Table of Contents
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549  
 
FORM 10-K  
 
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017.
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
(State or other jurisdiction of
incorporation or organization)

 
 
 
22-2953275
(I.R.S. Employer
Identification No.)
 
250 Oak Ridge Road,
Oak Ridge, New Jersey 07438
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: (973) 697-2000
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
 
Name of each exchange on which registered
 
 
Common Stock, no par value
 
NASDAQ
 
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  
Yes  ☒    No  ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ☐    No  ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See 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
o
Non-accelerated filer
o
Smaller Reporting Company
o
Emerging growth company
o
 
 
 
 
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 a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
As of June 30, 2017, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $840,000,000, based on the closing sale price as reported on the NASDAQ Global Select Market.
The number of shares outstanding of the registrant’s common stock, as of February 23, 2018, was 47,363,146.
DOCUMENTS INCORPORATED BY REFERENCE:

 
Table of Contents
 
 
 

Lakeland Bancorp, Inc’s. Proxy Statement for its 2018 Annual Meeting of Shareholders (Part III).

 
Table of Contents


LAKELAND BANCORP, INC.
Form 10-K Index
 
 
PAGE
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 3A.
Item 4.
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
Item 15.
Item 16.

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Table of Contents


PART I
ITEM 1 - Business.
GENERAL

Lakeland Bancorp, Inc. (the “Company” or “Lakeland Bancorp”) is a bank holding company headquartered in Oak Ridge, New Jersey. The Company was organized in March of 1989 and commenced operations on May 19, 1989, upon the consummation of the acquisition of all of the outstanding stock of Lakeland Bank, formerly named Lakeland State Bank (“Lakeland” or the “Bank” or “Lakeland Bank”). The Bank operates 53 branch offices throughout Bergen, Essex, Morris, Ocean, Passaic, Somerset, Sussex, and Union counties in New Jersey and also including one branch in Highland Mills, New York; six New Jersey regional commercial lending centers in Bernardsville, Jackson, Montville, Newton, Teaneck and Waldwick; and one in New York to serve the Hudson Valley region. Lakeland also has a commercial loan production office serving Middlesex and Monmouth counties in New Jersey. Lakeland offers an extensive suite of financial products and services for businesses and consumers.
The Company has shown substantial growth through a combination of organic growth and acquisitions. Since 1998, the Company has acquired seven community banks with an aggregate asset total of approximately $1.8 billion. All of the acquired banks have been merged into Lakeland and the acquired holding companies, if applicable, have been merged into the Company.
At December 31, 2017 , Lakeland Bancorp had total consolidated assets of $5.4 billion , total consolidated deposits of $4.4 billion , total consolidated loans, net of the allowance for loan and lease losses, of $4.1 billion  and total consolidated stockholders’ equity of $583.1 million .
This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“Forward-Looking Statements”). Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in such Forward-Looking Statements. Certain factors which could materially affect such results and the future performance of the Company are described in Item 1A - Risk Factors of this Annual Report on Form 10-K.
Unless otherwise indicated, all weighted average, actual shares and per share information contained in this Annual Report on Form 10-K have been adjusted retroactively for the effect of stock dividends, including the Company’s 5% stock dividend which was distributed on June 17, 2014.
Commercial Bank Services
Through Lakeland, the Company offers a broad range of lending, depository, and related financial services to individuals and small to medium sized businesses located primarily in northern and central New Jersey, the Hudson Valley region in New York, and surrounding areas. In the lending area, these services include short and medium term loans, lines of credit, letters of credit, inventory and accounts receivable financing, real estate construction loans, mortgage loans, small business administration (“SBA”) loans, and merchant credit card services. In addition to commercial real estate loans, Lakeland makes commercial and industrial loans. These types of loans can diversify the Company’s exposure in a depressed real estate market. Lakeland’s equipment financing division provides a solution to small and medium sized companies who prefer to lease equipment over other financial alternatives. Lakeland’s asset based loan department provides commercial borrowers with another lending alternative.
Depository products include demand deposits, as well as savings, money market and time accounts. The Company also offers internet banking, mobile banking, wire transfer and night depository services to the business community and municipal relationships. In addition, Lakeland offers cash management services, such as remote capture of deposits and overnight sweep repurchase agreements.
Consumer Banking

Lakeland also offers a broad range of consumer banking services, including checking accounts, savings accounts, NOW accounts, money market accounts, certificates of deposit, internet banking, secured and unsecured loans, consumer installment loans, mortgage loans, and safe deposit services.



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Other Services
Investment and advisory services for individuals and businesses are also available. Additionally, as a result of the merger with Somerset Hills Bancorp in 2013, Lakeland acquired a 50% interest in a New Jersey title company, Lakeland Title Group LLC, which provides commercial title insurance services.
Competition
Lakeland faces considerable competition in its market areas for deposits and loans from other depository institutions. Many of Lakeland’s depository institution competitors have substantially greater resources, broader geographic markets, and higher lending limits than Lakeland and are also able to provide more services and make greater use of media advertising. In recent years, intense market demands, economic pressures, increased customer awareness of products and services, and the availability of electronic services have forced banking institutions to diversify their services and become more cost-effective.
Lakeland also competes with credit unions, brokerage firms, insurance companies, money market mutual funds, consumer finance companies, mortgage companies and other financial companies, some of which are not subject to the same degree of regulation and restrictions as Lakeland in attracting deposits and making loans. Interest rates on deposit accounts, convenience of facilities, products and services, and marketing are all significant factors in the competition for deposits. Competition for loans comes from other commercial banks, savings institutions, insurance companies, consumer finance companies, credit unions, mortgage banking firms and other institutional lenders. Lakeland primarily competes for loan originations through its structuring of loan transactions and the overall quality of service it provides. Competition is affected by the availability of lendable funds, general and local economic conditions, interest rates, and other factors that are not readily predictable.

The Company expects that competition will continue in the future.
Concentration
The Company is not dependent on deposits or exposed by loan concentrations to a single customer or a few customers, the loss of any one or more of which would have a material adverse effect upon the financial condition of the Company.
Employees
At December 31, 2017, the Company had 621 full-time equivalent employees. None of these employees are covered by a collective bargaining agreement. The Company considers relations with its employees to be good.
SUPERVISION AND REGULATION
General

The Company is a registered bank holding company under the Federal Bank Holding Company Act of 1956, as amended (the “Holding Company Act”), and is required to file with the Federal Reserve Board an annual report and such additional information as the Federal Reserve Board may require pursuant to the Holding Company Act. The Company is subject to examination by the Federal Reserve Board.

Lakeland is a state chartered commercial bank subject to supervision and examination by the Department of Banking and Insurance of the State of New Jersey (the “Department”) and the Federal Deposit Insurance Corporation (the “FDIC”). The regulations of the State of New Jersey and FDIC govern most aspects of Lakeland’s business, including reserves against deposits, loans, investments, mergers and acquisitions, borrowings, dividends, and location of branch offices. Lakeland is subject to certain restrictions imposed by law on, among other things, (i) the maximum amount of obligations of any one person or entity which may be outstanding at any one time, (ii) investments in stock or other securities of the Company or any subsidiary of the Company, and (iii) the taking of such stock or securities as collateral for loans to any borrower.
The Holding Company Act

The Holding Company Act limits the activities which may be engaged in by the Company and its subsidiaries to those of banking, the ownership and acquisition of assets and securities of banking organizations, and the management of banking organizations, and to certain non-banking activities which the Federal Reserve Board finds, by order or regulation, to be so closely related to banking or managing or controlling a bank as to be a proper incident thereto. The Federal Reserve Board is empowered

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to differentiate between activities by a bank holding company or a subsidiary thereof and activities commenced by acquisition of a going concern.

With respect to non-banking activities, the Federal Reserve Board has by regulation determined that several non-banking activities are closely related to banking within the meaning of the Holding Company Act and thus may be performed by bank holding companies. Although the Company’s management periodically reviews other avenues of business opportunities that are included in that regulation, the Company has no present plans to engage in any of these activities other than providing investment brokerage services.

With respect to the acquisition of banking organizations, the Company is required to obtain the prior approval of the Federal Reserve Board before it may, by merger, purchase or otherwise, directly or indirectly acquire all or substantially all of the assets of any bank or bank holding company, if, after such acquisition, it will own or control more than 5% of the voting shares of such bank or bank holding company.
Regulation of Bank Subsidiaries

There are various legal limitations, including Sections 23A and 23B of the Federal Reserve Act, which govern the extent to which a bank subsidiary may finance or otherwise supply funds to its holding company or its holding company’s non-bank subsidiaries. Under federal law, no bank subsidiary may, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, its parent or the non-bank subsidiaries of its parent (other than direct subsidiaries of such bank which are not financial subsidiaries) or take their securities as collateral for loans to any borrower. Each bank subsidiary is also subject to collateral security requirements for any loans or extensions of credit permitted by such exceptions.
Commitments to Affiliated Institutions

The policy of the Federal Reserve Board provides that a bank holding company is expected to act as a source of financial strength to its subsidiary banks and to commit resources to support such subsidiary banks in circumstances in which it might not do so absent such policy.
Interstate Banking
    
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 permits bank holding companies to acquire banks in states other than their home state, regardless of applicable state law. New Jersey enacted legislation to authorize interstate banking and branching and the entry into New Jersey of foreign country banks. New Jersey did not authorize de novo branching into the state. However, under federal law, federal savings banks, which meet certain conditions, may branch de novo into a state, regardless of state law. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) removes the restrictions on interstate branching contained in the Riegle-Neal Act, and allows national banks and state banks to establish branches in any state if, under the laws of the state in which the branch is to be located, a state bank chartered by that state would be permitted to establish the branch.
Gramm-Leach-Bliley Act of 1999

The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the “Modernization Act”) became effective in early 2000. The Modernization Act:

•
allows bank holding companies meeting management, capital, and Community Reinvestment Act standards to engage in a substantially broader range of non-banking activities than previously was permissible, including insurance underwriting and making merchant banking investments in commercial and financial companies; if a bank holding company elects to become a financial holding company, it files a certification, effective in 30 days, and thereafter may engage in certain financial activities without further approvals (Lakeland Bancorp is such a financial holding company);

•
allows insurers and other financial services companies to acquire banks;

•
removes various restrictions that previously applied to bank holding company ownership of securities firms and mutual fund advisory companies; and

•
establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations.


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The Modernization Act also modified other financial laws, including laws related to financial privacy and community reinvestment.
The USA PATRIOT Act

As part of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (collectively, the “USA PATRIOT Act”). By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act encourages information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.

Among other requirements, Title III of the USA PATRIOT Act imposes the following requirements with respect to financial institutions:

•
All financial institutions must establish anti-money laundering programs that include, at a minimum: (i) internal policies, procedures, and controls; (ii) specific designation of an anti-money laundering compliance officer; (iii) ongoing employee training programs; and (iv) an independent audit function to test the anti-money laundering program.

•
The Secretary of the Department of the Treasury, in conjunction with other bank regulators, was authorized to issue regulations that provide for minimum standards with respect to customer identification at the time new accounts are opened.

•
Financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) are required to establish appropriate, specific and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering.

•
Financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and will be subject to certain record keeping obligations with respect to correspondent accounts of foreign banks.

•
Bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications.

The United States Treasury Department has issued a number of implementing regulations which address various requirements of the USA PATRIOT Act and are applicable to financial institutions such as Lakeland. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Banking agencies have strictly enforced various anti-money laundering and suspicious activity reporting requirements using formal and informal enforcement tools to cause banks to comply with these provisions.
Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 (the “SOA”) added new legal requirements for public companies affecting corporate governance, accounting and corporate reporting, to increase corporate responsibility and to protect investors.

The SOA addresses, among other matters:

•    audit committees for all reporting companies;

•
certification of financial statements by the chief executive officer and the chief financial officer;

•
the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement;

•
a prohibition on insider trading during pension plan black out periods;


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•
disclosure of off-balance sheet transactions;

•
a prohibition on personal loans to directors and officers (other than loans made by an insured depository institution (as defined in the Federal Deposit Insurance Act), if the loan is subject to the insider lending restrictions of Section 22(h) of the Federal Reserve Act);

•
expedited filing requirements for Form 4’s;

•
disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code;

•
“real time” filing of periodic reports;

•
the formation of a public accounting oversight board;

•
auditor independence; and

•
various increased criminal penalties for violations of the securities laws.

The Securities and Exchange Commission (the “SEC”) has enacted various rules to implement various provisions of the SOA with respect to, among other matters, disclosure in periodic filings pursuant to the Exchange Act. Each of the national stock exchanges, including the NASDAQ Stock Market where Lakeland Bancorp’s common stock is listed, have corporate governance listing standards, including rules strengthening director independence requirements for boards, and requiring the adoption of charters for the nominating and corporate governance, compensation and audit committees.
Regulation W

Transactions between a bank and its “affiliates” are quantitatively and qualitatively restricted under the Federal Reserve Act. The Federal Deposit Insurance Act applies Sections 23A and 23B to insured nonmember banks in the same manner and to the same extent as if they were members of the Federal Reserve System. The Federal Reserve Board has also issued Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with respect to affiliate transactions. Regulation W incorporates the exemption from the affiliate transaction rules but expands the exemption to cover the purchase of any type of loan or extension of credit from an affiliate. Affiliates of a bank include, among other entities, the bank’s holding company and companies that are under common control with the bank. The Company is considered to be an affiliate of Lakeland. In general, subject to certain specified exemptions, a bank or its subsidiaries are limited in their ability to engage in “covered transactions” with affiliates:

•
to an amount equal to 10% of the bank’s capital and surplus, in the case of covered transactions with any one affiliate; and

•
to an amount equal to 20% of the bank’s capital and surplus, in the case of covered transactions with all affiliates.

In addition, a bank and its subsidiaries may engage in covered transactions and other specified transactions only on terms and under circumstances that are substantially the same, or at least as favorable to the bank or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A “covered transaction” includes:

•
a loan or extension of credit to an affiliate;

•
a purchase of, or an investment in, securities issued by an affiliate;
 
•
a purchase of assets from an affiliate, with some exceptions;

•
the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; and

•
the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.

In addition, under Regulation W:

•
a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;


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•
covered transactions and other specified transactions between a bank or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices; and

•
with some exceptions, each loan or extension of credit by a bank to an affiliate must be secured by certain types of collateral with a market value ranging from 100% to 130%, depending on the type of collateral, of the amount of the loan or extension of credit.

Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the Federal Reserve Board decides to treat these subsidiaries as affiliates.
Community Reinvestment Act

Under the Community Reinvestment Act (“CRA”), as implemented by FDIC regulations, a state bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the FDIC, in connection with its examination of a state non-member bank, to assess the bank’s record of meeting the credit needs of its community and to take that record into account in its evaluation of certain applications by the bank. Under the FDIC’s CRA evaluation system, the FDIC focuses on three tests: (i) a lending test, to evaluate the institution’s record of making loans in its service areas; (ii) an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing and programs benefiting low or moderate income individuals and businesses; and (iii) a service test, to evaluate the institution’s delivery of services through its branches, ATMs and other offices. The CRA also requires all institutions to make public disclosure of their CRA ratings. Lakeland Bank received an “outstanding” CRA rating in its most recent examination.
Securities and Exchange Commission

The common stock of the Company is registered with the SEC under the Exchange Act. As a result, the Company and its officers, directors, and major stockholders are obligated to file certain reports with the SEC. The Company is subject to proxy and tender offer rules promulgated pursuant to the Exchange Act. You may read and copy any document the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the Public Reference Room. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, such as the Company.

The Company maintains a website at http://www.lakelandbank.com . The Company makes available on its website the proxy statements and reports on Forms 8-K, 10-K and 10-Q that it files with the SEC as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Additionally, the Company has adopted and posted on its website a Code of Ethics that applies to its principal executive officer, principal financial officer and principal accounting officer. The Company intends to disclose any amendments to or waivers of the Code of Ethics on its website.
Effect of Government Monetary Policies

The earnings of the Company are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The monetary policies of the Federal Reserve Board have had, and will likely continue to have, an important impact on the operating results of commercial banks through the Board’s power to implement national monetary policy in order to, among other things, curb inflation or combat a recession. The Federal Reserve Board has a major effect upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of, among other things, the discount rate of borrowings of banks and the reserve requirements against bank deposits. It is not possible to predict the nature and impact of future changes in monetary fiscal policies.

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Dividend Restrictions

The Company is a legal entity separate and distinct from Lakeland. Virtually all of the revenue of the Company available for payment of dividends on its capital stock will result from amounts paid to the Company by Lakeland. All such dividends are subject to various limitations imposed by federal and state laws and by regulations and policies adopted by federal and state regulatory agencies. Under New Jersey state law, a bank may not pay dividends unless, following the dividend payment, the capital stock of the bank would be unimpaired and either (a) the bank will have a surplus of not less than 50% of its capital stock, or, if not, (b) the payment of the dividend will not reduce the surplus of the bank.

If, in the opinion of the FDIC, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which could include the payment of dividends), the FDIC may require, after notice and hearing, that such bank cease and desist from such practice or, as a result of an unrelated practice, require the bank to limit dividends in the future. The Federal Reserve Board has similar authority with respect to bank holding companies. In addition, the Federal Reserve Board and the FDIC have issued policy statements which provide that insured banks and bank holding companies should generally only pay dividends out of current operating earnings. Regulatory pressures to reclassify and charge off loans and to establish additional loan loss reserves can have the effect of reducing current operating earnings and thus impacting an institution’s ability to pay dividends. Further, as described herein, the regulatory authorities have established guidelines with respect to the maintenance of appropriate levels of capital by a bank or bank holding company under their jurisdiction. Compliance with the standards set forth in these policy statements and guidelines could limit the amount of dividends which the Company and Lakeland may pay. Banking institutions that fail to maintain the minimum capital ratios, or that maintain the requisite minimum capital ratios but do so at a level below the minimum capital ratios plus the new capital conservation buffer, will face constraints on their ability to pay dividends. See “Capital Requirements” below.
Capital Requirements

Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), each federal banking agency has promulgated regulations, specifying the levels at which a financial institution would be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” and to take certain mandatory and discretionary supervisory actions based on the capital level of the institution. To qualify to engage in financial activities under the Gramm-Leach-Bliley Act, all depository institutions must be “well capitalized.” The financial holding company of a bank will be put under directives to raise its capital levels or divest its activities if the depository institution falls from that level.

In July 2013, the Federal Reserve Board, the FDIC and the Comptroller of the Currency adopted final rules establishing a new comprehensive capital framework for U.S. banking organizations (the “Basel Rules”). The Basel Rules implement the Basel Committee’s December 2010 framework, commonly referred to as Basel III, for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act, as discussed below. The Basel Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including Lakeland Bancorp and Lakeland Bank, compared to prior U.S. risk-based capital rules. The Basel Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Basel Rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing risk-weighting approach, which was derived from Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee’s 2004 Basel II capital accords. The Basel Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules.

The Basel Rules became effective for us on January 1, 2015 (subject to phase-in periods for certain components).

For bank holding companies and banks like Lakeland Bancorp and Lakeland Bank, January 1, 2015 was the start date for compliance with the revised minimum regulatory capital ratios and for determining risk-weighted assets under what the Basel Rules call a “standardized approach.” As of January 1, 2015, Lakeland Bancorp and Lakeland Bank were required to maintain the following minimum capital ratios, expressed as a percentage of risk-weighted assets:

•
Common Equity Tier 1 Capital Ratio of 4.5% (this is referred to as the “CET1”);

•
Tier 1 Capital Ratio (CET1 capital plus “Additional Tier 1 capital”) of 6.0%; and

•
Total Capital Ratio (Tier 1 capital plus Tier 2 capital) of 8.0%.

In addition, Lakeland Bancorp and Lakeland Bank are subject to a leverage ratio of 4.0% (calculated as Tier 1 capital to average consolidated assets as reported on the consolidated financial statements).

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The Basel Rules also require a “capital conservation buffer.” When fully phased in on January 1, 2019, Lakeland Bancorp and Lakeland Bank will be required to maintain a 2.5% capital conservation buffer, in addition to the minimum capital ratios described above, effectively resulting in the following minimum capital ratios on January 1, 2019:

•
CET1 of 7.0%;

•
Tier 1 Capital Ratio of 8.5%; and

•
Total Capital Ratio of 10.5%.

The purpose of the capital conservation buffer is to ensure that banking organizations conserve capital when it is needed most, allowing them to weather periods of economic stress. Banking institutions with a CET1, Tier 1 Capital Ratio and Total Capital Ratio above the minimum capital ratios but below the minimum capital ratios plus the capital conservation buffer will face constraints on their ability to pay dividends, repurchase equity and pay discretionary bonuses to executive officers, based on the amount of the shortfall. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level, and increases by 0.625% on each subsequent January 1 until it reaches 2.5% on January 1, 2019. Accordingly, as of January 1, 2018, the minimum capital ratios applicable to Lakeland Bancorp and Lakeland Bank are 6.375% for CET1, 7.875% for Tier 1 Capital and 9.875% for Total Capital.

