Total Noninterest Income7,063 5,269 13,843 11,028 
Noninterest Expense
Compensation and employee benefits26,938 20,407 54,617 40,925 
Premises and equipment7,679 6,078 15,651 12,396 
FDIC insurance expense672 621 1,344 1,332 
Data processing expense1,891 1,299 3,561 2,554 
Merger related expenses— — 4,585 — 
Other expenses7,888 5,692 15,269 10,793 
Total Noninterest Expense45,068 34,097 95,027 68,000 
Income before provision for income taxes38,653 36,871 59,590 68,097 
Provision for income taxes9,536 9,464 14,544 17,515 
Net Income$29,117 $27,407 $45,046 $50,582 
Per Share of Common Stock
Basic earnings$0.44 $0.53 $0.69 $0.99 
Diluted earnings$0.44 $0.53 $0.69 $0.98 
Dividends paid$0.145 $0.135 $0.280 $0.260 
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 (Loss) (Unaudited)
 For the Three Months Ended June 30,For the Six Months Ended June 30,
(in thousands)2022202120222021
Net income$29,117 $27,407 $45,046 $50,582 
Other comprehensive income (loss), net of tax:
Unrealized (losses) gains on securities available for sale(19,688)7,119 (50,653)(6,016)
Reclassification for securities gains included in net income
— (6)— (6)
Amortization of gain on debt securities reclassified to held to maturity(148)— (283)— 
Unrealized losses on derivatives— (77)— (30)
Other comprehensive (loss) gain(19,836)7,036 (50,936)(6,052)
Total comprehensive income (loss)$9,281 $34,443 $(5,890)$44,530 
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 June 30, 2022 and 2021

(in thousands, except per share data)Common StockRetained Earnings (1)Treasury StockAccumulated Other Comprehensive Income (Loss)Total
April 1, 2021$562,984 $208,224 $(1,452)$(1,691)$768,065 
Net income— 27,407 — — 27,407 
Other comprehensive loss, net of tax— — — 7,036 7,036 
Stock-based compensation990 — — — 990 
Exercise of stock options— — — 
Cash dividends on common stock of $0.135 per share
— (6,828)— — (6,828)
June 30, 2021$563,980 $228,803 $(1,452)$5,345 $796,676 
April 1, 2022$852,110 $266,460 $(1,452)$(27,836)$1,089,282 
Net income— 29,117 — — 29,117 
Other comprehensive income, net of tax— — — (19,836)(19,836)
Stock-based compensation1,159 — — — 1,159 
Retirement of restricted stock(63)— — — (63)
Cash dividends on common stock of $0.145 per share
— (9,514)— — (9,514)
June 30, 2022$853,206 $286,063 $(1,452)$(47,672)$1,090,145 
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 Six Months Ended June 30, 2022 and 2021
(in thousands, except per share data)Common
Stock
Retained
Earnings
Treasury StockAccumulated
Other
Comprehensive
Income (Loss)
Total
 
January 1, 2021$562,421 $191,418 $(1,452)$11,397 $763,784 
Net income— 50,582 — — 50,582 
Other comprehensive loss, net of tax— — — (6,052)(6,052)
Stock based compensation2,196 — — — 2,196 
Retirement of restricted stock(656)— — — (656)
Exercise of stock options19 — — — 19 
Cash dividends on common stock of $0.26 per share
— (13,197)— — (13,197)
June 30, 2021$563,980 $228,803 $(1,452)$5,345 $796,676 
January 1, 2022$565,862 $259,340 $(1,452)$3,264 $827,014 
Net income— 45,046 — — 45,046 
Other comprehensive loss, net of tax— — — (50,936)(50,936)
Issuance of stock for 1st Constitution acquisition285,742 — — — 285,742 
Stock based compensation2,598 — — — 2,598 
Retirement of restricted stock(996)— — — (996)
Cash dividends on common stock of $0.28 per share
— (18,323)— — (18,323)
June 30, 2022$853,206 $286,063 $(1,452)$(47,672)$1,090,145 
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 Six Months Ended June 30,
(in thousands)20222021
Cash Flows from Operating Activities:
Net income$45,046 $50,582 
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premiums, discounts and deferred loan fees and costs2,580 (3,101)
Depreciation and amortization3,320 1,811 
Amortization of intangible assets1,189 447 
Amortization of operating lease right-of-use assets2,058 1,368 
Provision for credit losses (benefit)9,916 (8,601)
Loans originated for sale(41,914)(32,063)
Proceeds from sales of loans held for sale49,450 33,897 
Gains on investment securities transactions, net— (9)
Loss on equity securities849 133 
Income on bank owned life insurance(1,558)(1,283)
Gains on proceeds from bank owned life insurance policies(92)— 
Gains on sales of loans held for sale(2,141)(1,315)
Gains on other real estate and other repossessed assets(12)(8)
Loss on sales of premises and equipment215 (4)
Impairment of property held for sale100 400 
Stock-based compensation2,598 2,196 
Excess tax benefits (deficiencies)65 (93)
(Increase) decrease in other assets(18,209)28,644 
Increase (decrease) in other liabilities13,855 (26,867)
Net Cash Provided by Operating Activities67,315 46,134 
Cash Flows from Investing Activities:
Net cash acquired in acquisitions326,236 — 
Proceeds from repayments and maturities of available for sale securities82,343 109,899 
Proceeds from repayments and maturities of held to maturity securities66,692 22,227 
Proceeds from sales of available for sale securities— 4,402 
Purchase of available for sale securities(308,075)(259,654)
Purchase of held to maturity securities(62,306)(26,203)
Purchase of equity securities(1,075)(879)
Death benefit proceeds from bank owned life insurance policy134 — 
Proceeds from redemptions of Federal Home Loan Bank stock9,240 13,524 
Purchases of Federal Home Loan Bank stock(24,591)(10,755)
Net (increase) decrease in loans(329,049)23,010 
Proceeds from sales of loans previously held for investment— 15,031 
Proceeds from sales of other real estate and repossessed assets12 
Proceeds from dispositions and sales of premises and equipment598 123 
Purchases of premises and equipment(2,664)(2,630)
Net Cash Used in Investing Activities(242,505)(111,897)
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Lakeland Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Six Months Ended June 30,
(in thousands)20222021
Cash Flows from Financing Activities:
Net (decrease) increase in deposits(114,308)259,277 
Increase (decrease) in federal funds purchased and securities sold under agreements to repurchase325,753 (69,370)
Redemption of subordinated debt— (5,000)
Exercise of stock options— 19 
Retirement of restricted stock(996)(656)
Dividends paid(18,323)(13,197)
Net Cash Provided by Financing Activities192,126 171,073 
Net increase in cash and cash equivalents16,936 105,310 
Cash and cash equivalents, beginning of period228,530 270,090 
Cash and cash equivalents, end of period$245,466 $375,400 
 For the Six Months Ended June 30,
(in thousands)20222021
Supplemental schedule of non-cash investing and financing activities:
Cash paid during the period for income taxes$10,153 $16,274 
Cash paid during the period for interest12,467 13,141 
Transfer of available for sale debt securities to held to maturity securities at fair value— 15,111 
Right-of-use assets obtained in exchange for new lease liabilities89 109 
Acquisitions:
Non-cash assets acquired:
Federal Home Loan Bank stock1,247 — 
Investment securities available for sale217,774 — 
Investment securities held to maturity124,485 — 
Loans held for sale4,620 — 
Loans1,095,266 — 
Fixed Assets13,748 — 
Operating lease right-of-use assets12,991 — 
Goodwill and other intangible assets, net124,570 — 
Bank owned life insurance37,580 — 
Other assets8,820 — 
Total non-cash assets acquired1,641,101 — 
Liabilities assumed:
Deposits1,650,613 — 
Subordinated debt14,734 — 
Operating lease liabilities12,991 — 
Other liabilities3,257 — 
Total liabilities assumed1,681,595 — 
Common stock issued$285,742 $— 
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 (unaudited)
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 U.S. generally accepted accounting principles (“U.S. GAAP”) and predominant practices within the banking industry. The Company’s unaudited interim financial statements reflect all adjustments, such as normal recurring accruals that are in the opinion of management, necessary for the fair presentation of the results of the interim periods. The results of operations for the six months ended June 30, 2022 do not necessarily indicate the results that the Company will achieve for all of 2022.
Certain information and footnote disclosures required under U.S. GAAP have been condensed or omitted, as permitted by rules and regulations of the Securities and Exchange Commission. These unaudited interim financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes that are presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Certain reclassifications have been made in the consolidated financial statements to conform with current year classifications.
Note 2 – Acquisitions
On January 6, 2022, the Company completed its acquisition of 1st Constitution Bancorp ("1st Constitution"), a bank holding company headquartered in Cranbury, New Jersey. 1st Constitution was the parent of 1st Constitution Bank, which operated 25 branches in Bergen, Mercer, Middlesex, Monmouth, Ocean and Somerset Counties in New Jersey. This acquisition enabled the Company to establish a presence in Mercer, Middlesex and Monmouth Counties and broaden its presence in the other counties. Effective as of the close of business on January 6, 2022, 1st Constitution merged into the Company and 1st Constitution Bank merged into Lakeland. Pursuant to the merger agreement, the shareholders of 1st Constitution received for each outstanding share of 1st Constitution common stock that they owned at the effective time of the merger, 1.3577 shares of Lakeland Bancorp, Inc. common stock. The Company issued 14,020,495 shares of its common stock in the merger. Outstanding 1st Constitution stock options were paid out in cash at the difference between $25.55 and an average strike price of $15.95 for a total cash payment of $559,000.
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. 1st Constitution's assets were recorded at their preliminary estimated fair values as of January 6, 2022 and 1st Constitution's 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. The calculation of goodwill is subject to change for up to one year after the closing date of the transaction as additional information relative to closing date estimates and uncertainties becomes available. As the Company finalizes its analysis of these assets and liabilities, there may be adjustments to the recorded carrying values. The goodwill is not deductible for tax purposes.

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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 1st Constitution.
(in thousands)
Assets acquired:
Cash and cash equivalents$326,236 
Investment securities available for sale217,774 
Investment securities held to maturity124,485 
Federal Home Loan Bank stock1,247 
Loans held for sale4,620 
Loans1,095,266 
Premises and equipment13,748 
Right-of-use assets, operating lease12,991 
Goodwill115,552 
Other intangible assets9,018 
Bank owned life insurance37,580 
Accrued interest receivable and other assets8,820 
Total assets acquired1,967,337 
Liabilities assumed:
Deposits(1,650,613)
Subordinated debt(14,734)
Operating lease liabilities(12,991)
Other liabilities(3,257)
Total liabilities assumed(1,681,595)
Net assets acquired$285,742 
Loans acquired in the 1st Constitution 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 1st Constitution were estimated using the discounted cash flow method 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 based on the relative risk of the cash flows, taking into account the loan type, liquidity risk, maturity of the loans, servicing costs, and a required return on capital; the monthly principal and interest cash flows were discounted to present value and summed to arrive at the calculated value of loans.
For loans acquired without evidence of more-than-insignificant deterioration in credit quality since origination, the Company prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into pools based on similar characteristics, such as loan type, fixed or adjustable interest rates, payment type, index rate and caps/floors, and non-accrual status. The loans were valued at the sub-pool level and were pooled at the summary level based on loan type. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these market rates was used as the fair value interest rate that a market participant would utilize.
Loans acquired that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated ("PCD") loans. The Company evaluated acquired loans for deterioration in credit quality based on any of, but not limited to, the following: (1) non-accrual status; (2) troubled debt restructured designation; (3) risk ratings of special mention, substandard or doubtful; and (4) delinquency status. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. Additionally for PCD loans, an allowance for loan losses was calculated using management's best estimate of projected losses over the remaining life of the loans, in accordance with ASC 326-20. This represents the portion of loan balances that has been deemed uncollectible based on the Company's expectation of future cash flows for the PCD loans. For loans that were put in collection status immediately, Management made a best estimate of the loan's fair value based on an analysis of the credit and our lien position. For all other loans, the fair value was determined using discounted cash flows as described above for non-PCD loans.

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The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired (in thousands):
Gross amortized cost basis at January 6, 2022$1,110,600 
Interest rate fair value adjustment on all loans3,057 
Credit fair value adjustment on non-PCD loans(6,314)
Fair value of acquired loans at January 6, 20221,107,343 
Allowance for credit losses on PCD loans(12,077)
Fair value of acquired loans, net, as of January 6, 2022$1,095,266 
The following is a summary of the PCD loans acquired in the 1st Constitution acquisition as of the closing date.
(in thousands)PCD Loans
Gross amortized cost basis at January 6, 2022$140,300 
Interest component of expected cash flows (accretable difference)(3,792)
Allowance for credit losses on PCD loans(12,077)
Net PCD loans$124,431 
    The Company acquired 25 branches through the 1st Constitution merger, eight of which were owned premises. The fair value of the properties acquired was derived by valuations prepared by an independent third party using the sales comparison approach to value the property as improved.
As part of the 1st Constitution acquisition, the Company added 17 lease obligations. The Company recorded a $13.0 million right of use asset and lease liability for these lease obligations.
The core deposit intangible totaled $9.0 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 represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit.
Direct costs related to the acquisition were expensed as incurred. The Company incurred merger-related expenses of $4.6 million during the six months ended June 30, 2022, that have been separately stated in the Company's Consolidated Statements of Income. There were no merger-related expenses in the second quarter of 2022 or in the three and six months ended June 30, 2021.
Supplemental Pro Forma Financial Information
The following table presents financial information regarding the former 1st Constitution operations included in the Consolidated Statements of Income from the date of the acquisition (January 6, 2022) through June 30, 2022. In addition the table provides condensed pro forma financial information assuming that the 1st Constitution acquisition had been completed as of January 1, 2022 for the six months ended June 30, 2021 and 2022. The table has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisitions occurred as of the beginning of the periods presented, nor is it indicative of future results. The pro forma information does not reflect management's estimate of any revenue-enhancing opportunities nor anticipated cost savings that may have occurred as a result of the integration and consolidation of 1st Constitution's operations. The pro forma information reflects adjustments related to certain purchase accounting fair value adjustments, amortization of core deposit and other intangibles, and related income tax effects.

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(in thousands, except per share data)
1st Constitution Actual from Acquisition to June 30, 2022
Pro forma Six Months Ended June 30, 2022
Pro forma Six Months Ended June 30, 2021
Net interest income$23,078 $153,096 $145,625 
Provision (benefit) for credit losses49 9,916 (6,601)
Noninterest income6,002 13,541 18,841 
Noninterest expense14,851 93,475 90,398 
Net income10,720 48,925 59,686 
Earnings per share:
   Fully diluted$0.17 $0.75 $0.97 
Note 3 – Earnings Per Share
The following schedule shows the Company’s earnings per share calculations for the periods presented:
 For the Three Months Ended June 30,For the Six Months Ended June 30,
(in thousands, except per share data)2022202120222021
Net income available to common shareholders
$29,117 $27,407 $45,046 $50,582 
Less: earnings allocated to participating securities
357 317 510 531 
Net income allocated to common shareholders
$28,760 $27,090 $44,536 $50,051 
Weighted average number of common shares outstanding - basic
64,828 50,636 64,397 50,606 
Share-based plans161 222 218 215 
Weighted average number of common shares outstanding - diluted
64,989 50,858 64,615 50,821 
Basic earnings per share$0.44 $0.53 $0.69 $0.99 
Diluted earnings per share$0.44 $0.53 $0.69 $0.98 
There were no antidilutive options to purchase common stock excluded from the computation for the three and six months ended June 30, 2022 and 2021.
