LAKELAND BANCORP INC - Quarter Report: 2022 March (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		March 31, 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 class	Trading Symbol	Name of exchange on which registered
Common Stock, no par value	LBAI	The NASDAQ Stock Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

As of May 3, 2022, there were 64,779,728 outstanding shares of Common Stock, no par value.

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LAKELAND BANCORP, INC.

Form 10-Q Index


		PAGE
	Part I. Financial Information

Item 1.	Financial Statements:

	Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021	3
	Consolidated Statements of Income for the Three Months Ended March 31, 2022 and 2021 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2022 and 2021 (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021 (unaudited)	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49

Item 4.	Controls and Procedures	50

	Part II. Other Information

Item 1.	Legal Proceedings	51

Item 1A.	Risk Factors	51

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 3.	Defaults Upon Senior Securities	51

Item 4.	Mine Safety Disclosures	51

Item 5.	Other Information	51

Item 6.	Exhibits	52

Signatures		53

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Lakeland Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets


	March 31, 2022		December 31, 2021
(dollars in thousands)	(unaudited)

Assets
Cash	$	384,490	$	199,158
Interest-bearing deposits due from banks	37,179		29,372
Total cash and cash equivalents	421,669		228,530
Investment securities available for sale, at fair value (allowance for credit losses of $1,267 at March 31, 2022 and $83 at December 31, 2021)	1,170,938		769,956
Investment securities held to maturity (fair value of $859,928 at March 31, 2022 and $815,211 at December 31, 2021 and allowance for credit losses of $199 at March 31, 2022 and $181 at December 31, 2021)	940,786		824,956
Equity securities, at fair value	16,915		17,368
Federal Home Loan Bank and other membership bank stock, at cost	10,415		9,049
Loans held for sale	1,906		1,943
Loans, net of deferred fees	7,137,793		5,976,148
Less: Allowance for credit losses	67,112		58,047
Total loans, net	7,070,681		5,918,101
Premises and equipment, net	58,591		45,916
Operating lease right-of-use assets	27,281		15,222
Accrued interest receivable	24,999		19,209
Goodwill	271,829		156,277
Other intangible assets	10,842		2,420
Bank owned life insurance	155,700		117,356
Other assets	92,681		71,753
Total Assets	$	10,275,233	$	8,198,056
Liabilities and Stockholders' Equity
Liabilities





Deposits	8,748,909		6,965,823
Federal funds purchased and securities sold under agreements to repurchase	102,911		106,453
Other borrowings	25,000		25,000
Subordinated debentures	193,904		179,043
Operating lease liabilities	28,694		16,523
Other liabilities	86,533		78,200
Total Liabilities	9,185,951		7,371,042
Stockholders' Equity
Common stock, no par value; authorized 100,000,000 shares; issued 64,910,643 shares and outstanding 64,779,608 shares at March 31, 2022 and issued 50,737,400 shares and outstanding 50,606,365 shares at December 31, 2021	852,110		565,862
Retained earnings	266,460		259,340
Treasury shares, at cost, 131,035 shares at March 31, 2022 and December 31, 2021	(1,452)		(1,452)
Accumulated other comprehensive income	(27,836)		3,264
Total Stockholders' Equity	1,089,282		827,014
Total Liabilities and Stockholders' Equity	$	10,275,233	$	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 March 31,
(in thousands, except per share data)	2022		2021
Interest Income
Loans and fees	$	67,809	$	58,778
Federal funds sold and interest-bearing deposits with banks	182		37
Taxable investment securities and other	6,709		3,981
Tax-exempt investment securities	1,302		612
Total Interest Income	76,002		63,408
Interest Expense
Deposits	4,039		5,124
Federal funds purchased and securities sold under agreements to repurchase	20		23
Other borrowings	1,555		1,533
Total Interest Expense	5,614		6,680
Net Interest Income	70,388		56,728
Provision (benefit) for credit losses	6,272		(2,642)
Net Interest Income after Provision (Benefit) for Credit Losses	64,116		59,370
Noninterest Income
Service charges on deposit accounts	2,626		2,296
Commissions and fees	2,106		1,598
Income on bank owned life insurance	830		634
Loss on equity securities	(485)		(144)
Gains on sales of loans held for sale	1,426		708

Swap income	—		562
Other income	277		105
Total Noninterest Income	6,780		5,759
Noninterest Expense
Compensation and employee benefits	27,679		20,518
Premises and equipment	7,972		6,318
FDIC insurance expense	672		711
Data processing expense	1,670		1,255
Merger related expenses	4,585		—
Other expenses	7,381		5,101
Total Noninterest Expense	49,959		33,903
Income before provision for income taxes	20,937		31,226
Provision for income taxes	5,008		8,051
Net Income	$	15,929	$	23,175
Per Share of Common Stock
Basic earnings	$	0.25	$	0.45
Diluted earnings	$	0.25	$	0.45
Dividends paid	$	0.135	$	0.125

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

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Lakeland Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)


	For the Three Months Ended March 31,
(in thousands)	2022		2021

Net Income	$	15,929	$	23,175
Other comprehensive income (loss), net of tax:
Unrealized losses on securities available for sale	(30,965)		(13,135)


Amortization of gain on debt securities reclassified to held to maturity	(135)		—
Unrealized gains on derivatives	—		47

Other comprehensive loss	(31,100)		(13,088)
Total Comprehensive (Loss) Income	$	(15,171)	$	10,087

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

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Lakeland Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the Three Months Ended March 31, 2022 and 2021


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

January 1, 2021	$	562,421	$	191,418	$	(1,452)	$	11,397	$	763,784


Net income	—		23,175		—		—		23,175
Other comprehensive loss, net of tax	—		—		—		(13,088)		(13,088)


Stock based compensation	1,206		—		—		—		1,206
Retirement of restricted stock	(656)		—		—		—		(656)
Exercise of stock options	13		—		—		—		13
Cash dividends on common stock of $0.125 per share	—		(6,369)		—		—		(6,369)
March 31, 2021	562,984		208,224		(1,452)		(1,691)		768,065

January 1, 2022	$	565,862	$	259,340	$	(1,452)	$	3,264	$	827,014


Net income	—		15,929		—		—		15,929
Other comprehensive loss, net of tax	—		—		—		(31,100)		(31,100)

Issuance of stock for 1st Constitution acquisition	285,742		—		—		—		285,742
Stock based compensation	1,439		—		—		—		1,439
Retirement of restricted stock	(933)		—		—		—		(933)

Cash dividends on common stock of $0.135 per share	—		(8,809)		—		—		(8,809)
March 31, 2022	$	852,110	$	266,460	$	(1,452)	$	(27,836)	$	1,089,282

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

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Lakeland Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)


	For the Three Months Ended March 31,
(in thousands)	2022		2021
Cash Flows from Operating Activities:
Net income	$	15,929	$	23,175
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premiums, discounts and deferred loan fees and costs	1,271		(1,497)
Depreciation and amortization	1,665		1,040
Amortization of intangible assets	596		226
Amortization of operating lease right-of-use assets	1,021		682
Provision (benefit) for credit losses	6,272		(2,642)
Loans originated for sale	(25,379)		(16,905)
Proceeds from sales of loans held for sale	31,462		17,718

Loss on equity securities	485		144
Income on bank owned life insurance	(777)		(634)
Gains on proceeds from bank owned life insurance policies	(53)		—
Gains on sales of loans held for sale	(1,426)		(708)
Gains on other real estate and other repossessed assets	(8)		—
Loss on sales of premises and equipment	3		—



Stock-based compensation	1,439		1,206

Excess tax deficiencies (benefits)	79		(88)
(Increase) decrease in other assets	(1,860)		26,971
Decrease in other liabilities	(1,379)		(18,687)
Net Cash Provided by Operating Activities	29,340		30,001
Cash Flows from Investing Activities:
Net cash acquired in acquisitions	326,236		—
Proceeds from repayments and maturities of available for sale securities	41,454		55,314
Proceeds from repayments and maturities of held to maturity securities	42,432		9,561


Purchase of available for sale securities	(269,070)		(188,321)
Purchase of held to maturity securities	(35,648)		(3,968)
Purchase of equity securities	(32)		(40)

Death benefit proceeds from bank owned life insurance policy	95		—
Proceeds from redemptions of Federal Home Loan Bank stock	—		11,251
Purchases of Federal Home Loan Bank stock	(119)		(10,044)
Net increase in loans	(60,109)		(94,975)
Proceeds from sales of loans previously held for investment	—		10,078
Proceeds from sales of other real estate and repossessed assets	8		—
Proceeds from dispositions and sales of premises and equipment	123		—
Purchases of premises and equipment	(944)		(1,714)
Net Cash Provided by (Used in) Investing Activities	44,426		(212,858)




















Cash Flows from Financing Activities:
Net increase in deposits	132,657		179,458
Decrease in federal funds purchased and securities sold under agreements to repurchase	(3,542)		(57,561)





Exercise of stock options	—		13
Retirement of restricted stock	(933)		(656)
Dividends paid	(8,809)		(6,369)
Net Cash Provided by Financing Activities	119,373		114,885
Net increase (decrease) in cash and cash equivalents	193,139		(67,972)
Cash and cash equivalents, beginning of period	228,530		270,090
Cash and cash equivalents, end of period	$	421,669	$	202,118

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	For the Three Months Ended March 31,
(in thousands)	2022		2021
Supplemental schedule of non-cash investing and financing activities:
Cash paid during the period for income taxes	$	5,619	$	9,035
Cash paid during the period for interest	6,969		8,273