The Basel Rules also adopted a “countercyclical capital buffer,” which is not applicable to Lakeland Bancorp or Lakeland Bank. That buffer is applicable only to “advanced approaches banking organizations,” which generally are those with consolidated total assets of at least $250 billion.

The Basel Rules provide for several deductions from and adjustments to CET1, which were phased in as of January 1, 2018. For example, mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in common equity issued by nonconsolidated financial entities must be deducted from CET1 to the extent that any one of those categories exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.

Under prior capital standards, the effects of accumulated other comprehensive income items included in capital were excluded for the purposes of determining regulatory capital ratios. Under the Basel Rules, the effects of certain accumulated other comprehensive income items are not excluded; however, banking organizations such as Lakeland Bancorp and Lakeland Bank were permitted to make a one-time permanent election to continue to exclude these items effective as of January 1, 2015. Lakeland Bancorp and Lakeland Bank made such an election to continue to exclude these items.

While the Basel Rules generally require the phase-out of non-qualifying capital instruments such as trust preferred securities and cumulative perpetual preferred stock, holding companies with less than $15 billion in total consolidated assets as of December 31, 2009, such as Lakeland Bancorp, may permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in Additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.
    
The Basel Rules prescribe a standardized approach for calculating risk-weighted assets that expands the risk-weighting categories from the previous four categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. Government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. In addition, the Basel Rules provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.

Consistent with the Dodd-Frank Act, the Basel Rules adopt alternatives to credit ratings for calculating the risk-weighting for certain assets.
With respect to Lakeland Bank, the Basel Rules revise the “prompt corrective action” regulations under Section 38 of the Federal Deposit Insurance Act by (i) introducing a CET1 ratio requirement at each capital quality level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status (a new standard); (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (increased from 6%); and (iii) requiring a leverage ratio of 5% to be well-capitalized (increased from the previously required leverage ratio of 3% or 4%). The Basel Rules do not change the total risk-based capital requirement for any “prompt corrective action” category.

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Effective as of January 1, 2015, the FDIC’s regulations implementing these provisions of FDICIA provide that an institution will be classified as “well capitalized” if it (i) has a total risk-based capital ratio of at least 10.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 8.0 percent, (iii) has a CET1 ratio of at least 6.5 percent, (iv) has a Tier 1 leverage ratio of at least 5.0 percent, and (v) meets certain other requirements. An institution will be classified as “adequately capitalized” if it (i) has a total risk-based capital ratio of at least 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 6.0 percent, (iii) has a CET1 ratio of at least 4.5 percent, (iv) has a Tier 1 leverage ratio of at least 4.0 percent, and (v) does not meet the definition of “well capitalized.” An institution will be classified as “undercapitalized” if it (i) has a total risk-based capital ratio of less than 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 6.0 percent, (iii) has a CET1 ratio of less than 4.5 percent or (iv) has a Tier 1 leverage ratio of less than 4.0 percent. An institution will be classified as “significantly undercapitalized” if it (i) has a total risk-based capital ratio of less than 6.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 4.0 percent, (iii) has a CET1 ratio of less than 3.0 percent or (iv) has a Tier 1 leverage ratio of less than 3.0 percent. An institution will be classified as “critically undercapitalized” if it has a tangible equity to total assets ratio that is equal to or less than 2.0 percent. An insured depository institution may be deemed to be in a lower capitalization category if it receives an unsatisfactory examination rating. Similar categories apply to bank holding companies. When the capital conservation buffer is fully phased in, the capital ratios applicable to depository institutions under the Basel Rules will exceed the ratios to be considered well-capitalized under the prompt corrective action regulations.

As of December 31, 2017, Lakeland Bancorp and Lakeland Bank met all capital requirements under the Basel Rules as then in effect, and the Company believes that as of such date, it would meet all capital requirements under the Basel Rules on a fully phased-in basis, if the full phase-in of such requirements were currently in effect.
Volcker Rule
In December 2013, the Federal Reserve Board, the FDIC and several other governmental regulatory agencies issued final rules to implement the Volcker Rule contained in section 619 of the Dodd-Frank Act, generally to become effective on July 21, 2015. The Federal Reserve extended the Volcker Rule’s conformance period until July 21, 2017. In August 2017, the U.S. Comptroller of the Currency, one of the federal bank regulators, announced he was soliciting public comment on how the Volcker Rule should be revised to better accomplish its purposes. The Volcker Rule prohibits an insured depository institution and its affiliates from (i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain types of funds (defined as “Covered Funds”) subject to certain limited exceptions. The Company does not own any interests in any hedge funds or private equity funds that are designated “Covered Funds” under the Volcker Rule.
Federal Deposit Insurance and Premiums
Lakeland’s deposits are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. As a result of the Dodd-Frank Act, the basic federal deposit insurance limit was permanently increased to at least $250,000.

In November 2010, the FDIC approved a rule to change the assessment base from adjusted domestic deposits to average consolidated total assets minus average tangible equity, as required by the Dodd-Frank Act. Since the new base is larger than the current base, the FDIC’s rule lowered the total base assessment rates to between 2.5 and 9 basis points for banks in the lowest risk category, and 30 to 45 basis points for banks in the highest risk category. The Company paid $ 1.6 million in total FDIC assessments in 2017 and $ 2.2 million in 2016 .

Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio (“DRR”), that is, the ratio of the DIF to insured deposits. The FDIC has adopted a plan under which it will meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act.  The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%. In March 2016, the FDIC adopted a rule that imposes a surcharge on the quarterly assessments of insured depository institutions with total consolidated assets of $10 billion or more. The surcharge equals an annual rate of 4.5 basis points applied to the institution’s assessment base, with certain adjustments.
In addition to deposit insurance assessments, the FDIC is required to continue to collect from institutions payments for the servicing of obligations of the Financing Corporation (“FICO”) that were issued in connection with the resolution of savings and loan associations, so long as such obligations remain outstanding. Lakeland paid a FICO premium of approximately $243,000 in 2017 and expects to pay a similar amount in 2018.

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The Dodd-Frank Act
The Dodd-Frank Act, which was signed into law on July 21, 2010, significantly changed the bank regulatory landscape and has impacted and will continue to have a broad impact on the financial services industry as a result of significant regulatory and compliance changes, including, among other things, (i) enhanced resolution authority over troubled and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; and (v) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Generally, the Dodd-Frank Act became effective the day after it was signed into law, but different effective dates apply to specific sections of the law.
The following is a summary of certain provisions of the Dodd-Frank Act:
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Minimum Capital Requirements. The Dodd-Frank Act requires new capital rules and the application of the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies. In addition to making bank holding companies subject to the same capital requirements as their bank subsidiaries, these provisions (often referred to as the Collins Amendment to the Dodd-Frank Act) were also intended to eliminate or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. See “Capital Requirements.”
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Deposit Insurance. The Dodd-Frank Act makes permanent the $250,000 deposit insurance limit for insured deposits. Amendments to the Federal Deposit Insurance Act also revised the assessment base against which an insured depository institution’s deposit insurance premiums paid to the Deposit Insurance Fund (“DIF”) are calculated. See “Federal Deposit Insurance and Premiums.”
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Shareholder Votes . The Dodd-Frank Act requires publicly traded companies like Lakeland Bancorp to give shareholders a non-binding vote on executive compensation and so-called “golden parachute” payments in certain circumstances.
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Transactions with Affiliates. The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.
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Transactions with Insiders. Insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors.
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Enhanced Lending Limits. The Dodd-Frank Act strengthened the previous limits on a depository institution’s credit exposure to one borrower which limited a depository institution’s ability to extend credit to one person (or group of related persons) in an amount exceeding certain thresholds. The Dodd-Frank Act expanded the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions.
•
Compensation Practices . The Dodd-Frank Act provides that the appropriate federal regulators must establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company or other “covered financial institution” that provides an insider or other employee with “excessive compensation” or compensation that gives rise to excessive risk or could lead to a material financial loss to such firm. In June 2010, prior to the Dodd-Frank Act, the bank regulatory agencies promulgated the Interagency Guidance on Sound Incentive Compensation Policies , which sets forth three key principles concerning incentive compensation arrangements:
▪
such arrangements should provide employees incentives that balance risk and financial results in a manner that does not encourage employees to expose the financial institution to imprudent risks;
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such arrangements should be compatible with effective controls and risk management; and
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such arrangements should be supported by strong corporate governance with effective and active oversight by the financial institution’s board of directors.
Together, the Dodd-Frank Act and guidance from the bank regulatory agencies on compensation may impact the Company’s compensation practices.

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•
The Consumer Financial Protection Bureau (“Bureau”). The Dodd-Frank Act created the Bureau within the Federal Reserve. The Bureau is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The Bureau has rulemaking authority over many of the statutes governing products and services offered to bank consumers. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more stringent than those regulations promulgated by the Bureau and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau against state-chartered institutions. The Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Institutions with $10 billion or less in assets, such as the Bank, will continue to be examined for compliance with the consumer laws by their primary bank regulators.
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De Novo Banking . The Dodd-Frank Act allows de novo interstate branching by banks.
Final rules have been issued which implement the ability-to-repay and qualified mortgage (QM) provisions of the Truth in Lending Act, as amended by the Dodd-Frank Act (the “QM Rule”). The QM Rule impacted our mortgage originations when it became effective in January 2014. The ability-to-repay provision requires creditors to make reasonable, good faith determinations that borrowers are able to repay their mortgages before extending the credit based on a number of factors and consideration of financial information about the borrower from reasonably reliable third-party documents. Under the Dodd-Frank Act and the QM Rule, loans meeting the definition of “qualified mortgage” are entitled to a presumption that the lender satisfied the ability-to-repay requirements. The presumption is a conclusive presumption/safe harbor for prime loans meeting the QM requirements, and a rebuttable presumption for higher-priced/subprime loans meeting the QM requirements. The definition of a “qualified mortgage” incorporates the statutory requirements, such as not allowing negative amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43 percent debt-to-income ratio for borrowers if the loan is to meet the QM definition, though some mortgages that meet GSE, FHA and VA underwriting and eligibility guidelines may, for a period not to exceed seven years, meet the QM definition without being subject to the 43 percent debt-to-income limits. We cannot assure you that existing or future regulations will not have a material adverse impact on our residential mortgage loan business or the housing markets in which we participate.  

In addition, provisions in the Dodd-Frank Act which have revised the capital requirements of the Company and the Bank could require the Company and the Bank to seek additional sources of capital in the future. See “Capital Requirements.”

The Dodd-Frank Act contains numerous other provisions affecting financial institutions of all types, many of which may have an impact on our operating environment in substantial and unpredictable ways. Consequently, the Dodd-Frank Act is likely to continue to increase our cost of doing business, it may limit or expand our permissible activities, and it may affect the competitive balance within our industry and market areas.
Proposed Legislation
From time to time proposals are made in the United States Congress, the New Jersey Legislature, and before various bank regulatory authorities, which would alter the powers of, and place restrictions on, different types of banking organizations. It is impossible to predict the impact, if any, of potential legislative trends on the business of the Company and its subsidiaries.
In accordance with federal law providing for deregulation of interest on all deposits, banks and thrift organizations are now unrestricted by law or regulation from paying interest at any rate on most time deposits. It is not clear whether deregulation and other pending changes in certain aspects of the banking industry will result in further increases in the cost of funds in relation to prevailing lending rates.

ITEM 1A - Risk Factors.
Our business, financial condition, operating results and cash flows can be affected by a number of factors, including, but not limited to, those set forth below, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results.
Credit Risks
Our allowance for loan and lease losses may not be adequate to cover actual losses.
Like all commercial banks, Lakeland Bank maintains an allowance for loan and lease losses to provide for loan and lease defaults and non-performance. If our allowance for loan and lease losses is not adequate to cover actual loan and lease losses, we

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may be required to significantly increase future provisions for loan and lease losses, which could materially and adversely affect our operating results. Our allowance for loan and lease losses is determined by analyzing historical loan and lease losses, current trends in delinquencies and charge-offs, plans for problem loan and lease resolution, the opinions of our regulators, changes in the size and composition of the loan and lease portfolio and industry information. We also consider the possible effects of economic events, which are difficult to predict. The amount of future losses is affected by changes in economic, operating and other conditions, including changes in interest rates, many of which are beyond our control. These losses may exceed our current estimates. Federal regulatory agencies, as an integral part of their examination process, review our loans and the allowance for loan and lease losses. While we believe that our allowance for loan and lease losses in relation to our current loan portfolio is adequate to cover current losses, we cannot assure you that we will not need to increase our allowance for loan and lease losses or that the regulators will not require us to increase this allowance. Future increases in our allowance for loan and lease losses could materially and adversely affect our earnings and profitability.
A change in accounting standards could also cause an increase in Lakeland’s allowance for loan and lease losses. In June 2016, the FASB issued an accounting standards update pertaining to the measurement of credit losses on financial instruments. This update requires the measurement of all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions, such as Lakeland, and other organizations will now use forward-looking information to better inform their credit loss estimates. This update will be effective for fiscal years and interim periods beginning after December 15, 2019. While Lakeland is currently evaluating the impact that this standard could have on its financial statements, the adoption of this update is likely to cause an increase in Lakeland’s allowance for loan and lease losses and a reduction in capital.

The concentration of our commercial real estate loan portfolio may subject us to increased regulatory analysis, or otherwise adversely affect our business and operating results.

The FDIC, the Federal Reserve and the OCC have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate (CRE) lending. The 2006 interagency guidance did not establish specific CRE lending limits or caps; rather, the guidance set forth supervisory criteria to serve as levels of bank CRE concentration above which certain financial institutions may be identified for further supervisory analysis. According to the guidelines, institutions could be subject to further analysis if (i) their loans for construction, land, and land development (CLD) represent 100% or more of the institution's total risk-based capital, or (ii) their total non-owner-occupied CRE loans (including CLD loans), as defined, represent 300% or more of the institution’s total risk-based capital, and further, that the institution’s non-owner-occupied CRE loan portfolio has increased by 50% or more during the previous 36 months.

The Bank’s total reported CLD loans represented 47% of total risk-based capital at December 31, 2017. The Bank’s total reported CRE loans to total capital was 404% at December 31, 2017, while the Bank’s CRE portfolio has increased by 127% over the preceding 36 months. The growth rate of the preceding 36 months included the acquisitions of Pascack Community Bank and Harmony Bank.

The Bank’s CRE portfolio is segmented and spread among various property types including retail, office, multi-family, mixed use, industrial, hospitality, healthcare, special use and residential and commercial construction. Management regularly reviews and evaluates its CRE portfolio, including concentrations within the various property types based on current market conditions and risk appetite as well as by utilizing stress testing on material exposures and believes its underwriting practices are sound.
There is no assurance that in the future we will not continue to exceed the levels set forth in the guidelines. Furthermore, the concentration of our commercial real estate portfolio could materially and adversely affect our business and operating results, including our overall profitability, and/or adversely impact the growth of our business, including the growth and composition of our overall loan portfolio.
Our mortgage banking operations expose us to risks that are different than the risks associated with our retail banking operations.
The Bank’s mortgage banking operations expose us to risks that are different than our retail banking operations. Our mortgage banking operations are dependent upon the level of demand for residential mortgages. During higher and rising interest rate environments, the level of refinancing activity tends to decline, which can lead to reduced volumes of business and lower revenues that may not exceed our fixed costs to run the business. In addition, mortgages sold to third-party investors are typically subject to certain repurchase provisions related to borrower refinancing, defaults, fraud or other reasons stipulated in the applicable third-party investor agreements. If the fair value of a loan when repurchased is less than the fair value when sold, a bank may be required to charge such shortfall to earnings.

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In addition, the “ability to repay” and “Qualified Mortgage” rules promulgated as required by the Dodd-Frank Act, may expose the Company to greater losses, reduced volume and litigation related expenses and delays in taking title to collateral real estate, if these loans do not perform and borrowers challenge whether the rules were satisfied when originating the loans.
We are subject to various lending and other economic risks that could adversely affect our results of operations and financial condition.
Economic, political and market conditions, trends in industry and finance, legislative and regulatory changes, changes in governmental monetary and fiscal policies and inflation affect our business. These factors are beyond our control. A deterioration in economic conditions, particularly in the markets we lend in, could have the following consequences, any of which could materially adversely affect our business:
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loan and lease delinquencies may increase;
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problem assets and foreclosures may increase;
•
demand for our products and services may decrease; and
•
collateral for loans made by us may decline in value, in turn reducing the borrowing ability of our customers.
Deterioration in the real estate market, particularly in New Jersey, could adversely affect our business. A decline in real estate values in New Jersey would reduce our ability to recover on defaulted loans by selling the underlying real estate, which would increase the possibility that we may suffer losses on defaulted loans.
We may suffer losses in our loan portfolio despite our underwriting practices.

We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices. Although we believe that our underwriting criteria are appropriate for the various kinds of loans that we make, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in our allowance for loan and lease losses.
  
Liquidity and Interest Rate Risks

A decrease in our ability to borrow funds could adversely affect our liquidity.

Our ability to obtain funding from the Federal Home Loan Bank ("FHLB") or through our overnight federal funds lines with other banks could be negatively affected if we experienced a substantial deterioration in our financial condition or if such funding became restricted due to deterioration in the financial markets. While we have a contingency funds management plan to address such a situation if it were to occur (such plan includes deposit promotions, the sale of securities and the curtailment of loan growth, if necessary), a significant decrease in our ability to borrow funds could adversely affect our liquidity.

Public funds deposits are an important source of funds for us and a reduced level of those deposits may hurt our profits.

Public funds deposits are a significant source of funds for our lending and investment activities. The Company’s public funds deposits consist of deposits from local government entities, domiciled in the state of New Jersey, such as school districts, counties and other municipalities, and are collateralized by letters of credit from the FHLB and investment securities. Given our use of these high-average balance public funds deposits as a source of funds, our inability to retain such funds could adversely affect our liquidity. In addition, Governor Phil Murphy of New Jersey has proposed the creation of a state-owned bank which would accept public revenues to be invested in New Jersey. A bill was introduced in the New Jersey legislature in January 2018 that calls for the establishment of such a state-run bank. While no assurance can be provided that such a bank will be created, to the extent that a state-run bank is established and accepts public revenues, the amount of the Company’s public funds deposits could be reduced, which could adversely affect our liquidity.

Further, our public funds deposits are primarily demand deposit accounts or short-term time deposits and are therefore more sensitive to interest rate risks. If we are forced to pay higher rates on our public funds accounts to retain those funds, or if we are unable to retain such funds and we are forced to resort to other sources of funds for our lending and investment activities, such as borrowings from the FHLB, the interest expense associated with these other funding sources may be higher than the rates we are currently paying on our public funds deposits, which would adversely affect our net income.



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We are subject to interest rate risk and variations in interest rates that may negatively affect our financial performance.

We are unable to predict actual fluctuations of market interest rates. Rate fluctuations are influenced by many factors, including:

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inflation or deflation
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excess growth or recession;
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a rise or fall in unemployment;
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tightening or expansion of the money supply;
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domestic and international disorder;
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instability in domestic and foreign financial markets; and
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actions taken or statements made by the Federal Reserve Board.
Both increases and decreases in the interest rate environment may reduce our profits. We expect that we will continue to realize income from the difference or “spread” between the interest we earn on loans, securities and other interest-earning assets, and the interest we pay on deposits, borrowings and other interest-bearing liabilities. Our net interest spreads are affected by the differences between the maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities. Our interest-earning assets may not reprice as slowly or rapidly as our interest-bearing liabilities. Changes in market interest rates could materially and adversely affect our net interest spread, asset quality, levels of prepayments, cash flows, market value of our securities portfolio, loan and deposit growth, costs and yields on loans and deposits and our overall profitability. Competition for our deposits has increased significantly as a result of the continuing low interest rate environment.
Declines in value may adversely impact our investment portfolio .
As of December 31, 2017, the Company had approximately $646.1 million and $139.7 million in available for sale and held to maturity investment securities, respectively. We may be required to record impairment charges on our investment securities if they suffer a decline in value that is considered other-than-temporary. Numerous factors, including lack of liquidity for sales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on our investment portfolio in future periods. If an impairment charge is significant enough it could affect the ability of Lakeland to upstream dividends to the Company, which could have a material adverse effect on our liquidity and our ability to pay dividends to shareholders and could also negatively impact our regulatory capital ratios.
Information Technology or Cybersecurity Risks

The occurrence of any failure, breach, or interruption in service involving our systems or those of our service providers could damage our reputation, cause losses, increase our expenses, and result in a loss of customers, an increase in regulatory scrutiny, or expose us to civil litigation and possibly financial liability, any of which could adversely impact our financial condition, results of operations and the market price of our stock.