Note 4 – Investment Securities
The amortized cost, gross unrealized gains and losses, allowance for credit losses and the fair value of the Company's available for sale securities are as follows:
 June 30, 2022
(in thousands)Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Allowance for Credit LossesFair
Value
U.S. Treasury and U.S. government agencies$389,836 $138 $(19,923)$— $370,051 
Mortgage-backed securities, residential370,700 (30,371)— 340,337 
Collateralized mortgage obligations, residential181,946 (9,641)— 172,307 
Mortgage-backed securities, multifamily1,804 — (299)— 1,505 
Collateralized mortgage obligations, multifamily52,779 — (3,159)— 49,620 
Asset-backed securities61,587 (1,726)— 59,862 
Obligations of states and political subdivisions23,930 — (903)(2)23,025 
Corporate bonds127,006 99 (1,598)(2,800)122,707 
Total$1,209,588 $248 $(67,620)$(2,802)$1,139,414 
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 December 31, 2021
(in thousands)Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Allowance for Credit LossesFair
Value
U.S. Treasury and U.S. government agencies$202,961 $1,215 $(789)$— $203,387 
Mortgage-backed securities, residential238,456 1,250 (1,731)— 237,975 
Collateralized mortgage obligations, residential191,086 1,693 (1,488)— 191,291 
Mortgage-backed securities, multifamily1,816 — (75)— 1,741 
Collateralized mortgage obligations, multifamily32,254 511 (246)— 32,519 
Asset-backed securities52,518 153 (87)— 52,584 
Corporate bonds49,598 959 (15)(83)50,459 
Total$768,689 $5,781 $(4,431)$(83)$769,956 
The amortized cost, gross unrealized gains and losses, allowance for credit losses and the fair value of the Company's held to maturity investment securities are as follows:
 June 30, 2022
(in thousands)Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Allowance for Credit LossesFair
Value
U.S. government agencies$16,418 $13 $(425)$— $16,006 
Mortgage-backed securities, residential363,071 23 (43,156)— 319,938 
Collateralized mortgage obligations, residential13,773 — (1,705)— 12,068 
Mortgage-backed securities, multifamily5,139 — (477)— 4,662 
Obligations of states and political subdivisions540,347 17 (86,962)(21)453,381 
Corporate bonds3,000 — (223)(169)2,608 
Total$941,748 $53 $(132,948)$(190)$808,663 
 December 31, 2021
(in thousands)Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Allowance for Credit LossesFair
Value
U.S. government agencies$18,672 $293 $— $— $18,965 
Mortgage-backed securities, residential370,247 718 (5,989)— 364,976 
Collateralized mortgage obligations, residential13,921 168 — — 14,089 
Mortgage-backed securities, multifamily2,710 26 (2)— 2,734 
Obligations of states and political subdivisions416,587 810 (5,800)(21)411,576 
Corporate bonds3,000 31 — (160)2,871 
Total$825,137 $2,046 $(11,791)$(181)$815,211 
During the third quarter of 2021, the Company transferred $494.2 million of previously designated available for sale securities to a held to maturity designation at estimated fair value. The reclassification for the period ended September 30, 2021 was permitted as the Company has appropriately determined the ability and intent to hold these securities as an investment until maturity or call. The securities transferred had an unrealized net gain of $3.8 million at the time of transfer, which is reflected, net of taxes, in accumulated other comprehensive income (loss) on the consolidated balance sheets. Subsequent amortization will be recognized over the life of the securities. The Company recorded amortization, net of tax, of $148,000 and $283,000 during the three and six months ended June 30, 2022, respectively.
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The following table lists contractual maturities of investment securities classified as available for sale and held to maturity as of June 30, 2022. Mortgage-backed and asset-backed securities are not shown by maturity because expected maturities may differ from contractual maturities due to underlying loan prepayments of the issuer. 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 SaleHeld to Maturity
(in thousands)Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Due in one year or less$24,606 $24,384 $72,185 $71,921 
Due after one year through five years254,918 244,056 33,004 32,092 
Due after five years through ten years190,823 181,632 67,896 60,215 
Due after ten years70,425 65,711 386,680 307,767 
540,772 515,783 559,765 471,995 
Mortgage-backed and asset-backed securities668,816 623,631 381,983 336,668 
Total$1,209,588 $1,139,414 $941,748 $808,663 
For the three and six months ended June 30, 2022, there were no sales of available for sale securities. During the three and six months ended June 30, 2021, the Company sold $4.4 million of available for sale securities recording a gain of $9,000. 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 $1.15 billion and $1.04 billion at June 30, 2022 and December 31, 2021, 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:
June 30, 2022Less Than 12 Months12 Months or LongerTotal
(dollars in thousands)Fair ValueUnrealized
Losses
Fair ValueUnrealized
Losses
Number of
Securities
Fair ValueUnrealized
Losses
Available for Sale
U.S. Treasury and U.S. government agencies
$338,126 $18,373 $16,698 $1,550 67 $354,824 $19,923 
Mortgage-backed securities, residential326,475 29,130 11,948 1,241 126 338,423 30,371 
Collateralized mortgage obligations, residential142,202 7,592 29,481 2,049 101 171,683 9,641 
Mortgage-backed securities, multifamily— — 1,505 299 1,505 299 
Collateralized mortgage obligations, multifamily48,811 3,069 770 90 19 49,581 3,159 
Asset-backed securities
49,524 1,442 7,297 284 16 56,821 1,726 
Obligations of states and political subdivisions
22,695 903 — — 50 22,695 903 
Corporate bonds100,989 1,440 2,842 158 43 103,831 1,598 
Total$1,028,822 $61,949 $70,541 $5,671 423 $1,099,363 $67,620 
Held to Maturity
U.S. government agencies$14,584 $425 $— $— $14,584 $425 
Mortgage-backed securities, residential310,639 41,624 8,440 1,532 175 319,079 43,156 
Collateralized mortgage obligations, residential12,067 1,705 — — 12 12,067 1,705 
Mortgage-backed securities, multifamily4,662 477 — — 4,662 477 
Obligations of states and political subdivisions
438,702 85,451 5,260 1,511 381 443,962 86,962 
Corporate bonds2,777 223 — — 2,777 223 
Total$783,431 $129,905 $13,700 $3,043 577 $797,131 $132,948 
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December 31, 2021Less Than 12 Months12 Months or LongerTotal
(dollars in thousands)Fair ValueUnrealized
Losses
Fair ValueUnrealized
Losses
Number of
Securities
Fair ValueUnrealized
Losses
Available for Sale
U.S. Treasury and U.S. government agencies
$76,106 $322 $14,670 $467 15 $90,776 $789 
Mortgage-backed securities, residential176,990 1,465 14,582 266 45 191,572 1,731 
Collateralized mortgage obligations, residential86,749 1,429 5,000 59 18 91,749 1,488 
Mortgage-backed securities, multifamily— — 1,741 75 1,741 75 
Collateralized mortgage obligations, multifamily9,083 210 1,072 36 10,155 246 
Asset-backed securities
14,688 87 — — 14,688 87 
Corporate bonds15,325 (5)980 20 16,305 15 
Total$378,941 $3,508 $38,045 $923 94 $416,986 $4,431 
Held to Maturity
Mortgage-backed securities, residential$340,474 $5,882 $2,376 $107 96 $342,850 $5,989 
Collateralized mortgage obligations, multifamily2,051 — — 2,051 
Obligations of states and political subdivisions
307,827 5,800 — — 239 307,827 5,800 
Total$650,352 $11,684 $2,376 $107 336 $652,728 $11,791 
For available for sale securities, the Company assesses whether a loss is from credit or other factors and considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and adverse conditions related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows is less than the amortized cost, a credit loss exists and an allowance is created, limited by the amount that the fair value is less than the amortized cost basis.
For held to maturity securities, management measures expected credit losses on a collective basis by major security type. All of the mortgage-backed securities are issued by U.S. government agencies and are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses and, therefore, the expectation of non-payment is zero. A range of historical losses method is utilized in estimating the net amount expected to be collected for mortgage-backed securities, collateralized mortgage obligations and obligations of states and political subdivisions.
The gross unrealized losses reported for residential mortgage-backed securities relate to investment securities issued by U.S. government sponsored entities such as Federal National Mortgage Association and Federal Home Loan Mortgage Corporation and U.S. government agencies such as Government National Mortgage Association. The total gross unrealized losses, shown in the tables above, were primarily attributable to changes in interest rates and levels of market liquidity, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.
Credit Quality Indicators
Credit ratings, which are updated monthly, are a key measure for estimating the probability of a bond's default and for monitoring credit quality on an on-going basis. For bonds other than U.S. Treasuries and bonds issued or guaranteed by U.S. government agencies, credit ratings issued by one or more nationally recognized statistical rating organizations are considered in conjunction with an assessment by the Company's management. Investment grade reflects a credit quality of BBB or above.
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The tables below indicate the credit profile of the Company's held to maturity investment securities at amortized cost:
June 30, 2022 AAA  AA  A  BBB  Not Rated  Total
(in thousands)
U.S. government agencies$16,418 $— $— $— $— $16,418 
Mortgage-backed securities, residential363,071 — — — — 363,071 
Collateralized mortgage obligations, residential13,773 — — — — 13,773 
Mortgage-backed securities, multifamily5,139 — — — — 5,139 
Obligations of states and political subdivisions167,667 315,978 1,044 — 55,658 540,347 
Corporate bonds— — — 3,000 — 3,000 
Total$566,068 $315,978 $1,044 $3,000 $55,658 $941,748 
December 31, 2021 AAA  AA  A  BBB  Not Rated  Total
(in thousands)
U.S. government agencies$18,672 $— $— $— $— $18,672 
Mortgage-backed securities, residential370,247 — — — — 370,247 
Collateralized mortgage obligations, residential13,921 — — — — 13,921 
Mortgage-backed securities, multifamily2,710 — — — — 2,710 
Obligations of states and political subdivisions143,777 270,909 1,068 — 833 416,587 
Corporate bonds— — — 3,000 — 3,000 
Total$549,327 $270,909 $1,068 $3,000 $833 $825,137 
Equity securities at fair value
The Company has an equity securities portfolio, which primarily consists of investments in Community Reinvestment funds. The fair value of the equity portfolio was $17.6 million and $17.4 million at June 30, 2022 and December 31, 2021, respectively. For the six months ended June 30, 2022, the Company recorded no sales of equity securities or Community Reinvestment funds. The Company recorded fair value losses on equity securities of $364,000 for the second quarter of 2022 and fair value gains of $11,000 for the second quarter of 2021. For the six months ended June 30, 2022 and 2021, the Company recorded fair value losses on equity securities of $849,000 and $133,000, respectively. Fair value gain or loss on equity securities are recorded in noninterest income.
As of June 30, 2022, the Company's investments in Community Reinvestment funds include $7.8 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 fair value between accounting periods. These funds can be redeemed with 60 days' notice at the net asset value less unpaid management fees with the approval of the fund manager. As of June 30, 2022, the net amortized cost equaled the fair value of the investment. There are no unfunded commitments related to these investments.
The Community Reinvestment funds also included $9.8 million of investment in government guaranteed loans, mortgage-backed securities, small business loans and other instruments supporting affordable housing and economic development as of June 30, 2022. 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.
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Note 5 – Loans
The following sets forth the composition of the Company’s loan portfolio:
(in thousands)June 30, 2022December 31, 2021
Non-owner occupied commercial$2,777,003 $2,316,284 
Owner occupied commercial1,179,527 908,449 
Multifamily1,134,938 972,233 
Non-owner occupied residential221,339 177,097 
Commercial, industrial and other657,935 462,406 
Construction370,777 302,228 
Equipment finance134,136 123,212 
Residential mortgage622,417 438,710 
Home equity and consumer310,468 275,529 
Total$7,408,540 $5,976,148 
Loans are recorded at amortized cost, which includes principal balance and net deferred loan fees and costs. The Company elected to exclude accrued interest receivable from amortized cost. Accrued interest receivable is reported separately in the Consolidated Balance Sheets and totaled $18.1 million at June 30, 2022 and $13.9 million at December 31, 2021. Loan origination fees and certain direct loan origination costs are deferred and the net fee or cost is recognized in interest income as an adjustment of yield. Net deferred loan fees are included in loans by respective segment and totaled $3.2 million at June 30, 2022 and $5.8 million at December 31, 2021.
At June 30, 2022 and December 31, 2021, Small Business Association ("SBA") Paycheck Protection Program ("PPP") loans totaled $10.4 million and $56.6 million, respectively, and are included in the balance of commercial, industrial and other loans. Consumer loans included overdraft deposit balances of $248,000 and $184,000, at June 30, 2022 and December 31, 2021, respectively. At June 30, 2022 and December 31, 2021, the Company had $2.56 billion and $2.30 billion of loans pledged for potential borrowings at the Federal Home Loan Bank of New York ("FHLB").
The Company transferred approximately $10.1 million of commercial and residential mortgage loans from the loan portfolio to loans held for sale during the three months ended June 30, 2021 and subsequently sold these loans. For the six months ended June 30, 2021, the Company transferred from the loan portfolio to loans held for sale and subsequently sold approximately $15.1 million of commercial and residential mortgage loans. Excluding these loan transfers, there were no other sales of loans from the held for investment portfolio during the six months ended June 30, 2022 and 2021.
Credit Quality Indicators
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 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 the loan portfolios. The risk rating system assists senior management in evaluating the loan portfolio and analyzing trends. In assigning risk ratings, management considers, among other things, the borrower’s ability to service the debt based on relevant information such as current financial information, historical payment experience, credit documentation, public information and current economic conditions.
Management categorizes loans and commitments into the following risk ratings:
Pass: "Pass" assets are well protected by the current net worth and paying capacity of the obligor or guarantors, if any, or by the fair value of any underlying collateral.
Watch: "Watch" assets require more than the usual amount of monitoring due to declining earnings, strained cash flow, increasing leverage and/or weakening market. These borrowers generally have limited additional debt capacity and modest coverage and average or below average asset quality, margins and market share. Any residential or consumer loan currently on deferment in accordance with the Coronavirus Aid, Relief and Economic Security ("CARES") Act or the interagency statement issued by bank regulatory agencies has been classified by management as watch or worse.
Special Mention: "Special mention" assets exhibit identifiable credit weakness, which if not checked or corrected could weaken the loan quality or inadequately protect the bank’s credit position at some future date.