Transfer of loans to loans held for sale	—		10,078



Right-of-use assets obtained in exchange for new lease liabilities	89		109
Acquisitions:
Non-cash assets acquired:
Federal Home Loan Bank stock	1,247		—
Investment securities available for sale	217,774		—
Investment securities held to maturity	124,485		—
Loans held for sale	4,620		—
Loans	1,095,266		—
Fixed Assets	13,748		—
Operating lease right-of-use assets	12,991		—
Goodwill and other intangible assets, net	124,570		—
Bank owned life insurance	37,580		—
Other assets	8,820		—
Total non-cash assets acquired	1,641,101		—
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		—
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 three months ended March 31, 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 sale	217,774
Investment securities held to maturity	124,485
Federal Home Loan Bank stock	1,247
Loans held for sale	4,620
Loans	1,095,266
Premises and equipment	13,748
Right-of-use assets, operating lease	12,991
Goodwill	115,552
Other intangible assets	9,018
Bank owned life insurance	37,580
Accrued interest receivable and other assets	8,820
Total assets acquired	1,967,337
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 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 loans	3,057
Credit fair value adjustment on non-PCD loans	(6,314)
Fair value of acquired loans at January 6, 2022	1,107,343
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, seven 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 $4.6 million merger-related expenses during the first quarter of 2022 which have been separately stated in the Company's Consolidated Statements of Income. There were no merger-related expenses in the first quarter of 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 March 31, 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 quarters ended March 31, 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)	1st Constitution Actual from acquisition to March 31, 2022		Pro forma Quarter ended March 31, 2022		Pro forma Quarter ended March 31, 2021
Net interest income	$	11,406	$	72,794	$	71,689
Provision (benefit) for credit losses	37		6,272		(1,242)
Noninterest income	2,108		6,478		9,837
Noninterest expense	7,730		48,407		45,306
Net income	4,352		18,713		27,671
Earnings per share:
Fully diluted	$	0.07	$	0.29	$	0.43

Note 3 – Earnings Per Share

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


	For the Three Months Ended March 31,
(in thousands, except per share data)	2022		2021
Net income available to common shareholders	$	15,929	$	23,175
Less: earnings allocated to participating securities	164		216
Net income allocated to common shareholders	$	15,765	$	22,959
Weighted average number of common shares outstanding - basic	63,961		50,576
Share-based plans	277		204
Weighted average number of common shares outstanding - diluted	64,238		50,780
Basic earnings per share	$	0.25	$	0.45
Diluted earnings per share	$	0.25	$	0.45

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


	March 31, 2022
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value
U.S. Treasury and U.S. government agencies	$	397,100	$	131	$	(13,516)	$	—	$	383,715
Mortgage-backed securities, residential	377,454		59		(16,817)		—		360,696
Collateralized mortgage obligations, residential	196,369		80		(6,659)		—		189,790
Mortgage-backed securities, multifamily	1,809		—		(206)		—		1,603
Collateralized mortgage obligations, multifamily	56,101		31		(1,901)		—		54,231
Asset-backed securities	63,685		9		(738)		—		62,956
Obligations of states and political subdivisions	24,069		1		(590)		(2)		23,478
Corporate bonds	96,232		227		(725)		(1,265)		94,469
Total	$	1,212,819	$	538	$	(41,152)	$	(1,267)	$	1,170,938

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	December 31, 2021
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value
U.S. Treasury and U.S. government agencies	$	202,961	$	1,215	$	(789)	$	—	$	203,387
Mortgage-backed securities, residential	238,456		1,250		(1,731)		—		237,975
Collateralized mortgage obligations, residential	191,086		1,693		(1,488)		—		191,291
Mortgage-backed securities, multifamily	1,816		—		(75)		—		1,741
Collateralized mortgage obligations, multifamily	32,254		511		(246)		—		32,519
Asset-backed securities	52,518		153		(87)		—		52,584

Corporate bonds	49,598		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:


	March 31, 2022
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value
U.S. government agencies	$	21,795	$	52	$	(248)	$	—	$	21,599
Mortgage-backed securities, residential	367,084		71		(27,444)		—		339,711
Collateralized mortgage obligations, residential	14,433		—		(1,116)		—		13,317
Mortgage-backed securities, multifamily	4,270		—		(204)		—		4,066

Obligations of states and political subdivisions	530,403		24		(51,898)		(49)		478,480
Corporate bonds	3,000		—		(95)		(150)		2,755
Total	$	940,985	$	147	$	(81,005)	$	(199)	$	859,928


	December 31, 2021
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value
U.S. government agencies	$	18,672	$	293	$	—	$	—	$	18,965
Mortgage-backed securities, residential	370,247		718		(5,989)		—		364,976
Collateralized mortgage obligations, residential	13,921		168		—		—		14,089
Mortgage-backed securities, multifamily	2,710		26		(2)		—		2,734

Obligations of states and political subdivisions	416,587		810		(5,800)		(21)		411,576
Corporate bonds	3,000		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 on the consolidated balance sheets. Subsequent amortization will be recognized over the life of the securities. The Company recorded net amortization of $135,000 during the first quarter of 2022.

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The following table lists contractual maturities of investment securities classified as available for sale and held to maturity as of March 31, 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 Sale				Held to Maturity
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	22,807	$	22,778	$	63,878	$	63,754
Due after one year through five years	264,511		256,516		35,136		34,352
Due after five years through ten years	155,023		149,933		64,103		59,765
Due after ten years	75,060		72,435		392,081		344,963
	517,401		501,662		555,198		502,834
Mortgage-backed and asset-backed securities	695,418		669,276		385,787		357,094
Total	$	1,212,819	$	1,170,938	$	940,985	$	859,928

For the three months ended March 31, 2022 and 2021, there were no sales of available for sale securities. 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 $1.08 billion and $1.04 billion at March 31, 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:


March 31, 2022	Less Than 12 Months				12 Months or Longer				Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities		Fair Value		Unrealized Losses
Available for Sale
U.S. Treasury and U.S. government agencies	$	329,916	$	12,391	$	18,066	$	1,125	58		$	347,982	$	13,516
Mortgage-backed securities, residential	341,088		15,974		12,992		843		110		354,080		16,817
Collateralized mortgage obligations, residential	158,210		6,557		4,645		102		78		162,855		6,659
Mortgage-backed securities, multifamily	—		—		1,603		206		1		1,603		206
Collateralized mortgage obligations, multifamily	41,205		1,832		797		69		16		42,002		1,901
Asset-backed securities	56,624		738		—		—		14		56,624		738
Obligations of states and political subdivisions	21,427		590		—		—		46		21,427		590
Corporate bonds	58,365		612		2,887		113		29		61,252		725
Total	$	1,006,835	$	38,694	$	40,990	$	2,458	$	352	$	1,047,825	$	41,152
Held to Maturity
U.S. government agencies	$	10,000	$	248	$	—	$	—	3		$	10,000	$	248
Mortgage-backed securities, residential	$	329,605	$	26,834	$	5,021	610		162		$	334,626	$	27,444
Collateralized mortgage obligations, residential	13,317		1,116		—		—		12		13,317		1,116
Mortgage-backed securities, multifamily	4,066		204		—		—		3		4,066		204

Obligations of states and political subdivisions	462,388		51,898		—		—		373		462,388		51,898
Corporate bonds	2,905		95		—		—		1		2,905		95
Total	$	822,281	$	80,395	$	5,021	$	610	554		$	827,302	$	81,005

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December 31, 2021	Less Than 12 Months				12 Months or Longer				Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses
Available for Sale
U.S. Treasury and U.S. government agencies	$	76,106	$	322	$	14,670	$	467	15	$	90,776	$	789
Mortgage-backed securities, residential	176,990		1,465		14,582		266		45	191,572		1,731
Collateralized mortgage obligations, residential	86,749		1,429		5,000		59		18	91,749		1,488
Mortgage-backed securities, multifamily	—		—		1,741		75		1	1,741		75
Collateralized mortgage obligations, multifamily	9,083		210		1,072		36		4	10,155		246
Asset-backed securities	14,688		87		—		—		3	14,688		87

Corporate bonds	15,325		(5)		980		20		8	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, multifamily	2,051		2		—		—		1	2,051		2
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:


March 31, 2022	AAA		AA		A		BBB		Not Rated		Total
(in thousands)
U.S. government agencies	$	21,795	$	—	$	—	$	—	$	—	$	21,795
Mortgage-backed securities, residential	367,084		—		—		—		—		367,084
Collateralized mortgage obligations, residential	14,433		—		—		—		—		14,433
Mortgage-backed securities, multifamily	4,270		—		—		—		—		4,270

Obligations of states and political subdivisions	166,385		319,005		1,056		—		43,957		530,403
Corporate bonds	—		—		—		3,000		—		3,000
Total	$	573,967	$	319,005	$	1,056	$	3,000	$	43,957	$	940,985


December 31, 2021	AAA		AA		A		BBB		Not Rated		Total
(in thousands)
U.S. government agencies	$	18,672	$	—	$	—	$	—	$	—	$	18,672
Mortgage-backed securities, residential	370,247		—		—		—		—		370,247
Collateralized mortgage obligations, residential	13,921		—		—		—		—		13,921
Mortgage-backed securities, multifamily	2,710		—		—		—		—		2,710

Obligations of states and political subdivisions	143,777		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 consists of investments in Community Reinvestment funds. The fair value of the equity portfolio was $16.9 million and $17.4 million at March 31, 2022 and December 31, 2021, respectively. For the three months ended March 31, 2022, the Company recorded no sales of equity securities or Community Reinvestment funds. The Company recorded fair value losses on equity securities of $485,000 and $144,000 for the first quarter of 2022 and 2021, respectively. Fair value gain or loss on equity securities are recorded in noninterest income.