In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data. Any failure, interruption or breach in security of these systems could result in significant disruption to our operations. Information security breaches and cybersecurity-related incidents may include, but are not limited to, attempts to access information, including customer and company information, malicious code, computer viruses and denial of service attacks that could result in unauthorized access, misuse, loss or destruction of data (including confidential customer information), account takeovers, unavailability of service or other events. These types of threats may derive from human error, fraud or malice on the part of external or internal parties, or may result from accidental technological failure. Further, to access our products and services our customers may use computers and mobile devices that are beyond our security control systems. Our technologies, systems, networks and software, and those of other financial institutions have been, and are likely to continue to be, the target of cybersecurity threats and attacks, which may range from uncoordinated individual attempts to sophisticated and targeted measures directed at us. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.
Our business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services. We also maintain important internal company data such as personally identifiable information about our

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employees and information relating to our operations. The integrity and protection of that customer and company data is important to us. Our collection of such customer and company data is subject to extensive regulation and oversight.
Our customers and employees have been, and will continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, bank account information or other personal information or to introduce viruses or other malware through “Trojan horse” programs to our information systems and/or our customers' computers. Though we endeavor to mitigate these threats through product improvements, use of encryption and authentication technology and customer and employee education, such cyber attacks against us or our merchants and our third party service providers remain a serious issue. The pervasiveness of cybersecurity incidents in general and the risks of cyber crime are complex and continue to evolve. More generally, publicized information concerning security and cyber-related problems could inhibit the use or growth of electronic or web-based applications or solutions as a means of conducting commercial transactions.
Although we make significant efforts to maintain the security and integrity of our information systems and have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because attempted security breaches, particularly cyber attacks and intrusions, or disruptions will occur in the future, and because the techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is virtually impossible for us to entirely mitigate this risk. While we maintain specific “cyber” insurance coverage, which would apply in the event of various breach scenarios, the amount of coverage may not be adequate in any particular case. Furthermore, because cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under our cyber insurance coverage. A security breach or other significant disruption of our information systems or those related to our customers, merchants and our third party vendors, including as a result of cyber attacks, could (i) disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our customers; (ii) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of ours or our customers; (iii) result in a violation of applicable privacy, data breach and other laws, subjecting us to additional regulatory scrutiny and expose the us to civil litigation, governmental fines and possible financial liability; (iv) require significant management attention and resources to remedy the damages that result; or (v) harm our reputation or cause a decrease in the number of customers that choose to do business with us. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
The inability to stay current with technological change could adversely affect our business model.
Financial institutions continually are required to maintain and upgrade technology in order to provide the most current products and services to their customers, as well as create operational efficiencies. This technology requires personnel resources, as well as significant costs to implement. Failure to successfully implement technological change could adversely affect the Company’s business, results of operations and financial condition.
Our operations rely on certain third party vendors.
We rely on certain external vendors to provide products and services necessary to maintain our day-to-day operations. These third party vendors are sources of operational and informational security risk to us, including risks associated with operational errors, information system interruptions or breaches and unauthorized disclosures of sensitive or confidential client or customer information. If these vendors encounter any of these issues, or if we have difficulty communicating with them, we could be exposed to disruption of operations, loss of service or connectivity to customers, reputational damage, and litigation risk that could have a material adverse effect on our business and, in turn, our financial condition and results of operations.
In addition, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. While we have selected these external vendors carefully, we do not control their actions. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements, because of changes in the vendor’s organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which could have a material adverse effect on our business and, in turn, our financial condition and results of operations. Replacing these external vendors could also entail significant delay and expense.


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Legal and Regulatory Risks
The Dodd-Frank Act could materially and adversely affect us by increasing compliance costs, heightening our risk of noncompliance with applicable regulations, and changing the competitive landscape in the banking industry.

The Dodd-Frank Act has resulted in sweeping changes in the regulation of financial institutions. As discussed in the section herein entitled “Business-Supervision and Regulation,” the Dodd-Frank Act contains numerous provisions that affect all banks and bank holding companies. Some of the provisions in the Dodd-Frank Act were subject to regulatory rule-making and implementation, the full effects of which are not yet fully known. Although we cannot predict the full and specific impact and long-term effects that the Dodd-Frank Act and the regulations promulgated thereunder will have on us and our prospects, our target markets and the financial industry more generally, we believe that the Dodd-Frank Act and the regulations promulgated thereunder are likely to continue to impose additional administrative and regulatory burdens that will obligate us to continue to incur additional expenses and will continue to adversely affect our margins and profitability. For example, the elimination of the prohibition on the payment of interest on demand deposits could materially increase our interest expense, depending on our competitors’ responses. Provisions in the legislation mandating modification of the capital requirements applicable to the Company and the Bank, and the resulting adoption by federal regulators of the new capital requirements described under “Business-Supervision and Regulation-Capital Requirements,” could require the Company and the Bank to seek additional sources of capital in the future. More stringent consumer protection regulations could materially and adversely affect our profitability.
President Donald Trump has stated that he intends to relax financial regulations, including various provisions of the Dodd-Frank Act and the rules implementing those provisions. The nature and extent of future legislative and regulatory changes affecting financial institutions remains very unpredictable at this time.
The Company and the Bank are subject to more stringent capital and liquidity requirements .
The Dodd-Frank Act also imposes more stringent capital requirements on bank holding companies such as Lakeland Bancorp by, among other things, imposing leverage ratios on bank holding companies and prohibiting new trust preferred issuances from counting as Tier I capital. These restrictions will limit our future capital strategies. Under the Dodd-Frank Act, our currently outstanding trust preferred securities will continue to count as Tier I capital, but we will be unable to issue replacement or additional trust preferred securities which would count as Tier I capital.
As further described above under “Business-Supervision and Regulation-Capital Requirements,” we were required to meet new capital requirements beginning on January 1, 2015. In addition, beginning in 2016, banks and bank holding companies were required to maintain a capital conservation buffer on top of minimum risk-weighted asset ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level, and increases by 0.625% on each subsequent January 1 until it reaches 2.5% when fully phased in on January 1, 2019. Banking institutions which do not maintain capital in excess of the capital conservation buffer face constraints on the payment of dividends, equity repurchases and compensation based on the amount of the shortfall. Accordingly, if the Bank fails to maintain the applicable minimum capital ratios and the capital conservation buffer, distributions to Lakeland Bancorp may be prohibited or limited.
Future increases in minimum capital requirements could adversely affect our net income. Furthermore, our failure to comply with the minimum capital requirements could result in our regulators taking formal or informal actions against us which could restrict our future growth or operations.

- 16 -


The extensive regulation and supervision to which we are subject impose substantial restrictions on our business .
The Company, Lakeland and certain non-bank subsidiaries are subject to extensive regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole. Such laws are not designed to protect our shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Lakeland is also subject to a number of laws which, among other things, govern its lending practices and require the Bank to establish and maintain comprehensive programs relating to anti-money laundering and customer identification. The United States Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputational damage, which could have a material adverse effect on our business, financial condition and results of operations.
Lakeland’s ability to pay dividends is subject to regulatory limitations which, to the extent that our holding company requires such dividends in the future, may affect our holding company’s ability to pay its obligations and pay dividends to shareholders.
As a bank holding company, the Company is a separate legal entity from Lakeland Bank and its subsidiaries, and we do not have significant operations of our own. We currently depend on Lakeland Bank’s cash and liquidity to pay our operating expenses and dividends to shareholders. The availability of dividends from Lakeland Bank is limited by various statutes and regulations. The inability of the Company to receive dividends from Lakeland Bank could adversely affect our financial condition, results of operations, cash flows and prospects and the Company’s ability to pay dividends.
In addition, as described under “Business-Supervision and Regulation-Capital Requirements,” banks and bank holding companies are required to maintain a capital conservation buffer on top of minimum risk-weighted asset ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level, and increases by 0.625% on each subsequent January 1 until it reaches 2.5% when fully phased in on January 1, 2019. Banking institutions which do not maintain capital in excess of the capital conservation buffer will face constraints on the payment of dividends, equity repurchases and compensation based on the amount of the shortfall. Accordingly, if Lakeland Bank fails to maintain the applicable minimum capital ratios and the capital conservation buffer, distributions to Lakeland Bancorp may be prohibited or limited.

Strategic and External Risks

The effect of the Tax Cuts and Jobs Act and future tax reform is uncertain and may adversely affect our business.
 
The current Presidential administration and U.S. Congress passed significant reform of the Internal Revenue Code, known as the Tax Cuts and Jobs Act of 2017 ("the Tax Act"). We have completed the process of determining the accounting under ASC Topic 740, Income Taxes, for the income tax effects of the Tax Cuts and Jobs Act, as discussed in the related notes to the consolidated financial statements. The Company has therefore disclosed the impact that the Tax Act will have on its financial position and the results of operations. Technical corrections or other forthcoming guidance could change how we interpret provisions of the Tax Act, which may impact our effective tax rate and could affect our deferred tax assets, tax positions and/or our tax liabilities.

While the decline in the federal corporate tax rate from 35% to 21% will lower the Company's income tax expense as a percent of its taxable income in 2018, other provisions of the Tax Act or future tax reform could negatively impact certain balance sheet and tax positions taken by the Company. The Tax Act imposes higher limitations on the deductibility of interest and property tax expenses which may adversely impact the property values of real estate used to secure loans and create an additional tax burden for many borrowers, particularly in high tax jurisdictions such as the State of New Jersey where the Company operates. These and other federal tax changes could significantly impact the financial health of our customers, potentially resulting, in among other things, an inability to repay loans or maintain deposits at the Bank. Any negative financial impact to our customers resulting from tax reform could adversely impact our financial condition and earnings.

The ultimate impact of any tax reform on our business, customers and shareholders is uncertain and could be adverse.

Severe weather, acts of terrorism and other external events could impact our ability to conduct business.

  Weather-related events have adversely impacted our market area in recent years, especially areas located near coastal waters and flood prone areas. Such events that may cause significant flooding and other storm-related damage may become more common events in the future. Financial institutions have been, and continue to be, targets of terrorist threats aimed at compromising

- 17 -


operating and communication systems and the metropolitan New York area, including New Jersey, remain central targets for potential acts of terrorism. Such events could cause significant damage, impact the stability of our facilities and result in additional expenses, impair the ability of our borrowers to repay their loans, reduce the value of collateral securing repayment of our loans, and result in the loss of revenue. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and financial condition.

We face intense competition from other financial services and financial services technology companies, and competitive pressures could adversely affect our business or financial performance.
The Company faces intense competition in all of its markets and geographic regions. The Company expects competitive pressures to intensify in the future, especially in light of legislative and regulatory initiatives arising out of the recent global economic crisis, technological innovations that alter the barriers to entry, current economic and market conditions, and government monetary and fiscal policies. Competition with financial services technology companies, or technology companies partnering with financial services companies, may be particularly intense, due to, among other things, differing regulatory environments. Competitive pressures may drive the Company to take actions that the Company might otherwise eschew, such as lowering the interest rates or fees on loans or raising the interest rates on deposits in order to keep or attract high-quality customers. These pressures also may accelerate actions that the Company might otherwise elect to defer, such as substantial investments in technology or infrastructure. Whatever the reason, actions that the Company takes in response to competition may adversely affect its results of operations and financial condition. These consequences could be exacerbated if the Company is not successful in introducing new products and other services, achieving market acceptance of its products and other services, developing and maintaining a strong customer base, or prudently managing expenses.
The Company’s future growth may require the Company to raise additional capital in the future, but that capital may not be available when it is needed or may be available only at an excessive cost.
The Company is required by regulatory authorities to maintain adequate levels of capital to support its operations. The Company anticipates that current capital levels will satisfy regulatory requirements for the foreseeable future. The Company, however, may at some point choose to raise additional capital to support its continued growth. The Company’s ability to raise additional capital will depend, in part, on conditions in the capital markets at that time, which are outside of the Company’s control. Accordingly, the Company may be unable to raise additional capital, if and when needed, on terms acceptable to the Company, or at all. If the Company cannot raise additional capital when needed, its ability to further expand operations through internal growth and acquisitions could be materially impacted. In the event of a material decrease in the Company’s stock price, future issuances of equity securities could result in dilution of existing shareholder interests.
Operational Risks
The Company may incur impairment to goodwill.
We review our goodwill at least annually. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely on projections of future operating performance. We operate in a competitive environment and projections of future operating results and cash flows may vary significantly from actual results. Additionally, if our analysis results in an impairment to our goodwill, we would be required to record a non-cash charge to earnings in our financial statements during the period in which such impairment is determined to exist. Any such charge could have a material adverse effect on our results of operations and our stock price.
                                                                                                                                                                                                    
 We could be adversely affected by failure in our internal controls.

We continue to devote a significant amount of effort, time and resources to continually strengthen our controls and ensure compliance with complex accounting standards and banking regulations. A failure in our internal controls could have a significant negative impact not only on our earnings, but also on the perception that customers, regulators and investors may have of us.
Our risk management strategies may not be fully effective in mitigating our risk exposures in all market environments or against all types of risk.
We have devoted significant resources to develop our risk management policies and procedures and expect to continue to do so in the future. Nonetheless, our risk management strategies may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk, including risks that are unidentified or unanticipated. As our products and services change and grow and the markets in which we operate evolve, our risk management strategies may not always adapt to those changes. Some of our methods of managing risk are based upon our use of observed historical market behavior and management’s judgment. As a result, these methods may not predict future risk exposures, which could be significantly greater

- 18 -


than the historical measures indicate. Management of market, credit, liquidity, operational, legal, regulatory and compliance risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events and these policies and procedures may not be fully effective. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate every economic and financial outcome or the timing of such outcomes. Any of these circumstances could have an adverse effect on our business, financial condition and results of operations.
The inability to attract and retain key personnel could adversely affect our Company’s business.
The success of the Company depends partially on the ability to attract and retain a high level of experienced personnel. The inability to attract and retain key employees, as well as find suitable replacements, if necessary, could adversely affect the Company’s customer relationships and internal operations.
The accuracy of our financial statements and related disclosures could be affected if the judgments, assumptions or estimates used in our critical accounting policies are inaccurate.
The preparation of financial statements and related disclosure in conformity with GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our critical accounting policies, which are included in Item 7 of this report captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that we consider “critical” because they require judgments, assumptions and estimates that materially affect our consolidated financial statements and related disclosures. As a result, if future events differ significantly from the judgments, assumptions and estimates in our critical accounting policies, those events or assumptions could have a material impact on our consolidated financial statements and related disclosures.

If we do not successfully integrate any banks that we may acquire in the future, the combined company may be adversely affected.
If we make acquisitions in the future, we will need to integrate the acquired entities into our existing business and systems. We may experience difficulties in accomplishing this integration or in effectively managing the combined company after any future acquisition. Any actual cost savings or revenue enhancements that we may anticipate from a future acquisition will depend on future expense levels and operating results, the timing of certain events and general industry, regulatory and business conditions. Many of these events will be beyond our control, and we cannot assure you that if we make any acquisitions in the future, we will be successful in integrating those businesses into our own.

ITEM 1B - Unresolved Staff Comments.
Not Applicable.
ITEM 2 – Properties.
At December 31, 2017 , Lakeland Bank conducted business through 53 branch offices located throughout Bergen, Essex, Morris, Ocean, Passaic, Somerset, Sussex, and Union counties in New Jersey and also including one branch in Highland Mills, New York. Lakeland Bank also operates six New Jersey regional commercial lending centers in Bernardsville, Jackson, Montville, Newton, Teaneck and Waldwick; and one in New York to serve the Hudson Valley region. Lakeland also has a commercial loan production office serving Middlesex and Monmouth counties in New Jersey. The Company’s principal office is located at 250 Oak Ridge Road, Oak Ridge, New Jersey 07438.
The aggregate net book value of premises and equipment was $ 50.3 million at December 31, 2017 . As of December 31, 2017 , 30 of the Company’s facilities were owned and 32 were leased for various terms.
ITEM 3 - 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 3A - Executive Officers of the Registrant.

- 19 -


The following table sets forth the name and age of each current executive officer of the Company. Each officer is appointed by the Company’s Board of Directors. Unless otherwise indicated, the persons named below have held the position indicated for more than the past five years.
 
Name and Age
 
Officer of the
Company Since
 
Position with the Company, its Subsidiary
Banks, and Business Experience
Thomas J. Shara
Age 60
 
2008
 
President and CEO of the Company and the Bank (April 2008 - Present); President and Chief Credit Officer (May 2007 - April 2008) and Executive Vice President and Senior Commercial Banking Officer (February 2006 - May 2007), TD Banknorth, N.A.’s Mid-Atlantic Division.
Thomas Splaine
Age 52
 
May 2016
 
Executive Vice President and Chief Financial Officer of the Company and the Bank (March 2017 - Present); First Senior Vice President and Chief Accounting Officer of the Company and the Bank (May 2016 - March 2017); Senior Vice President, Financial Planning and Analysis and Investor Relations of Investors Bancorp, Inc. (January 2015 - December 2015); Senior Vice President and Chief Financial Officer of Investors Bancorp, Inc. (2008 - 2015).
Ronald E. Schwarz
Age 63
 
2009
 
Senior Executive Vice President and Chief Operating Officer of the Company and the Bank (January 2017 - Present); Senior Executive Vice President and Chief Revenue Officer of the Company and the Bank (January 2016 - January 2017); Executive Vice President and Chief Retail Officer of the Company and the Bank (June 2009 - December 2015); Executive Vice President and Market Executive of Sovereign Bank (June 2006 - June 2009).

Ellen Lalwani Age 54
 
January 2018
 
Executive Vice President and Chief Retail Officer of the Company and the Bank (January 2018 - Present); Senior Vice President and Director of Retail Sales of the Bank (August 2008 - January 2018).
Timothy J. Matteson, Esq.
Age 48
 
2008
 
Executive Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary of the Company (January 2017 - Present); Executive Vice President, General Counsel and Corporate Secretary of the Company (March 2012 - January 2017); Senior Vice President and General Counsel of the Company (September 2008 - March 2012); Assistant General Counsel, Israel Discount Bank (November 2007 - September 2008); Senior Attorney and Senior Vice President, TD Banknorth, N.A. (February 2006 - May 2007); General Counsel and Senior Vice President, Hudson United Bancorp and Hudson United Bank (January 2005 - February 2006).
James M. Nigro
Age 50
 
March 2016
 
Executive Vice President, Chief Risk Officer of the Company (March 2016 - Present); Senior Vice President, Credit Risk Manager of The Provident Bank (December 2013 - March 2016); Senior Vice-President, Commercial Lending of Lakeland Bank (May 2013 - December 2013); Executive Vice President, Chief Lending Officer of Somerset Hills Bank (July 2001 - May 2013).
John F. Rath, III
Age 59
 
January 2018
 
Executive Vice President and Chief Lending Officer of the Company and the Bank (January 2018 - Present); First Senior Vice-President, Lending Group Manager of the Company (January 2016 - January 2018); Senior Vice-President, Commercial Lending of the Company (March 2015- January 2016); Senior Vice-President, Lending Group Manager of TD Bank (August 1998 - March 2015).


ITEM 4 - Mine Safety Disclosures.
Not applicable.

- 20 -


PART II
 

Item 5 - Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Shares of the common stock of Lakeland Bancorp, Inc. have been traded under the symbol “LBAI” on the NASDAQ Global Select Market (or the NASDAQ National Market) since February 22, 2000 and in the over the counter market prior to that date. As of December 31, 2017 , there were approximately 3,185 shareholders of record of the common stock. The following table sets forth the range of the high and low daily closing prices of the common stock as provided by NASDAQ and dividends declared for the periods presented.
 
 
 
High
 
Low
 
Dividends
Declared
Year Ended December 31, 2017
 
 
 
 
 
 
First Quarter
 
$
20.75

 
$
18.00

 
$
0.095

Second Quarter
 
20.35

 
18.40

 
0.100

Third Quarter
 
20.40

 
17.65

 
0.100

Fourth Quarter
 
21.65

 
19.05

 
0.100

 
 
 
High
 
Low
 
Dividends
Declared
Year Ended December 31, 2016
 
 
 
 
 
 
First Quarter
 
$
11.62

 
$
9.81

 
$
0.085

Second Quarter
 
11.76

 
10.26

 
0.095

Third Quarter
 
14.04

 
11.14

 
0.095

Fourth Quarter
 
19.75

 
13.20

 
0.095


Dividends on the Company’s common stock are within the discretion of the Board of Directors of the Company and are dependent upon various factors, including the future earnings and financial condition of the Company and Lakeland and bank regulatory policies.

The Bank Holding Company Act of 1956 restricts the amount of dividends the Company can pay. Accordingly, dividends should generally only be paid out of current earnings, as defined.

The New Jersey Banking Act of 1948 restricts the amount of dividends paid on the capital stock of New Jersey chartered banks. Accordingly, no dividends shall be paid by such banks on their capital stock unless, following the payment of such dividends, the capital stock of the bank will be unimpaired and the bank will have a surplus of not less than 50% of its capital stock, or, if not, the payment of such dividend will not reduce the surplus of the bank. Under this limitation, approximately $507.9 million was available for the payment of dividends from Lakeland Bank to the Company as of December 31, 2017.