Substandard: "Substandard" assets are inadequately protected by the current sound worth and paying capacity of the obligors or of the collateral pledged, if any. A substandard loan has a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt.
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Doubtful: "Doubtful" assets that exhibit all of the weaknesses inherent in substandard loans, but have the added characteristics that the weaknesses make collection or liquidation in full improbable on the basis of existing facts.
Loss: “Loss” is a rating for loans or portions of loans that are considered uncollectible and of such little value that their continuance as bankable loans is not warranted.
The following table presents the risk category of loans by class of loan and vintage as of June 30, 2022.
Term Loans by Origination Year
(in thousands)20222021202020192018Pre-2018Revolving LoansRevolving to TermTotal
Non-owner occupied commercial
  Pass$384,345 $391,076 $549,572 $284,618 $202,346 $745,838 $17,575 — $2,575,370 
  Watch— — 8,411 25,805 23,056 66,973 305 — 124,550 
  Special mention— — 955 14,320 5,678 29,048 — — 50,001 
  Substandard— — — 842 135 26,105 — — 27,082 
    Total384,345 391,076 558,938 325,585 231,215 867,964 17,880 — 2,777,003 
Owner occupied commercial
  Pass109,598 227,056 183,891 92,936 76,526 338,059 12,757 — 1,040,823 
  Watch— — 9,549 7,135 7,071 32,358 — — 56,113 
  Special mention599 — — 7,547 3,131 17,285 — — 28,562 
  Substandard— — 11,147 18,968 2,180 21,734 — — 54,029 
    Total110,197 227,056 204,587 126,586 88,908 409,436 12,757 — 1,179,527 
Multifamily
  Pass142,907 227,382 277,456 65,923 96,550 289,520 3,499 170 1,103,407 
  Watch— — — 1,308 4,703 — — 6,020 
  Special mention162 — 2,445 3,904 — 14,234 — — 20,745 
  Substandard— — — — — 4,766 — — 4,766 
    Total143,069 227,391 279,901 69,827 97,858 313,223 3,499 170 1,134,938 
Non-owner occupied residential
  Pass20,118 30,678 22,358 22,310 16,810 74,016 7,787 367 194,444 
  Watch— — 2,536 4,136 3,384 7,584 75 — 17,715 
  Special mention— — — 627 829 5,852 — — 7,308 
  Substandard— — — — — 1,822 50 — 1,872 
    Total20,118 30,678 24,894 27,073 21,023 89,274 7,912 367 221,339 
Commercial, industrial and other
  Pass17,959 67,348 24,424 66,410 14,219 41,999 380,592 973 613,924 
  Watch— 1,106 7,300 359 (1)1,274 14,260 — 24,298 
  Special mention— — — 2,862 46 2,577 1,238 — 6,723 
  Substandard— 96 125 846 5,609 824 5,490 — 12,990 
    Total17,959 68,550 31,849 70,477 19,873 46,674 401,580 973 657,935 
Construction
  Pass32,411 171,287 77,972 35,700 9,982 5,059 10,322 — 342,733 
  Watch— — — 999 13,500 — 612 — 15,111 
  Special mention250 — 2,227 — — — — — 2,477 
  Substandard— — — — — 10,456 — — 10,456 
    Total32,661 171,287 80,199 36,699 23,482 15,515 10,934 — 370,777 
Equipment finance
  Pass36,420 42,348 25,403 21,294 6,838 1,732 — — 134,035 
  Substandard— — — 47 53 — — 101 
    Total36,420 42,348 25,403 21,341 6,891 1,733 — — 134,136 
Residential mortgage
  Pass160,644 172,440 113,014 35,930 21,742 116,327 — — 620,097 
  Substandard— — — 455 328 1,537 — — 2,320 
    Total160,644 172,440 113,014 36,385 22,070 117,864 — — 622,417 
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Term Loans by Origination Year
(in thousands)20222021202020192018Pre-2018Revolving LoansRevolving to TermTotal
Consumer
  Pass27,484 32,985 9,498 4,608 3,780 25,172 205,305 — 308,832 
  Substandard33 — — — — 953 650 — 1,636 
    Total27,517 32,985 9,498 4,608 3,780 26,125 205,955 — 310,468 
Total loans$932,930 $1,363,811 $1,328,283 $718,581 $515,100 $1,887,808 $660,517 $1,510 $7,408,540 
The following table presents the risk category of loans by class of loan and vintage as of December 31, 2021.
Term Loans by Origination Year
(in thousands)20212020201920182017Pre-2017Revolving LoansRevolving to TermTotal
Non-owner occupied commercial
  Pass$363,459 $516,131 $295,944 $189,592 $195,733 $562,338 $18,795 — $2,141,992 
  Watch— — 25,292 14,660 4,641 47,011 130 — 91,734 
  Special mention— 458 — 5,749 14,639 6,602 — — 27,448 
  Substandard119 431 332 2,656 8,000 43,572 — — 55,110 
    Total363,578 517,020 321,568 212,657 223,013 659,523 18,925 — 2,316,284 
Owner occupied commercial
  Pass209,515 133,292 83,395 54,019 48,850 252,001 8,343 108 789,523 
  Watch— 5,757 2,134 900 280 24,873 — — 33,944 
  Special mention— 9,694 21,837 12,632 95 17,851 — — 62,109 
  Substandard— — 2,597 1,299 18,972 — — 22,873 
    Total209,520 148,743 107,366 70,148 50,524 313,697 8,343 108 908,449 
Multifamily
  Pass225,060 255,016 72,438 71,366 73,122 207,509 18,161 1,281 923,953 
  Watch— 966 — 13,709 854 6,497 — — 22,026 
  Special mention— 2,470 — — 8,944 2,948 — — 14,362 
  Substandard— — 5,485 1,321 — 4,987 99 — 11,892 
    Total225,060 258,452 77,923 86,396 82,920 221,941 18,260 1,281 972,233 
Non-owner occupied residential
  Pass28,476 18,527 16,928 15,695 18,048 51,194 7,288 — 156,156 
  Watch— — — — 651 5,057 — — 5,708 
  Special mention— — 523 837 1,205 284 515 — 3,364 
  Substandard— 3,062 510 4,797 988 2,512 — — 11,869 
    Total28,476 21,589 17,961 21,329 20,892 59,047 7,803 — 177,097 
Commercial, industrial and other
  Pass100,921 23,940 65,225 11,636 3,808 37,479 191,293 872 435,174 
  Watch939 461 446 — 1,378 173 5,056 — 8,453 
  Special mention— — — — 1,896 443 1,365 — 3,704 
  Substandard101 7,352 — 1,276 496 422 5,428 — 15,075 
    Total101,961 31,753 65,671 12,912 7,578 38,517 203,142 872 462,406 
Construction
  Pass108,585 84,993 40,847 30,125 23,578 3,654 — — 291,782 
  Special mention— — — — 10,446 — — — 10,446 
    Total108,585 84,993 40,847 30,125 34,024 3,654 — — 302,228 
Equipment finance
  Pass50,482 30,486 27,626 10,238 3,128 803 — — 122,763 
  Substandard— — 216 177 56 — — — 449 
    Total50,482 30,486 27,842 10,415 3,184 803 — — 123,212 
Residential mortgage
  Pass171,442 112,680 27,228 20,784 9,103 96,510 — — 437,747 
  Substandard12 — — 123 694 134 — — 963 
    Total171,454 112,680 27,228 20,907 9,797 96,644 — — 438,710 
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Term Loans by Origination Year
(in thousands)20212020201920182017Pre-2017Revolving LoansRevolving to TermTotal
Consumer
  Pass35,283 10,476 5,358 4,561 3,260 24,888 190,481 34 274,341 
  Substandard32 — — — — 630 526 — 1,188 
    Total35,315 10,476 5,358 4,561 3,260 25,518 191,007 34 275,529 
Total loans$1,294,431 $1,216,192 $691,764 $469,450 $435,192 $1,419,344 $447,480 $2,295 $5,976,148 
Past Due and Non-Accrual Loans
Loans are considered past due if required principal and interest payments have not been received as of the date such payments were contractually due. A loan is generally considered non-performing when it is placed on non-accrual status. A loan is generally placed on non-accrual status when it becomes 90 days past due if such loan has been identified as presenting uncertainty with respect to the collectability of interest and principal. A loan past due 90 days or more may remain on accruing status if such loan is both well secured and in the process of collection.
In the absence of other intervening factors, loans granted payment deferrals related to COVID-19 are not reported as past due or placed on non-accrual status provided the borrowers have met the criteria in the CARES Act or otherwise have met the criteria included in an interagency statement issued by bank regulatory agencies.
The following tables present the payment status of the recorded investment in past due loans as of the periods noted, by class of loans.
June 30, 2022Past Due
(in thousands)Current30 - 59 Days60 - 89 DaysGreater than 89 daysTotalTotal Loans
Non-owner occupied commercial$2,776,310 $364 $— $329 $693 $2,777,003 
Owner occupied commercial1,176,764 1,538 928 297 2,763 1,179,527 
Multifamily1,134,938 — — — — 1,134,938 
Non-owner occupied residential220,207 294 230 608 1,132 221,339 
Commercial, industrial and other653,324 76 — 4,535 4,611 657,935 
Construction370,777 — — — — 370,777 
Equipment finance133,686 347 49 54 450 134,136 
Residential mortgage618,384 2,604 — 1,429 4,033 622,417 
Consumer309,404 237 398 429 1,064 310,468 
Total$7,393,794 $5,460 $1,605 $7,681 $14,746 $7,408,540 
December 31, 2021Past Due
(in thousands)Current30 - 59 Days60 - 89 DaysGreater than 89 daysTotalTotal Loans
Non-owner occupied commercial$2,312,557 $— $718 $3,009 $3,727 $2,316,284 
Owner occupied commercial905,751 20 — 2,678 2,698 908,449 
Multifamily972,233 — — — — 972,233 
Non-owner occupied residential174,245 — 136 2,716 2,852 177,097 
Commercial, industrial and other461,659 154 — 593 747 462,406 
Construction302,228 — — — — 302,228 
Equipment finance122,923 211 41 37 289 123,212 
Residential mortgage437,574 255 64 817 1,136 438,710 
Consumer274,426 705 135 263 1,103 275,529 
Total$5,963,596 $1,345 $1,094 $10,113 $12,552 $5,976,148 
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The following tables present information on non-accrual loans at June 30, 2022 and December 31, 2021:
June 30, 2022
(in thousands)Non-accrualInterest Income Recognized on Non-accrual LoansAmortized Cost Basis of Loans > 89 days Past due but still accruingAmortized Cost Basis of Non-accrual Loans without Related Allowance
Non-owner occupied commercial$324 $— $— $— 
Owner occupied commercial12,587 — — 12,084 
Non-owner occupied residential839 — — 462 
Commercial, industrial and other4,882 — — 288 
Equipment finance112 — — — 
Residential mortgage2,249 — — 210 
Consumer1,168 — — — 
Total$22,161 $— $— $13,044 
December 31, 2021
(in thousands)Non-accrualInterest Income Recognized on Non-accrual LoansAmortized Cost Basis of Loans > 89 days Past due but still accruingAmortized Cost Basis of Non-accrual Loans without Related Allowance
Non-owner occupied commercial$3,009 $— $— $2,624 
Owner occupied commercial2,810 — — 2,398 
Non-owner occupied residential2,852 — — 2,567 
Commercial, industrial and other6,763 — — 1,122 
Equipment finance43 — — — 
Residential mortgage817 — — 694 
Consumer687 — — 
Total$16,981 $— $$9,405 
At June 30, 2022, there were no loans that were past due more than 89 days and still accruing and at December 31, 2021, one loan with a recorded investment of $1,000 was past due more than 89 days and still accruing. The Company had $1.7 million and $930,000 in residential mortgages and consumer home equity loans included in total non-accrual loans that were in the process of foreclosure at June 30, 2022 and December 31, 2021, respectively.
Purchased Credit Deteriorated Loans
The following summarizes the PCD loans acquired in the 1st Constitution acquisition as of the closing date, January 6, 2022.
(in thousands)PCD Loans
Gross amortized cost basis$140,300 
Interest component of expected cash flows (accretable difference)(3,792)
Allowance for credit losses on PCD loans(12,077)
Net PCD loans$124,431 
    At June 30, 2022, net PCD loans acquired from 1st Constitution totaled $104.7 million.
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.
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The CARES Act provided relief from TDR classification for certain loan modifications related to the COVID-19 pandemic beginning March 1, 2020 through the earlier of 60 days after the end of the pandemic or December 31, 2020. Additionally, banking regulatory agencies issued interagency guidance that COVID-19 related short-term modifications (i.e., six months or less) granted to borrowers that were current as of the loan modification program implementation date do not need to be considered TDRs. The Consolidated Appropriations Act, 2021 (the "CAA"), which was signed into law on December 27, 2020, extended this guidance to modifications made until the earlier of January 1, 2022 or 60 days after the end of the COVID-19 national emergency. The Company elected this provision of the CARES Act and excluded modified loans that met the required guidelines for relief from its TDR classification. At June 30, 2022, no loans were on COVID-related deferrals as the remaining 90-day loan deferments expired and borrowers began paying their pre-deferral loan payments in the first quarter of 2021. 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. None of these modifications were considered TDRs.
At June 30, 2022 and December 31, 2021, TDRs totaled $4.1 million and $3.5 million, respectively. Accruing TDRs totaled $3.2 million and non-accrual TDRs totaled $928,000 at June 30, 2022. Accruing TDRs and non-accrual TDRs totaled $3.3 million and $127,000, respectively, at December 31, 2021. There were no loans that were restructured during the three and six months ended June 30, 2022 and 2021 that met the definition of a TDR. There were no restructured loans that subsequently defaulted in the six months ended June 30, 2022 and 2021.
Note 6 - Allowance for Credit Losses
The Company measures expected credit losses for financial assets measured at amortized cost, including loans, investments and certain off-balance-sheet credit exposures in accordance with ASU 2016-13. See Note 1 - Summary of Significant Accounting Policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for a description of the Company's methodology.
Under the standard, the Company's methodology for determining the allowance for credit losses on loans is based upon key assumptions, including the lookback periods, historic net charge-off factors, economic forecasts, reversion periods, prepayments and qualitative adjustments. The allowance is measured on a collective, or pool, basis when similar risk characteristics exist. Loans that do not share common risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. At June 30, 2022, loans totaling $7.28 billion were evaluated collectively and the allowance on these balances totaled $62.2 million and loans totaling $126.2 million were evaluated on an individual basis with the specific allocations of the allowance for credit losses totaling $6.6 million. Loans evaluated on an individual basis include $105.0 million in PCD loans, which had a specific allowance for credit losses of $3.7 million. The Company made the election to exclude accrued interest receivable from the estimate of credit losses.