As of March 31, 2022, the Company's investments in Community Reinvestment funds include $6.8 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 March 31, 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 include $10.1 million of investment in government guaranteed loans, mortgage-backed securities, small business loans and other instruments supporting affordable housing and economic development as of March 31, 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)	March 31, 2022		December 31, 2021
Non-owner occupied commercial	$	2,639,784	$	2,316,284
Owner occupied commercial	1,122,754		908,449
Multifamily	1,104,206		972,233
Non-owner occupied residential	225,795		177,097
Commercial, industrial and other	657,396		462,406
Construction	404,186		302,228
Equipment finance	123,943		123,212
Residential mortgage	564,042		438,710
Home equity and consumer	295,687		275,529
Total	$	7,137,793	$	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 $17.1 million at March 31, 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 total $4.1 million at March 31, 2022 and $5.8 million at December 31, 2021.

At March 31, 2022 and December 31, 2021, Small Business Association ("SBA") Paycheck Protection Program ("PPP") loans totaled $36.8 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 $3.0 million and $184,000, at March 31, 2022 and December 31, 2021, respectively. At March 31, 2022 and December 31, 2021, the Company had $2.69 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 March 31, 2021 and subsequently sold these loans. Excluding the loan transfers, there were no other sales of loans from the held for investment portfolio during the three months ended March 31, 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 March 31, 2022.


	Term Loans by Origination Year
(in thousands)	2022		2021		2020		2019		2018		Pre-2018		Revolving Loans		Revolving to Term	Total
Non-owner occupied commercial
Pass	$	134,552	$	395,622	$	557,085	$	307,522	$	206,280	$	790,696	$	20,267	—	$	2,412,024
Watch	—		—		8,465		19,248		20,887		54,013		230		—	102,843
Special mention	—		—		456		—		5,712		50,199		1,037		—	57,404
Substandard	—		—		431		15,543		2,656		48,883		—		—	67,513
Total	134,552		395,622		566,437		342,313		235,535		943,791		21,534		—	2,639,784
Owner occupied commercial
Pass	23,803		228,057		161,113		105,987		84,816		360,280		13,101		—	977,157
Watch	—		—		9,507		7,202		2,870		30,493		—		—	50,072
Special mention	—		—		9,697		24,095		3,147		19,425		—		—	56,364
Substandard	—		—		2,341		—		7,029		29,791		—		—	39,161
Total	23,803		228,057		182,658		137,284		97,862		439,989		13,101		—	1,122,754
Multifamily
Pass	68,898		227,863		279,619		79,981		110,943		300,178		1,682		933	1,070,097
Watch	—		9		—		—		1,314		5,585		—		—	6,908
Special mention	—		—		2,458		—		—		14,346		—		—	16,804
Substandard	—		—		—		5,486		—		4,810		101		—	10,397
Total	68,898		227,872		282,077		85,467		112,257		324,919		1,783		933	1,104,206
Non-owner occupied residential
Pass	6,241		31,936		23,161		27,100		17,928		81,630		9,471		298	197,765
Watch	—		—		2,548		2,058		3,746		7,826		125		—	16,303
Special mention	—		—		—		633		833		6,439		—		—	7,905
Substandard	—		—		501		510		611		2,150		50		—	3,822
Total	6,241		31,936		26,210		30,301		23,118		98,045		9,646		298	225,795



Commercial, industrial and other
Pass	2,241		89,641		26,661		69,721		15,211		44,946		365,030		521	613,972
Watch	—		881		7,584		397		—		1,471		11,663		57	22,053
Special mention	—		41		—		2,873		51		2,702		910		250	6,827
Substandard	—		96		130		849		5,950		1,775		5,744		—	14,544
Total	2,241		90,659		34,375		73,840		21,212		50,894		383,347		828	657,396




Construction
Pass	8,790		164,791		112,923		39,336		10,107		27,329		5,673		—	368,949
Watch	9		—		—		912		13,682		1,846		287		—	16,736
Special mention	251		—		—		3,095		—		—		—		—	3,346
Substandard	—		—		—		219		—		14,936		—		—	15,155
Total	9,050		164,791		112,923		43,562		23,789		44,111		5,960		—	404,186








Equipment finance
Pass	13,607		46,564		27,809		24,631		8,517		2,756		—		—	123,884


Substandard	—		—		—		31		21		7		—		—	59
Total	13,607		46,564		27,809		24,662		8,538		2,763		—		—	123,943





Residential mortgage
Pass	81,735		177,323		115,332		37,799		23,626		126,161		—		—	561,976


Substandard	—		—		—		571		123		1,372		—		—	2,066
Total	81,735		177,323		115,332		38,370		23,749		127,533		—		—	564,042

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	Term Loans by Origination Year
(in thousands)	2022		2021		2020		2019		2018		Pre-2018		Revolving Loans		Revolving to Term		Total
Consumer
Pass	15,451		33,877		10,010		5,134		4,175		27,423		198,168		68		294,306


Substandard	30		—		—		—		—		697		654		—		1,381
Total	15,481		33,877		10,010		5,134		4,175		28,120		198,822		68		295,687
Total loans	$	355,608	$	1,396,701	$	1,357,831	$	780,933	$	550,235	$	2,060,165	$	634,193	$	2,127	$	7,137,793

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)	2021		2020		2019		2018		2017		Pre-2017		Revolving Loans		Revolving to Term	Total
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
Substandard	119		431		332		2,656		8,000		43,572		—		—	55,110
Total	363,578		517,020		321,568		212,657		223,013		659,523		18,925		—	2,316,284
Owner occupied commercial
Pass	209,515		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	5		—		—		2,597		1,299		18,972		—		—	22,873
Total	209,520		148,743		107,366		70,148		50,524		313,697		8,343		108	908,449
Multifamily
Pass	225,060		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
Total	225,060		258,452		77,923		86,396		82,920		221,941		18,260		1,281	972,233






Non-owner occupied residential
Pass	28,476		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
Total	28,476		21,589		17,961		21,329		20,892		59,047		7,803		—	177,097








Commercial, industrial and other
Pass	100,921		23,940		65,225		11,636		3,808		37,479		191,293		872	435,174
Watch	939		461		446		—		1,378		173		5,056		—	8,453
Special mention	—		—		—		—		1,896		443		1,365		—	3,704
Substandard	101		7,352		—		1,276		496		422		5,428		—	15,075
Total	101,961		31,753		65,671		12,912		7,578		38,517		203,142		872	462,406






Construction
Pass	108,585		84,993		40,847		30,125		23,578		3,654		—		—	291,782

Special mention	—		—		—		—		10,446		—		—		—	10,446

Total	108,585		84,993		40,847		30,125		34,024		3,654		—		—	302,228






Equipment finance
Pass	50,482		30,486		27,626		10,238		3,128		803		—		—	122,763


Substandard	—		—		216		177		56		—		—		—	449
Total	50,482		30,486		27,842		10,415		3,184		803		—		—	123,212









Residential mortgage
Pass	171,442		112,680		27,228		20,784		9,103		96,510		—		—	437,747


Substandard	12		—		—		123		694		134		—		—	963
Total	171,454		112,680		27,228		20,907		9,797		96,644		—		—	438,710

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	Term Loans by Origination Year
(in thousands)	2021		2020		2019		2018		2017		Pre-2017		Revolving Loans		Revolving to Term		Total
Consumer
Pass	35,283		10,476		5,358		4,561		3,260		24,888		190,481		34		274,341


Substandard	32		—		—		—		—		630		526		—		1,188
Total	35,315		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.


March 31, 2022			Past Due
(in thousands)	Current		30 - 59 Days		60 - 89 Days		Greater than 89 days		Total		Total Loans
Non-owner occupied commercial	$	2,633,793	$	510	$	—	$	5,481	$	5,991	$	2,639,784
Owner occupied commercial	1,118,754		1,590		—		2,410		4,000		1,122,754
Multifamily	1,104,206		—		—		—		—		1,104,206
Non-owner occupied residential	222,461		788		116		2,430		3,334		225,795
Commercial, industrial and other	651,958		102		4,774		562		5,438		657,396
Construction	403,966		—		—		220		220		404,186
Equipment finance	123,727		124		44		48		216		123,943
Residential mortgage	560,615		1,706		—		1,721		3,427		564,042
Consumer	294,363		734		160		430		1,324		295,687
Total	$	7,113,843	$	5,554	$	5,094	$	13,302	$	23,950	$	7,137,793


December 31, 2021			Past Due
(in thousands)	Current		30 - 59 Days		60 - 89 Days		Greater than 89 days		Total		Total Loans
Non-owner occupied commercial	$	2,312,557	$	—	$	718	$	3,009	$	3,727	$	2,316,284
Owner occupied commercial	905,751		20		—		2,678		2,698		908,449
Multifamily	972,233		—		—		—		—		972,233
Non-owner occupied residential	174,245		—		136		2,716		2,852		177,097
Commercial, industrial and other	461,659		154		—		593		747		462,406
Construction	302,228		—		—		—		—		302,228
Equipment finance	122,923		211		41		37		289		123,212
Residential mortgage	437,574		255		64		817		1,136		438,710
Consumer	274,426		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 March 31, 2022 and December 31, 2021:


March 31, 2022
(in thousands)	Non-accrual		Interest Income Recognized on Non-accrual Loans		Amortized Cost Basis of Loans > 89 days Past due but still accruing		Amortized Cost Basis of Non-accrual Loans without Related Allowance
Non-owner occupied commercial	$	5,482	$	—	$	—	$	2,624
Owner occupied commercial	2,626		—		—		2,392

Non-owner occupied residential	2,430		—		—		2,145
Commercial, industrial and other	6,098		—		—		701
Construction	220		—		—		—
Equipment finance	51		—		—		—
Residential mortgage	1,935		—		—		—
Consumer	898		—		—		—
Total	$	19,740	$	—	$	—	$	7,862


December 31, 2021
(in thousands)	Non-accrual		Interest Income Recognized on Non-accrual Loans		Amortized Cost Basis of Loans > 89 days Past due but still accruing		Amortized Cost Basis of Non-accrual Loans without Related Allowance
Non-owner occupied commercial	$	3,009	$	—	$	—	$	2,624
Owner occupied commercial	2,810		—		—		2,398

Non-owner occupied residential	2,852		—		—		2,567
Commercial, industrial and other	6,763		—		—		1,122

Equipment finance	43		—		—		—
Residential mortgage	817		—		—		694
Consumer	687		—		1		—
Total	$	16,981	$	—	$	1	$	9,405

At March 31, 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 $2.1 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 March 31, 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 March 31, 2022, PCD loans acquired from 1st Constitution totaled $112.9 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 March 31, 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 March 31, 2022 and December 31, 2021, TDRs totaled $3.4 million and $3.5 million, respectively. Accruing TDRs totaled $3.3 million and non-accrual TDRs totaled $127,000 at March 31, 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 months ended March 31, 2022 and 2021 that met the definition of a TDR. There were no restructured loans that subsequently defaulted in the three months ended March 31, 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 March 31, 2022, loans totaling $7.01 billion were evaluated collectively and the allowance on these balances totaled $59.1 million and loans evaluated on an individual basis totaled $132.0 million with the specific allocations of the allowance for credit losses totaling $8.0 million. Loans evaluated on an individual basis include $114.3 million in PCD loans, which had a specific allowance for credit losses of $4.6 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 March 31,
(in thousands)	2022		2021
Balance at beginning of the period	$	58,047	$	71,124
Initial allowance for credit losses on PCD loans	12,077		—
Charge-offs on PCD loans	(7,634)		—
Charge-offs	(170)		(1,270)
Recoveries	162		206
Net charge-offs	(7,642)		(1,064)
Provision (benefit) for credit loss - loans	4,630		(2,808)
Balance at end of the period	$	67,112	$	67,252

The provision for credit losses on loans for the three months ended March 31, 2022, was predominantly due to the provision for the 1st Constitution's acquired non-purchased credit deteriorated loans, while the benefit for credit losses for the three months ended March 31, 2021, was largely due to an improvement in economic conditions. Charge-offs in the first quarter of 2022 include $7.6 million in charge-offs on 1st Constitution's acquired PCD loans. Non-performing loans totaling $10.1 million were sold during the first quarter of 2021 resulting in net charge-offs of $1.1 million.

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The following tables detail activity in the allowance for credit losses on loans by portfolio segment for the three months ended March 31, 2022 and 2021:


(in thousands)	Balance at 12/31/2021		Initial allowance for credit losses on PCD loans		Charge-offs		Recoveries		Provision (Benefit) for Credit Loss		Balance at 3/31/2022
Non-owner occupied commercial	$	20,071	$	1,312	$	(4)	$	—	$	2,270	$	23,649
Owner occupied commercial	3,964		1,137		(34)		10		1,048		6,125
Multifamily	8,309		4		—		—		(13)		8,300
Non-owner occupied residential	2,380		175		—		14		339		2,908
Commercial, industrial and other	9,891		2,413		(823)		45		148		11,674
Construction	838		6,843		(6,807)		3		850		1,727
Equipment finance	3,663		—		(97)		15		(1,122)		2,459
Residential mortgage	3,914		179		—		48		1,545		5,686
Consumer	5,017		14		(39)		27		(435)		4,584
Total	$	58,047	$	12,077	$	(7,804)	$	162	$	4,630	$	67,112


(in thousands)	Balance at 12/31/2020		Charge-offs		Recoveries		(Benefit) Provision for Credit Loss		Balance at 3/31/2021
Non owner occupied commercial	$	25,910	$	(593)	$	1	$	(1,438)	$	23,880
Owner occupied commercial	3,955		(78)		8		118		4,003
Multifamily	7,253		—		—		255		7,508
Non owner occupied residential	3,321		(208)		2		(232)		2,883
Commercial, industrial and other	13,665		(265)		44		(1,305)		12,139
Construction	786		—		25		318		1,129
Equipment finance	6,552		(94)		11		(205)		6,264
Residential mortgage	3,623		—		58		100		3,781
Consumer	6,059		(32)		57		(419)		5,665
Total	$	71,124	$	(1,270)	$	206	$	(2,808)	$	67,252

The following tables present the recorded investment in loans by portfolio segment and the related allowance for credit losses at March 31, 2022 and December 31, 2021:


March 31, 2022	Loans								Allowance for Credit Losses
(in thousands)	Individually evaluated for impairment		Collectively evaluated for impairment		Acquired with deteriorated credit quality		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Non-owner occupied commercial	$	3,059	$	2,581,075	$	55,650	$	2,639,784	1,130		$	22,519	$	23,649
Owner occupied commercial	6,640		1,084,443		31,671		1,122,754		1,124		5,001		6,125
Multifamily	—		1,100,716		3,490		1,104,206		4		8,296		8,300
Non-owner occupied residential	2,145		217,102		6,548		225,795		163		2,745		2,908
Commercial, industrial and other	5,815		640,447		11,134		657,396		5,383		6,291		11,674
Construction	—		400,572		3,614		404,186		35		1,692		1,727
Equipment finance	—		123,943		—		123,943		—		2,459		2,459
Residential mortgage	—		562,199		1,843		564,042		170		5,516		5,686
Consumer	—		295,325		362		295,687		17		4,567		4,584
Total loans	$	17,659	$	7,005,822	$	114,312	$	7,137,793	$	8,026	$	59,086	$	67,112

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December 31, 2021	Loans								Allowance for Credit Losses
(in thousands)	Individually evaluated for impairment		Collectively evaluated for impairment		Acquired with deteriorated credit quality		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Non-owner occupied commercial	$	3,063	$	2,313,047	$	174	2,316,284		$	—	$	20,071	$	20,071
Owner occupied commercial	6,678		901,638		133		908,449		69		3,895		3,964
Multifamily	—		972,233		—		972,233		—		8,309		8,309
Non-owner occupied residential	2,567		174,463		67		177,097		—		2,380		2,380
Commercial, industrial and other	6,537		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 mortgage	1,416		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

Allowance for Credit Losses - Securities

At March 31, 2022, the balance of the allowance for credit loss on available for sale and held to maturity securities was $1.3 million and $199,000, 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. For the first quarter of 2022, the Company recorded a provision for credit losses on available for sale securities of $1.2 million and a provision for credit losses on held to maturity securities of $18,000. For the first quarter of 2021, the Company recorded a provision for credit losses of $142,000 on securities available for sale and no provision for credit losses on held to maturity securities. Accrued interest receivable on securities is reported as a component of accrued interest receivable on the consolidated balance sheets and totaled $7.9 million at March 31, 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 March 31, 2022 and December 31, 2021, the balance of the allowance for credit losses for off-balance sheet exposures was $2.8 million and $2.3 million, respectively. The Company recorded a provision for credit losses on off-balance-sheet exposures in other operating expense of $440,000 and $24,000 for the three months ended March 31, 2022 and 2021, respectively.

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 March 31, 2022, the Company had lease liabilities totaling $28.7 million and right-of-use assets totaling $27.3 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. As a result of the Company's acquisition of 1st Constitution, the Company obtained right-of use assets in exchange for new operating lease liabilities of $13.0 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.

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For the three months ended March 31, 2022, the weighted average remaining lease term for operating leases was 11.89 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.01%. 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%.

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 March 31,
(in thousands)	2022		2021
Operating lease cost	$	1,226	$	829
Short-term lease cost	10		—
Variable lease cost	17		22
Sublease income	$	(30)	$	(31)
Net lease cost	$	1,223	$	820

The table below presents other information on the Company's operating leases for the three months ended March 31, 2022 and 2021:


	Three Months Ended March 31,
(in thousands)	2022		2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	930	$	719
Right-of-use assets obtained in exchange for new operating lease liabilities	89		109

There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the three months ended March 31, 2022 or March 31, 2021. At March 31, 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 March 31, 2022 are as follows:


(in thousands)
Within one year	$	3,721
After one year but within three years	8,865
After three years but within five years	6,236
After five years	16,191
Total undiscounted cash flows	35,013
Discount on cash flows	(6,319)
Total operating lease liabilities	$	28,694

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Note 8 - Deposits

The following table sets forth the details of total deposits:


(dollars in thousands)	March 31, 2022				December 31, 2021

Noninterest-bearing demand	$	2,300,030	26.3	%	$	1,732,452	24.9	%
Interest-bearing checking	2,743,522		31.4	%	2,219,658		31.9	%
Money market	1,696,553		19.4	%	1,577,385		22.6	%
Savings	1,162,599		13.2	%	677,101		9.7	%
Certificates of deposit $250 thousand and under	696,518		8.0	%	623,393		8.9	%
Certificates of deposit over $250 thousand	149,687		1.7	%	135,834		2.0	%
Total deposits	$	8,748,909	100.0	%	$	6,965,823	100.0	%

At March 31, 2022 and December 31, 2021, certificates of deposit obtained through brokers totaled $96.3 million and $114.3 million, respectively. Brokered deposits are included in certificates of deposit $250,000 and under in the Consolidated Balance Sheets.