- 21 -


Capital guidelines and other regulatory requirements may further limit the Company’s and Lakeland’s ability to pay dividends. See “Item 1 - Business - Supervision and Regulation - Dividend Restrictions” and “-Capital Requirements.”

The following chart compares the Company’s cumulative total shareholder return (on a dividend reinvested basis) over the past five years commencing December 31, 2012 and ending December 31, 2017 with the NASDAQ Market Index and the Peer Group Index. The Peer Group Index is the Zacks Regional Northeast Banks Index, which consists of 95 Regional Northeast Banks.
.

  COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Assumes Initial Investment of $100
December 2017
CHART-3DEB411E387D56339FC.JPG
 
Company/Market/Peer Group
 
12/31/2012
 
12/31/2013
 
12/31/2014
 
12/31/2015
 
12/31/2016
 
12/31/2017
Lakeland Bancorp, Inc.
 
100.00

 
124.93

 
127.80

 
132.78

 
227.04

 
228.75

NASDAQ Market Index
 
100.00

 
140.12

 
160.78

 
171.97

 
187.22

 
242.71

Regional Northeast Banks
 
100.00

 
127.19

 
137.22

 
142.90

 
198.36

 
206.24



- 22 -


Item 6 - Selected Financial Data.
SELECTED CONSOLIDATED FINANCIAL DATA
The following should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Company’s consolidated financial statements included in Items 7 and 8 of this report. The selective financial data set forth below has been derived from the Company’s audited consolidated financial statements.
 
 
At or for the Years Ended December 31,
 
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
(in thousands, except per share data)
Income Statement
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
190,204

 
$
163,296

 
$
127,514

 
$
122,503

 
$
114,199

Interest expense
 
24,966

 
17,647

 
10,874

 
8,937

 
9,657

Net interest income
 
165,238

 
145,649

 
116,640

 
113,566

 
104,542

Provision for loan and lease losses
 
6,090

 
4,223

 
1,942

 
5,865

 
9,343

Noninterest income excluding gains on investment securities and gain on debt extinguishment
 
22,911

 
20,960

 
19,090

 
17,720

 
18,925

Gains on sales of investment securities
 
2,524

 
370

 
241

 
2

 
839

Gain on early debt extinguishment
 
—

 
—

 
1,830

 
—

 
1,197

Merger related expenses
 
—

 
4,103

 
1,152

 
—

 
2,834

Long-term debt prepayment fee
 
2,828

 
—

 
2,407

 
—

 
1,209

Noninterest expenses
 
101,706

 
95,814

 
83,652

 
79,135

 
74,698

Income before income taxes
 
80,049

 
62,839

 
48,648

 
46,288

 
37,419

Income tax provision
 
27,469

 
21,321

 
16,167

 
15,159

 
12,450

Net income
 
$
52,580

 
$
41,518

 
$
32,481

 
$
31,129

 
$
24,969

Per-Share Data (1)
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
47,438

 
42,912

 
37,844

 
37,749

 
34,742

Diluted
 
47,674

 
43,114

 
37,993

 
37,869

 
34,902

Earnings per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
1.10

 
$
0.96

 
$
0.85

 
$
0.82

 
$
0.71

Diluted
 
$
1.09

 
$
0.95

 
$
0.85

 
$
0.82

 
$
0.71

Cash dividend per common share
 
$
0.40

 
$
0.37

 
$
0.33

 
$
0.29

 
$
0.27

Book value per common share
 
$
12.31

 
$
11.65

 
$
10.57

 
$
10.01

 
$
9.28

Tangible book value per common share (2)
 
$
9.38

 
$
8.70

 
$
7.62

 
$
7.06

 
$
6.31

Balance Sheet
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale and other (5)
 
$
658,711

 
$
621,803

 
$
456,436

 
$
467,295

 
$
439,044

Investment securities held to maturity
 
139,685

 
147,614

 
116,740

 
107,976

 
101,744

Loans and leases, net of deferred fees
 
4,152,720

 
3,870,598

 
2,965,200

 
2,653,826

 
2,469,016

Goodwill and other identifiable intangible assets
 
138,795

 
139,091

 
111,519

 
111,934

 
112,398

Total assets
 
5,405,639

 
5,093,131

 
3,869,550

 
3,538,325

 
3,317,791

Total deposits
 
4,368,748

 
4,092,835

 
2,995,572

 
2,790,819

 
2,709,205

Total core deposits (3)
 
3,631,320

 
3,547,927

 
2,652,251

 
2,510,857

 
2,413,119

Term borrowings
 
296,913

 
365,650

 
303,143

 
243,736

 
160,238

Total stockholders’ equity
 
583,122

 
550,044

 
400,516

 
379,438

 
351,424

Performance Ratios
 
 
 
 
 
 
 
 
 
 
Return on average assets
 
1.00
%
 
0.90
%
 
0.89
%
 
0.92
%
 
0.80
%
Return on average tangible common equity (2)
 
12.24
%
 
12.19
%
 
11.58
%
 
12.21
%
 
11.42
%
Return on average equity
 
9.25
%
 
8.75
%
 
8.28
%
 
8.48
%
 
7.78
%
Efficiency ratio (2)(4)
 
53.40
%
 
56.48
%
 
60.31
%
 
59.53
%
 
59.76
%
Net interest margin (tax equivalent basis)
 
3.38
%
 
3.41
%
 
3.47
%
 
3.64
%
 
3.69
%
Loans to deposits
 
95.06
%
 
94.57
%
 
98.99
%
 
95.09
%
 
91.13
%
Capital Ratios
 
 
 
 
 
 
 
 
 
 
Common equity to asset ratio
 
10.79
%
 
10.80
%
 
10.35
%
 
10.72
%
 
10.59
%
Tangible common equity to tangible assets (2)
 
8.44
%
 
8.30
%
 
7.69
%
 
7.81
%
 
7.46
%
Tier 1 leverage ratio (6)
 
9.12
%
 
9.07
%
 
8.70
%
 
9.08
%
 
8.90
%
Tier 1 risk-based capital ratio (6)
 
10.87
%
 
10.85
%
 
10.53
%
 
11.76
%
 
11.73
%
Total risk-based capital ratio (6)
 
13.40
%
 
13.48
%
 
11.61
%
 
12.98
%
 
12.98
%
CET1 ratio (6)
 
10.18
%
 
10.11
%
 
9.54
%
 
NA

 
NA

(1)
Restated for 5% stock dividend in 2014.
(2)
A non-GAAP financial measure. See “Non-GAAP Financial Measures” for a reconciliation of such measures to data calculated in accordance with generally accepted accounting principles.
(3)
Core deposits represent all deposits with the exception of time deposits.
(4)
Ratio represents noninterest expense, excluding long-term debt prepayment fee, merger related expenses, provision for unfunded lending commitments and core deposit amortization, as a percentage of total revenue (calculated on a tax equivalent basis), excluding gains (losses) on securities and gain on debt extinguishment. Total revenue represents net interest income (calculated on a tax equivalent basis) plus noninterest income.
(5)
Includes investment in Federal Home Loan Bank and other membership stock, at cost.
(6)
Beginning March 31, 2015, these ratios were calculated according to the Basel III capital rules that took effect on January 1, 2015.

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ITEM 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This section presents a review of Lakeland Bancorp, Inc.’s consolidated results of operations and financial condition. You should read this section in conjunction with the selected consolidated financial data that is presented on the preceding page as well as the accompanying consolidated financial statements and notes to financial statements. As used in the following discussion, the term “Company” refers to Lakeland Bancorp, Inc. and “Lakeland” refers to the Company’s wholly owned banking subsidiary—Lakeland Bank.
Statements Regarding Forward-Looking Information
The information disclosed in this document includes various forward-looking statements that are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to credit quality (including delinquency trends and the allowance for loan and lease losses), corporate objectives, the expected impact from the Tax Cuts and Jobs Act of 2017, 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 in Item 1A in this 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 nature and timing of actions of the Federal Reserve Board and other regulators, the nature and timing of legislation affecting the financial services industry, government intervention in the U.S. financial system, changes in levels of market interest rates, pricing pressures on loan and deposit products, credit risks of Lakeland’s lending and leasing activities, successful implementation, deployment and upgrades of new and existing technology, systems, services and products, customers’ acceptance of Lakeland’s products and services and competition.
The above-listed risk factors are not necessarily exhaustive, particularly as to possible future events, and new risk factors may emerge from time to time. Certain events may occur that could cause the Company’s actual results to be materially different than those described in the Company’s periodic filings with the Securities and Exchange Commission. Any statements made by the Company that are not historical facts should be considered to be forward-looking statements. The Company is not obligated to update and does not undertake to update any of its forward-looking statements made herein.
Strategy
The Company, through its wholly owned subsidiary, Lakeland Bank, currently operates 53 banking offices located in Northern and Central New Jersey including one branch in Highland Mills, New York. Lakeland offers a broad range of lending, depository, and related financial services to individuals and small to medium sized businesses located in its market areas. Lakeland also offers a broad range of consumer banking services, including lending, depository, safe deposit services and wealth management services.
Lakeland’s growth has come from a combination of organic growth and acquisitions. In addition to organic growth, through December 31, 2017 , the Company has acquired seven community banks with an aggregate asset total of approximately $1.8 billion at the date of acquisition, including the recent acquisitions of Pascack Bancorp, Inc. and Harmony Bank. On January 7, 2016, the Company completed its acquisition of Pascack, with eight branches and an asset total of approximately $405.3 million. Three of the eight Pascack branches have been merged with Lakeland branches. On July 1, 2016, the Company completed its acquisition of Harmony, with three branches and an asset total of approximately $326.4 million. All acquired banks have been merged into Lakeland and their holding companies, if applicable, have been merged into the Company. In 2015, the Company opened two new Loan Production Offices (“LPOs”) that allowed Lakeland to expand geographically in New Jersey and to enter New York state for the first time. In the first quarter of 2017, the Company opened its first full service branch in New York state with the opening of the Highland Mills branch in the Hudson Valley. The Company’s strategy is to continue growing both organically and through acquisition should opportunities allow. The Company continues to evaluate opportunities to increase market share by expanding within existing and contiguous markets.
The Company’s strategic aim is to provide an adequate return to its shareholders by focusing on profitable growth through services that meet the needs of its customers in its market areas. This will be accomplished by continuing to offer commercial and consumer loan, deposit and other financial product services in a changing economic and technological environment. The Company recognizes that there are more service delivery channels than the traditional branch office and has offered internet banking, mobile banking and cash management services to meet the needs of its business and consumer customers.

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The Company’s results of operations are primarily dependent upon net interest income, the difference between interest earned on interest-earning assets and the interest paid on interest-bearing liabilities. For information on how interest rate change can influence the Company’s net interest income and how the Company manages its net interest income, see “Interest Rate Risk” below.
The Company generates noninterest income such as income from retail and business account fees, loan servicing fees, loan origination fees, appreciation in the cash surrender value of bank owned life insurance, income from securities sales, fees from wealth management services and investment product sales, income from the origination and sale of residential mortgages and SBA loans and other fees. The Company’s operating expenses consist primarily of compensation and benefits expense, occupancy and equipment expense, data processing expense, ATM and debit card expense, marketing and advertising expense and other general and administrative expenses. The Company’s results of operations are also affected by general economic conditions, changes in market interest rates, changes in asset quality, changes in asset values, actions of regulatory agencies and government policies.

The Company continues to control its expenses by continually reviewing its ongoing noninterest expense, including evaluating its salary expense, ongoing service contract expense, marketing expenses and other expenses. The Company also controls its expenses by leveraging its technology investments that maximize the efficient delivery of products and services to its customers, which allows it further to evaluate its infrastructure.  Through this process, Lakeland Bank has consolidated and closed branches in markets where it may have more branches than necessary, including one branch in 2014, three branches in 2015 and seven branches in 2016 (including three of the eight acquired Pascack branches) while permitting it to expand and open a branch in 2017 in an area of opportunity (Highland Mills, New York).

As a result of the Tax Cut and Jobs Act of 2017, management has decided to further invest in Lakeland's future. Management intends to utilize 20% of the tax savings by accelerating and expanding its investments in personnel and technology that will continue to enhance the delivery of banking services and products to Lakeland Bank's customers. In addition, Lakeland plans to further increase its financial support of non-profits in the communities that it serves.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company and Lakeland conform with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and predominant practices within the banking industry. 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. Significant estimates implicit in these financial statements are as follows. For additional accounting policies and detail, refer to Note 1 to the consolidated financial statements included in Item 8 of this report.
Allowance for loan and lease losses. The allowance for loan and lease losses is the estimated amount considered necessary to cover probable and reasonably estimable incurred losses inherent in the loan portfolio at the balance sheet date. In determining the allowance, we make significant estimates and judgments, and, therefore, have identified the allowance as a critical accounting policy. The allowance is established through a provision for loan and lease losses charged against income. Loan principal considered to be uncollectible by management is charged against the allowance.

The allowance for loan and lease losses has been determined in accordance with U.S. GAAP. We are responsible for the timely and periodic determination of the amount of the allowance required. We believe that our allowance is adequate to cover identifiable losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable.

The determination of the adequacy of the allowance for loan and lease losses and the periodic provisioning for estimated losses included in the consolidated financial statements is the responsibility of management and the Board of Directors. Management performs a formal quarterly evaluation of the allowance for loan and lease losses. This quarterly process is performed by the credit administration department and approved by the Chief Credit Officer. All supporting documentation with regard to the evaluation process is maintained by the credit administration department. Each quarter, the evaluation along with the supporting documentation is reviewed by the finance department before approval by the Chief Credit Officer. The allowance evaluation is then presented to an Allowance for Loan and Lease Losses committee, which gives final approval to the allowance evaluation before presented to the Board of Directors for their approval.

Additionally, the Company continually evaluates, through its governance process, the development of the allowance for loan and lease losses methodology. During the 3 rd quarter of 2017, the Company refined and enhanced its quantitative framework by implementing loss migration periods to determine historical loss rates. It also enhanced its qualitative framework to complement the loss migration historical loss rates. These enhancements were implemented to increase the level of precision in the allowance for loan and lease losses and did not result in a material change in the required allowance for loan and lease losses.

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The methodology employed for assessing the adequacy of the allowance consists of the following criteria:

• The establishment of specific reserve amounts for impaired loans and leases, including purchase-credit impaired loans.

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

The Company defines impaired loans as all non-accrual loans with recorded investments of $500,000 or greater. Impaired loans also include all loans modified as troubled debt restructurings. Loans and leases are considered impaired when, based on current information and events, it is probable that Lakeland will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments.

Impairment is measured based on the present value of expected cash flows discounted at the loan’s effective interest rate, or as a practical expedient, Lakeland may measure impairment based on a loan’s observable market price, or the fair value of the collateral, less estimated costs to sell, if the loan is collateral-dependent. Regardless of the measurement method, Lakeland measures impairment based on the fair value of the collateral when it is determined that foreclosure is probable. Most of Lakeland’s impaired loans are collateral-dependent. Shortfalls in collateral or cash flows are charged-off or specifically reserved for in the period the shortfall is identified. Charge-offs are recommended by the Chief Credit Officer and approved by the Board.

Lakeland groups impaired commercial loans under $500,000 into homogeneous pools and collectively evaluates them. Interest received on impaired loans and leases may be recorded as interest income. However, if management is not reasonably certain that an impaired loan and lease will be repaid in full, or if a specific time frame to resolve full collection cannot yet be reasonably determined, all payments received are recorded as reductions of principal.

The establishment of reserve amounts for pools of homogeneous loans and leases are based upon the determination of historical loss rates, which are adjusted to reflect current conditions through the use of qualitative factors. The qualitative factors considered by the Company include an evaluation of the results of the Company’s independent loan review function, the Company's reporting capabilities, the adequacy and expertise of Lakeland’s lending staff, underwriting policies, loss histories, trends in the portfolio, delinquency trends, economic and business conditions and capitalization rates. Since many of Lakeland’s loans depend on the sufficiency of collateral as a secondary source of repayment, any adverse trends in the real estate market could affect the underlying values available to protect Lakeland from losses.

Additionally, management determines the loss emergence periods for each loan segment, which are used to define loss migration periods and establish appropriate ranges for qualitative adjustments for each loan segment. The loss emergence period is the estimated time from the date of a loss event (such as a personal bankruptcy) to the actual recognition of the loss (typically via the first partial or full loan charge-off), and is determined based upon a study of our past loss experience by loan segment. All of the factors considered in the analysis of the adequacy of the allowance for loan and lease losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan and lease losses may be required that would adversely impact earnings in future periods.
Fair value measurements of investment securities . Fair values of financial instruments are volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates, credit ratings and yield curves. Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on the quoted prices of similar instruments or an estimate of fair value by using a range of fair value estimates in the market place as a result of the illiquid market specific to the type of security.
When the fair value of a security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair value is below amortized cost, additional analysis is performed to determine whether an other-than-temporary impairment condition exists. Available for sale and held to maturity securities are analyzed quarterly for possible other-than-temporary impairment. The analysis considers (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer which may include projections of cash flows, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on the Company’s results of operations and financial condition.

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Use of Non-GAAP Disclosures
Reported amounts are presented in accordance with U.S. GAAP. The Company’s management believes that the supplemental non-GAAP information, which consists of measurements and ratios based on tangible equity, tangible assets and the efficiency ratio, which excludes certain items considered to be non-recurring from earnings, is utilized by regulators and market analysts to evaluate a company’s financial condition and therefore, such information is useful to investors. 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.
Financial Overview
The year ended December 31, 2017 represented a year of continued growth for the Company. As discussed in this management’s discussion and analysis:

•
Net income was $52.6 million , or $1.09 per diluted share, for the year ended December 31, 2017 compared to net income of $41.5 million , or $0.95 per diluted share, for 2016 . Excluding the impact of the net charge of $602,000 taken in 2017 related to the Tax Cuts and Jobs Act of 2017, net income would have been $53.2 million and diluted EPS would have been $1.11 in 2017. For more information, please see Note 10 to the audited Consolidated Financial Statements. Excluding merger related expenses and other items, net income for 2016 would have been $44.3 million, or $1.02 per diluted share.

•
In 2017 , return on average assets was 1.00% , return on average common equity was 9.25% and return on average tangible common equity was 12.24% .

•
Total loans and leases increased by $282.1 million , or 7% , in 2017 , with the majority of the increase in the commercial loans secured by real estate category.

•
Total deposits increased $275.9 million , or 7% , in 2017 , which included $40.1 million in noninterest-bearing
deposits.

•
The Company’s net interest margin was 3.38% for 2017 compared to 3.41% for 2016 .

•
The efficiency ratio was 53.40% for 2017 , as compared to 56.48% for 2016 . The improvement in this ratio, in part, reflects the realization of cost savings from our acquisitions and the closure of seven branches in 2016.

Net Income
Net income for 2017 was $52.6 million , or $1.09 per diluted share, compared to net income of $41.5 million , or $0.95 per diluted share, in 2016 . Excluding the impact of the one-time charge taken in 2017 related to the Tax Cuts and Jobs Act of 2017, net income for 2017 was $53.2 million, or $1.11 per diluted share. Excluding merger related expenses and other items, net income for 2016 was $44.3 million, or $1.02 per diluted share. The major contributing factor to the increase in net income was an increase in net interest income of $19.6 million from 2016 to 2017 due to an increase in interest-earning assets resulting from organic growth as well as the Harmony acquisition.
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 2017 was $166.3 million , compared to $146.6 million in 2016 , resulting primarily from growth in average earning assets of $631.6 million . The net interest margin decreased from 3.41% in 2016 to 3.38% in 2017 primarily as a result of a 13 basis point increase in the cost of interest-bearing liabilities. The increase in the cost of interest-bearing deposits is primarily attributable to an increasingly competitive market for deposits, which led the Company to run a time deposit promotion, as well as higher costing core deposits acquired in the Harmony acquisition. The increase in the cost of funds was partially mitigated by an increase in the yield on interest-earning assets of 6 basis points and an increase in interest income

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earned on free funds (interest-earning assets funded by noninterest-bearing liabilities) resulting from an increase in average noninterest-bearing deposits of $106.7 million . The components of net interest income will be discussed in greater detail below.
Interest income and expense volume/rate analysis. The following table shows the impact that changes in average balances of the Company’s assets and liabilities and changes in average interest rates have had on the Company’s net interest income over the past three years. This information is presented on a tax equivalent basis assuming a 35% tax rate. If a change in interest income or expense is attributable to a change in volume and a change in rate, the amount of the change is allocated proportionately.
 