Allowance for Credit Losses - Loans
The allowance for credit losses on loans is summarized in the following table:
For the Three Months Ended June 30,For the Six Months Ended June 30,
(in thousands)2022202120222021
Balance at beginning of the period$67,112 $67,252 $58,047 $71,124 
Initial allowance for credit losses on PCD loans— — 12,077 — 
Charge-offs on PCD loans— — (7,634)— 
Charge-offs(369)(1,861)(539)(3,132)
Recoveries510 312 672 519 
  Net recoveries (charge-offs)141 (1,549)(7,501)(2,613)
Provision (benefit) for credit loss - loans1,583 (5,314)6,213 (8,122)
Balance at end of the period$68,836 $60,389 $68,836 $60,389 
The provision for credit losses on loans for the second quarter of 2022 was due to an increase in the baseline estimate due to increased loan balances while the provision for the six months ended June 30, 2022 was predominantly due to the provision for the 1st Constitution's acquired non-purchased credit deteriorated loans and the additional charge-offs on PCD loans. The benefit for credit losses for the three and six months ended June 30, 2021, was largely due to an improvement in macroeconomic factors. Charge-offs in the six months ended June 30, 2022 include $7.6 million in charge-offs on 1st Constitution's acquired PCD loans. Non-performing loans totaling $5.0 million and $15.1 million were sold during the three and six months ended June 30, 2021, respectively, resulting in net charge-offs of $75,000 and $1.2 million, respectively.

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The following tables detail activity in the allowance for credit losses on loans by portfolio segment for the three and six months ended June 30, 2022 and 2021:
(in thousands)
Balance at March 31, 2022
Charge-offsRecoveriesProvision (Benefit) for Credit Loss
Balance at June 30, 2022
Non-owner occupied commercial$23,649 $— $$273 $23,926 
Owner occupied commercial6,125 (4)341 476 6,938 
Multifamily8,300 — — 141 8,441 
Non-owner occupied residential2,908 — — (15)2,893 
Commercial, industrial and other11,674 (305)33 (1,313)10,089 
Construction1,727 — — 1,210 2,937 
Equipment finance2,459 (24)64 (246)2,253 
Residential mortgage5,686 — — 893 6,579 
Consumer4,584 (36)68 164 4,780 
Total$67,112 $(369)$510 $1,583 $68,836 
(in thousands)
Balance at March 31, 2021
Charge-offsRecoveries(Benefit) Provision for Credit Loss
Balance at June 30, 2021
Non owner occupied commercial$23,880 $(1,650)$$(1,325)$20,906 
Owner occupied commercial4,003 — 88 4,100 
Multifamily7,508 — — (331)7,177 
Non owner occupied residential2,883 (3)11 (299)2,592 
Commercial, industrial and other12,139 (110)105 (1,645)10,489 
Construction1,129 — 42 (137)1,034 
Equipment finance6,264 (10)(1,140)5,120 
Residential mortgage3,781 (36)118 22 3,885 
Consumer5,665 (52)20 (547)5,086 
Total$67,252 $(1,861)$312 $(5,314)$60,389 
(in thousands)
Balance at December 31, 2021
Initial allowance for credit losses on PCD loansCharge-offsRecoveries(Benefit) Provision for Credit Loss
Balance at June 30, 2022
Non-owner occupied commercial$20,071 $1,312 $(4)$$2,543 $23,926 
Owner occupied commercial3,964 1,137 (38)351 1,524 6,938 
Multifamily8,309 — — 128 8,441 
Non-owner occupied residential2,380 175 — 14 324 2,893 
Commercial, industrial and other9,891 2,413 (1,128)78 (1,165)10,089 
Construction838 6,843 (6,807)2,060 2,937 
Equipment finance3,663 — (121)79 (1,368)2,253 
Residential mortgage3,914 179 — 48 2,438 6,579 
Consumer5,017 14 (75)95 (271)4,780 
Total$58,047 $12,077 $(8,173)$672 $6,213 $68,836 
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(in thousands)
Balance at December 31, 2020
Charge-offsRecoveries(Benefit) Provision for Credit Loss
Balance at June 30, 2021
Non owner occupied commercial$25,910 $(2,243)$$(2,764)$20,906 
Owner occupied commercial3,955 (78)17 206 4,100 
Multifamily7,253 — — (76)7,177 
Non owner occupied residential3,321 (212)13 (530)2,592 
Commercial, industrial and other13,665 (375)149 (2,950)10,489 
Construction786 — 67 181 1,034 
Equipment finance6,552 (104)17 (1,345)5,120 
Residential mortgage3,623 (36)176 122 3,885 
Consumer6,059 (84)77 (966)5,086 
Total$71,124 $(3,132)$519 $(8,122)$60,389 
The following tables present the recorded investment in loans by portfolio segment and the related allowance for credit losses at June 30, 2022 and December 31, 2021:
June 30, 2022Loans Allowance for Credit Losses
(in thousands) Individually evaluated for impairment Collectively evaluated for impairmentAcquired with deteriorated credit qualityTotalIndividually evaluated for impairmentCollectively evaluated for impairment Total
Non-owner occupied commercial$431 $2,725,169 $51,403 $2,777,003 $854 $23,072 $23,926 
Owner occupied commercial15,327 1,132,686 31,514 1,179,527 1,290 5,648 6,938 
Multifamily— 1,131,475 3,463 1,134,938 8,436 8,441 
Non-owner occupied residential462 214,394 6,483 221,339 153 2,740 2,893 
Commercial, industrial and other4,979 642,601 10,355 657,935 4,160 5,929 10,089 
Construction— 370,777 — 370,777 — 2,937 2,937 
Equipment finance— 134,136 — 134,136 — 2,253 2,253 
Residential mortgage— 620,981 1,436 622,417 138 6,441 6,579 
Consumer— 310,111 357 310,468 4,777 4,780 
Total loans$21,199 $7,282,330 $105,011 $7,408,540 $6,603 $62,233 $68,836 
December 31, 2021Loans Allowance for Credit Losses
(in thousands)Individually evaluated for impairmentCollectively evaluated for impairmentAcquired with deteriorated credit qualityTotalIndividually evaluated for impairmentCollectively evaluated for impairmentTotal
Non-owner occupied commercial$3,063 $2,313,047 $174 2,316,284 $— $20,071 $20,071 
Owner occupied commercial6,678 901,638 133 908,449 69 3,895 3,964 
Multifamily— 972,233 — 972,233 — 8,309 8,309 
Non-owner occupied residential2,567 174,463 67 177,097 — 2,380 2,380 
Commercial, industrial and other6,537 455,306 563 462,406 4,182 5,709 9,891 
Construction— 302,228 — 302,228 — 838 838 
Equipment finance— 123,212 — 123,212 — 3,663 3,663 
Residential mortgage1,416 437,294 — 438,710 — 3,914 3,914 
Consumer— 275,529 — 275,529 — 5,017 5,017 
Total loans$20,261 $5,954,950 $937 $5,976,148 $4,251 $53,796 $58,047 
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Allowance for Credit Losses - Securities
At June 30, 2022, the balance of the allowance for credit loss on available for sale and held to maturity securities was $2.8 million and $190,000, respectively. At December 31, 2021, the Company reported an allowance for credit losses on available for sale securities of $83,000 and an allowance for credit losses on held to maturity securities of $181,000.
The allowance for credit losses on securities is summarized in the following tables:
Available for SaleFor the Three Months Ended June 30,For the Six Months Ended June 30,
(in thousands)2022202120222021
Balance at beginning of the period$1,267 $144 $83 $
Provision for credit loss expense1,535 (123)2,719 19 
Balance at end of the period$2,802 $21 $2,802 $21 
Held to MaturityFor the Three Months Ended June 30,For the Six Months Ended June 30,
(in thousands)2022202120222021
Balance at beginning of the period$199 $— $181 $— 
Provision for credit loss expense(9)137 137 
Balance at end of the period$190 $137 $190 $137 
Accrued interest receivable on securities is reported as a component of accrued interest receivable on the consolidated balance sheets and totaled $8.2 million at June 30, 2022 and $5.3 million and December 31, 2021. The Company made the election to exclude accrued interest receivable from the estimate of credit losses on securities.
Allowance for Credit Losses - Off-Balance-Sheet Exposures
The allowance for credit losses on off-balance sheet exposures is reported in other liabilities in the Consolidated Balance Sheets. The liability represents an estimate of expected credit losses arising from off balance sheet exposures such as letters of credit, guarantees and unfunded loan commitments. The process for measuring lifetime expected credit losses on these exposures is consistent with that for loans as discussed above, but is subject to an additional estimate reflecting the likelihood that funding will occur. No liability is recognized for off balance sheet credit exposures that are unconditionally cancellable by the Company. Adjustments to the liability are reported as a component of the provision for credit losses.
At June 30, 2022 and December 31, 2021, the balance of the allowance for credit losses for off-balance sheet exposures was $3.3 million and $2.3 million, respectively. The Company recorded a provision for credit losses on off-balance-sheet exposures in other operating expense of $535,000 for the second quarter of 2022 and a benefit for credit losses on off-balance-sheet exposures of $659,000 for the second quarter of 2021. For the six months ended June 30, 2022, the Company recorded a provision for credit losses on off-balance-sheet exposures in other operating expense of $975,000 and a benefit for credit losses on off-balance-sheet exposures of $635,000 for the same period in 2021.
Note 7 – Leases
The Company leases certain premises and equipment under operating leases. Portions of certain properties are subleased for terms extending through 2027. At June 30, 2022, the Company had lease liabilities totaling $27.6 million and right-of-use assets totaling $26.2 million related to these leases. At December 31, 2021, the Company had lease liabilities totaling $16.5 million and right-of-use assets totaling $15.2 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 the six months ended June 30, 2022, the weighted average remaining lease term for operating leases was 11.91 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.02%. At December 31, 2021, the weighted average remaining lease term for operating leases was 9.16 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.41%.
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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 June 30,For the Six Months Ended June 30,
(in thousands)2022202120222021
Operating lease cost$1,242 $829 $2,468 $1,658 
Short-term lease cost— 18 — 
Variable lease cost17 23 33 45 
Sublease income$(32)$(30)(64)(61)
Net lease cost$1,234 $822 $2,455 $1,642 
The table below presents other information on the Company's operating leases for the six months ended June 30, 2022 and 2021:
Six Months Ended June 30,
(in thousands)20222021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$1,985 $1,446 
Right-of-use assets obtained in exchange for new operating lease liabilities89 109 
There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the six months ended June 30, 2022 or June 30, 2021. At June 30, 2022, 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 June 30, 2022 are as follows:
(in thousands)
Within one year$4,833 
After one year but within three years8,317 
After three years but within five years5,508 
After five years15,094 
Total undiscounted cash flows33,752 
Discount on cash flows(6,113)
Total operating lease liabilities$27,639 
Note 8 - Deposits
    The following table sets forth the details of total deposits:
(dollars in thousands)June 30, 2022December 31, 2021
Noninterest-bearing demand$2,330,550 27.4 %$1,732,452 24.9 %
Interest-bearing checking2,620,349 30.8 %2,219,658 31.9 %
Money market1,639,001 19.3 %1,577,385 22.6 %
Savings1,147,862 13.5 %677,101 9.7 %
Certificates of deposit $250 thousand and under620,720 7.3 %623,393 8.9 %
Certificates of deposit over $250 thousand143,322 1.7 %135,834 2.0 %
Total deposits$8,501,804 100.0 %$6,965,823 100.0 %
At June 30, 2022 and December 31, 2021, certificates of deposit obtained through brokers totaled $76.3 million and $114.3 million, respectively. Brokered deposits are included in certificates of deposit $250,000 and under in the Consolidated Balance Sheets.
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Note 9 – Borrowings
Overnight and Short-Term Borrowings
At June 30, 2022, the Company had $330.0 million overnight and short-term borrowings from the FHLB and none at December 31, 2021. In addition, Lakeland had no overnight and short-term borrowings from correspondent banks at June 30, 2022 and December 31, 2021. At June 30, 2022, Lakeland had overnight and short-term federal funds lines available to borrow up to $250.0 million from correspondent banks. Lakeland may also borrow from the discount window of the Federal Reserve Bank of New York based on the fair value of collateral pledged. Lakeland had no borrowings with the Federal Reserve Bank of New York as of June 30, 2022 or December 31, 2021.
Other short-term borrowings at June 30, 2022 and December 31, 2021 consisted of short-term securities sold under agreements to repurchase of $102.2 million and $106.5 million, respectively. The securities sold under agreements to repurchase are overnight sweep arrangement accounts with our customers. As of June 30, 2022, the Company had $110.4 million in agency and mortgage-backed securities pledged for its securities sold under agreements to repurchase.
At times, the fair 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.
FHLB Advances
The Company had one advance from the FHLB, which totaled $25.0 million at both June 30, 2022 and December 31, 2021, with a weighted average interest rate of 0.77% and maturity in 2025. The advance was collateralized by first mortgage loans and has prepayment penalties.
Subordinated Debentures
On January 6, 2022, the Company acquired $18.0 million of fixed to floating subordinated notes in connection with the 1st Constitution acquisition with a fair value of $14.7 million. The notes were dated June 15, 2006 and pay interest at a rate of LIBOR plus a spread of 165 basis points which resets quarterly until maturity on June 15, 2036 or earlier redemption.
The Company completed an offering of $150.0 million of fixed to floating rate subordinated notes on September 15, 2021, due on September 15, 2031. The notes bear interest at a rate of 2.875% per annum until September 15, 2026, and will then reset quarterly to benchmark rate, which is expected to be the three-month term Secured Overnight Financing Rate ("SOFR") plus a spread of 220 basis points. The debt is included in Tier 2 capital for the Company.
Note 10 – Share-Based Compensation
The Company's 2018 Omnibus Equity Incentive Plan (the "Plan") 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.
Restricted Stock
The following is a summary of the Company’s restricted stock activity during the six months ended June 30, 2022:
Number of
Shares
Weighted
Average
Price
Outstanding, January 1, 202216,035 $13.72 
Granted17,722 19.74 
Vested(16,035)13.72 
Outstanding, June 30, 202217,722 $19.74 
In the first six months of 2022, the Company granted 17,722 shares of restricted stock to non-employee directors at a grant date fair value of $19.74 per share under the Plan. The restricted stock vests one year from the date it was granted. Compensation expense on this restricted stock is expected to be $350,000 over a one year period. In the first six months of 2021, the Company granted 16,035 shares of restricted stock to non-employee directors at a grant date fair value of $13.72 per share. The restricted stock vested one year from the date it was granted with a compensation expense of $220,000 over such period.
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The Company recognized share-based compensation expense on its restricted stock of $88,000 for both the second quarter of 2022 and 2021, respectively, and $175,000 and $176,000 for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, there was unrecognized compensation cost of $175,000 related to unvested restricted stock that is expected to be recognized over a weighted average period of approximately 0.55 years.