Note 9 – Borrowings

Overnight and Short-Term Borrowings

At March 31, 2022 and December 31, 2021, the Company had no overnight or short-term borrowings from the FHLB, as well as no overnight or short-term borrowings from correspondent banks. At March 31, 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 March 31, 2022 or December 31, 2021.

Other short-term borrowings at March 31, 2022 and December 31, 2021 consisted of short-term securities sold under agreements to repurchase of $102.9 million and $106.5 million, respectively. The securities sold under agreements to repurchase are overnight sweep arrangement accounts with our customers. As of March 31, 2022, the Company had $110.3 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 March 31, 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.

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.

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Restricted Stock

The following is a summary of the Company’s restricted stock activity during the three months ended March 31, 2022:


	Number of Shares	Weighted Average Price
Outstanding, January 1, 2022	16,035	$	13.72
Granted	17,722	19.74
Vested	(16,035)	13.72

Outstanding, March 31, 2022	17,722	$	19.74

In the first three 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 three 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.

The Company recognized share-based compensation expense on its restricted stock of $87,000 and $88,000 for the first quarter of 2022 and 2021, respectively. As of March 31, 2022, there was unrecognized compensation cost of $262,000 related to unvested restricted stock that is expected to be recognized over a weighted average period of approximately 0.80 years.

Restricted Stock Units

The following is a summary of the Company’s RSU activity during the three months ended March 31, 2022:


	Number of Shares	Weighted Average Price
Outstanding, January 1, 2022	591,342	$	16.64
Granted	298,554	18.07
Vested	(178,643)	16.50
Forfeited	(177)	15.94
Outstanding, March 31, 2022	711,076	$	17.28

In the first three months of 2022, the Company granted 298,554 RSUs under the Plan at a weighted average grant date fair value of $18.07 per share. These units vest within a range of one to three years. A portion of these RSUs will vest subject to certain performance conditions in the applicable restricted stock unit agreement. There are also certain provisions in the compensation program which state that if a recipient of the RSUs reaches a certain age and years of service, the person has effectively earned a portion of the RSUs at that time. Compensation expense on these RSUs is expected to average approximately $1.8 million per year over a three-year period. In the first three months of 2021, the Company granted 258,154 RSUs under the Plan at a weighted average grant date fair value of $16.22 per share. Compensation expense on these RSUs is expected to average approximately $1.4 million per year over a three-year period.

For the first quarter of 2022 and 2021, the Company recognized share-based compensation expense on RSUs of $1.4 million and $1.1 million, respectively. Unrecognized compensation expense related to RSUs was approximately $9.0 million as of March 31, 2022, and that cost is expected to be recognized over a period of 1.73 years.

Stock Options

At March 31, 2022 and December 31, 2021, there were no stock options outstanding under the Plan. There were no stock option grants in the first three months of 2022 or 2021. There were no stock options exercised during the first quarter of 2022 and the 1,757 stock options exercised during the first three months of 2021 resulted in $13,000 in cash receipts.

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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.

Generally, the pricing of transactions between the Company and each customer is either (i) established within a legally enforceable contract between the two parties, as is the case with loan sales, or (ii) disclosed to the customer at a specific point in time, as is the case when a deposit account is opened or before a new loan is underwritten. Fees are usually fixed at a specific amount or as a percentage of a transaction amount. No judgment or estimates by management are required to record revenue related to these transactions and pricing is clearly identified within these contracts.

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

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

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The following table sets forth the components of noninterest income for the three months ended March 31, 2022 and 2021:


	For the Three Months Ended March 31,
(in thousands)	2022		2021

Deposit-Related Fees and Charges
Debit card interchange income	$	1,572	$	1,410
Overdraft charges	769		587
ATM service charges	171		143
Demand deposit fees and charges	94		141
Savings service charges	20		15
Total deposit-related fees and charges	2,626		2,296
Commissions and fees
Loan fees	809		507
Wire transfer charges	457		375
Investment services income	405		363
Merchant fees	251		201
Commissions from sales of checks	84		78
Safe deposit income	54		79
Other income	37		47
Total commissions and fees	2,097		1,650
Gains on sales of loans	1,426		708
Other income
Gains on customer swap transactions	—		562
Title insurance income	—		13
Other income	269		82
Total other income	269		657
Revenue not from contracts with customers	362		448
Total Noninterest Income	$	6,780	$	5,759
Timing of Revenue Recognition:
Products and services transferred at a point in time	6,418		5,292
Products and services transferred over time	—		19
Revenue not from contracts with customers	362		448
Total Noninterest Income	$	6,780	$	5,759

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 March 31,
(in thousands)	2022		2021
Consulting and advisory board fees	1,054		523
ATM and debit card expense	657		604
Telecommunications expense	582		522
Marketing expense	397		318
Core deposit intangible amortization	596		226



Other operating expenses	4,095		2,908
Total other operating expenses	$	7,381	$	5,101

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Note 13 – Comprehensive Income

The components of other comprehensive income are as follows:


	For the Three Months Ended
	March 31, 2022						March 31, 2021
(in thousands)	Before Tax Amount		Tax Benefit (Expense)		Net of Tax Amount		Before Tax Amount		Tax Benefit (Expense)		Net of Tax Amount
Net unrealized gains (losses) on available for sale securities:
Net unrealized holding losses arising during period	$	(41,964)	$	10,999	$	(30,965)	$	(18,637)	$	5,502	$	(13,135)



Amortization of gain on debt securities reclassified to held to maturity from available for sale	(176)		41		(135)		—		—		—
Unrealized gains on derivatives	—		—		—		67		(20)		47

Other comprehensive loss, net	$	(42,140)	$	11,040	$	(31,100)	$	(18,570)	$	5,482	$	(13,088)

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 March 31, 2022
(in thousands)	Unrealized Gains (Losses) on Available for Sale Securities		Amortization of Gain on Debt Securities Reclassified to Held to Maturity		Total

Beginning balance	$	745	$	2,519	$	3,264



Net current period other comprehensive loss	(30,965)		(135)		(31,100)
Ending balance	$	(30,220)	$	2,384	$	(27,836)


	For the Three Months Ended March 31, 2021
(in thousands)	Unrealized Gains (Losses) on Available for Sale Securities		Unrealized Gains (Losses) on Derivatives		Pension Items		Total

Beginning balance	$	11,402	$	25	$	(30)	$	11,397
Net current period other comprehensive (loss) income	(13,135)		47		—		(13,088)


Ending balance	$	(1,733)	$	72	$	(30)	$	(1,691)

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 $48.5 million and $55.1 million in investment securities available for sale pledged for collateral on its interest rate swaps with financial institutions at March 31, 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

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payment at 3 month LIBOR. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. 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 $65,000 of accumulated other comprehensive loss into interest expense for the first quarter 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):


March 31, 2022	Notional Amount		Average Maturity (Years)	Weighted Average Fixed Rate		Weighted Average Variable Rate	Fair Value
Classified in Other Assets:
3rd Party interest rate swaps	$	718,287	7.6	3.39	%	1 Mo. LIBOR + 2.06	$	38,550
Customer interest rate swaps	200,010		8.6	4.72	%	1 Mo. LIBOR + 1.89	8,923

Classified in Other Liabilities:
Customer interest rate swaps	$	718,287	7.6	3.39	%	1 Mo. LIBOR + 2.06	$	(38,550)
3rd Party interest rate swaps	200,010		8.6	4.72	%	1 Mo. LIBOR + 1.89	(8,923)


December 31, 2021	Notional Amount		Average Maturity (Years)	Weighted Average Fixed Rate		Weighted Average Variable Rate	Fair Value
Classified in Other Assets:
3rd Party interest rate swaps	$	326,941	7.7	3.14	%	1 Mo. LIBOR + 2.32	$	9,847
Customer interest rate swaps	607,688		8.2	3.97	%	1 Mo. LIBOR + 1.87	33,952

Classified in Other Liabilities:
Customer interest rate swaps	$	326,941	7.7	3.14	%	1 Mo. LIBOR + 2.32	(9,847)
3rd party interest rate swaps	607,688		8.2	3.97	%	1 Mo. LIBOR + 1.87	(33,952)

Note 15 – Goodwill and Other Intangible Assets

The Company had goodwill of $271.8 million at March 31, 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 months ended March 31, 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 months ended March 31, 2022 and 2021.