 
 
2017 vs. 2016
 
2016 vs. 2015
 
 
Increase (Decrease)
Due to Change in:
 
Total
Change
 
Increase (Decrease)
Due to Change in:
 
Total
Change
 
 
Volume
 
Rate
 
Volume
 
Rate
 
 
 
(in thousands)
INTEREST INCOME
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases
 
$
19,713

 
$
2,852

 
$
22,565

 
$
33,166

 
$
1,316

 
$
34,482

Taxable investment securities and other
 
3,972

 
(148
)
 
3,824

 
141

 
459

 
600

Tax-exempt investment securities
 
404

 
(84
)
 
320

 
554

 
(256
)
 
298

Federal funds sold
 
(96
)
 
407

 
311

 
309

 
198

 
507

Total interest income
 
23,993

 
3,027


27,020


34,170


1,717


35,887

INTEREST EXPENSE
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
 
1

 
(38
)
 
(37
)
 
50

 
51

 
101

Interest-bearing transaction accounts
 
1,334

 
2,694

 
4,028

 
1,019

 
1,487

 
2,506

Time deposits
 
1,040

 
1,057

 
2,097

 
1,513

 
637

 
2,150

Borrowings
 
(555
)
 
1,786

 
1,231

 
1,089

 
927

 
2,016

Total interest expense
 
1,820


5,499


7,319


3,671


3,102


6,773

NET INTEREST INCOME
 
$
22,173


$
(2,472
)

$
19,701


$
30,499


$
(1,385
)

$
29,114


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The following table reflects the components of the Company’s net interest income, setting forth for the years presented, (1) average assets, liabilities and stockholders’ equity, (2) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) the Company’s net interest spread (i.e., the average yield on interest-earning assets less the average cost of interest-bearing liabilities) and (5) the Company’s net interest margin. Rates are computed on a tax equivalent basis assuming a 35% tax rate.  
 
 
2017
 
2016
 
2015
 
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/
Paid
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/
Paid
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/
Paid
 
 
(dollars in thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases (1)
 
$
4,024,257

 
$
172,342

 
4.28
%
 
$
3,562,882

 
$
149,777

 
4.20
%
 
$
2,773,601

 
$
115,295

 
4.16
%
Taxable investment securities and other
 
706,167

 
14,987

 
2.12
%
 
518,905

 
11,163

 
2.15
%
 
512,145

 
10,563

 
2.06
%
Tax-exempt securities
 
104,267

 
3,069

 
2.94
%
 
90,431

 
2,749

 
3.04
%
 
69,307

 
2,451

 
3.54
%
Federal funds sold (2)
 
92,295

 
880

 
0.95
%
 
123,166

 
569

 
0.46
%
 
35,059

 
62

 
0.18
%
Total interest-earning assets
 
4,926,986

 
191,278

 
3.88
%
 
4,295,384

 
164,258

 
3.82
%
 
3,390,112

 
128,371

 
3.79
%
Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses
 
(33,148
)
 
 
 
 
 
(31,190
)
 
 
 
 
 
(31,062
)
 
 
 
 
Other assets
 
373,723

 
 
 
 
 
355,622

 
 
 
 
 
289,786

 
 
 
 
TOTAL ASSETS
 
$
5,267,561

 
 
 
 
 
$
4,619,816

 
 
 
 
 
$
3,648,836

 
 
 
 
LIABILITIES AND STOCKHOLDERS EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings accounts
 
$
486,821

 
$
276

 
0.06
%
 
$
485,004

 
$
313

 
0.06
%
 
$
399,431

 
$
212

 
0.05
%
Interest-bearing transaction accounts
 
2,241,259

 
10,186

 
0.45
%
 
1,880,391

 
6,158

 
0.33
%
 
1,511,954

 
3,652

 
0.24
%
Time deposits
 
623,257

 
6,138

 
0.98
%
 
506,487

 
4,041

 
0.80
%
 
303,682

 
1,891

 
0.62
%
Borrowings
 
357,978

 
8,366

 
2.34
%
 
393,149

 
7,135

 
1.81
%
 
328,936

 
5,119

 
1.56
%
Total interest-bearing liabilities
 
3,709,315

 
24,966

 
0.67
%
 
3,265,031

 
17,647

 
0.54
%
 
2,544,003

 
10,874

 
0.43
%
Noninterest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
 
959,298

 
 
 
 
 
852,629

 
 
 
 
 
695,630

 
 
 
 
Other liabilities
 
30,268

 
 
 
 
 
27,616

 
 
 
 
 
16,982

 
 
 
 
Stockholders’ equity
 
568,680

 
 
 
 
 
474,540

 
 
 
 
 
392,221

 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
5,267,561

 
 
 
 
 
$
4,619,816

 
 
 
 
 
$
3,648,836

 
 
 
 
Net interest income/spread
 
 
 
166,312

 
3.21
%
 
 
 
146,611

 
3.28
%
 
 
 
117,497

 
3.36
%
Tax equivalent basis adjustment
 
 
 
1,074

 
 
 
 
 
962

 
 
 
 
 
857

 
 
NET INTEREST INCOME
 
 
 
$
165,238

 
 
 
 
 
$
145,649

 
 
 
 
 
$
116,640

 
 
Net interest margin (3)
 
 
 
 
 
3.38
%
 
 
 
 
 
3.41
%
 
 
 
 
 
3.47
%
 
(1)
Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, loans held for sale, and deferred loan fees.
(2)
Includes interest-bearing cash accounts.
(3)
Net interest income on a tax equivalent basis divided by interest-earning assets.
Interest income on a tax equivalent basis increased from $164.3 million in 2016 to $191.3 million in 2017 , an increase of $27.0 million , or 16% . The increase in interest income was primarily a result of the Harmony acquisition as well as organic growth in loans, as the average balance of loans and leases increased $461.4 million compared to 2016 . The yield on average loans and

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leases of 4.28% in 2017 was 8 basis points greater than 2016 . The yield on average taxable investment securities and tax-exempt investment securities decreased by 3 and 10 basis points, respectively, compared to 2016 . Interest on taxable investment securities in 2016, included $358,000 in income on called U.S. government agency securities. The decrease in yield on tax-exempt investment securities was primarily due to securities maturing at higher rates and new purchases of short-term securities at lower rates.
Interest income on a tax equivalent basis increased from $128.4 million in 2015 to $164.3 million in 2016, an increase of $35.9 million, or 28%. The increase in interest income was primarily a result of the Pascack and Harmony acquisitions as well as organic growth in loans, as the average balance of loans and leases increased $789.3 million compared to 2015. The yield on average loans and leases of 4.20% in 2016 was 4 basis points greater than 2015. The yield on average taxable investment securities increased 9 basis points, while the yield on tax-exempt investment securities decreased by 50 basis points, compared to 2015. The decrease in yield on tax-exempt investment securities was primarily due to securities maturing at higher rates and new purchases of short-term securities at lower rates.
Total interest expense increased from $17.6 million in 2016 to $25.0 million in 2017 , an increase of $7.3 million , or 41% , primarily due to the increasing rate environment. The cost of average interest-bearing liabilities increased from 0.54% in 2016 to 0.67% in 2017 . The increase in the cost of interest-bearing liabilities was due to an increase in the cost of borrowings and an increasingly competitive market for deposits. The 53 basis point increase in the cost of borrowings was due primarily to the $75.0 million issuance of subordinated debt in September 2016 bearing a rate of 5.125%. During 2017, average interest-bearing transaction accounts and time deposits increased 19% and 23%, respectively, while the yield for those categories increased by 12 basis points and 18 basis points, respectively.
Total interest expense increased from $10.9 million in 2015 to $17.6 million in 2016, an increase of $6.8 million, or 62%. The increase in interest income from 2015 to 2016 resulted from a combination of growth and an increasing rate environment. The cost of average interest-bearing liabilities increased from 0.43% in 2015 to 0.54% in 2016. The yield on interest-bearing transaction accounts and time deposits increased by 9 basis points and 18 basis points, respectively. The increase in the yield on interest-bearing liabilities was due primarily to higher costing deposits acquired in the Pascack and Harmony acquisitions, an increase in the cost of borrowings, and an increasingly competitive market for deposits. As growth in loans exceeded growth in core deposits from 2015 to 2016, the Company utilized higher cost time deposits and term borrowings from the Federal Home Loan Bank of New York to fund loan growth. A change in the mix of deposits also contributed to the increase in the cost of funds. The percentage of time deposits to total interest-bearing liabilities increased from 12% in 2015 to 16% in 2016, while savings and interest-bearing transaction accounts decreased as a percentage of interest-bearing liabilities. Time deposits typically pay higher rates than savings and interest-bearing transaction accounts. Additionally, the $75.0 million subordinated debt offering in September 2016 added $1.0 million to the cost of borrowings in 2016.
Provision for Loan and Lease Losses
In determining the provision for loan and lease losses, management considers national and local economic conditions; trends in the portfolio including orientation to specific loan types or industries; experience, ability and depth of lending management in relation to the complexity of the portfolio; adequacy and adherence to policies, procedures and practices; levels and trends in delinquencies, impaired loans and leases and net charge-offs and the results of independent third party loan reviews.
The provision for loan and lease losses increased from $4.2 million in 2016 to $6.1 million in 2017 . The increased provision during 2017 was primarily a result of commercial real estate loan growth and higher charge-offs in commercial construction loans. For more information, please see the discussion under "Risk Elements" below.
The provision for loan and lease losses increased from $1.9 million in 2015 to $4.2 million in 2016. The increased provision during 2016 was primarily a result of increased net charge-offs of $3.9 million (0.11% of average loans), which were 120% higher than the $1.8 million (0.06% of average loans) for 2015. The increase in net charge-offs from 2015 to 2016 resulted from a $1.9 million reduction in recoveries during that time period.
Noninterest Income
Noninterest income of $25.4 million in 2017 increased by $4.1 million compared to 2016 . Included in noninterest income in 2017 was $2.5 million in gains on sales of investment securities compared to $370,000 for the same period last year. Service charges on deposit accounts of $10.7 million in 2017 was $583,000 higher than 2016 due primarily to changes in the fee structure on deposit accounts. Commissions and fees of $4.9 million in 2017 increased $509,000 compared to 2016 due primarily to increases in commercial loan fees and credit card related merchant service fees. Gains on sales of loans in 2017 of $1.8 million decreased $287,000 compared to 2016 due primarily to a reduced volume of sales. Income on bank owned life insurance at $2.4 million decreased $208,000 compared to 2016 due primarily to higher death benefits received in 2016 . Other income of $3.1 million in 2017 was $1.4 million higher than 2016 due primarily to a $380,000 increase in gains on sales of other real estate owned, a $324,000 gain on the payoff of an acquired loan and $881,000 in gains on the sales of three former branches. Noninterest income represented 13% of total revenue in 2017 . (Total revenue is defined as net interest income plus noninterest income).

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Noninterest income of $21.3 million in 2016 increased by $169,000 compared to 2015. Excluding a $1.8 million gain on debt extinguishment received in 2015, noninterest income increased $2.0 million from 2015 to 2016. Gains on sales of loans of $2.1 million and gain on investment securities of $370,000 in 2016 increased $442,000 and $129,000, respectively, compared to the same period last year. Income on bank owned life insurance at $2.6 million increased $545,000 compared to 2015. In 2016, an $864,000 death benefit was received on a bank owned life insurance policy, compared to a $435,000 death benefit received in 2015. Commissions and fees totaling $4.3 million decreased $219,000, due primarily to reduced financial services income. Other income totaling $1.8 million in 2016 was $969,000 higher than 2015, resulting primarily from an increase in swap income of $659,000 compared to 2015, as well as a $219,000 recovery from a Somerset Hills loan that was written off prior to the Lakeland acquisition. Noninterest income represented 13% of total revenue in 2016.
Noninterest Expense
Noninterest expense totaling $104.5 million increased $4.6 million in 2017 from 2016 . During 2017 , the Company incurred $2.8 million in long-term debt prepayment penalties, and in 2016 , the Company incurred $4.1 million in merger related expenses. Salaries and employee benefits expense of $61.2 million increased $5.1 million from 2016, primarily due to the addition of Harmony employees during the second half of 2016 and year-over-year increases in employee salary and benefit costs. FDIC insurance expense of $1.6 million in 2017 decreased $671,000 compared to 2016, due primarily to decreased non-performing loans and increased capital levels. Data processing expense of $2.0 million increased $102,000 resulting from increases in the cost of mobile banking and the addition of the Harmony branches in the second half of 2016 .
Noninterest expense totaling $99.9 million increased $12.7 million in 2016 from 2015. Included in noninterest expense during 2016 was $4.1 million in merger related expenses compared to $1.2 million in 2015. Noninterest expense in 2015 included a $2.4 million long-term debt prepayment fee. Excluding merger related expenses and the debt prepayment fee, total noninterest expense increased $12.2 million compared to 2015. Salary and employee benefits of $56.1 million increased by $7.5 million, or 15%, due primarily to the addition of the Pascack and Harmony employees as well as normal salary and benefit increases. Furniture and equipment expense, net occupancy expense and telecommunications expense increased $1.1 million, $979,000 and $183,000, respectively, compared to 2015 due to the addition of the Pascack and Harmony branches. Stationary, supplies and postage increased $198,000 compared to 2015 primarily due to mailing and supplies associated with the Pascack and Harmony acquisitions. FDIC insurance expense of $2.2 million in 2016 increased $162,000 compared to 2015, due to the addition of the Pascack and Harmony deposits. ATM and debit card expense of $1.6 million increased $184,000 compared to 2015 due primarily to the addition of Pascack and Harmony ATMs as well as an initiative during 2016 to replace debit cards with the increased security EMV chip cards. Data processing expense of $1.9 million increased $367,000 primarily due to increases in the cost of mobile banking, the addition of the Pascack and Harmony branches and because of the usage of Pascack and Harmony systems before the systems were integrated into Lakeland’s systems. Other expenses of $10.2 million in 2016 increased $1.2 million compared to 2015 due primarily to higher consulting, courier, director, insurance and investor relations expenses. The increase in courier expense is due to the outsourcing of the Company’s couriers which had previously impacted salary expense.
The efficiency ratio, a non-GAAP measure, expresses the relationship between noninterest expense (excluding long-term debt repayment fees, merger related expenses, provision for unfunded lending commitments and core deposit amortization) to total tax-equivalent revenue (excluding gains (losses) on securities and gain on debt extinguishment). In 2017 , the Company’s efficiency ratio on a tax equivalent basis was 53.40% compared to 56.48% in 2016 . The efficiency ratio was 60.31% in 2015 .
 

- 31 -


 
 
For the Year Ended December 31,
 
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
(dollars in thousands)
Calculation of Efficiency Ratio (a Non-GAAP Measure)
 
 
 
 
 
 
 
 
 
 
Total noninterest expense
 
$
104,534

 
$
99,917

 
$
87,211

 
$
79,135

 
$
78,741

Less:
 
 
 
 
 
 
 
 
 
 
Amortization of core deposit intangibles
 
(654
)
 
(734
)
 
(415
)
 
(464
)
 
(288
)
Merger related expenses
 
—

 
(4,103
)
 
(1,152
)
 
—

 
(2,834
)
Long-term debt prepayment fee
 
(2,828
)
 
—

 
(2,407
)
 
—

 
(1,209
)
Provision for unfunded lending commitments
 
—

 
(438
)
 
(864
)
 
65

 
(55
)
Noninterest expense, as adjusted
 
$
101,052

 
$
94,642

 
$
82,373

 
$
78,736

 
$
74,355

Net interest income
 
$
165,238

 
$
145,649

 
$
116,640

 
$
113,566

 
$
104,542

Noninterest income
 
25,435

 
21,330

 
21,161

 
17,722

 
20,961

Total revenue
 
190,673

 
166,979

 
137,801

 
131,288

 
125,503

Plus: Tax-equivalent adjustment on municipal securities
 
1,074

 
962

 
857

 
972

 
965

Less: Gains on sales of investment securities and debt extinguishment
 
(2,524
)
 
(370
)
 
(2,071
)
 
(2
)
 
(2,036
)
Total revenue, as adjusted
 
$
189,223

 
$
167,571

 
$
136,587

 
$
132,258

 
$
124,432

Efficiency ratio (Non-GAAP)
 
53.40
%
 
56.48
%
 
60.31
%
 
59.53
%
 
59.76
%

Income Taxes
The Company’s effective income tax rate was 34.3% , 33.9% and 33.2% , in the years ended December 31, 2017 , 2016 and 2015 , respectively. The effective tax rate increase from 2016 to 2017 was primarily as a result of a decrease in tax advantaged items as a percent of pre-tax income. A net charge of $602,000 taken in 2017 related to the Tax Cuts and Jobs Act of 2017 was mitigated by the implementation of Accounting Standards Update 2016-09 which resulted in a $587,000 tax benefit related to excess tax benefits from the exercise of stock options and the vesting of restricted stock and restricted stock units. The effective tax rate increase from 2015 to 2016 was primarily as a result of a decrease in tax advantaged items as a percent of pre-tax income. Contributing to the increase in the effective tax rate was the impact of non-deductible merger related expenses, offset by the impact of interest income from tax-exempt securities and income on bank owned life insurance policies.
Financial Condition
Total assets increased from $5.09 billion at December 31, 2016 to $5.41 billion at December 31, 2017 , an increase of $312.5 million , or 6% . Loans, net of deferred fees, were $4.15 billion , an increase of $282.1 million , or 7% , from $3.87 billion at December 31, 2016 . Total deposits were $4.37 billion , an increase of $275.9 million , or 7%, from December 31, 2016 . Total assets at year-end 2016 increased $1.22 billion, or 32%, from year-end 2015 .
Loans and Leases
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.
Gross loans and leases of $4.16 billion increased by $282.8 million from December 31, 2016 , primarily in the commercial loans secured by real estate category. Commercial loans secured by real estate increased $274.6 million , or 11% , from December 31, 2016 to December 31, 2017 . Leases and real estate construction loans increased $8.0 million , or 12% , and $53.8 million , or 25% , respectively. Commercial, industrial and other decreased $9.8 million , or 3% , while real estate-residential mortgages declined $26.7 million , or 8% . The decline in residential mortgages results from a decision to sell most of the residential loans that the Company originates. Additionally, home equity and consumer loans decreased $17.1 million , or 5% . Gross loans and leases at December 31, 2016 of $3.87 billion increased by $905.9 million from December 31, 2015, including Pascack and Harmony loans, which totaled $319.6 million and $260.8 million, respectively, at acquisition. Excluding Pascack’s and Harmony’s loans, total loans increased $325.6 million, or 11%, from December 31, 2015 to December 31, 2016, primarily in the commercial loans secured by real estate category.

- 32 -


The following table sets forth the classification of Lakeland’s gross loans and leases by major category as of December 31 for each of the last five years:
 
 
December 31,
   
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
(in thousands)
Commercial, secured by real estate
 
$
2,831,184

 
$
2,556,601

 
$
1,761,589

 
$
1,529,761

 
$
1,389,861

Commercial, industrial and other
 
340,400

 
350,228

 
307,044

 
238,252

 
213,808

Leases
 
75,039

 
67,016

 
56,660

 
54,749

 
41,332

Real estate - residential mortgage
 
322,880

 
349,581

 
389,692

 
431,190

 
432,831

Real estate - construction
 
264,908

 
211,109

 
118,070

 
64,020

 
53,119

Home equity and consumer
 
322,269

 
339,360

 
334,891

 
337,642

 
339,338

Total loans and leases
 
4,156,680

 
3,873,895

 
2,967,946

 
2,655,614

 
2,470,289

Deferred fees
 
(3,960
)
 
(3,297
)
 
(2,746
)
 
(1,788
)
 
(1,273
)
Loans and leases, net
 
$
4,152,720

 
$
3,870,598

 
$
2,965,200

 
$
2,653,826

 
$
2,469,016

At December 31, 2017 , there were no concentrations of loans or leases exceeding 10% of total loans and leases outstanding other than loans that are secured by real estate. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other related conditions.
The following table sets forth maturities and sensitivity to changes in interest rates in commercial loans in Lakeland’s loan portfolio at December 31, 2017 :
 
 
Within
One Year
 
After One
but Within
Five Years
 
After Five
Years
 
Total
 
 
(in thousands)
Commercial, secured by real estate
 
$
104,115

 
$
549,013

 
$
2,178,056

 
$
2,831,184

Commercial, industrial and other
 
172,429

 
88,918

 
79,053

 
340,400

Real estate - construction
 
120,607

 
57,298

 
87,003

 
264,908

Total
 
$
397,151

 
$
695,229

 
$
2,344,112

 
$
3,436,492

Predetermined rates
 
$
73,815

 
$
511,435

 
$
310,066

 
$
895,316

Floating or adjustable rates
 
323,336

 
183,794

 
2,034,046

 
2,541,176

Total
 
$
397,151

 
$
695,229

 
$
2,344,112

 
$
3,436,492

Risk Elements
Commercial loans and leases 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.