Restricted Stock Units
The following is a summary of the Company’s RSU activity during the six months ended June 30, 2022:
Number of
Shares
Weighted
Average
Price
Outstanding, January 1, 2022591,342 $16.64 
Granted313,754 18.00 
Vested(194,470)16.67 
Forfeited(2,885)17.64 
Outstanding, June 30, 2022707,741 $17.24 
In the first six months of 2022, the Company granted 313,754 RSUs under the Plan at a weighted average grant date fair value of $18.00 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 RSU 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 these RSUs is expected to average approximately $1.9 million per year over a three-year period. In the first six months of 2021, the Company granted 368,516 RSUs under the Plan at a weighted average grant date fair value of $16.92 per share. Compensation expense on these RSUs is expected to average approximately $2.1 million per year over a three-year period.
For the second quarter of 2022 and 2021, the Company recognized share-based compensation expense on RSUs of $1.1 million and $901,000, respectively, and $2.4 million and $2.0 million for the six months ended June 30, 2022 and 2021, respectively. Unrecognized compensation expense related to RSUs was approximately $8.2 million as of June 30, 2022, and that cost is expected to be recognized over a period of 1.56 years.
Stock Options
At June 30, 2022 and December 31, 2021, there were no stock options outstanding under the Plan. There were no stock option grants in the first six months of 2022 or 2021. There were no stock options exercised during the second quarter of 2022 and the 2,764 stock options exercised during the first six months of 2021 resulted in $19,000 in cash receipts.
Note 11 – 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.
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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.
The following table sets forth the components of noninterest income for the three and six months ended June 30, 2022 and 2021:
For the Three Months Ended June 30,For the Six Months Ended June 30,
(in thousands)2022202120222021
Deposit-Related Fees and Charges
Debit card interchange income$1,737 $1,608 $3,309 $3,018 
Overdraft charges756 551 1,525 1,138 
ATM service charges208 172 379 315 
Demand deposit fees and charges(7)100 87 241 
Savings service charges17 14 37 29 
Total deposit-related fees and charges2,711 2,445 5,337 4,741 
Commissions and fees
Loan fees781 484 1,590 991 
Wire transfer charges525 375 982 750 
Investment services income700 474 1,105 837 
Merchant fees 302 258 553 459 
Commissions from sales of checks91 75 175 153 
Safe deposit income99 79 153 158 
Other income50 42 87 89 
Total commissions and fees2,548 1,787 4,645 3,437 
Gains on sales of loans715 607 2,141 1,315 
Other income
Gains on customer swap transactions399 72 399 634 
Title insurance income31 44 
Other income519 81 788 163 
Total other income920 184 1,189 841 
Revenue not from contracts with customers169 246 531 694 
Total Noninterest Income$7,063 $5,269 $13,843 $11,028 
Timing of Revenue Recognition:
Products and services transferred at a point in time6,894 5,019 13,312 10,311 
Products and services transferred over time— — 23 
Revenue not from contracts with customers169 246 531 694 
Total Noninterest Income$7,063 $5,269 $13,843 $11,028 
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Note 12 - Other Operating Expenses
The following table presents the major components of other operating expenses for the periods indicated:
For the Three Months ended June 30,For the Six Months Ended June 30,
(in thousands)2022202120222021
Consulting and advisory board fees927 831 1,981 1,354 
ATM and debit card expense709 611 1,366 1,215 
Telecommunications expense564 517 1,146 1,039 
Marketing expense760 427 1,157 745 
Core deposit intangible amortization593 221 1,189 447 
Other operating expenses4,335 3,085 8,430 5,993 
Total other operating expenses$7,888 $5,692 $15,269 $10,793 
Note 13 – Comprehensive Income
The components of other comprehensive income are as follows:
For the Three Months Ended
 June 30, 2022June 30, 2021
(in thousands)Before
Tax Amount
Tax Benefit
(Expense)
Net of
Tax Amount
Before
Tax Amount
Tax Benefit
(Expense)
Net of
Tax Amount
Unrealized (losses) gains on available for sale securities arising during the period:$(26,758)$7,070 $(19,688)$9,738 $(2,619)$7,119 
Reclassification adjustment for securities gains arising during the period— — — (9)(6)
Net unrealized (losses) gains(26,758)7,070 (19,688)9,729 (2,616)7,113 
Amortization of gain on debt securities reclassified to held to maturity from available for sale(203)55 (148)— — — 
Unrealized gains on derivatives— — — 68 (145)(77)
Other comprehensive (loss) gains, net$(26,961)$7,125 $(19,836)$9,797 $(2,761)$7,036 
For the Six Months Ended
 June 30, 2022June 30, 2021
(in thousands)Before Tax AmountTax Benefit (Expense)Net of Tax AmountBefore Tax AmountTax Benefit
(Expense)
Net of Tax Amount
Unrealized losses on available for sale securities arising during the period:$(68,722)$18,069 $(50,653)$(8,899)$2,883 $(6,016)
Reclassification adjustment for securities gains arising during the period— — — (9)(6)
Net unrealized losses(68,722)18,069 (50,653)(8,908)2,886 (6,022)
Amortization of gain on debt securities reclassified to held to maturity from available for sale(379)96 (283)— — — 
Unrealized gains on derivatives— — — 135 (165)(30)
Other comprehensive loss, net$(69,101)$18,165 $(50,936)$(8,773)$2,721 $(6,052)
The following tables show the changes in the balances of each of the components of other comprehensive income (loss) for the periods presented, net of tax:
For the Three Months Ended June 30, 2022
(in thousands)Unrealized Gains
(Losses) on
Available for  Sale
Securities
Amortization of Gain on Debt Securities Reclassified to Held to MaturityTotal
Beginning balance$(30,220)$2,384 $(27,836)
Net current period other comprehensive loss(19,688)(148)(19,836)
Ending balance$(49,908)$2,236 $(47,672)
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For the Three Months Ended June 30, 2021
(in thousands)Unrealized Gains
(Losses) on
Available for  Sale
Securities
Unrealized
Gains (Losses)
on Derivatives
Pension ItemsTotal
Beginning balance$(1,733)$72 $(30)$(1,691)
Net current period other comprehensive income (loss)7,119 (77)— 7,042 
Amounts reclassified from accumulated other comprehensive income(6)— — (6)
Net current period other comprehensive income (loss)7,113 (77)— 7,036 
Ending balance$5,380 $(5)$(30)$5,345 
For the Six Months Ended June 30, 2022
(in thousands)Unrealized Gains
(Losses) on
Available for  Sale
Securities
Amortization of Gain on Debt Securities Reclassified to Held to MaturityTotal
Beginning balance$745 $2,519 $3,264 
Net current period other comprehensive loss(50,653)(283)(50,936)
Ending balance$(49,908)$2,236 $(47,672)
For the Six Months Ended June 30, 2021
(in thousands)Unrealized Gains
(Losses) on
Available for  Sale
Securities
Unrealized
Gains (Losses)
on Derivatives
Pension ItemsTotal
Beginning balance$11,402 $25 $(30)$11,397 
Net current period other comprehensive loss(6,016)(30)— (6,046)
Amounts reclassified from accumulated other comprehensive income(6)— — (6)
Net current period other comprehensive loss(6,022)(30)— (6,052)
Ending balance$5,380 $(5)$(30)$5,345 
Note 14 – Derivatives
Lakeland is a party to interest rate derivatives that are not designated as hedging instruments. 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 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 $4.9 million and $55.1 million in investment securities available for sale pledged for collateral on its interest rate swaps with financial institutions at June 30, 2022 and December 31, 2021, respectively.
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 was 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 was paying a third party an average of 1.10% in exchange for a payment at the 3 month LIBOR rate. The effective portion of changes in the fair value of derivatives designated and that qualify
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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. On June 30, 2021, $20.0 million in notional value of the swaps matured and on August 1, 2021, the remaining $10.0 million matured. The Company reclassified $69,000 of accumulated other comprehensive loss into interest expense for the second quarter of 2021 and $134,000 first six months of 2021. Amounts reported in accumulated other comprehensive income related to derivatives were reclassified to interest expense as interest payments are made on the Company’s debt.
The following table presents summary information regarding these derivatives for the periods presented (dollars in thousands):
June 30, 2022Notional AmountAverage
Maturity (Years)
Weighted Average
Fixed Rate
Weighted Average
Variable Rate
Fair
 Value
Classified in Other Assets:
Third Party interest rate swaps$790,426 7.33.53 %
1 Mo. LIBOR + 2.06
$61,569 
Customer interest rate swaps101,045 9.04.81 %
1 Mo. LIBOR + 1.69
2,249 
Classified in Other Liabilities:
Customer interest rate swaps$790,426 7.33.53 %
1 Mo. LIBOR + 2.06
$(61,569)
Third Party interest rate swaps101,045 9.04.81 %
1 Mo. LIBOR + 1.69
(2,249)
December 31, 2021Notional
 Amount
Average
Maturity  (Years)
Weighted 
Average
Fixed Rate
Weighted Average
Variable Rate
Fair
 Value
Classified in Other Assets:
Third Party interest rate swaps$326,941 7.73.14 %
1 Mo. LIBOR + 2.32
$9,847 
Customer interest rate swaps607,688 8.23.97 %
1 Mo. LIBOR + 1.87
33,952 
Classified in Other Liabilities:
Customer interest rate swaps $326,941 7.73.14 %
1 Mo. LIBOR + 2.32
(9,847)
Third party interest rate swaps607,688 8.23.97 %
1 Mo. LIBOR + 1.87
(33,952)
Note 15 – Goodwill and Other Intangible Assets
The Company had goodwill of $271.8 million at June 30, 2022 and $156.3 million at December 31, 2021. The Company recorded $115.6 million in goodwill from the 1st Constitution merger in January 2022 as further described in Note 2 of the Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q. 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. During the three and six months ended June 30, 2022, there were no triggering events that would more likely than not reduce the fair value of our one reporting unit below its carrying amount. There was no impairment of goodwill recognized during the three and six months ended June 30, 2022 and 2021.
The Company had core deposit intangibles of $10.2 million and $2.4 million at June 30, 2022 and December 31, 2021, respectively. The Company recorded core deposit intangible of $9.0 million in connection with the 1st Constitution acquisition. Amortization of core deposit intangible totaled $593,000 and $221,000 for the second quarters of 2022 and 2021, respectively, and $1.2 million and $447,000 for the six months ended June 30, 2022 and 2021, respectively. The estimated future amortization expense for the remainder of 2022 and for each of the succeeding five years ended December 31 is as follows (in thousands):
For the Year Ended
2022$1,162 
20232,029 
20241,737 
20251,465 
20261,193 
2027955 
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Note 16 – 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 investment securities available for sale, equity securities and its interest rate swaps. The Company obtains fair values on its securities using information from a third-party servicer. If quoted prices for securities are available in an active market, those securities are classified as Level 1 securities. The Company has U.S. Treasury Notes 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).
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Recurring Fair Value Measurements
The following table sets forth the Company’s financial assets that were accounted for at fair value on a recurring basis as of the periods presented by level within the fair value hierarchy. During the six months ended June 30, 2022 and during 2021, 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:
June 30, 2022Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Fair Value
(in thousands)
Assets:
Investment securities, available for sale
U.S. Treasury and government agencies$167,185 $202,866 $— $370,051 
Mortgage-backed securities, residential— 340,337 — 340,337 
Collateralized mortgage obligations, residential— 172,307 — 172,307 
Mortgage-backed securities, multifamily— 1,505 — 1,505 
Collateralized mortgage obligations, multifamily— 49,620 — 49,620 
Asset-backed securities— 59,862 — 59,862 
Obligations of states and political subdivisions— 23,025 — 23,025 
Corporate bonds— 122,707 — 122,707 
Total investment securities, available for sale167,185 972,229 — 1,139,414 
Equity securities, at fair value— 17,594 — 17,594 
Derivative assets— 63,818 — 63,818 
Total Assets$167,185 $1,053,641 $— $1,220,826 
Liabilities:
Derivative liabilities$— $63,818 $— $63,818 
Total Liabilities$— $63,818 $— $63,818 
December 31, 2021Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Fair Value
(in thousands)
Assets:
Investment securities, available for sale
U.S. Treasury and government agencies$104,861 $98,526 $— $203,387 
Mortgage-backed securities, residential— 237,975 — 237,975 
Collateralized mortgage obligations, residential— 191,291 — 191,291 
Mortgage-backed securities, multifamily— 1,741 — 1,741 
Collateralized mortgage obligations, multifamily— 32,519 — 32,519 
Asset-backed securities— 52,584 — 52,584 
Corporate bonds— 50,459 — 50,459 
Total investment securities, available for sale104,861 665,095 — 769,956 
Equity securities, at fair value— 17,368 — 17,368 
Derivative assets— 43,799 — 43,799 
Total Assets$104,861 $726,262 $— $831,123 
Liabilities:
Derivative liabilities$— $43,799 $— $43,799 
Total Liabilities$— $43,799 $— $43,799 
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Non-Recurring Fair Value Measurements
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 fair value. Fair value is generally determined by the value of purchase commitments.
Loans that do not have similar risk characteristics to the segments reported must be individually evaluated to determine an appropriate allowance. Management has identified criteria and procedures for identifying whether a loan should be individually evaluated for calculation of expected credit losses. If a loan is identified as meeting any of the criteria, it is deemed to have risk characteristics that are unique and will be separated from a pool. Those loans that are considered to have unique risk characteristics are then subjected to an individual allowance evaluation using either the fair value of the collateral, less estimated costs to sell, if collateral-dependent or the discounted cash flow method.
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 a recognized valuation resource. At June 30, 2022 and December 31, 2021, the Company had no OREO or other repossessed assets.
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 individually evaluated loans, OREO and other repossessed assets.
The following table summarized the Company’s financial assets that are measured at fair value 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
June 30, 2022
Assets:
Individually evaluated loans$— $— $6,003 $6,003 
December 31, 2021
Assets:
Individually evaluated loans$— $— $7,113 $7,113 
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 June 30, 2022 and December 31, 2021, 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.
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.
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.