The Company had core deposit intangibles of $10.8 million and $2.4 million at March 31, 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 $596,000 and $226,000 for the first quarters of 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	$	1,754
2023	2,029
2024	1,737
2025	1,465
2026	1,193
2027	955

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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 three months ended March 31, 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:


(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
March 31, 2022
Assets:
Investment securities, available for sale
U.S. Treasury and government agencies	$	170,404	$	213,311	$	—	$	383,715
Mortgage-backed securities, residential	—		360,696		—		360,696
Collateralized mortgage obligations, residential	—		189,790		—		189,790
Mortgage-backed securities, multifamily	—		1,603		—		1,603
Collateralized mortgage obligations, multifamily	—		54,231		—		54,231
Asset-backed securities	—		62,956		—		62,956
Obligations of states and political subdivisions	—		23,478		—		23,478
Corporate bonds	—		94,469		—		94,469
Total securities available for sale	170,404		1,000,534		—		1,170,938
Equity securities, at fair value	—		16,915		—		16,915
Derivative assets	—		47,473		—		47,473
Total Assets	$	170,404	$	1,064,922	$	—	$	1,235,326
Liabilities:
Derivative liabilities	$	—	$	47,473	$	—	$	47,473
Total Liabilities	$	—	$	47,473	$	—	$	47,473


(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
December 31, 2021
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 securities available for sale	104,861		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 market 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 March 31, 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
March 31, 2022
Assets:
Individually evaluated loans	$	—	$	—	$	6,539	$	6,539




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 March 31, 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 March 31, 2022 and December 31, 2021:


March 31, 2022	Carrying Value		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(in thousands)
Financial Assets:
Investment securities, held to maturity
U.S. Treasury and U.S. government agencies	$	21,795	$	21,599	$	—	$	21,599	$	—
Mortgage-backed securities, residential	367,084		339,711		—		339,711		—
Collateralized mortgage obligations, residential	14,433		13,317		—		13,317		—
Mortgage-backed securities, multifamily	4,270		4,066		—		4,066		—

Obligations of states and political subdivisions	530,354		478,480		—		434,685		43,795
Corporate bonds	2,850		2,755		—		2,755		—
Total investment securities held to maturity, net	$	940,786	$	859,928	$	—	$	816,133	$	43,795
Federal Home Loan Bank and other membership bank stocks	10,415		10,415		—		10,415		—
Loans, net	7,070,681		7,064,268		—		—		7,064,268
Financial Liabilities:
Certificates of deposit	846,205		828,415		—		828,415		—
Other borrowings	25,000		23,662		—		23,662		—
Subordinated debentures	193,904		176,848		—		—		176,848

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December 31, 2021	Carrying Value		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(in thousands)
Financial Assets:
Investment securities, held to maturity
U.S. Treasury and U.S. government agencies	$	18,672	$	18,965	$	—	$	18,965	$	—
Mortgage-backed securities, residential	370,247		364,976		—		364,976		—
Collateralized mortgage obligations, residential	13,921		14,089		—		14,089		—
Mortgage-backed securities, multifamily	2,710		2,734		—		2,734		—

Obligations of states and political subdivisions	416,566		411,576		—		410,744		832
Corporate bonds	2,840		2,871		—		2,871		—
Total investment securities held to maturity	824,956		815,211		—		814,379		832
Federal Home Loan Bank and other membership bank stocks	9,049		9,049		—		9,049		—
Loans, net	5,918,101		5,900,876		—		—		5,900,876
Financial Liabilities:
Certificates of deposit	759,227		753,483		—		753,483		—
Other borrowings	25,000		24,604		—		24,604		—
Subordinated debentures	179,043		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.

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, 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, including vaccination mandates, which may affect our workforce, human capital resources and infrastructure; the nature and timing of actions of the Federal Reserve Board and other regulators; the nature and timing of legislation affecting the financial services industry; government intervention in the U.S. financial system; changes in levels of market interest rates; pricing pressures on loan and deposit products; credit risks of Lakeland’s lending and equipment financing 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 we may incur 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

The Company reported net income of $15.9 million and earnings per diluted share ("EPS") of $0.25 for the three months ended March 31, 2022 compared to net income of $23.2 million and EPS of $0.45 for the three months ended March 31, 2021. Excluding merger-related expenses pertaining to the Company’s January 2022 acquisition of 1st Constitution of $3.6 million, tax-effected, net income for the first quarter of 2022 was $19.5 million, or $0.30 per diluted share.

For the first quarter of 2022, annualized return on average assets was 0.64%, annualized return on average common equity was 5.89% and annualized return on average tangible common equity was 7.88%. Excluding merger-related expenses these ratios were 0.78%, 7.21% and 9.64%, respectively. For more information, please see "Reconciliation of Net Income" in "Non-GAAP Financial Measures" below.

In the first quarter of 2022, the Company recorded a provision for credit losses of $6.3 million compared to a negative provision of $2.6 million in the first quarter of 2021.

Net interest margin was 3.02% in the first quarter of 2022 compared to 3.19% in the first quarter of 2021. The decrease in net interest margin compared to the first quarter 2021 was due primarily to an increase in lower yielding average federal funds sold and a reduction in yield on investment securities partially offset by a reduction in the cost of interest-bearing liabilities.

Total loans, net of deferred fees, grew $1.16 billion, or 19%, to $7.14 billion during the first three months of 2022 and included $1.10 billion of loans acquired from 1st Constitution on January 6, 2022. Total deposits increased $1.78 billion, or 26%, to $8.75 billion during the first three months of 2022 and included $1.65 billion of deposit acquired from 1st Constitution on January 6, 2022.

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Comparison of Operating Results for the Three Months Ended March 31, 2022 and 2021

Net Income

Net income was $15.9 million or $0.25 per diluted share, for the first quarter of 2022 compared to net income of $23.2 million or $0.45 per diluted share, for the first quarter of 2021. The decrease in net income compared to the first quarter of 2021 was due primarily to $4.6 million in merger related expenses and a provision for credit losses of $6.3 million, which compared to a negative provision of $2.6 million recorded in the first 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 first quarter of 2022 was $70.7 million, compared to $56.9 million for the first quarter of 2021. The increase in net interest income compared to the first quarter of 2021 was due primarily to growth in the volume of interest-earning assets and a reduction in the cost of interest-bearing deposits. The net interest margin decreased to 3.02% in the first quarter of 2022 from 3.19% in the first quarter of 2021 primarily due to an increase in lower yielding average federal funds sold and a reduction in yield on investment securities partially offset by a reduction in the cost of interest-bearing liabilities.

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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 March 31, 2022 and March 31, 2021 are computed on a tax equivalent basis using a tax rate of 21%.


	For the Three Months Ended March 31, 2022						For the Three Months Ended March 31, 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)	$	7,021,462	$	67,809	3.92	%	$	6,089,757	$	58,778	3.91	%
Taxable investment securities and other	1,674,562		6,709		1.60	%	881,425		3,981		1.81	%
Tax-exempt securities	345,016		1,648		1.91	%	122,054		775		2.54	%
Federal funds sold (2)	463,247		182		0.16	%	136,900		37		0.11	%
Total interest-earning assets	9,504,287		76,348		3.25	%	7,230,136		63,571		3.56	%
Noninterest-earning assets:
Allowance for credit losses	(70,032)						(72,348)
Other assets	704,182						546,815
Total Assets	$	10,138,437					$	7,704,603

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Savings accounts	$	1,131,359	$	484	0.17	%	$	604,931	$	78	0.05	%
Interest-bearing transaction accounts	4,399,531		2,665		0.25	%	3,388,027		2,866		0.34	%
Time deposits	879,427		890		0.40	%	1,044,915		2,179		0.83	%
Federal funds purchased	—		—		—	%	8,889		8		0.36	%
Securities sold under agreements to repurchase	104,634		20		0.08	%	64,603		15		0.09	%
Long-term borrowings	217,983		1,555		2.85	%	143,261		1,534		4.28	%
Total interest-bearing liabilities	6,732,934		5,614		0.34	%	5,254,626		6,680		0.51	%
Noninterest-bearing liabilities:
Demand deposits	2,194,038						1,545,968
Other liabilities	115,552						133,754
Stockholders' equity	1,095,913						770,255
Total Liabilities and Stockholders’ Equity	$	10,138,437					$	7,704,603
Net interest income/spread			70,734		2.92	%			56,891		3.05	%
Tax equivalent basis adjustment			346						163
Net Interest Income			$	70,388					$	56,728
Net interest margin (3)					3.02	%					3.19	%

(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 $12.8 million from $63.6 million in the first quarter of 2021 to $76.3 million in the first quarter of 2022. The impact of the growth in the volume of interest-earning assets was offset by a 31 basis point reduction in the yield on interest-earning assets Average loans increased $931.7 million compared to the first quarter of 2021, while the yield on average loans increased one basis point to 3.92% in the first quarter of 2022 from the first quarter of 2021. Total average taxable investment securities increased $793.1 million to $1.67 billion for the first quarter of 2022 from the first quarter of 2021, while average tax-exempt securities increased $223.0 million to $345.0 million for the same periods. The yield on average taxable investment securities decreased 21 basis points from the first quarter of 2021 to 1.60% for the first quarter of 2022, while the yield on average tax-exempt investment securities decreased 63 basis points to 1.91% due to declines in market interest rates during the period. Average federal funds sold in the first quarter of 2022 increased $326.3 million compared to the first quarter of 2021, while the yield increased five basis points to 0.16% for the first quarter of 2022.