- 33 -


The following schedule sets forth certain information regarding Lakeland’s non-accrual loans (including troubled debt restructurings that are on non-accrual) and past due loans and leases and other real estate owned and other repossessed assets as of December 31, for each of the last five years:
 
 
December 31,
 
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
(dollars in thousands)
Commercial, secured by real estate
 
$
5,890

 
$
10,413

 
$
10,446

 
$
7,424

 
$
7,697

Commercial, industrial and other
 
184

 
167

 
103

 
308

 
88

Leases, including leases held for sale
 
144

 
153

 
316

 
88

 
—

Real estate - residential mortgage
 
3,860

 
6,048

 
8,664

 
9,246

 
6,141

Real estate - construction
 
1,472

 
1,472

 
—

 
188

 
831

Home equity and consumer
 
2,105

 
2,151

 
3,167

 
3,415

 
2,175

Total non-accrual loans and leases
 
13,655

 
20,404

 
22,696

 
20,669

 
16,932

Other real estate and other repossessed assets
 
843

 
1,072

 
983

 
1,026

 
520

Total non-performing assets
 
$
14,498

 
$
21,476

 
$
23,679

 
$
21,695

 
$
17,452

Non-performing assets as a percentage of total assets
 
0.27
%
 
0.42
%
 
0.61
%
 
0.61
%
 
0.53
%
Loans and leases past due 90 days or more and still accruing
 
$
200

 
$
10

 
$
331

 
$
66

 
$
1,997

Troubled debt restructurings, still accruing
 
$
11,462

 
$
8,802

 
$
10,108

 
$
10,579

 
$
10,289

Non-accrual loans and leases decreased to $13.7 million on December 31, 2017 from $20.4 million at December 31, 2016 due primarily to commercial, secured by real estate which decreased $4.5 million , or 43% , and residential mortgages which decreased $2.2 million , or 36% .
Non-accruals include 4 loan relationships between $500,000 and $1.0 million totaling $2.4 million, and 2 loan relationships exceeding $1.0 million totaling $2.5 million. All non-accrual loans and leases are in various stages of litigation, foreclosure, or workout. Non-accrual loans included $2.7 million and $2.4 million in troubled debt restructurings for the years ended December 31, 2017 and 2016 , respectively.
At December 31, 2017 and 2016 , Lakeland had $11.5 million and $8.8 million , respectively, in loans that were restructured and still accruing. Restructured loans are those loans where Lakeland has granted concessions to the borrower in payment terms, in rate and/or in maturity as a result of the financial difficulties of the borrower.
    
For 2017 , the gross interest income that would have been recorded, had the loans and leases classified at year-end as impaired been performing in conformance with their original terms, was approximately $1.5 million . The amount of interest income actually recorded on those loans and leases for 2017 was $705,000. The resultant loss of $785,000 for 2017 compares with prior year losses of $1.0 million for 2016 and $792,000 for 2015 .
    
As of December 31, 2017 , Lakeland had impaired loans and leases totaling $22.6 million (consisting primarily of non-accrual and restructured loans and leases), compared to $25.3 million at December 31, 2016 . The valuation allowance of these loans and leases is based primarily on the fair value of the underlying collateral. Based upon such evaluation, $505,000 has been allocated to the allowance for loan and lease losses for impairment at December 31, 2017 compared to $529,000 at December 31, 2016 . At December 31, 2017 , Lakeland also had $28.3 million in loans and leases that were rated substandard that were not classified as non-performing or impaired compared to $28.7 million at December 31, 2016 .
There were no additional loans or leases at December 31, 2017 , other than those designated non-performing, impaired or substandard, where Lakeland was aware of any credit conditions of any borrowers that would indicate a strong possibility of the borrowers not complying with the present terms and conditions of repayment and which may result in such loans or leases being included as non-accrual, past due or renegotiated at a future date.

- 34 -


The following table sets forth for each of the five years ended December 31, 2017 , the historical relationships among the amount of loans and leases outstanding, the allowance for loan and lease losses, the provision for loan and lease losses, the amount of loans and leases charged off and the amount of loan and lease recoveries:
 
 
 
Years Ended December 31,
   
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
(dollars in thousands)
Allowance balance, beginning of the year
 
$
31,245

 
$
30,874

 
$
30,684

 
$
29,821

 
$
28,931

Loans and leases charged off:
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
 
(762
)
 
(410
)
 
(1,821
)
 
(2,282
)
 
(2,026
)
Commercial, industrial and other
 
(477
)
 
(796
)
 
(205
)
 
(999
)
 
(1,324
)
Leases
 
(305
)
 
(366
)
 
(548
)
 
(597
)
 
(206
)
Real estate - residential mortgage
 
(441
)
 
(1,103
)
 
(375
)
 
(827
)
 
(1,257
)
Real estate - construction
 
(609
)
 
—

 
(20
)
 
(25
)
 
(3,854
)
Home equity and consumer
 
(852
)
 
(1,980
)
 
(1,511
)
 
(2,697
)
 
(1,624
)
Total loans and leases charged off
 
(3,446
)
 
(4,655
)
 
(4,480
)
 
(7,427
)
 
(10,291
)
Recoveries:
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
 
396

 
297

 
2,221

 
999

 
1,061

Commercial, industrial and other
 
172

 
202

 
183

 
1,039

 
260

Leases
 
59

 
31

 
26

 
19

 
121

Real estate - residential mortgage
 
5

 
8

 
63

 
42

 
99

Real estate - construction
 
31

 
18

 
106

 
106

 
14

Home equity and consumer
 
903

 
247

 
129

 
220

 
283

Total recoveries
 
1,566

 
803

 
2,728

 
2,425

 
1,838

Net charge-offs
 
(1,880
)
 
(3,852
)
 
(1,752
)
 
(5,002
)
 
(8,453
)
Provision for loan and lease losses
 
6,090

 
4,223

 
1,942

 
5,865

 
9,343

Allowance balance, end of year
 
$
35,455

 
$
31,245

 
$
30,874

 
$
30,684

 
$
29,821

Net charge-offs as a percentage of average loans and leases outstanding
 
0.05
%
 
0.11
%
 
0.06
%
 
0.19
%
 
0.36
%
Allowance as a percentage of year-end total loans and leases outstanding
 
0.85
%
 
0.81
%
 
1.04
%
 
1.16
%
 
1.21
%
Allowance as a percent of non-accrual loans and leases
 
259.65
%
 
153.13
%
 
136.03
%
 
148.45
%
 
176.12
%
The ratio of the allowance for loan and lease losses to loans and leases outstanding reflects management’s evaluation of the underlying credit risk inherent in the loan portfolio as discussed above in “Critical Accounting Policies, Judgments and Estimates – Allowance for Loan and Lease Losses.”
Non-accrual loans and leases decreased from $20.4 million on December 31, 2016 to $13.7 million on December 31, 2017 and the allowance for loan and lease losses was 0.85% of total loans and leases on December 31, 2017 compared to 0.81% of total loans and leases on December 31, 2016 . Management believes, based on appraisals and estimated selling costs, that the majority of its non-performing loans are well secured and that the reserves on its non-performing loans are adequate. Based upon the process employed and giving recognition to all accompanying factors related to the loan and lease portfolio, management considers the allowance for loan and lease losses to be adequate at December 31, 2017 .
The overall balance of the allowance for loan and lease losses of $35.5 million at December 31, 2017 increased $4.2 million from December 31, 2016 , an increase of 13% . The change of the allowance within segments of the loan portfolio reflects changes in the non-performing loans and charge-off statistics within each segment as well as the level of growth within each segment. Loan reserves are based on a combination of historical charge-off experience, estimating the appropriate loss emergence and pre-emergence periods and assigning qualitative factors based on general economic conditions and specific bank portfolio characteristics.
The increase in the allowance from December 31, 2016 to December 31, 2017 within the commercial, secured by real estate and the real estate-construction segments reflects loan growth in both of these segments as well as an increase in charge-offs in

- 35 -


real estate-construction. The increase in the allowance in commercial, industrial and other loans relates to the migration of loans into higher risk rating categories. On the other hand, the decline in the allowance for real estate-residential mortgages and home equity and consumer loans reflects both a decline in loans outstanding as well as an improvement in asset quality and net charge-offs.
The following table sets forth the allowance for loan and lease losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan and lease losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
 
 
December 31,
 
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
Allowance
 
% of
Loans in
Each
Category
 
Allowance
 
% of
Loans in
Each
Category
 
Allowance
 
% of
Loans in
Each
Category
 
Allowance
 
% of
Loans in
Each
Category
 
Allowance
 
% of
Loans in
Each
Category
 
 
(dollars in thousands)
Commercial, secured by real estate
 
$
25,704

 
68.0
%
 
$
21,223

 
66.1
%
 
$
20,223

 
59.4
%
 
$
13,577

 
57.6
%
 
$
14,463

 
56.2
%
Commercial, industrial and other
 
2,313

 
8.2
%
 
1,723

 
9.0
%
 
2,637

 
10.3
%
 
3,196

 
9.0
%
 
5,331

 
8.7
%
Leases
 
630

 
1.8
%
 
548

 
1.7
%
 
460

 
1.9
%
 
582

 
2.1
%
 
504

 
1.7
%
Real estate - residential mortgage
 
1,557

 
7.8
%
 
1,964

 
9.0
%
 
2,588

 
13.1
%
 
4,020

 
16.2
%
 
3,214

 
17.5
%
Real estate - construction
 
2,731

 
6.4
%
 
2,352

 
5.4
%
 
1,591

 
4.0
%
 
553

 
2.4
%
 
542

 
2.2
%
Home equity and consumer
 
2,520

 
7.8
%
 
3,435

 
8.8
%
 
3,375

 
11.3
%
 
6,333

 
12.7
%
 
2,737

 
13.7
%
Unallocated
 
—

 
 
 
—

 
 
 
—

 
 
 
2,423

 
 
 
3,030

 
 
 
 
$
35,455

 
100.0
%
 
$
31,245

 
100.0
%
 
$
30,874

 
100.0
%
 
$
30,684

 
100.0
%
 
$
29,821

 
100.0
%

Investment Securities
The Company has classified its investment securities into the available for sale and held to maturity categories based on its intent and ability to hold the securities to maturity. The Company has no investment securities classified as trading securities.
The following table sets forth the carrying value of the Company’s investment securities, both available for sale and held to maturity, as of December 31 for each of the last three years. Investment securities available for sale are stated at fair value while securities held for maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts.
 
 
December 31,
   
 
2017
 
2016
 
2015
 
 
(in thousands)
U.S. Treasury and U.S. government agencies
 
$
180,670

 
$
150,912

 
$
127,610

Mortgage-backed securities, residential
 
469,245

 
442,244

 
315,918

Mortgage-backed securities, multifamily
 
12,034

 
12,246

 
12,279

Obligations of states and political subdivisions
 
94,638

 
119,610

 
82,115

Equity securities
 
18,089

 
21,882

 
18,645

Debt securities
 
11,144

 
7,424

 
2,522

 
 
$
785,820

 
$
754,318

 
$
559,089

The Company also does not own any interests in any hedge funds or private equity funds that are designated “covered funds” under the Volcker Rule issued in December 2013. All of the Company’s mortgage-backed securities are issued by U.S. Government or U.S. Government sponsored entities.

- 36 -


The following tables set forth the maturity distribution and weighted average yields (calculated on the basis of the stated yields to maturity, considering applicable premium or discount), on a fully taxable equivalent basis, of investment securities as of December 31, 2017 , at book value:
Available for Sale
 
Within
One Year
 
Over One
but Within
Five Years
 
Over Five
but Within
Ten Years
 
After Ten
Years
 
Total
 
 
(dollars in thousands)
U.S. Treasury and U.S. government agencies
 
 
 
 
 
 
 
 
 
 
Amount
 
$
4,477

 
$
88,753

 
$
27,046

 
$
26,979

 
$
147,255

Yield
 
1.07
%
 
1.69
%
 
1.78
%
 
2.05
%
 
1.75
%
Mortgage-backed securities, residential
 
 
 
 
 
 
 
 
 
 
Amount
 
152

 
5,519

 
60,883

 
347,700

 
414,254

Yield
 
2.89
%
 
2.62
%
 
2.11
%
 
2.19
%
 
2.18
%
Mortgage-backed securities, multifamily
 
 
 
 
 
 
 
 
 
 
Amount
 
—

 
10,077

 
—

 
—

 
10,077

Yield
 
—
%
 
2.08
%
 
—
%
 
—
%
 
2.08
%
Obligations of states and political subdivisions
 
 
 
 
 
 
 
 
 
 
Amount
 
4,910

 
20,246

 
23,391

 
2,773

 
51,320

Yield
 
2.99
%
 
2.66
%
 
2.35
%
 
3.01
%
 
2.57
%
Debt securities
 
 
 
 
 
 
 
 
 
 
Amount
 
—

 
—

 
5,140

 
—

 
5,140

Yield
 
—
%
 
—
%
 
5.19
%
 
—
%
 
5.19
%
Equity securities
 
 
 
 
 
 
 
 
 
 
Amount
 
18,089

 
—

 
—

 
—

 
18,089

Yield
 
1.66
%
 
—
%
 
—
%
 
—
%
 
1.66
%
Total securities
 
 
 
 
 
 
 
 
 
 
Amount
 
$
27,628

 
$
124,595

 
$
116,460

 
$
377,452

 
$
646,135

Yield
 
1.81
%
 
1.92
%
 
2.22
%
 
2.18
%
 
2.12
%
Held to Maturity
 
Within
One Year
 
Over One
but Within
Five Years
 
Over Five
but Within
Ten Years
 
After Ten
Years
 
Total
 
 
(dollars in thousands)
U.S. Treasury and U.S. government agencies
 
 
 
 
 
 
 
 
 
 
Amount
 
$
5,001

 
$
21,387

 
$
7,027

 
$
—

 
$
33,415

Yield
 
1.98
%
 
2.02
%
 
1.76
%
 
—
%
 
1.96
%
Mortgage-backed securities, residential
 
 
 
 
 
 
 
 
 
 
Amount
 
—

 
—

 
211

 
54,780

 
54,991

Yield
 
—
%
 
—
%
 
5.05
%
 
2.65
%
 
2.66
%
Mortgage-backed securities, multifamily
 
 
 
 
 
 
 
 
 
 
Amount
 
—

 
1,119

 
—

 
838

 
1,957

Yield
 
—
%
 
1.09
%
 
—
%
 
2.37
%
 
1.63
%
Obligations of states and political subdivisions
 
 
 
 
 
 
 
 
 
 
Amount
 
10,380

 
17,599

 
11,541

 
3,798

 
43,318

Yield
 
1.84
%
 
2.48
%
 
2.88
%
 
3.13
%
 
2.49
%
Debt securities
 
 
 
 
 
 
 
 
 
 
Amount
 
1,004

 
—

 
5,000

 
—

 
6,004

Yield
 
5.75
%
 
—
%
 
4.48
%
 
—
%
 
4.69
%
Total securities
 
 
 
 
 
 
 
 
 
 
Amount
 
$
16,385

 
$
40,105

 
$
23,779

 
$
59,416

 
$
139,685

Yield
 
2.12
%
 
2.20
%
 
2.91
%
 
2.67
%
 
2.51
%
Other Assets
Other assets increased from $30.6 million at December 31, 2016 to $35.6 million at December 31, 2017 primarily due to a $3.2 million increase in swap assets.

- 37 -


Deposits
Total deposits increased from $4.09 billion at December 31, 2016 to $4.37 billion at December 31, 2017 , an increase of $275.9 million , or 7% . Noninterest-bearing deposits increased $40.1 million , or 4% , to $967.3 million . Savings and interest-bearing transaction accounts and time deposits increased $43.3 million and $192.5 million , respectively.
Total deposits increased from $3.00 billion at December 31, 2015 to $4.09 billion at December 31, 2016, an increase of $1.10 billion, or 37%. Pascack’s and Harmony’s deposits totaled $304.5 million and $278.1 million, respectively, at the time of acquisition.
The average amount of deposits and the average rates paid on deposits for the years indicated are summarized in the following table:
 
   
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
   
 
Average
Balance
 
Average
Rate
 
Average
Balance
 
Average
Rate
 
Average
Balance
 
Average
Rate
 
 
(dollars in thousands)
Noninterest-bearing demand deposits
 
$
959,298

 
—
%
 
$
852,629

 
—
%
 
$
695,630

 
—
%
Interest-bearing transaction accounts
 
2,241,259

 
0.45
%
 
1,880,391

 
0.33
%
 
1,511,954

 
0.24
%
Savings
 
486,821

 
0.06
%
 
485,004

 
0.06
%
 
399,431

 
0.05
%
Time deposits
 
623,257

 
0.98
%
 
506,487

 
0.80
%
 
303,682

 
0.62
%
Total
 
$
4,310,635

 
0.38
%
 
$
3,724,511

 
0.28
%
 
$
2,910,697

 
0.20
%
As of December 31, 2017 , the aggregate amount of outstanding time deposits issued in amounts of greater than $250,000, broken down by time remaining to maturity, was as follows (in thousands):
Maturity
 
Within 3 months
$
40,279

Over 3 through 6 months
52,306

Over 6 through 12 months
63,293

Over 12 months
24,687

Total
$
180,565

 
 
Derivatives
Lakeland enters into interest rate swaps (“swaps”) with loan customers to provide a facility to mitigate the fluctuations in the variable rate on the respective loans. These swaps are matched in offsetting terms to swaps that Lakeland enters into with an outside third party. The swaps are reported at fair value in other assets or other liabilities. Lakeland’s swaps qualify as derivatives, but are not designated as hedging instruments; thus any net gain or loss resulting from changes in the fair value is recognized in other noninterest income.
In 2016, the Company entered into two cash flow hedges in order to hedge the variable cash outflows associated with its subordinated debentures. The notional value of these hedges was $30.0 million. The Company’s objectives in using the cash flow hedge is to add stability to interest expense and to manage its exposure to interest rate movements. The Company used interest rate swaps designated as cash flow hedges which involved the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. In these particular hedges the Company is paying a third party an average of 1.10% in exchange for a payment at 3 month LIBOR over a five year period. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2017 , the Company did not record any hedge ineffectiveness.
Further discussion of Lakeland’s financial derivatives is set forth in Note 18 to the audited Consolidated Financial Statements.

- 38 -


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

Lakeland funds loan demand and operation expenses from several sources:
•
Net income. Cash provided by operating activities was $67.5 million in 2017 compared to $50.1 million and $40.8 million in 2016 and 2015 , respectively.
•
Deposits. Lakeland can offer new products or change its rate structure in order to increase deposits. In 2017 , Lakeland generated $275.9 million in deposit growth, compared to $514.7 million in 2016 .
•
Sales of securities and overnight funds. At year-end 2017 , the Company had $646.1 million in securities designated “available for sale.” Of these securities, $354.6 million was pledged to secure public deposits and for other purposes required by applicable laws and regulations.
•
Repayments on loans and leases can also be a source of liquidity to fund further loan growth.
•
Overnight credit lines. As a member of the Federal Home Loan Bank of New York (“FHLB”), Lakeland has the ability to borrow overnight based on the market value of collateral pledged. Lakeland had no overnight borrowings from the FHLB on December 31, 2017 . Lakeland also has overnight federal funds lines available for it to borrow up to $210.0 million. Lakeland had borrowings against these lines of $80.0 million at December 31, 2017 . Lakeland also has the ability to utilize a line of credit from the FHLB to secure a portion of its public deposits. Lakeland may also borrow from the discount window of the Federal Reserve Bank of New York based on the market value of collateral pledged. Lakeland had no borrowings with the Federal Reserve Bank of New York as of December 31, 2017 .
•
Other borrowings. Lakeland can also generate funds by utilizing long-term debt or securities sold under agreements to repurchase that would be collateralized by security or mortgage collateral. At times the market values of securities collateralizing our securities sold under agreements to repurchase may decline due to changes in interest rates and may necessitate our lenders to issue a “margin call” which requires the Company to pledge additional collateral to meet that margin call. For more information regarding the Company’s borrowings, see Note 8 to the Consolidated Financial Statements.
Management and the Board monitor the Company’s liquidity through the Asset/Liability Committee, which monitors the Company’s compliance with certain regulatory ratios and other various liquidity guidelines.
The cash flow statements for the periods presented provide an indication of the Company’s sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. Cash and cash equivalents totaling $142.9 million on December 31, 2017 , decreased $32.9 million from December 31, 2016 . Operating activities provided $67.5 million in net cash. Investing activities used $355.1 million in net cash, primarily reflecting an increase in loans and leases and available for sale securities. Financing activities provided $254.8 million in net cash primarily reflecting a net increase in deposits of $276.5 million , and an increase in federal funds purchased and securities sold under agreements to repurchase of $68.6 million , partially offset by net repayments of other borrowings of $71.0 million .
The Company’s management believes that its current level of liquidity is sufficient to meet its current and anticipated operational needs, including current loan commitments, deposit maturities and other obligations. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from anticipated results due to a variety of factors, including uncertainties relating to general economic conditions; unanticipated decreases in deposits; changes in or failure to comply with governmental regulations; and uncertainties relating to the analysis of the Company’s assessment of rate sensitive assets and rate sensitive liabilities and the extent to which market factors indicate that a financial institution such as Lakeland should match such assets and liabilities.
Off Balance Sheet Arrangements and Aggregate Contractual Obligations
The following table sets forth contractual obligations and other commitments representing required cash outflows as of December 31, 2017 . Interest on subordinated debentures and other borrowings is calculated based on current contractual interest rates.