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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 not carried at fair value as of June 30, 2022 and December 31, 2021:
June 30, 2022Carrying
Value
Fair
Value
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(in thousands)
Financial Assets:
Investment securities, held to maturity
U.S. government agencies$16,418 $16,006 $— $16,006 $— 
Mortgage-backed securities, residential363,071 319,938 — 319,938 — 
Collateralized mortgage obligations, residential13,773 12,068 — 12,068 — 
Mortgage-backed securities, multifamily5,139 4,662 — 4,662 — 
Obligations of states and political subdivisions540,326 453,381 — 453,381 — 
Corporate bonds2,831 2,608 — 2,608 — 
Total investment securities, held to maturity$941,558 $808,663 $— $808,663 $— 
Federal Home Loan Bank and other membership bank stocks25,647 25,647 — 25,647 — 
Loans, net7,339,704 7,343,386 — — 7,343,386 
Financial Liabilities:
Certificates of deposit764,042 739,857 — 739,857 — 
Other borrowings25,000 23,419 — 23,419 — 
Subordinated debentures194,027 168,691 — — 168,691 
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December 31, 2021Carrying
Value
Fair
Value
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(in thousands)
Financial Assets:
Investment securities, held to maturity
U.S. government agencies$18,672 $18,965 $— $18,965 $— 
Mortgage-backed securities, residential370,247 364,976 — 364,976 — 
Collateralized mortgage obligations, residential13,921 14,089 — 14,089 — 
Mortgage-backed securities, multifamily2,710 2,734 — 2,734 — 
Obligations of states and political subdivisions416,566 411,576 — 410,744 832 
Corporate bonds2,840 2,871 — 2,871 — 
Total investment securities, held to maturity824,956 815,211 — 814,379 832 
Federal Home Loan Bank and other membership bank stocks9,049 9,049 — 9,049 — 
Loans, net5,918,101 5,900,876 — — 5,900,876 
Financial Liabilities:
Certificates of deposit759,227 753,483 — 753,483 — 
Other borrowings25,000 24,604 — 24,604 — 
Subordinated debentures179,043 175,243 — — 175,243 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
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 credit losses), corporate objectives and other financial and business matters. The words “anticipates,” “projects,” “intends,” “estimates,” “expects,” “believes,” “plans,” “may,” “will,” “should,” “could” and other similar expressions are intended to identify such forward-looking statements. The Company cautions that these forward-looking statements are necessarily speculative and speak only as of the date made, and are subject to numerous assumptions, risks and uncertainties, all of which may change over time. Actual results could differ materially from such forward-looking statements. Accordingly, you should not put undue reliance on 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, as updated by the Company's subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, the following factors, among others, could cause the Company’s actual results to differ materially and adversely from such forward-looking statements: changes in the financial services industry and the U.S. and global capital markets; changes in economic conditions nationally, regionally and in the Company’s markets; the ongoing COVID-19 outbreak and its effects on economic activity; government responses to the COVID-19 pandemic; the nature and timing of actions of the Federal Reserve Board and other regulators; the nature and timing of legislation affecting the financial services industry; changes in federal and state tax laws; government intervention in the U.S. financial system; changes in levels of market interest rates; pricing pressures on loan and deposit products; credit risks of Lakeland’s lending activities; successful implementation, deployment and upgrades of new and existing technology, systems, services and products; customers’ acceptance of Lakeland’s products and services; failure to realize anticipated efficiencies and synergies from the merger of 1st Constitution Bancorp into Lakeland Bancorp and the merger of 1st Constitution Bank into Lakeland Bank; and unanticipated expenses, including litigation expenses, related to the merger.
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The above-listed risk factors are not 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 U.S. generally accepted accounting principles and predominant practices within the banking industry. The consolidated financial statements include the accounts of the Company, Lakeland and its subsidiaries, including Lakeland NJ Investment Corp., Lakeland Investment Corp., Lakeland Equity, Inc., Lakeland Preferred Equity, Inc., 1st Constitution Investment Company of New Jersey, Inc. and 1st Constitution Real Estate Corporation. 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.
Executive Summary
On January 6, 2022, the Company completed its acquisition of 1st Constitution with 1st Constitution merging into Lakeland Bancorp and 1st Constitution’s wholly-owned subsidiary, 1st Constitution Bank, merging into Lakeland Bank. The merger added $1.97 billion in total assets including $1.10 billion in total loans and $1.65 billion in total deposits. Goodwill totaled $115.6 million and core deposit intangibles were $9.0 million. The acquisition represents a significant addition to Lakeland’s New Jersey franchise and the consolidated organization totals over $10 billion in assets. Full systems integration was completed in February 2022. The Company’s financial statements reflect the impact of the merger from the date of acquisition, which should be considered when comparing periods. For additional information on the fair value of the acquired assets of 1st Constitution, please see Note 2 of the Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Financial Overview
For the second quarter of 2022, the Company reported net income of $29.1 million and earnings per diluted share of $0.44 compared to net income of $27.4 million and earnings per diluted share of $0.53 for the second quarter of 2021. For the second quarter of 2022, annualized return on average assets was 1.15%, annualized return on average common equity was 10.71% and annualized return on average tangible common equity was 14.45% compared to 1.41%, 14.07%, and 17.67%, respectively, for the second quarter of 2021.
For the six months ended June 30, 2022, the Company reported net income of $45.0 million, compared to $50.6 million for the same period in 2021. For the six months ended June 30, 2022, the Company reported earnings per diluted share of $0.69 compared to $0.98 earnings per diluted share reported for the first six months of 2021. For the first six months of 2022, annualized return on average assets was 0.89%, annualized return on average common equity was 8.31%, and annualized return on average tangible common equity was 11.16% compared to 1.32%, 13.15% and 16.55%, respectively, for the same period in 2021.
The second quarter and year-to-date 2022 results were negatively impacted by provision for credit losses of $3.6 million and $9.9 million, respectively, compared to a benefit of $6.0 million and $8.6 million for the same periods last year. The benefit for credit losses in 2021 was due primarily to an improvement in forecasted macroeconomic conditions, following the initial impacts of COVID-19 in 2020, a reduction in non-performing assets and continued strength in asset quality.
Net interest margin for the second quarter of 2022 of 3.38% increased 11 basis points compared to the second quarter of 2021 and increased 36 basis points compared to the linked first quarter 2022. Net interest margin for the six months ended June 30, 2022 was 3.20% as compared to 3.23% for the same period in 2021. The increase in net interest margin compared to the second quarter of 2021 was due primarily to an increase in the volume of interest-earning assets, an increase in yields on interest-earning assets and a decrease in the cost of interest-bearing liabilities, while the decrease in the net interest margin in the year-to-date periods was due to lower yields on interest-earning assets.
Total loans, net of deferred fees, increased $1.43 billion to $7.41 billion during the first six months of 2022 and included loans totaling $1.10 billion acquired in the Company's acquisition of 1st Constitution. Total deposits increased $1.54 billion, or 22%, during the first six months of 2022, to $8.50 billion and includes deposits of $1.65 billion acquired from 1st Constitution.
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Comparison of Operating Results for the Three Months Ended June 30, 2022 and 2021
Net Income
Net income was $29.1 million or $0.44 per diluted share, for the second quarter of 2022 compared to net income of $27.4 million or $0.53 per diluted share, for the second quarter of 2021. The increase in net income compared to the second quarter of 2021 was due primarily to an increase of $20.6 million in net interest income, partially offset by an increase in noninterest expense of $11.0 million and a provision for credit losses of $3.6 million, which compared to a negative provision of $6.0 million recorded in the second quarter of 2021.
Net Interest Income
Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. The Company’s net interest income is determined by: (i) the volume of interest-earning assets that it holds and the yields that it earns on those assets, and (ii) the volume of interest-bearing liabilities that it has assumed and the rates that it pays on those liabilities.
Net interest income on a tax equivalent basis for the second quarter of 2022 was $80.7 million, compared to $59.9 million for the second quarter of 2021. The net interest margin increased 11 basis points to 3.38% in the second quarter of 2022 from 3.27% in the second quarter of 2021. The increase in net interest income compared to the second quarter of 2021 was due primarily to growth of loans and investment securities and higher loan prepayment fees and non-accrual interest recoveries during the second quarter of 2022.

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The following table reflects the components of the Company’s net interest income, setting forth for the periods presented, (1) average assets, liabilities and stockholders’ equity, (2) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) the Company’s net interest spread (i.e., the average yield on interest-earning assets less the average cost of interest-bearing liabilities) and (5) the Company’s net interest margin. Rates for the three months ended June 30, 2022 and June 30, 2021 are computed on a tax equivalent basis using a tax rate of 21%.
For the Three Months Ended June 30, 2022For the Three Months Ended June 30, 2021
(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)$7,229,175 $76,973 4.22 %$6,080,408 $60,529 3.99 %
Taxable investment securities and other1,827,450 8,284 1.81 %938,632 4,029 1.72 %
Tax-exempt securities360,749 1,825 2.02 %127,454 798 2.50 %
Federal funds sold (2)171,022 235 0.55 %196,458 52 0.11 %
Total interest-earning assets
9,588,396 87,317 3.61 %7,342,952 65,408 3.57 %
Noninterest-earning assets:
Allowance for credit losses(68,199)(67,358)
Other assets
671,943 508,791 
Total Assets$10,192,140 $7,784,385 
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Savings accounts$1,153,591 $507 0.18 %$639,540 $84 0.05 %
Interest-bearing transaction accounts4,369,067 3,542 0.33 %3,495,610 2,805 0.32 %
Time deposits803,421 780 0.39 %880,079 1,349 0.61 %
Federal funds purchased27,451 125 1.81 %330 — 0.45 %
Securities sold under agreements to repurchase102,791 25 0.10 %84,995 16 0.08 %
Long-term borrowings218,958 1,654 2.99 %140,162 1,247 3.52 %
Total interest-bearing liabilities
6,675,279 6,633 0.40 %5,240,716 5,501 0.42 %
Noninterest-bearing liabilities:
Demand deposits2,310,702 1,660,825 
Other liabilities115,546 101,545 
Stockholders' equity1,090,613 781,299 
Total Liabilities and Stockholders’ Equity$10,192,140 $7,784,385 
Net interest income/spread
80,684 3.22 %59,907 3.15 %
Tax equivalent basis adjustment
382 167 
Net Interest Income$80,302 $59,740 
Net interest margin (3)3.38 %3.27 %
(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 increased $21.9 million to $87.3 million in the second quarter of 2022 from $65.4 million in the second quarter of 2021. Average loans increased $1.15 billion to $7.23 billion in the second quarter of 2022 compared to $6.08 billion in the second quarter of 2021, due to the acquisition of 1st Constitution. The yield earned on loans increased by 23 basis points to 4.22% in the second quarter of 2022 from the second quarter of 2021 due primarily to the increase in market rates. Total average taxable investment securities increased $888.8 million to $1.83 billion for the second quarter of 2022 from the second quarter of 2021, while average tax-exempt securities increased $233.3 million to $360.7 million for the same periods, due to the acquisition of 1st Constitution and purchases of investment securities. The yield on average taxable investment securities increased nine basis points from the second quarter of 2021 to 1.81% for the second quarter of 2022, while the yield on average tax-exempt investment securities decreased 48 basis points to 2.02% due to declines in market conditions during the period and an increase in bond anticipation note purchases at lower rates. Average federal funds sold in the second quarter of 2022 decreased $25.4 million compared to the second quarter of 2021, while the yield increased 44 basis points to 0.55% for the second quarter of 2022 as short-term market rates have risen in 2022.
Total interest expense of $6.6 million in the second quarter of 2022 increased by $1.1 million from the $5.5 million reported for the same period in 2021. The cost of average interest-bearing liabilities decreased from 0.42% in the second quarter of 2021 to 0.40% in the second quarter of 2022, largely driven by the reduction in the cost of long-term borrowings on the Company's subordinated notes and lower interest-bearing deposit costs. Total interest-bearing deposits increased by $1.31 billion from the second quarter of 2021 to $6.33 billion, while the cost of interest-bearing deposits decreased three basis points. For the second quarter of 2022, lower cost savings and interest bearing transaction account average balances increased $514.1 million and $873.5 million, respectively, when compared to the same period in 2021, while higher cost average time deposits decreased $76.7 million. Additionally, in September 2021 the Company issued $150.0 million Fixed-to-Floating Rate Subordinated Notes at a fixed rate of 2.875% and redeemed $75.0 million of its outstanding 5.125% Fixed-to-Floating Rate Subordinated Notes, which contributed to a decrease in the average cost of long-term borrowings of 53 basis points, to 2.99% in the second quarter of 2022 from 3.52% in the second quarter of 2021. Partially offsetting the impact of the decline in the cost of funds was a growth in average interest-bearing liabilities of $1.43 billion during the same period.
Provision for Credit Losses
In determining the allowance for credit losses on investments, loans and off-balance-sheet credit exposures, management measures expected credit losses based on relevant information about past events, current conditions, reasonable and supportable forecasts, prepayments and future economic conditions. The key assumptions of the methodology include the lookback periods, historic net charge-off factors, economic forecasts, reversion periods, prepayments and qualitative adjustments. The Company uses its best judgment to assess economic conditions and loss data in estimating the allowance for credit losses.
In the second quarter of 2022, a $3.6 million provision for credit losses was recorded, compared to a $6.0 million benefit for credit losses for the same period last year. The provision is comprised of a provision for credit losses on loans of $1.6 million, a provision for credit losses on securities of $1.5 million and a provision on off-balance-sheet exposures of $535,000. The increase in the provision for credit losses on loans was related to a deterioration of macroeconomic factors. The provision for credit losses on securities during the second quarter of 2022 was primarily due to increased unrealized losses on lower credit rated securities within our portfolio resulting from a rise in market interest rates. The Company recorded loan charge-offs of $369,000 and recoveries on loans of $510,000 in the second quarter of 2022 compared to loan charge-offs of $1.9 million and loan recoveries of $312,000 in the second quarter of 2021. For more information, see Note 6 in Notes to the Consolidated Statements in this Form 10-Q.
Noninterest Income
Noninterest income increased $1.8 million to $7.1 million for the second quarter of 2022 compared to $5.3 million during the same period in 2021. Commissions and fees increased $800,000 from the second quarter of 2021 due primarily to increases in wire transfer charges and financial services income. Other income increased $500,000 from the second quarter of 2021 to the second quarter of 2022 due to reductions in write-downs on premises and equipment as well as recoveries on loans charged off from prior acquisitions. Service charges on deposit accounts increased $266,000 compared to the second quarter of 2021 due primarily to increases in debit card interchange income. Losses on equity securities totaled $364,000 in the three months ended June 30, 2022 compared to gains of $11,000 in the same period of 2021, due to the increase in long-term market rates which decreased the fair value of the securities underlying the CRA funds. The Company recorded swap income in the second quarter of 2022 and 2021 of $399,000 and $72,000, respectively, because changes in the yield curve increased the demand for swap transactions.
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Noninterest Expense
Noninterest expense in the second quarter of 2022 totaled $45.1 million compared to $34.1 million for the same quarter of 2021, an increase of $11.0 million. Compensation and employee benefits increased $6.5 million to $26.9 million in the second quarter of 2022 due primarily to increase in compensation and employee benefits resulting primarily from additions to our staff from the 1st Constitution merger and normal merit increases. The Company recorded premises and equipment expense of $7.7 million in the second quarter of 2022 and $6.1 million in the second quarter of 2021, an increase of $1.6 million due primarily to increases in occupancy expense related to the 1st Constitution branches. Data processing expense increased $592,000 due to increases related to the expansion of our franchise as a result of the 1st Constitution merger. Core deposit intangible amortization was $593,000 and $221,000, for the second quarter of 2022 and 2021, respectively, increasing due to the core deposit intangible recorded on the 1st Constitution acquisition. Other operating expenses, excluding core deposit amortization expense, increased $1.8 million in the second quarter of 2022 compared to the same period in 2021 due primarily to increased consulting fees, appraisal fees, marketing and insurance expense.