Total interest expense of $5.6 million in the first quarter of 2022 was $1.1 million less than the $6.7 million for the same period in 2021. The cost of average interest-bearing liabilities decreased from 0.51% in the first quarter of 2021 to 0.34% in the first quarter of 2022 and was largely driven by reductions in market interest rates and a change in mix of interest-bearing liabilities. For the first quarter of 2022, lower cost savings and interest bearing transaction account average balances increased $526.4 million and $1.01 billion, respectively, when compared to the same period in 2021 while higher cost average time deposits decreased $165.5 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 reduced the cost of long term borrowings. Partially offsetting the impact of the decline in the cost of funds was a growth in average interest-bearing liabilities of $1.48 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 first quarter of 2022, a $6.3 million provision for credit losses was recorded, compared to an $2.6 million benefit for credit losses for the same period last year. The provision is comprised of a provision for credit losses on loans of $4.6 million, a provision on off-balance-sheet exposures of $440,000 and a provision for credit losses on securities of $1.2 million. The provision for credit losses on loans was related to provision for the 1st Constitution non-purchased credit deteriorated loans partially offset by a decline in the provision due to an improvement in macroeconomic factors. The provision for credit losses on securities during the first quarter of 2022 was primarily due to increased unrealized losses on lower credit rated securities within our portfolio. The increase in unrealized losses is primarily due to the rise in market interest rates. The Company recorded loan charge-offs of $7.8 million predominately related to 1st Constitution purchased credit deteriorated ("PCD") loans and recoveries on loans of $162,000 in the first quarter of 2022 compared to loan charge-offs of $1.3 million and loan recoveries of $206,000 in the first 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 $1.0 million to $6.8 million for the first quarter of 2022 compared to $5.8 million during the same period in 2021 primarily due to a $718,000 increase in gains on sales of loans driven predominately by an increase in gains on sales of SBA loans. Commissions and fees increased $508,000 due primarily to an increase in commercial and mortgage loan fees. Service charges on deposit accounts increased $330,000 compared to the first three months of 2021 due primarily to increases in debit card interchange income and overdraft charges. Losses on equity securities totaled $485,000 in the first three months of 2022 compared to losses of $144,000 in the first three months of 2021, due to the increase in long-term market rates which drives down the fair value of the securities underlying the CRA funds. There was no swap income recorded in the first quarter of 2022 compared to $562,000 during the same period of 2021 due primarily to changes in the yield curve which decreased the demand for swap transactions.

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Noninterest Expense

Noninterest expense in the first quarter of 2022 totaled $50.0 million compared to $33.9 million for the same quarter of 2021, an increase of $16.1 million. Excluding $4.6 million in pre-tax merger related expenses, noninterest expense increased $11.5 million primarily due to compensation and employee benefits which increased $7.2 million. The increase in compensation and employee benefits resulted primarily from additions to our staff from the 1st Constitution merger and normal merit increases. Premises and equipment expense increased $1.7 million compared to the first three months of 2021 due primarily to increases in occupancy expense related to the 1st Constitution branches. Data processing expense increased $415,000 due primarily to 1st Constitution data processing costs prior to core system conversion. Other operating expenses in the first quarter of 2022 increased $2.3 million compared to the same period in 2021 due primarily to increased consulting fees, appraisal fees, core deposit intangible amortization and insurance expense.

The Company’s efficiency ratio, a non-GAAP financial measure, was 57.77% in the first quarter of 2022, compared to 53.75% for the same period last year. The Company uses this ratio because it believes that the ratio provides a good comparison of period-to-period performance and because the ratio is widely accepted in the banking industry. The following table shows the calculation of the efficiency ratio for the periods presented:


	For the Three Months Ended March 31,
(dollars in thousands)	2022			2021

Total noninterest expense	$	49,959		$	33,903
Amortization of core deposit intangibles	(596)			(226)
Merger-related expenses	(4,585)			—


Noninterest expense, as adjusted	$	44,778		$	33,677

Net interest income	$	70,388		$	56,728
Noninterest income	6,780			5,759
Total revenue	77,168			62,487
Tax-equivalent adjustment on municipal securities	346			163

Total revenue, as adjusted	$	77,514		$	62,650
Efficiency ratio	57.77		%	53.75		%

Income Tax Expense

The effective tax rate in the first quarter of 2022 was 23.9% compared to 25.8% during the same period in 2021 primarily as a result of tax advantaged items increasing as a percentage of pretax income due to the decrease in pretax income during the current period.

Financial Condition

The Company’s total assets increased $2.08 billion from December 31, 2021, to $10.28 billion at March 31, 2022. Total loans, net of deferred fees, were $7.14 billion, an increase of $1.16 billion or 19% from $5.98 billion at December 31, 2021. Total deposits were $8.75 billion, an increase of $1.78 billion, or 26%, from December 31, 2021, while total borrowings increased $11.3 million to $321.8 million at March 31, 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 $7.14 billion at March 31, 2022 and an increase of $1.16 billion as compared to December 31, 2021 and includes $1.10 billion of loans acquired from 1st Constitution. Excluding the impact of the 1st Constitution acquisition, loans increased $66.4 million or 1%. 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.

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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 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 PCD loans, increased $2.8 million from $17.0 million at December 31, 2021 to $19.7 million at March 31, 2022. Non-accrual loans in the non-owner occupied and residential categories increased $2.5 million and $1.1 million, respectively, and were due to non-accrual loans acquired from 1st Constitution. The percentage of non-performing assets to total assets was 0.19% at March 31, 2022 compared to 0.21% at December 31, 2021. Non-accrual loans at March 31, 2022 included four loan relationships with a balance of $1 million or greater, totaling $14.5 million and three loan relationships between $500,000 and $1.0 million, totaling $1.9 million. At March 31, 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 both March 31, 2022 and December 31, 2021, the Company had $3.3 million 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 both March 31, 2022 and December 31, 2021, the Company had $127,000 in TDRs that were included in non-accrual loans.

At March 31, 2022 and December 31, 2021, the Company had $115.2 million and $102.3 million, respectively, of loans that were rated substandard that were not classified as non-performing. There were no loans at March 31, 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 adopted 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 $67.1 million at March 31, 2022 increased $9.1 million from December 31, 2021, an increase of 16% 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.

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	As of and for the Three Months Ended March 31,						As of and for the Year Ended
(dollars in thousands)	2022			2021			December 31, 2021

Allowance for credit losses on loans to total loans outstanding	0.94		%	1.10		%	0.97		%
Allowance for credit losses on loans	$	67,112		$	67,252		$	58,047
Total loans outstanding	7,137,793			6,108,946			5,976,148

Non-accrual loans to total loans outstanding	0.28		%	0.51		%	0.28		%
Non-accrual loans	$	19,740		$	31,125		$	16,981
Total loans outstanding	7,137,793			6,108,946			5,976,148

Allowance for credit losses on loans to non-accrual loans	339.98		%	216.07		%	341.83		%
Allowance for credit losses on loans	$	67,112		$	67,252		$	58,047
Non-accrual loans	19,740			31,125			16,981

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	As of and for the Three Months Ended March 31,						As of and for the Year Ended
(dollars in thousands)	2022			2021			December 31, 2021
Net charge-offs (recoveries) during the period to average loans outstanding:
Non-owner occupied commercial	—		%	0.10		%	0.10		%
Net charge-offs during the period	$	4		$	592		$	2,246
Average amount outstanding	2,751,934			2,396,050			2,347,575

Owner occupied commercial	0.01		%	0.03		%	—		%
Net charge-offs (recoveries) during the period	$	24		$	70		$	(20)
Average amount outstanding	1,012,050			843,322			870,727

Multifamily	—		%	—		%	—		%
Net charge-offs during the period	$	—		$	—		$	28
Average amount outstanding	1,028,108			829,263			889,456

Non owner occupied residential	(0.03)		%	0.41		%	0.03		%
Net (recoveries) charge-offs during the period	$	(14)		$	206		$	58
Average amount outstanding	200,107			199,558			188,166

Commercial, industrial and other	0.46		%	0.12		%	(0.08)		%
Net charge-offs (recoveries) during the period	$	778		$	221		$	(487)
Average amount outstanding	675,920			740,237			593,979

Construction	6.60		%	(0.03)		%	(0.01)		%
Net charge-offs (recoveries) during the period	$	6,804		$	(25)		$	(21)
Average amount outstanding	412,520			286,799			312,107

Equipment finance	0.27		%	0.28		%	0.24		%
Net charge-offs during the period	$	82		$	83		$	285
Average amount outstanding	123,428			118,224			120,252

Residential mortgage	(0.04)		%	(0.06)		%	(0.02)		%
Net recoveries during the period	$	(48)		$	(58)		$	(64)
Average amount outstanding	522,526			381,403			398,141

Consumer	0.02		%	(0.03)		%	0.05		%
Net charge-offs (recoveries) during the period	$	12		$	(25)		$	137
Average amount outstanding	289,551			293,927			281,896

Total loans	0.44		%	0.07		%	0.04		%
Net charge-offs during the period	$	7,642		$	1,064		$	2,162
Average amount outstanding	7,016,144			6,088,783			6,002,299

Non-accrual loans of $19.7 million at March 31, 2022 decreased $2.8 million from December 31, 2021. The allowance for credit losses as a percent of total loans was 0.94% at March 31, 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 March 31, 2022.

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Net charge-offs as a percentage of average loans outstanding was 0.44% in the first quarter of 2022, predominately related to 1st Constitution PCD loans compared to 0.07% for the first quarter of 2021.