- 39 -


 
 
Payment Due Period
 
 
Total
 
Within
One Year
 
After
One but
Within Three
Years
 
After Three
but Within
Five Years
 
After
Five Years
 
 
(in thousands)
Minimum annual rentals or noncancellable operating leases
 
$
29,832

 
$
3,185

 
$
5,898

 
$
4,964

 
$
15,785

Benefit plan commitments
 
5,965

 
307

 
793

 
793

 
4,072

Remaining contractual maturities of time deposits
 
737,428

 
555,167

 
150,711

 
31,550

 
—

Subordinated debentures
 
104,902

 
—

 
—

 
—

 
104,902

Loan commitments and lines of credit
 
966,441

 
620,387

 
181,114

 
42,246

 
122,694

Other borrowings
 
192,011

 
70,896

 
91,144

 
29,971

 
—

Interest on other borrowings (1)
 
61,425

 
7,984

 
13,171

 
10,723

 
29,547

Standby letters of credit
 
14,832

 
12,853

 
1,868

 
31

 
80

Total
 
$
2,112,836

 
$
1,270,779

 
$
444,699

 
$
120,278

 
$
277,080

 
(1)
Includes interest on other borrowings and subordinated debentures at a weighted rate of 2.86%.
Interest Rate Risk
Closely related to the concept of liquidity is the concept of interest rate sensitivity (i.e., the extent to which assets and liabilities are sensitive to changes in interest rates). As a financial institution, the Company’s potential interest rate volatility is a primary component of its market risk. Fluctuations in interest rates will ultimately impact the level of income and expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest-earning assets, other than those which possess a short term to maturity. Based upon the Company’s nature of operations, the Company is not subject to foreign currency exchange or commodity price risk. The Company does not own any trading assets.
The Company’s net income is largely dependent on net interest income. Net interest income is susceptible to interest rate risk to the extent that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. For example, when interest-bearing liabilities mature or reprice more quickly than interest-earning assets, an increase in market interest rates could adversely affect net interest income. Conversely, when interest-earning assets reprice more quickly than interest-bearing liabilities, an increase in market interest rates could increase net interest income.
The Company’s Board of Directors has adopted an Asset/Liability Policy designed to stabilize net interest income and preserve capital over a broad range of interest rate movements. This policy outlines guidelines and ratios dealing with, among others, liquidity, volatile liability dependence, investment portfolio composition, loan portfolio composition, loan-to-deposit ratio and gap analysis ratio. Key quantitative measurements include the percentage change of net interest income in various interest rate scenarios (net interest income at risk) and changes in the market value of equity in various rate environments (net portfolio value at risk). The Company’s performance as compared to the Asset/Liability Policy is monitored by its Board of Directors. In addition, to effectively administer the Asset/Liability Policy and to monitor exposure to fluctuations in interest rates, the Company maintains an Asset/Liability Committee (the “ALCO”), consisting of the Chief Executive Officer, the Chief Financial Officer, a Regional President, Chief Operating Officer, Chief Lending Officer, Chief Retail Officer, Chief Credit Officer, Chief Risk Officer, certain other senior officers and certain directors. This committee meets quarterly to review the Company’s financial results and to develop strategies to implement the Asset/Liability Policy and to respond to market conditions.
The Company monitors and controls interest rate risk through a variety of techniques, including use of an interest rate risk management model. With the interest rate risk management model, the Company projects future net interest income, and then estimates the effect of various changes in interest rates and balance sheet growth rates on that projected net interest income. The Company also uses the interest rate risk management model to calculate the change in net portfolio value over a range of interest rate change scenarios.
Interest rate sensitivity modeling is done at a specific point in time and involves a variety of significant estimates and assumptions. Interest rate sensitivity modeling requires, among other things, estimates of how much and when yields and costs on individual categories of interest-earning assets and interest-bearing liabilities will respond to general changes in market rates, future cash flows and discount rates.
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.

- 40 -


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, decay rates 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.
Management reviews the accuracy of its model by back testing its results (comparing predicted results in past models with current data), and it periodically reviews its prepayment assumptions, decay rates and other assumptions.
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 year-end levels. The net interest income estimated for 2018 (the base case) is $170.0 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
 
-200 bp
Asset/Liability policy limit
 
(5.0
)%
 
(5.0
)%
December 31, 2017
 
(1.1
)%
 
(3.6
)%
December 31, 2016
 
(0.5
)%
 
(2.4
)%
The ALCO’s policy review of interest rate risk includes policy limits for net interest income changes in various “rate shock” scenarios. Rate shocks assume that current interest rates change immediately. The information provided for net interest income assumes fluctuations or “rate shocks” for changes in interest rates as shown in the table below.
 
 
 
Changes in Interest Rates
Rate Shock
 
+300 bp
 
+200 bp
 
+100 bp
 
-100 bp
Asset/Liability policy limit
 
(15.0
)%
 
(10.0
)%
 
(5.0
)%
 
(5.0
)%
December 31, 2017
 
0.3
 %
 
0.3
 %
 
0.3
 %
 
(5.9
)%
December 31, 2016
 
1.9
 %
 
1.4
 %
 
0.9
 %
 
(4.8
)%

In the table above, for a 100 basis point rate decrease in interest rates, net interest income at December 31, 2017 would decrease 5.9% which is slightly above our Asset/Liability Policy limit. Although management believes that we are in an increasing interest rate environment, the committee will continue to monitor this ratio to ensure no undue interest rate risk is taken.

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 year-end levels. The net portfolio value at December 31, 2017 (the base case) was $797.7 million. The information provided for the net portfolio value assumes fluctuations or rate shocks for changes in interest rates as shown in the table below.
 
 
Changes in Interest Rates
Rate Shock
 
+300 bp
 
+200 bp
 
+100 bp
 
-100 bp
Asset/Liability policy limit
 
(25.0
)%
 
(20.0
)%
 
(10.0
)%
 
(10.0
)%
December 31, 2017
 
(5.0
)%
 
(3.3
)%
 
(1.4
)%
 
(0.4
)%
December 31, 2016
 
(7.5
)%
 
(4.9
)%
 
(2.2
)%
 
0.4
 %
The information set forth above is based on significant estimates and assumptions, and constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.
The information in the above tables represent the policy scenario that the ALCO reviews on a quarterly basis. There are also other scenarios run that the ALCO examines that vary depending on the economic environment. These scenarios include a yield curve flattening scenario and scenarios that show more dramatic changes in rates. The committee uses alternative scenarios, depending on the economic environment, in its interest rate management decisions.
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

- 41 -


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.
Effects of Inflation
The impact of inflation, as it affects banks, differs substantially from the impact on non-financial institutions. Banks have assets which are primarily monetary in nature and which tend to move with inflation. This is especially true for banks with a high percentage of rate sensitive interest-earning assets and interest-bearing liabilities. A bank can further reduce the impact of inflation with proper management of its rate sensitivity gap. This gap represents the difference between interest rate sensitive assets and interest rate sensitive liabilities. Lakeland attempts to structure its assets and liabilities and manages its gap to protect against substantial changes in interest rate scenarios, in order to minimize the potential effects of inflation.
Capital Resources
Stockholders’ equity increased from $550.0 million on December 31, 2016 to $583.1 million on December 31, 2017 . The increase in stockholders’ equity from December 31, 2016 to December 31, 2017 was primarily due to $52.6 million of net income, partially offset by the payment of cash dividends on common stock of $18.9 million .
Book value per common share (total common stockholders’ equity divided by the number of shares outstanding) increased from $11.65 on December 31, 2016 to $12.31 on December 31, 2017 , primarily as a result of net income. Book value per common share was $10.57 on December 31, 2015 . Tangible book value per share increased from $8.70 on December 31, 2016 to $9.38 on December 31, 2017 . For more information see “Non-GAAP Financial Measures.”
The Company and Lakeland are subject to various regulatory capital requirements that are monitored by federal and state banking agencies. Failure to meet minimum capital requirements can lead to certain supervisory actions by regulators; any supervisory action could have a direct material adverse effect on the Company or Lakeland’s financial statements. As of December 31, 2017 , the Company and Lakeland met all capital adequacy requirements to which they are subject.
The final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks became effective for the Company on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019. As of December 31, 2017 , the Company’s capital levels remained characterized as “well-capitalized” under the new rules.
On September 30, 2016, the Company completed an offering of $75.0 million fixed to floating rate subordinated notes due September 30, 2026. The notes bear interest at a rate of 5.125% per annum until September 30, 2021 and will then reset quarterly to the then current three-month LIBOR rate plus 397 basis points until maturity in September 2026 or their earlier redemption. The debt is included in Tier 2 capital for the Company. On September 30, 2016, the Company contributed $69.9 million to Lakeland’s capital, increasing the Bank’s capital ratios.
On December 14, 2016, the Company successfully completed an at-the-market common stock issuance. A total of 2,739,650 shares of the Company’s common stock were sold at a weighted average price of $18.25, representing gross proceeds to the Company of approximately $50.0 million. Net proceeds from the transaction, after the sales commission and other expenses, were approximately $48.7 million. The Company contributed $48.5 million to Lakeland's capital, increasing the Bank's capital ratios.
The following table reflects capital ratios of the Company and Lakeland as of December 31, 2017 and 2016 :
 
 
Tier 1 Capital
to Total Average
Assets Ratio
December 31,
 
Common EquityTier 1
to Risk-Weighted
Assets Ratio
December 31,
 
Tier 1 Capital
to Risk-Weighted
Assets Ratio
December 31,
 
Total Capital
to Risk-Weighted
Assets Ratio
December 31,
Capital Ratios
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
The Company
 
9.12
%
 
9.07
%
 
10.18
%
 
10.11
%
 
10.87
%
 
10.85
%
 
13.40
%
 
13.48
%
Lakeland Bank
 
10.06
%
 
10.21
%
 
12.00
%
 
12.21
%
 
12.00
%
 
12.21
%
 
12.86
%
 
13.03
%
Required capital ratios including conservation buffer
 
4.00
%
 
4.00
%
 
5.75
%
 
5.125
%
 
7.25
%
 
6.625
%
 
9.25
%
 
8.625
%
“Well capitalized” institution under FDIC regulations
 
5.00
%
 
5.00
%
 
6.50
%
 
6.50
%
 
8.00
%
 
8.00
%
 
10.00
%
 
10.00
%

- 42 -


Non-GAAP Financial Measures
 
Calculation of Tangible Book Value Per Common Share
 
December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
(dollars in thousands)
Total common stockholders’ equity at end of period - GAAP
 
$
583,122

 
$
550,044

 
$
400,516

 
$
379,438

 
$
351,424

Less:
 
 
 
 
 
 
 
 
 
 
Goodwill
 
136,433

 
135,747

 
109,974

 
109,974

 
109,974

Other identifiable intangible assets, net
 
2,362

 
3,344

 
1,545

 
1,960

 
2,424

Total tangible common stockholders’ equity at end of period - Non-GAAP
 
$
444,327

 
$
410,953

 
$
288,997

 
$
267,504

 
$
239,026

Shares outstanding at end of period (1)
 
47,354

 
47,223

 
37,906

 
37,911

 
37,874

Book value per share - GAAP (1)
 
$
12.31

 
11.65

 
10.57

 
10.01

 
9.28

Tangible book value per share - Non-GAAP (1)
 
$
9.38

 
8.70

 
7.62

 
7.06

 
6.31

(1)
Adjusted for 5% stock dividends in 2014.
Calculation of Tangible Common Equity to Tangible Assets
 
December 31,
2017
 
2016
 
2015
 
2014
 
2013
 
 
(dollars in thousands)
Total tangible common stockholders’ equity at end of period - Non-GAAP
 
$
444,327

 
$
410,953

 
$
288,997

 
$
267,504

 
$
239,026

Total assets at end of period - GAAP
 
$
5,405,639

 
$
5,093,131

 
$
3,869,550

 
$
3,538,325

 
$
3,317,791

Less:
 
 
 
 
 
 
 
 
 
 
Goodwill
 
136,433

 
135,747

 
109,974

 
109,974

 
109,974

Other identifiable intangible assets, net
 
2,362

 
3,344

 
1,545

 
1,960

 
2,424

Total tangible assets at end of period - Non-GAAP
 
$
5,266,844

 
$
4,954,040

 
$
3,758,031

 
$
3,426,391

 
$
3,205,393

Common equity to assets - GAAP
 
10.79
%
 
10.80
%
 
10.35
%
 
10.72
%
 
10.59
%
Tangible common equity to tangible assets - Non-GAAP
 
8.44
%
 
8.30
%
 
7.69
%
 
7.81
%
 
7.46
%
Calculation of Return on Average
Tangible Common Equity
 
For the Years Ended December 31,
2017
 
2016
 
2015
 
2014
 
2013
 
 
(dollars in thousands)
Net income - GAAP
 
$
52,580

 
$
41,518

 
$
32,481

 
$
31,129

 
$
24,969

Total average common stockholders’ equity - GAAP
 
$
568,680

 
$
474,540

 
$
392,221

 
$
367,210

 
$
320,923

Less:
 
 
 
 
 
 
 
 
 
 
Average goodwill
 
136,095

 
130,689

 
109,974

 
109,974

 
100,753

Average other identifiable intangible assets, net
 
2,847

 
3,225

 
1,759

 
2,200

 
1,513

Total average tangible common stockholders’ equity - Non-GAAP
 
$
429,738

 
$
340,626

 
$
280,488

 
$
255,036

 
$
218,657

Return on average common stockholders’ equity - GAAP
 
9.25
%
 
8.75
%
 
8.28
%
 
8.48
%
 
7.78
%
Return on average tangible common stockholders’ equity - Non-GAAP
 
12.24
%
 
12.19
%
 
11.58
%
 
12.21
%
 
11.42
%

- 43 -


 
 
For the Years Ended December 31,
Reconciliation of Earnings Per Share
 
2017
 
2016
 
2015
 
 
(in thousands, except per share amounts)
Net income - GAAP
 
$
52,580

 
$
41,518

 
$
32,481

Non-routine transactions, net of tax
 
 
 
 
 
 
Debt prepayment charges
 
—

 
—

 
1,424

Gain on debt extinguishment
 
—

 
—

 
(1,082
)
Associated gain on sale of investment securities
 
—

 
—

 
(102
)
Excise tax on real estate investment trust ("REIT") dividend
 
1,945

 
—

 
—

Adjustment to net deferred tax asset for Tax Cuts and Jobs act
 
(1,343
)
 
—

 
—

Tax deductible merger related expenses
 
—

 
1,915

 
150

Non-tax deductible merger related expenses
 
—

 
866

 
889

Net effect of non-routine transactions
 
$
602

 
$
2,781

 
$
1,279

Net income available to common shareholders excluding non-routine transactions
 
53,182

 
44,299


33,760

Less: earnings allocated to participating securities
 
(480
)
 
(396
)
 
(263
)
        Adjusted net income
 
$
52,702

 
$
43,903


$
33,497

 
 
 
 
 
 
 
Weighted average shares - Basic
 
47,438

 
42,912

 
37,843

Weighted average shares - Diluted
 
47,674

 
43,114

 
37,993

 
 
 
 
 
 
 
Basic earnings per share, GAAP
 
$
1.10

 
$
0.96

 
$
0.85

Diluted earnings per share, GAAP
 
$
1.09

 
$
0.95

 
$
0.85

Basic earnings per share, adjusted for non-routine transactions
 
$
1.11

 
$
1.02

 
$
0.89

Diluted earnings per share, adjusted for non-routine transactions
 
$
1.11

 
$
1.02

 
$
0.88


Quarterly Financial Data
The following represents summarized quarterly financial data of the Company, which in the opinion of management reflected all adjustments, consisting only of non-recurring adjustments, necessary for a fair presentation of the Company’s results of operations.

- 44 -


 
 
Quarter Ended
 
 
March 31,
2017
 
June 30,
2017
 
September 30,
2017
 
December 31,
2017
 
 
(in thousands, except per share amounts)
Total interest income
 
$
44,796

 
$
47,212

 
$
48,735

 
$
49,461

Total interest expense
 
5,473

 
5,791

 
6,620

 
7,082

Net interest income
 
39,323

 
41,421

 
42,115

 
42,379

Provision for loan and lease losses
 
1,218

 
1,827

 
1,827

 
1,218

Noninterest income (excluding investment securities gains)
 
5,555

 
6,126

 
5,454

 
5,776

Gains on investment securities, net
 
2,539

 
(15
)
 
—

 
—

Long-term debt prepayment fee
 
2,828

 
—

 
—

 
—

Core deposit intangible amortization
 
195

 
190

 
104

 
165

Noninterest expense
 
25,447

 
25,176

 
24,745

 
25,684

Income before taxes
 
17,729

 
20,339

 
20,893

 
21,088

Income taxes
 
5,417

 
6,969

 
7,170

 
7,913

Net income
 
$
12,312

 
$
13,370

 
$
13,723

 
$
13,175

Earnings per share of common stock
 
 
 
 
 
 
 
 
Basic
 
$
0.26

 
$
0.28

 
$
0.29

 
$
0.28

Diluted
 
$
0.26

 
$
0.28

 
$
0.29

 
$
0.27

 
 
 
Quarter Ended
 
 
March 31,
2016
 
June 30,
2016
 
September 30,
2016
 
December 31,
2016
 
 
(in thousands, except per share amounts)
Total interest income
 
$
37,571

 
$
39,037

 
$
43,005

 
$
43,683

Total interest expense
 
3,721

 
3,935

 
4,487

 
5,504

Net interest income
 
33,850

 
35,102

 
38,518

 
38,179

Provision for loan and lease losses
 
1,075

 
1,010

 
1,763

 
375

Noninterest income (excluding investment securities gains)
 
4,497

 
4,885

 
6,417

 
5,161

Gains on investment securities, net
 
370

 
—

 
—

 
—

Merger related expenses
 
1,721

 
685

 
1,697

 
—

Core deposit intangible amortization
 
167

 
164

 
201

 
202

Noninterest expense
 
23,536

 
22,866

 
24,108

 
24,570

Income before taxes
 
12,218

 
15,262

 
17,166

 
18,193

Income taxes
 
4,110

 
5,132

 
5,839

 
6,240

Net income
 
$
8,108

 
$
10,130

 
$
11,327

 
$
11,953

Earnings per share of common stock
 
 
 
 
 
 
 
 
Basic
 
$
0.20

 
$
0.24

 
$
0.25

 
$
0.26

Diluted
 
$
0.20

 
$
0.24

 
$
0.25

 
$
0.26


Recent Accounting Pronouncements

In February 2018, the Financial Accounting Standards Board ("FASB") issued an update (ASU 2018-02) regarding the reclassification of certain tax effects from accumulated other comprehensive income. This update requires a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate tax rate. The amount of the reclassification would be the difference between the historical 35% corporate income tax rate and the newly enacted 21% corporate tax rate. This update would eliminate the stranded tax effects associated with the change in the federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 and would improve the usefulness of information reported to financial statement users. The amendments would be effective for all entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption of the amendments would be permitted including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued and all other entities for reporting periods for which financial statements have not yet been made available for issuance. An entity

- 45 -


would apply the amendments in the update retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 is recognized. The Company elected to adopt this update in December 2017, and recorded a $420,000 increase to retained earnings and reduction to accumulated other comprehensive income.

In August 2017, the FASB issued an update intended to improve and simplify accounting rules around hedge accounting. Amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this update also make certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2019. The Company is still evaluating the impact that this guidance will have on its financial statements.

In July 2017, the FASB issued guidance which simplifies the accounting for certain financial instruments with down round features, a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings. The provisions of the new guidance related to down rounds are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this update is not expected to have a material impact on the Company’s financial statements because the Company does not have any equity-linked financial instruments that have such down round features.
    
In May 2017, the FASB issued an update which provides clarity and reduces diversity in practice when accounting for the modification of terms and conditions for share-based payment awards. Previous accounting guidance did not distinguish between modifications which were substantive from modifications that were merely administrative. The accounting standards update requires entities to account for the effects of a modification unless the following three conditions are met: the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. This update will be effective for annual and interim periods beginning after December 15, 2017. The adoption of this update is not expected to have a material impact on the Company’s financial statements.

In March 2017, the FASB issued an update which shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. Under current GAAP, entities amortize the premium as an adjustment of yield over the contractual life of the instrument even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. The update shortens the amortization period for certain callable debt securities held at a premium and requires the premium be amortized to the earliest call date. This update will be effective for annual and interim periods beginning after December 15, 2018. Entities are required to apply the amendments on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of this update is not expected to have a material impact on the Company’s financial statements.