The Company’s efficiency ratio, a non-GAAP financial measure, was 50.69% in the second quarter of 2022, compared to 51.98% 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 June 30,
(dollars in thousands)20222021
 
Total noninterest expense$45,068 $34,097 
Less:
Amortization of core deposit intangibles593 221 
Noninterest expense, as adjusted$44,475 $33,876 
Net interest income$80,302 $59,740 
Noninterest income7,063 5,269 
Total revenue87,365 65,009 
Tax-equivalent adjustment on municipal securities382 167 
Less:
Gains on sales of investment securities— 
Total revenue, as adjusted$87,747 $65,167 
Efficiency ratio50.69 %51.98 %
Income Tax Expense
The effective tax rate in the second quarter of 2022 was 24.7% compared to 25.7% during the same period in 2021 primarily as a result of tax advantaged items increasing as a percentage of pretax income.
Comparison of Operating Results for the Six Months Ended June 30, 2022 and 2021
Net Income
Net income was $45.0 million, or $0.69 per diluted share, for the first six months of 2022 compared to net income of $50.6 million, or $0.98 per diluted share, for the first six months of 2021. Net income decreased primarily as a result of increases of $27.0 million in noninterest expense and $18.5 million in provision for credit losses, partially offset by a $34.2 million increase in net interest income.
Net interest income on a tax equivalent basis for the first six months of 2022 was $151.4 million, compared to $116.8 million for the first six months of 2021. The increase in net interest income was due primarily to an increase in the volume of interest-earning assets and loan yields, as well as a reduction in the cost of interest-bearing deposits. The net interest margin of 3.20% in the first six months of 2022 decreased from 3.23% for the same period in 2021, primarily due to a decrease in the yield on investment securities. The components of net interest income are discussed in greater detail below.
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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 six months ended June 30, 2022 and June 30, 2021 are computed on a tax equivalent basis using a tax rate of 21%.
For the Six Months Ended June 30, 2022For the Six Months Ended June 30, 2021
(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)$7,125,893 $144,782 4.05 %$6,085,057 $119,307 3.95 %
Taxable investment securities and other1,751,429 14,994 1.71 %910,187 8,010 1.76 %
Tax-exempt securities352,926 3,473 1.97 %124,769 1,573 2.52 %
Federal funds sold (2)316,327 417 0.27 %166,843 89 0.11 %
Total interest-earning assets
9,546,575 163,666 3.42 %7,286,856 128,979 3.57 %
Noninterest-earning assets:
Allowance for credit losses(69,111)(69,767)
Other assets
687,973 527,625 
TOTAL ASSETS
$10,165,437 $7,744,714 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Savings accounts$1,142,536 $990 0.17 %$622,331 $162 0.05 %
Interest-bearing transaction accounts4,384,215 6,208 0.28 %3,442,116 5,672 0.33 %
Time deposits841,214 1,670 0.40 %962,042 3,528 0.73 %
Federal funds purchased13,801 125 1.81 %4,586 0.36 %
Securities sold under agreements to repurchase103,707 45 0.09 %74,855 31 0.08 %
Long -term borrowings218,474 3,209 2.00 %141,703 2,780 2.54 %
Total interest-bearing liabilities
6,703,947 12,247 0.37 %5,247,633 12,181 0.47 %
Noninterest-bearing liabilities:
Demand deposits2,252,693 1,603,714 
Other liabilities115,549 117,559 
Stockholders' equity1,093,248 775,808 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$10,165,437 $7,744,714 
Net interest income/spread
151,419 3.05 %116,798 3.10 %
Tax equivalent basis adjustment
729 330 
NET INTEREST INCOME$150,690 $116,468 
Net interest margin (3)3.20 %3.23 %

(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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On a tax equivalent basis, interest income increased $34.7 million, or 27%, from $129.0 million in the first six months of 2021 to $163.7 million in the first six months of 2022. The increase in interest income was primarily due to growth in the volume of interest-earning assets and yields on loans, partially offset by a decrease in the rate earned on investment securities. Average loans increased $1.04 billion compared to the first six months of 2021, due to the acquisition of 1st Constitution. The yield on average loans of 4.05% in the first six months of 2022 was 10 basis points higher than the same period in 2021. Average taxable and tax-exempt investment securities increased $841.2 million and $228.2 million, respectively, for the first six months of 2022 compared to the same period in 2021 due to the acquisition of 1st Constitution. The yield on average taxable and tax-exempt investment securities decreased five basis points and 55 basis points, respectively, due to market conditions. Average federal funds sold increased $149.5 million in the first six months of 2022 compared to the same period in 2021, while the yield on federal funds sold increased 16 basis points.
Total interest expense of $12.2 million in the first six months of 2022 was $66,000 less than the interest expense reported for the same period in 2021. Total average interest-bearing liabilities increased $1.46 billion, while the cost of average interest-bearing liabilities decreased from 0.47% in the first six months of 2021 to 0.37% in the first six months of 2022. The increase in the balance was due to the acquisition of deposits from 1st Constitution. Rates paid decreased in almost all categories of interest-bearing liabilities. The cost of long-term borrowings, time deposits and interest-bearing transaction accounts decreased by 54 basis points, 33 basis points and five basis points, respectively, while the cost of overnight borrowings increased 145 basis points compared to the first six months of 2021.
Provision for Credit Losses
In the first six months of 2022, a $9.9 million provision for credit losses was recorded, compared to a $8.6 million benefit for the same period last year. As of June 30, 2022, the provision was comprised of a provision for credit losses on loans of $6.2 million, a provision for credit losses on securities of $2.7 million and a provision for off-balance-sheet exposures of $975,000. In addition, the Company recorded an initial allowance for credit losses of $12.1 million on purchased credit deteriorated loans acquired from 1st Constitution. The benefit for credit losses on loans in the six months ended June 30, 2021 was comprised of a benefit for credit losses on loans of $8.1 million, a provision for credit losses on securities of $156,000 and a benefit for off-balance-sheet exposures of $635,000. The increase in the provision recorded for loans and off-balance-sheet exposures in 2022 was due primarily to deterioration of the macroeconomic factors used in calculating the provision. The provision for credit losses on securities during the six months of 2022 was primarily due to increased unrealized losses on lower credit rated securities within the investment portfolio. The increase in unrealized losses in 2022 was primarily due to the rise in market interest rates, which caused decreases in the fair values of investment securities available for sale. The Company charged off $7.6 million of purchased credit deteriorated loans acquired from 1st Constitution in first six months of 2022. In addition, charge-offs totaled $539,000 and recoveries totaled $672,000 in the first six months of 2022 compared to $3.1 million and $519,000, respectively, in the first six months of 2021. For more information regarding the determination of the provision, see “Risk Elements” below.
Noninterest Income
Noninterest income of $13.8 million in the first six months of 2022 increased by $2.8 million from $11.0 million in the first six months of 2021 due primarily to increases in service charges on deposit accounts, commissions and fees and other income. Service charges on deposit accounts increased $596,000 compared to the first six months of 2021 due to an increase in debit card income, while commissions and fees increased $1.3 million due primarily to increases in wire transfer charges and financial services income. Gains on sales of loans increased $826,000 driven primarily by an increase in sale volume of residential mortgages. Losses on equity securities totaled $849,000 and $133,000 in the first six months of 2022 and 2021, respectively. Other income increased $672,000 in 2022 due primarily to reductions in write-downs on premises and recoveries on loans charged off from prior acquisitions.
Noninterest Expense
Noninterest expense in the first six months of 2022 totaled $95.0 million, increasing $27.0 million from the $68.0 million reported for the first six months of 2021. Compensation and employee benefit expense and premises and equipment expense increased $13.7 million and $3.3 million, respectively, compared to the first six months of 2021 due to the increases in staff and premises from the 1st Constitution acquisition. FDIC insurance expense remained flat at $1.3 million for the first six months of 2022 and 2021. The first six months of 2022 included $4.6 million in merger related costs for the completed acquisition of 1st Constitution Bancorp. Other operating expenses increased $4.5 million in the first six months of 2022 compared to the same period in 2021. Included in the increase in other operating expenses are increases in core deposit intangible amortization, consulting, and marketing expense, which increased $742,000, $627,000 and $412,000, respectively, compared to the first six months of 2021. The Company’s efficiency ratio, a non-GAAP financial measure, was 54.01% in the first six months of 2022, compared to 52.85% for the same period in 2021. 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.
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The following table shows the calculation of the efficiency ratio for the periods presented:
 Six Months Ended June 30,
(dollars in thousands)20222021
Total noninterest expense$95,027 $68,000 
Less:
Amortization of core deposit intangibles1,189 447 
Merger-related expenses4,585 — 
Noninterest expense, as adjusted$89,253 $67,553 
Net interest income$150,690 $116,468 
Noninterest income13,843 11,028 
Total revenue164,533 127,496 
Tax-equivalent adjustment on municipal securities729 330 
Less:
Gains on sales of investment securities— 
Total revenue, as adjusted$165,262 $127,817 
Efficiency ratio54.01 %52.85 %
Income Tax Expense
The effective tax rate in the first six months of 2022 was 24.4% compared to 25.7% during the same period last year due primarily to tax advantaged items declining as a percentage of pretax income resulting from the increase in pretax income during the current period.
Financial Condition
The Company’s total assets increased $2.18 billion from December 31, 2021, to $10.37 billion at June 30, 2022. Total loans, net of deferred fees, were $7.41 billion, an increase of $1.43 billion, or 24% from $5.98 billion at December 31, 2021. Total deposits were $8.50 billion, an increase of $1.54 billion, or 22%, from December 31, 2021, while total borrowings increased $340.7 million to $651.2 million at June 30, 2022.
With the completion of the 1st Constitution merger in January 2022, the Company recorded the assets acquired and the liabilities assumed in the acquisition at their estimated fair values as of the acquisition date. Total assets, total loans and total deposits acquired were $1.97 billion, $1.10 billion and $1.65 billion, respectively.
Loans
Lakeland primarily serves New Jersey, the Hudson Valley region in New York and the surrounding areas. Its equipment finance division serves a broader market with a primary focus on the Northeast United States. Total loans, net of deferred fees, totaled $7.41 billion at June 30, 2022, an increase of $1.43 billion as compared to December 31, 2021 and included $1.10 billion of loans acquired from 1st Constitution. Excluding the impact of the 1st Constitution acquisition, loans increased $337.1 million or 6%. For more information on the loan portfolio, see Note 5 in Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Risk Elements
Commercial loans are placed on a non-accrual status with all accrued interest and unpaid interest reversed if (a) because of the deterioration in the financial position of the borrower, they are maintained on a cash basis (which means payments are applied when and as received rather than on a regularly scheduled basis), (b) payment of all contractual principal and interest is not expected, or (c) principal and interest have been in default for a period of 90 days or more unless the obligation is both well-secured and in process of collection. Residential mortgage loans and closed-end consumer loans are placed on non-accrual status at the time principal and interest have been in default for a period of 90 days or more, except where there exists sufficient collateral to cover the defaulted principal and interest payments, and the loans are well-secured and in the process of collection. Open-end consumer loans secured by real estate are generally placed on non-accrual status and reviewed for charge-off when principal and interest payments are four months in arrears unless the obligations are well-secured and in the process of collection. Interest thereafter on such charged-off consumer loans is taken into income when received only after full recovery of principal. As a general rule, a non-accrual asset may be restored to accrual status when none of its
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principal or interest is due and unpaid and satisfactory payments have been received for a sustained period (usually six months), or when it otherwise becomes well-secured and in the process of collection.
Non-performing assets, including non-accrual PCD loans, increased $5.2 million from $17.0 million at December 31, 2021 to $22.2 million at June 30, 2022. Owner occupied commercial non-accrual loans increased $9.8 million due to one loan, while residential non-accrual loans increased by $1.4 million. Other non-accrual loan categories decreased by a total of $6.6 million as the Company exited three larger loan relationships. The percentage of non-performing assets to total assets was 0.21% at June 30, 2022 compared to 0.21% at December 31, 2021. Non-accrual loans at June 30, 2022 included three loan relationships with a balance of $1 million or greater, totaling $15.9 million and two loan relationships between $500,000 and $1.0 million, totaling $1.8 million. At June 30, 2022, there were no loans that were past due more than 89 days and still accruing and at December 31, 2021, one loan with a recorded investment of $1,000 was past due more than 89 days and still accruing.
On June 30, 2022 and December 31, 2021, the Company had $3.2 million and $3.3 million, respectively, in loans that were TDRs and accruing interest income. These loans are expected to be able to perform under the modified terms of the loan. At June 30, 2022 and December 31, 2021, the Company had $928,000 and $127,000, respectively, in TDRs that were included in non-accrual loans.
At June 30, 2022 and December 31, 2021, the Company had $93.4 million and $102.3 million, respectively, of loans that were rated substandard that were not classified as non-performing. There were no loans at June 30, 2022, other than those designated non-performing 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 credit losses on loans
The Company accounts for the allowance for credit losses using Accounting Standards Update ("ASU") 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which requires the measurement of expected credit losses for financial assets measured at amortized cost, including loans and certain off-balance-sheet credit exposures. Under the standard, the Company's methodology for determining the allowance for credit losses on loans is based upon key assumptions, including the lookback periods, historic net charge-off factors, economic forecasts, reversion periods, prepayments and qualitative adjustments. The allowance is measured on a collective, or pool, basis when similar risk characteristics exist. Loans that do not share common risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation.
The overall balance of the allowance for credit losses on loans of $68.8 million at June 30, 2022 increased $10.8 million from December 31, 2021, an increase of 19% due primarily to a day one PCD allowance of $12.1 million for the 1st Constitution acquisition offset by charge-offs of 1st Constitution's PCD loans of $7.6 million. The Company also recorded a provision on 1st Constitution's non-PCD loans of $4.6 million.