Investment Securities

Investment securities increased $516.8 million in the first quarter of 2022, including $342.3 million acquired from 1st Constitution, to $2.11 billion at March 31, 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 $8.75 billion at March 31, 2022, an increase of $1.78 billion, or 26%, including $1.65 billion assumed in the 1st Constitution merger. Excluding the impact of the 1st Constitution acquisition, deposits increased $132.5 million or 2%. Savings and interest-bearing transaction accounts increased $1.13 billion 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 $567.6 million, including $510.9 million from 1st Constitution, during the first quarter of 2022 to $2.30 billion at March 31. 2022

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 $29.3 million for the first three months of 2022 compared to $30.0 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 three months of 2022, Lakeland’s deposits increased $132.5 million, excluding the impact of the 1st Constitution merger.

•Sales of investment securities. At March 31, 2022 the Company had $1.17 billion in securities designated “available for sale.” Of these securities, $532.9 million were pledged to secure public deposits and for other purposes required by applicable laws and regulations.

•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 no overnight borrowings from the FHLB on March 31, 2022. Lakeland also has overnight federal funds lines available for it to borrow up to $250.0 million, of which none were outstanding at March 31, 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 March 31, 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 three months ended March 31, 2022 follows.

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Cash and cash equivalents totaling $421.7 million on March 31, 2022 increased $193.1 million from December 31, 2021. Operating activities provided $29.3 million in net cash. Investing activities provided $44.4 million in net cash, primarily reflecting net cash acquired in the 1st Constitution acquisition partially offset by purchases of investment securities. Financing activities provided $119.4 million in net cash primarily reflecting the net increase in deposits of $132.7 million partially offset by dividends paid of $8.8 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 March 31, 2022. Interest on subordinated debentures and long-term borrowed funds is calculated based on current contractual interest rates.


(in thousands)	Total		Within One Year		After One But Within Three Years		After Three But Within Five Years		After Five Years

Minimum annual rentals on noncancellable operating leases	$	35,013	$	3,721	$	8,865	$	6,236	$	16,191
Benefit plan commitments	4,421		422		792		745		2,462
Remaining contractual maturities of time deposits	846,204		705,684		115,562		24,958		—
Subordinated debentures	193,904		—		—		—		193,904
Loan commitments	1,709,181		1,264,286		225,816		15,659		203,420
Other borrowings	25,000		—		—		25,000		—
Interest on other borrowings (1)	60,577		6,022		12,039		11,659		30,857
Standby letters of credit	20,667		19,050		1,617		—		—
Total	$	2,894,967	$	1,999,185	$	364,691	$	84,257	$	446,834

(1) Includes interest on other borrowings and subordinated debentures at a weighted rate of 2.7%.

Capital Resources

Total stockholders’ equity increased to $1.09 billion on March 31, 2022 from $827.0 million on December 31, 2021, an increase of $262.3 million. Book value per common share increased to $16.82 on March 31, 2022 from $16.34 on December 31, 2021. Tangible book value per share decreased from $13.21 per share on December 31, 2021 to $12.45 per share on March 31, 2022, a decrease of 6%, resulting primarily from an increase in goodwill 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 March 31, 2022 was primarily due to $15.9 million of net income, offset by other comprehensive loss of $31.1 million and by the payment of cash dividends on common stock of $8.8 million.

The Company and Lakeland are subject to various regulatory capital requirements that are monitored by federal banking agencies. Failure to meet minimum capital requirements can lead to certain supervisory actions by regulators; any supervisory action could have a direct material adverse effect on the Company or Lakeland or their financial statements. As of March 31, 2022, the Company and Lakeland met all capital adequacy requirements to which they are subject.

As of March 31, 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
	March 31, 2022		December 31, 2021		March 31, 2022		December 31, 2021		March 31, 2022		December 31, 2021		March 31, 2022		December 31, 2021
The Company	8.97	%	8.51	%	10.73	%	10.67	%	11.34	%	11.15	%	14.03	%	14.48	%
Lakeland Bank	9.92	%	9.70	%	12.54	%	12.71	%	12.54	%	12.71	%	13.38	%	13.67	%
Required capital ratios including conservation buffer	4.00	%	4.00	%	7.00	%	7.00	%	8.50	%	8.50	%	10.50	%	10.50	%
“Well capitalized” institution under FDIC Regulations	5.00	%	5.00%		6.50	%	6.50%		8.00	%	8.00%		10.00	%	10.00%

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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 per share amounts)	March 31, 2022			December 31, 2021
Calculation of Tangible Book Value per Common Share
Total common stockholders’ equity at end of period - GAAP	$	1,089,282		$	827,014
Less:
Goodwill	271,829			156,277
Other identifiable intangible assets, net	10,842			2,420
Total tangible common stockholders’ equity at end of period - Non-GAAP	$	806,611		$	668,317
Shares outstanding at end of period	64,780			50,606
Book value per share - GAAP	$	16.82		$	16.34
Tangible book value per share - Non-GAAP	$	12.45		$	13.21
Calculation of Tangible Common Equity to Tangible Assets
Total tangible common stockholders’ equity at end of period - Non-GAAP	$	806,611		$	668,317

Total assets at end of period	$	10,275,233		$	8,198,056
Less:
Goodwill	271,829			156,277
Other identifiable intangible assets, net	10,842			2,420
Total tangible assets at end of period - Non-GAAP	$	9,992,562		$	8,039,359
Common equity to assets - GAAP	10.60		%	10.09		%
Tangible common equity to tangible assets - Non-GAAP	8.07		%	8.31		%


	For the Three Months Ended March 31,
(dollars in thousands)	2022			2021
Calculation of Return on Average Tangible Common Equity
Net income - GAAP	$	15,929		$	23,175
Total average common stockholders’ equity	$	1,095,913		$	770,255
Less:
Average goodwill	265,409			156,277
Average other identifiable intangible assets, net	10,851			3,192
Total average tangible common stockholders’ equity - Non-GAAP	$	819,653		$	610,786
Return on average common stockholders’ equity - GAAP	5.89		%	12.20		%
Return on average tangible common stockholders’ equity - Non-GAAP	7.88		%	15.39		%

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	For the Three Months Ended March 31,
(Dollars in thousands, except per share amounts)	2022			2021

Net income - GAAP	$	15,929		$	23,175

NON-ROUTINE TRANSACTIONS, NET OF TAX


Tax deductible merger-related expenses	2,402			—
Non-tax deductible merger-related expenses	1,149			—


Net effect of non-routine transactions	$	3,551		$	—

Net income available to common shareholders excluding non-routine transactions	$	19,480		$	23,175
Less: Earnings allocated to participating securities	164			216
Net Income, excluding non-routine transactions	$	19,316		$	22,959

Weighted average shares - Basic	63,961			50,576
Weighted average shares - Diluted	64,238			50,780

Basic earnings per share - GAAP	$	0.25		$	0.45
Diluted earnings per share - GAAP	$	0.25		$	0.45

Basic earnings per share, adjusted for non-routine transactions	$	0.30		$	0.45
Diluted earnings per share, adjusted for non-routine transactions (Core EPS)	$	0.30		$	0.45

Return on average assets - GAAP	0.64		%	1.22		%
Return on average assets, adjusted for non-routine transactions	0.78		%	1.22		%

Return on average common stockholders' equity - GAAP	5.89		%	12.20		%
Return on average common stockholders' equity, adjusted for non-routine transactions	7.21		%	12.20		%

Return on average tangible common stockholders' equity - Non-GAAP	7.88		%	15.39		%
Return on average tangible common stockholders' equity - Non-GAAP, adjusted for non-routine transactions	9.64		%	15.39		%

Recent Accounting Pronouncements

In March 2022, the Financial Accounting Standards Board ("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.

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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 will be 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.

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 $296.3 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)	%
March 31, 2022	(0.1)	%
December 31, 2021	(0.9)	%

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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)	%
March 31, 2022	3.1	%	2.2	%	1.2	%	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 March 31, 2022 (the base case) was $1.99 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)	%
March 31, 2022	(8.7)	%	(6.3)	%	(4.0)	%	(1.5)	%	(5.6)	%
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.

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

Item 4. Controls and Procedures

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

(b)Changes in internal controls over financial reporting. There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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.


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 first quarter of 2022.


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


January 1 to January 31, 2022	—	$	—	—	2,393,423
February 1 to February 28, 2022	—	—		—	2,393,423
March 1 to March 31, 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 Securities			Not Applicable


Item 4. Mine Safety Disclosures			Not Applicable


Item 5. Other Information			Not applicable

Item 6. Exhibits


2.1			Agreement and Plan of Merger, dated as of July 11, 2021, by and between Lakeland Bancorp, Inc. and 1st Constitution Bancorp (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on July 12, 2021)
4.1			Indenture, dated September 15, 2021, between Lakeland Bancorp, Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on September 15, 2021)
4.2			First Supplemental Indenture, dated September 15, 2021, between Lakeland Bancorp, Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on September 15, 2021)
4.3			Form of 2.875% Fixed-to-Floating Rate Subordinated Notes due 2031 (included in Exhibit 4.2)
31.1			Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2			Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1			Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS			Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document)
101.SCH			Inline XBRL Taxonomy Extension Schema Document
101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB			Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Lakeland Bancorp, Inc.
(Registrant)

/s/ Thomas J. Shara
Thomas J. Shara
President and Chief Executive Officer
(Principal Executive Officer)

/s/ Thomas F. Splaine
Thomas F. Splaine
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)

Date: May 9, 2022