 
As of and for the Six Months Ended June 30,
As of and for the Year Ended
(dollars in thousands)20222021December 31, 2021
Allowance for credit losses on loans to total loans outstanding0.93 %1.01 %0.97 %
Allowance for credit losses on loans$68,836 $60,389 $58,047 
Total loans outstanding7,408,540 5,988,832 5,976,148 
Non-accrual loans to total loans outstanding0.30 %0.38 %0.28 %
Non-accrual loans$22,161 $22,615 $16,981 
Total loans outstanding7,408,540 5,988,832 5,976,148 
Allowance for credit losses on loans to non-accrual loans310.62 %267.03 %341.83 %
Allowance for credit losses on loans$68,836 $60,389 $58,047 
Non-accrual loans22,161 22,615 16,981 
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As of and for the Six Months Ended June 30,
As of and for the Year Ended
(dollars in thousands)20222021December 31, 2021
Net charge-offs (recoveries) during the period to average loans outstanding:
Non-owner occupied commercial— %0.19 %0.10 %
Net charge-offs during the period$— $2,240 $2,246 
Average amount outstanding2,712,198 2,383,810 2,347,575 
Owner occupied commercial(0.06)%0.01 %— %
Net (recoveries) charge-offs during the period$(313)$61 $(20)
Average amount outstanding1,073,824 856,349 870,727 
Multifamily— %— %— %
Net charge-offs during the period$— $— $28 
Average amount outstanding1,078,635 854,362 889,456 
Non owner occupied residential(0.01)%0.20 %0.03 %
Net (recoveries) charge-offs during the period$(14)$199 $58 
Average amount outstanding212,046 195,012 188,166 
Commercial, industrial and other0.32 %0.06 %(0.08)%
Net charge-offs during the period$1,050 $226 $(487)
Average amount outstanding661,502 702,664 593,979 
Construction3.36 %(0.04)%(0.01)%
Net charge-offs (recoveries) during the period$6,804 $(67)$(21)
Average amount outstanding404,977 299,711 312,107 
Equipment finance0.07 %0.15 %0.24 %
Net charge-offs during the period$42 $87 $285 
Average amount outstanding125,730 119,152 120,252 
Residential mortgage(0.02)%(0.07)%(0.02)%
Net recoveries during the period$(48)$(140)$(64)
Average amount outstanding557,759 385,622 398,141 
Consumer(0.01)%— %0.05 %
Net (recoveries) charge-offs during the period$(20)$$137 
Net (recoveries) charge-offs during the period295,708 287,349 281,896 
Total loans 0.21 %0.09 %0.04 %
Net charge-offs during the period$7,501 $2,613 $2,162 
Average amount outstanding7,122,379 6,084,031 6,002,299 
Non-accrual loans of $22.2 million at June 30, 2022 increased $5.2 million from December 31, 2021. The allowance for credit losses as a percent of total loans was 0.93% at June 30, 2022 compared to 0.97% at December 31, 2021. The decrease in the allowance for credit losses as a percent of total loans was primarily due to an improvement in forecasted macroeconomic conditions and continued strength in asset quality.
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 credit losses to be adequate at June 30, 2022.
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Net recoveries as a percentage of average loans outstanding was 0.01% in the second quarter of 2022 compared to net charge-offs as a percentage of average loans outstanding of 0.10% for the second quarter of 2021. Net charge-offs as a percentage of average loans outstanding was 0.21% and 0.09% for the six months ended June 30, 2022 and 2021, respectively, with the change predominately related to 1st Constitution PCD loans charged off in the first quarter of 2022.
Investment Securities
Investment securities increased $486.1 million in the six months ended June 30, 2022, including $342.3 million acquired from 1st Constitution, to $2.08 billion at June 30, 2022 compared to $1.59 billion at December 31, 2021, as the Company deployed excess cash. For detailed information on the composition and maturity distribution of the Company’s investment securities portfolio, see Note 4 in Notes to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.
Deposits
Total deposits increased from $6.97 billion at December 31, 2021 to $8.50 billion at June 30, 2022, an increase of $1.54 billion, or 22%, including $1.65 billion assumed in the 1st Constitution merger. Excluding the impact of the 1st Constitution acquisition, deposits decreased $114.6 million or 2%. Savings and interest-bearing transaction accounts increased $933.1 million due primarily to an increase in interest bearing checking and savings accounts resulting primarily from the addition of 1st Constitution deposits. Noninterest-bearing deposits increased $598.1 million, including $510.9 million from 1st Constitution, during the six months ended June 30, 2022 to $2.33 billion.
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 $67.3 million for the first six months of 2022 compared to $46.1 million for the same period in 2021.
Deposits. Lakeland can offer new products or change its rate structure in order to increase deposits. In the first six months of 2022, Lakeland’s deposits increased $1.54 billion, including the impact of the 1st Constitution acquisition.
Sales of investment securities. At June 30, 2022 the Company had $1.14 billion in securities designated “available for sale.” Of these securities, $607.3 million were pledged to secure public deposits and for other purposes required by applicable laws and regulations.
Principal repayments on loans.
Credit lines. As a member of the FHLB, Lakeland has the ability to borrow overnight based on the fair value of collateral pledged. Lakeland had $330.0 million of overnight borrowings from the FHLB on June 30, 2022. Lakeland also has overnight federal funds lines available for it to borrow up to $250.0 million, of which none were outstanding at June 30, 2022. Lakeland may also borrow from the discount window of the Federal Reserve Bank of New York based on the fair value of collateral pledged. Lakeland had no borrowings with the Federal Reserve Bank of New York as of June 30, 2022.
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 fair value of securities collateralizing our securities sold under agreements to repurchase may decline due to changes in interest rates and may necessitate our lenders to issue a “margin call” which requires Lakeland to pledge additional collateral to meet that margin call.
Management and the Board monitor the Company’s liquidity through the Asset/Liability Committee, which monitors the Company’s compliance with certain regulatory ratios and other various liquidity guidelines. 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 six months ended June 30, 2022 follows.
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Cash and cash equivalents totaling $245.5 million on June 30, 2022 increased $16.9 million from December 31, 2021. Operating activities provided $67.3 million in net cash. Investing activities used $242.5 million in net cash, primarily due to securities purchases of $370.4 million and loan funding of $329.0 million, partially offset by net cash acquired in the 1st Constitution acquisition of $326.2 million. Financing activities provided $192.1 million in net cash primarily due to an increase of $325.8 million in federal funds purchased and securities sold under agreements to repurchase, partially offset by a net decrease in deposits of $114.3 million and dividends paid of $18.3 million. The Company anticipates that it will have sufficient funds available to meet its current loan commitments and deposit maturities.
The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of June 30, 2022. Interest on subordinated debentures and long-term borrowed funds is calculated based on current contractual interest rates.
(in thousands)TotalWithin
One Year
After One
But Within
Three Years
After Three
But Within
Five Years
After
Five Years
Minimum annual rentals on noncancellable operating leases
$33,752 $4,833 $8,317 $5,508 $15,094 
Benefit plan commitments4,323 422 761 745 2,395 
Remaining contractual maturities of time deposits
764,042 622,930 117,417 23,695 — 
Subordinated debentures194,027 — — — 194,027 
Loan commitments1,684,999 1,200,413 219,120 12,353 253,113 
Other borrowings25,000 — — 25,000 — 
Interest on other borrowings (1)59,075 6,022 11,991 11,659 29,403 
Standby letters of credit20,218 20,027 191 — — 
Total$2,785,436 $1,854,647 $357,797 $78,960 $494,032 
(1) Includes interest on other borrowings and subordinated debentures at a weighted rate of 2.75%.    
Capital Resources
Total stockholders’ equity increased to $1.09 billion on June 30, 2022 from $827.0 million on December 31, 2021, an increase of $263.1 million. Book value per common share increased to $16.82 on June 30, 2022 from $16.34 on December 31, 2021. Tangible book value per share decreased from $13.21 per share on December 31, 2021 to $12.47 per share on June 30, 2022, a decrease of 6%, resulting primarily from an increase in goodwill and the number of shares outstanding from the 1st Constitution merger. Please see “Non-GAAP Financial Measures” below. In addition to the equity acquired in the 1st Constitution merger of $285.7 million, the increase in stockholders’ equity from December 31, 2021 to June 30, 2022 was due in part to $45.0 million of net income, offset by an other comprehensive loss of $50.9 million and by the payment of cash dividends on common stock of $18.3 million.
The Company and Lakeland are subject to various regulatory capital requirements that are monitored by federal banking agencies. Failure to meet minimum capital requirements can lead to certain supervisory actions by regulators; any supervisory action could have a direct material adverse effect on the Company or Lakeland or their financial statements. As of June 30, 2022, the Company and Lakeland met all capital adequacy requirements to which they are subject.     
As of June 30, 2022, the Company’s capital levels remained characterized as “well-capitalized.”
The capital ratios for the Company and Lakeland Bank for the periods presented are as follows: 
 Tier 1 Capital to Total
Average Assets Ratio
Common Equity Tier 1 to
Risk-Weighted Assets
Ratio
Tier 1 Capital to Risk-
Weighted Assets Ratio
Total Capital to Risk-
Weighted Assets Ratio
June 30, 2022December 31, 2021June 30, 2022December 31, 2021June 30, 2022December 31, 2021June 30, 2022December 31, 2021
The Company9.05 %8.51 %10.57 %10.67 %11.12 %11.15 %13.74 %14.48 %
Lakeland Bank10.03 %9.70 %12.31 %12.71 %12.31 %12.71 %13.16 %13.67 %
Required capital ratios including conservation buffer4.00 %4.00 %7.00 %7.00 %8.50 %8.50 %10.50 %10.50 %
“Well capitalized” institution under FDIC Regulations5.00 %5.00%6.50 %6.50%8.00 %8.00%10.00 %10.00%
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Non-GAAP Financial Measures
Reported amounts are presented in accordance with U.S. GAAP. The Company’s management uses certain supplemental non-GAAP information in its analysis of the Company’s financial results. Specifically, the Company provides measurements and ratios based on tangible equity and tangible assets. These measures are utilized by regulators and market analysts to evaluate a company’s financial condition and therefore, such information is useful to investors.
The Company also provides measures based on what it believes are its operating earnings on a consistent basis, and excludes material non-routine operating items which affect the GAAP reporting of results of operations. The Company’s management believes that providing this information to analysts and investors allows them to better understand and evaluate the Company’s core financial results for the periods in question.
These disclosures should not be viewed as a substitute for financial results determined in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies.
(dollars in thousands, except share and per share amounts)June 30, 2022December 31, 2021
Calculation of Tangible Book Value per Common Share
Total common stockholders’ equity at end of period - GAAP$1,090,145 $827,014 
Less:
Goodwill271,829 156,277 
Other identifiable intangible assets, net10,250 2,420 
Total tangible common stockholders’ equity at end of period - Non-GAAP$808,066 $668,317 
Shares outstanding at end of period64,794 50,606 
Book value per share - GAAP$16.82 $16.34 
Tangible book value per share - Non-GAAP$12.47 $13.21 
Calculation of Tangible Common Equity to Tangible Assets
Total tangible common stockholders’ equity at end of period - Non-GAAP$808,066 $668,317 
Total assets at end of period$10,374,178 $8,198,056 
Less:
Goodwill271,829 156,277 
Other identifiable intangible assets, net10,250 2,420 
Total tangible assets at end of period - Non-GAAP$10,092,099 $8,039,359 
Common equity to assets - GAAP10.51 %10.09 %
Tangible common equity to tangible assets - Non-GAAP8.01 %8.31 %
 For the Three Months Ended June 30,For the Six Months Ended June 30,
(dollars in thousands)2022202120222021
Calculation of Return on Average Tangible Common Equity
Net income - GAAP$29,117 $27,407 $45,046 $50,582 
Total average common stockholders’ equity
$1,090,613 $781,299 $1,093,249 $775,808 
Less:
Average goodwill271,829 156,277 268,637 156,277 
Average other identifiable intangible assets, net
10,569 2,979 10,709 3,085 
Total average tangible common stockholders’ equity - Non-GAAP
$808,215 $622,043 $813,903 $616,446 
Return on average common stockholders’ equity - GAAP
10.71 %14.07 %8.31 %13.15 %
Return on average tangible common stockholders’ equity - Non-GAAP
14.45 %17.67 %11.16 %16.55 %
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Recent Accounting Pronouncements
In June 2022, the Financial Accounting Standards Board ("FASB") issued Update 2022-03, "Fair Value Measurement (Topic 820)" ("ASU 2022-03"). The guidance clarifies the guidance in Topic 820 when measuring the fair value of an equity security subject to contractual restrictions that prohibits the sale of an equity security, amends a related illustrative example, and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. This ASU will be effective for financial statements issued by public business entities for fiscal years and interim periods beginning after December 15, 2023. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company does not expect ASU 2022-03 to have a material impact on the Company's financial statements.
In March 2022, FASB issued Update 2022-02, "Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures" ("ASU 2022-02"). The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments in Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption using prospective application, including adoption in an interim period where the guidance should be applied as of the beginning of the fiscal year. The Company is currently assessing the impact of ASU 2022-02 on its disclosures and control structure; however, the Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements.
In October 2021, FASB issued Update 2021-08, an update to Topic 805, Business Combinations. The update provides guidance to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. The amendment provides specific guidance on how to recognize and measure acquired contract assets and contract liabilities from revenue contracts in a business combination. The amendments in this ASU apply to all entities that enter into a business combination within the scope of Subtopic 805-10, Business Combinations - Overall. This ASU will be effective for financial statements issued by public business entities for fiscal years and interim periods beginning after December 15, 2022. The Company does not expect the ASU to have a material impact on the Company's financial statements.
In March 2020, 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 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 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2021 with early adoption permitted. The update did not have a material impact on the Company's financial statements.
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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 $316.5 million. The information provided for net interest income assumes that changes in interest rates change gradually in equal increments (“rate ramp”) over the twelve month period.
 Changes in Interest Rates
Rate Ramp+200 bp
Asset/Liability Policy limit(5.0)%
June 30, 2022(1.0)%
December 31, 2021(0.9)%
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+400bp+300 bp+200 bp+100 bp
Asset/Liability policy limit(25.0)%(20.0)%(15.0)%(10.0)%
June 30, 2022(3.1)%(2.3)%(1.6)%(0.6)%
December 31, 2021(1.2)%(0.9)%(0.7)%(0.5)%
The base case for the following table is an estimate of the Company’s net portfolio value for the periods presented using current discount rates, and assuming the Company’s interest-sensitive assets and liabilities remain at period-end levels. The net portfolio value at June 30, 2022 (the base case) was $2.10 billion. 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+400bp+300 bp+200 bp+100 bp-100 bp
Asset/Liability policy limit(35.0)%(25.0)%(20.0)%(10.0)%(10.0)%
June 30, 2022(11.4)%(8.4)%(5.3)%(2.2)%0.1 %
December 31, 2021(14.8)%(10.9)%(7.0)%(2.7)%(7.0)%
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 for the year ended December 31, 2021.
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Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes in net interest income requires the making of certain assumptions regarding prepayment and deposit decay rates, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. While management believes such assumptions are reasonable, there can be no assurance that assumed prepayment rates and decay rates will approximate actual future loan prepayment and deposit withdrawal activity. Moreover, the net interest income table presented assumes that the composition of interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the net interest income table provides an indication of the Company’s interest rate risk exposure at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results.
Item 4.  Controls and Procedures
(a)Disclosure controls and procedures. As of the end of the Company’s most recently completed fiscal quarter covered by this report, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and are operating in an effective manner and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b)Changes in internal controls over financial reporting. There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2022 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 for the year ended December 31, 2021.
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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 second quarter of 2022.
PeriodTotal 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 ProgramsMaximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
April 1 to April 30, 2022— $— — 2,393,423
May 1 to May 31, 2022— — — 2,393,423
June 1 to June 30, 2022— — — 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. The share repurchase program has no expiration date.
Item 3.   Defaults Upon Senior SecuritiesNot Applicable
Item 4.   Mine Safety DisclosuresNot Applicable
Item 5.   Other InformationNot applicable
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Item 6.   Exhibits
2.1
3.1
3.2
4.1
4.2
4.3
31.1
31.2
32.1
101.INSInline 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.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Lakeland Bancorp, Inc.
(Registrant)
/s/ Thomas J. Shara
Thomas J. Shara
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Thomas F. Splaine
Thomas F. Splaine
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: August 5, 2022

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