In March 2017, the FASB issued an update which changes the presentation of net periodic pension cost and net periodic postretirement benefit cost in a company’s income statement. The amendment requires that an employer report the service cost component in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendment is effective for annual and interim periods beginning after December 15, 2017. Because the Company has minimal benefit plans that require the measurement of net periodic pension cost and net periodic post retirement benefit cost, the adoption of this update is not expected to have an impact on the Company’s financial statements.

In January 2017, the FASB issued an update to simplify the test for goodwill impairment. This amendment eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. This update will be effective for the Company’s financial statements for annual years beginning after December 15, 2019. The adoption of this update is not expected to have a material impact on the Company’s financial statements.

In January 2017, the FASB issued an update that clarifies the definition of a business as it pertains to business combinations. This amendment affects all companies and other reporting organizations that must determine whether they have sold or acquired a business. This update will be effective for the Company’s financial statements for fiscal years beginning after December 15, 2017. The adoption of this update is not expected to have an impact on the Company’s financial statements.

- 46 -



In September 2016, the FASB issued an accounting standards update to address diversity in presentation in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2017. The adoption of this update is not expected to have an impact on the Company’s consolidated balance sheet or statement of income.

In June 2016, the FASB issued an accounting standards update pertaining to the measurement of credit losses on financial instruments. This update requires the measurement of all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. This update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2019. The Company is currently evaluating its existing systems and data to support the new standard as well as assessing the impact that the guidance will have on the Company's consolidated financial statements. The Company has formed a working group under the direction of the chief risk officer that is comprised of individuals from the credit, risk management, finance and project management areas. The Company has been developing an implementation plan as well as considering various software providers and consultants to aid it in implementation.
    
In March 2016, the FASB issued an accounting standards update to simplify employee share-based payment accounting. The areas for simplification in this update involve several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standard specifically requires excess tax benefits and tax deficiencies to be recorded in the income statement when awards vest or are settled. The Company adopted this accounting standards update in the first quarter of 2017. As a result, during 2017, the Company recorded $587,000 in excess tax benefits in the income statement. The Company elected to continue its existing practice of estimating the number of awards that will be forfeited. The Company elected to apply the cash flow classification guidance prospectively, and therefore, prior periods have not been adjusted.

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

In February 2016, FASB issued accounting guidance that requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period, with early adoption permitted. A modified retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently assessing the impact of the new guidance on its consolidated financial statements by reviewing its existing lease contracts and service contracts that may include embedded leases. The Company expects to record an increase in assets and liabilities as a result of recognizing a right-of-use asset and a lease liability for its operating lease commitments.

In January 2016, the FASB issued an accounting standards update intended to improve the recognition and measurement of financial instruments. Specifically, the accounting standards update requires all equity instruments, with the exception of those that are accounted for under the equity method of accounting, to be measured at fair value with changes in the fair value recognized through net income. Additionally, public business entities are required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The amendments in this update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this update required an adjustment on January 1, 2018 from other comprehensive income to retained earnings for the amount of the unrealized gain on equity securities as of December 31, 2017. Thereafter, any increases or decreases to the market value on these equity securities will be recorded through the consolidated statement of income.

In May 2014, the FASB issued an accounting standards update that clarifies the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance

- 47 -


obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In 2016, the FASB issued further implementation guidance regarding revenue recognition. This additional guidance included clarification on certain principal versus agent considerations within the implementation of the guidance as well as clarification related to identifying performance obligations and licensing. The guidance also requires new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations. The guidance along with its updates is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. In evaluating this standard, management has determined that the majority of revenue earned by the Company is from revenue streams not included in the scope of this standard. The Company has assessed its revenue streams and reviewed contracts potentially affected by the guidance including deposit related fees, interchange fees, investment commissions, merchant fee income and other noninterest income sources to determine the potential impact the new guidance is expected to have on the Company’s consolidated financial statements. The Company adopted the guidance on January 1, 2018 using the modified retrospective method. The Company does not expect a cumulative-effect adjustment to opening retained earnings as a result of adopting this standard.


Item 7A - Quantitative and Qualitative Disclosures About Market Risk.
See Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

- 48 -


Item 8 - Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors
Lakeland Bancorp, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Lakeland Bancorp, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 2013.
Short Hills, New Jersey
February 28, 2018

 



- 49 -

Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
 
 
December 31,
   
 
2017
 
2016
 
 
(dollars in thousands)
ASSETS
 
 
 
 
Cash
 
$
114,138

 
$
169,149

Interest-bearing deposits due from banks
 
28,795

 
6,652

Total cash and cash equivalents
 
142,933

 
175,801

Investment securities, available for sale, at fair value
 
646,135

 
606,704

Investment securities, held to maturity, at amortized cost with fair value of
$138,688 in 2017 and $146,990 in 2016
 
139,685

 
147,614

Federal Home Loan Bank and other membership stock, at cost
 
12,576

 
15,099

Loans and leases, net of deferred fees
 
4,152,720

 
3,870,598

Less: allowance for loan and lease losses
 
35,455

 
31,245

Net loans
 
4,117,265

 
3,839,353

Loans held for sale
 
456

 
1,742

Premises and equipment, net
 
50,313

 
52,236

Accrued interest receivable
 
14,416

 
12,557

Goodwill
 
136,433

 
135,747

Other identifiable intangible assets
 
2,362

 
3,344

Bank owned life insurance
 
107,489

 
72,384

Other assets
 
35,576

 
30,550

TOTAL ASSETS
 
$
5,405,639

 
$
5,093,131

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
LIABILITIES:
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing
 
$
967,335

 
$
927,270

Savings and interest-bearing transaction accounts
 
2,663,985

 
2,620,657

Time deposits through $250 thousand
 
556,863

 
404,680

Time deposits over $250 thousand
 
180,565

 
140,228

Total deposits
 
4,368,748

 
4,092,835

Federal funds purchased and securities sold under agreements to repurchase
 
124,936

 
56,354

Other borrowings
 
192,011

 
260,866

Subordinated debentures
 
104,902

 
104,784

Other liabilities
 
31,920

 
28,248

TOTAL LIABILITIES
 
4,822,517

 
4,543,087

STOCKHOLDERS’ EQUITY:
 
 
 
 
Common stock, no par value; authorized 70,000,000 shares; issued shares, 47,353,864 at December 31, 2017 and 47,222,914 at December 31, 2016
 
512,734

 
510,861

Retained earnings
 
72,737

 
38,590

Accumulated other comprehensive (loss) income
 
(2,349
)
 
593

TOTAL STOCKHOLDERS’ EQUITY
 
583,122

 
550,044

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
5,405,639

 
$
5,093,131

The accompanying notes are an integral part of these statements.


- 50 -


Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
 
 
Years Ended December 31,
   
 
2017
 
2016
 
2015
 
 
(in thousands, except per share data)
INTEREST INCOME
 
 
 
 
 
 
Loans, leases and fees
 
$
172,342

 
$
149,777

 
$
115,295

Federal funds sold and interest-bearing deposits with banks
 
880

 
569

 
62

Taxable investment securities and other
 
14,987

 
11,163

 
10,563

Tax-exempt investment securities
 
1,995

 
1,787

 
1,594

TOTAL INTEREST INCOME
 
190,204

 
163,296

 
127,514

INTEREST EXPENSE
 
 
 
 
 
 
Deposits
 
16,600

 
10,512

 
5,755

Federal funds purchased and securities sold under agreements to repurchase
 
198

 
69

 
110

Other borrowings
 
8,168

 
7,066

 
5,009

TOTAL INTEREST EXPENSE
 
24,966

 
17,647

 
10,874

NET INTEREST INCOME
 
165,238

 
145,649

 
116,640

Provision for loan and lease losses
 
6,090

 
4,223

 
1,942

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES
 
159,148

 
141,426

 
114,698

NONINTEREST INCOME
 
 
 
 
 
 
Service charges on deposit accounts
 
10,740

 
10,157

 
10,024

Commissions and fees
 
4,858

 
4,349

 
4,568

Income on bank owned life insurance
 
2,354

 
2,562

 
2,017

Gain on debt extinguishment
 
—

 
—

 
1,830

Gains on sales of loans
 
1,836

 
2,123

 
1,681

Gain on sales and calls of investment securities, net
 
2,524

 
370

 
241

Other income
 
3,123

 
1,769

 
800

TOTAL NONINTEREST INCOME
 
25,435

 
21,330

 
21,161

NONINTEREST EXPENSE
 
 
 
 
 
 
Salaries and employee benefits
 
61,166

 
56,107

 
48,640

Net occupancy expense
 
10,243

 
9,935

 
8,956

Furniture and equipment
 
8,269

 
8,017

 
6,930

FDIC insurance expense
 
1,577

 
2,248

 
2,086

Stationery, supplies and postage
 
1,797

 
1,727

 
1,529

Marketing expense
 
1,675

 
1,672

 
1,586

Data processing expense
 
1,993

 
1,891

 
1,524

Telecommunications expense
 
1,607

 
1,631

 
1,448

ATM and debit card expense
 
2,051

 
1,582

 
1,398

Core deposit intangible amortization
 
654

 
734

 
415

Other real estate and repossessed asset expense
 
181

 
116

 
181

Long-term debt prepayment fee
 
2,828

 
—

 
2,407

Merger related expenses
 
—

 
4,103

 
1,152

Other expenses
 
10,493

 
10,154

 
8,959

TOTAL NONINTEREST EXPENSE
 
104,534

 
99,917

 
87,211

Income before provision for income taxes
 
80,049

 
62,839

 
48,648

Provision for income taxes
 
27,469

 
21,321

 
16,167

NET INCOME
 
$
52,580

 
$
41,518

 
$
32,481

PER SHARE OF COMMON STOCK:
 
 
 
 
 
 
Basic earnings
 
$
1.10

 
$
0.96

 
$
0.85

Diluted earnings
 
$
1.09

 
$
0.95

 
$
0.85

Cash dividends
 
$
0.40

 
$
0.37

 
$
0.33

The accompanying notes are an integral part of these statements.

- 51 -


Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
For the Years Ended December 31,
   
 
2017
 
2016
 
2015
 
 
(in thousands)
NET INCOME
 
$
52,580

 
$
41,518

 
$
32,481

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
 
 
 
 
 
 
Unrealized losses on securities available for sale
 
(903
)
 
(1,038
)
 
(220
)
Reclassification for securities gains included in net income
 
(1,640
)
 
(233
)
 
(157
)
Unrealized gains on derivatives
 
37

 
672

 
—

Change in pension liability, net
 
(16
)
 
42

 
4

Other comprehensive loss
 
(2,522
)
 
(557
)
 
(373
)
TOTAL COMPREHENSIVE INCOME
 
$
50,058


$
40,961


$
32,108

The accompanying notes are an integral part of these statements.


- 52 -


Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2017 , 2016 and 2015
 
 
Common Stock
 
Retained
Earnings
(Accumulated
Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
 
 
(in thousands)
At December 31, 2014
 
$
384,731

 
$
(6,816
)
 
$
1,523

 
$
379,438

Net income
 
—

 
32,481

 
—

 
32,481

Other comprehensive loss, net of tax
 
—

 
—

 
(373
)
 
(373
)
Stock based compensation
 
1,605

 
—

 
—

 
1,605

Issuance of stock
 
22

 
—

 
—

 
22

Retirement of restricted stock
 
(254
)
 
—

 
—

 
(254
)
Exercise of stock options, net of excess tax benefits
 
183

 
—

 
—

 
183

Cash dividends, common stock
 
—

 
(12,586
)
 
—

 
(12,586
)
At December 31, 2015
 
$
386,287

 
$
13,079

 
$
1,150

 
$
400,516

Net income
 
—

 
41,518

 
—

 
41,518

Other comprehensive loss, net of tax
 
—

 
—

 
(557
)
 
(557
)
Stock based compensation
 
1,899

 
—

 
—

 
1,899

Issuance of stock for Pascack acquisition
 
37,221

 
—

 
—

 
37,221

Issuance of stock for Harmony acquisition
 
36,654

 
—

 
—

 
36,654

Issuance of stock
 
48,678

 
—

 
—

 
48,678

Retirement of restricted stock
 
(206
)
 
—

 
—

 
(206
)
Exercise of stock options, net of excess tax benefits
 
328

 
—

 
—

 
328

Cash dividends, common stock
 
—

 
(16,007
)
 
—

 
(16,007
)
At December 31, 2016
 
$
510,861


$
38,590


$
593


$
550,044

Net income
 
—

 
52,580

 
—

 
52,580

Other comprehensive loss, net of tax
 
—

 
—

 
(2,522
)
 
(2,522
)
Adjustment related to implementation of ASU 2018-02
 
—

 
420

 
(420
)
 
—

Stock based compensation
 
2,325

 
—

 
—

 
2,325

Retirement of restricted stock
 
(773
)
 
—

 
—

 
(773
)
Exercise of stock options
 
321

 
—

 
—

 
321

Cash dividends, common stock
 
—

 
(18,853
)
 
—

 
(18,853
)
At December 31, 2017
 
$
512,734


$
72,737


$
(2,349
)

$
583,122

The accompanying notes are an integral part of these statements.


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Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Years Ended December 31,
   
 
2017
 
2016
 
2015
 
 
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net income
 
$
52,580

 
$
41,518

 
$
32,481

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Net amortization of premiums, discounts and deferred loan fees and costs
 
5,153

 
4,581

 
4,151

Depreciation and amortization
 
4,536

 
3,961

 
3,410

Amortization of intangible assets
 
654

 
734

 
415

Provision for loan and lease losses
 
6,090

 
4,223

 
1,942

Stock based compensation
 
2,325

 
1,899

 
1,605

Loans originated for sale
 
(60,783
)
 
(85,365
)
 
(71,833
)
Proceeds from sales of loans held for sale
 
63,905

 
86,859

 
72,873

Gains on sales of securities
 
(2,524
)
 
(370
)
 
(241
)
Gains on sales of loans held for sale
 
(1,836
)
 
(2,003
)
 
(1,681
)
Gains on proceeds from bank owned life insurance policies
 
(109
)
 
(864
)
 
(435
)
Gains on debt redemption and extinguishment
 
—

 
—

 
(1,830
)
Gains on other real estate and other repossessed assets
 
(646
)
 
(248
)
 
(102
)
Loss (gain) on sale of premises and equipment
 
(838
)
 
117

 
(6
)
Long-term debt prepayment penalty
 
2,828

 
—

 
2,407

Deferred tax expense (benefit)
 
16,904

 
(987
)
 
(824
)
Excess tax benefits
 
587

 
—

 
—

Increase in other assets
 
(25,065
)
 
(5,600
)
 
(5,257
)
Increase in other liabilities
 
3,705

 
1,618

 
3,691

NET CASH PROVIDED BY OPERATING ACTIVITIES
 
67,466

 
50,073

 
40,766

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
Net cash acquired in acquisitions
 
—

 
68,751

 
—

Proceeds from repayments and maturities of available for sale securities
 
91,314

 
79,425

 
71,368

Proceeds from repayments and maturities of held to maturity securities
 
43,218

 
28,421

 
24,453

Proceeds from sales of available for sale securities
 
4,500

 
15,654

 
33,613

Purchase of available for sale securities
 
(140,565
)
 
(245,699
)
 
(92,904
)
Purchase of held to maturity securities
 
(35,841
)
 
(59,715
)
 
(33,811
)
Proceeds from redemptions of Federal Home Loan Bank stock
 
13,497

 
3,054

 
456

Purchases of Federal Home Loan Bank stock
 
(10,974
)
 
(323
)
 
(4,697
)
Purchase of bank owned life insurance
 
(33,000
)
 
—

 
(7,000
)
Death benefit proceeds from bank owned life insurance policy
 
312

 
2,129

 
1,186

Net increase in loans and leases
 
(289,914
)
 
(334,040
)
 
(315,067
)
Proceeds from dispositions and sales of bank premises and equipment
 
1,638

 
21

 
696

Purchases of premises and equipment
 
(3,972
)
 
(3,977
)
 
(4,838
)
Proceeds from sales of other real estate and other repossessed assets
 
4,638

 
3,545

 
1,608

NET CASH USED IN INVESTING ACTIVITIES
 
(355,149
)
 
(442,754
)
 
(324,937
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
Net increase in deposits
 
276,537

 
515,437

 
204,854

Increase (decrease) in federal funds purchased and securities sold under agreements to repurchase
 
68,582

 
(94,880
)
 
42,299

Proceeds from other borrowings
 
306,184

 
14,921

 
117,000

Repayments of other borrowings
 
(377,183
)
 
(91,798
)
 
(50,000
)
Redemption of subordinated debentures, net
 
—

 
—

 
(8,170
)
Net proceeds from issuance of subordinated debt
 
—

 
73,516

 
—

Exercise of stock options
 
321

 
285

 
124

Net proceeds from issuance of common stock
 
—

 
48,678

 
22

Retirement of restricted stock
 
(773
)
 
(206
)
 
(254
)
Excess tax benefits
 
—

 
43

 
59

Dividends paid
 
(18,853
)
 
(16,007
)
 
(12,586
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
 
254,815

 
449,989

 
293,348

Net (decrease) increase in cash and cash equivalents
 
(32,868
)
 
57,308

 
9,177

Cash and cash equivalents, beginning of year
 
175,801

 
118,493

 
109,316

CASH AND CASH EQUIVALENTS, END OF YEAR
 
$
142,933

 
$
175,801

 
$
118,493



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Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
 
 
Years Ended December 31,
   
 
2017
 
2016
 
2015
 
 
(in thousands)
Supplemental schedule of non-cash investing and financing activities:
 
 
 
 
 
 
Cash paid during the period for income taxes
 
$
27,423

 
$
21,744

 
$
16,737

Cash paid during the period for interest
 
24,571

 
16,435

 
10,770

Transfer of loans and leases into other repossessed assets and other real estate owned
 
3,763

 
3,386

 
1,462

Acquisitions of Pascack and Harmony:
 
 
 
 
 
 
Non-cash assets acquired:
 
 
 
 
 
 
Federal Home Loan Bank stock
 
—

 
3,742

 
—

Investment securities held for maturity
 
—

 
10,810

 
—

Investment securities available for sale
 
—

 
7,474

 
—

Loans, including loans held for sale
 
—

 
579,560

 
—

Goodwill and other intangible assets, net
 
—

 
29,060

 
—

Other assets
 
—

 
32,381

 
—

Total non-cash assets acquired
 
—

 
663,027

 
—

Liabilities assumed:
 
 
 
 
 
 
Deposits
 
—

 
(582,526
)
 
—

Other borrowings
 
—

 
(66,622
)
 
—

Other liabilities
 
—

 
(8,755
)
 
—

Total liabilities assumed
 
—

 
(657,903
)
 
—

Common stock issued for acquisitions
 
—

 
73,875

 
—

The accompanying notes are an integral part of these statements.


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Lakeland Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
Lakeland Bancorp, Inc. (the “Company”) is a bank holding company whose principal activity is the ownership and management of its wholly owned subsidiary, Lakeland Bank (“Lakeland”). Lakeland operates under a state bank charter and provides full banking services and, as a state bank, is subject to regulation by the New Jersey Department of Banking and Insurance. Lakeland generates commercial, mortgage and consumer loans and receives deposits from customers located primarily in Northern and Central New Jersey. Through a third party, Lakeland also provides non-deposit products, such as securities brokerage services, including mutual funds and variable annuities.
Lakeland operates as a commercial bank offering a wide variety of commercial loans and leases and, to a lesser degree, consumer credits. Its primary strategic aim is to establish a reputation and market presence as the “small and middle market business bank” in its principal markets. Lakeland funds its loans primarily by offering demand deposit, savings and money market, and time deposit accounts to both commercial enterprises and individuals. Additionally, it originates residential mortgage loans, and services such loans which are owned by other investors. Lakeland also has an equipment finance division which provides equipment lease financing primarily to small and medium sized business clients and an asset based lending department which specializes in utilizing particular assets to fund the working capital needs of borrowers.
The Company and Lakeland are subject to regulations of certain state and federal agencies and, accordingly, are periodically examined by those regulatory authorities. As a consequence of the extensive regulation of commercial banking activities, Lakeland’s business is particularly susceptible to being affected by state and federal legislation and regulations.
Basis of Financial Statement Presentation
The accounting and reporting policies of the Company and its subsidiaries conform with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and predominant practices within the banking industry. The consolidated financial statements include the accounts of the Company, Lakeland, Lakeland NJ Investment Corp., Lakeland Investment Corp., Lakeland Equity, Inc. and Lakeland Preferred Equity, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made in the consolidated financial statements to conform with current year classifications.
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. The principal estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan and lease losses and the valuation of the Company’s investment securities portfolio. The policies regarding these estimates are discussed below.
The Company’s operating segments are components of its enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker is its Chief Executive Officer. All of the Company’s financial services activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, commercial lending is dependent upon the ability of Lakeland to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. The situation is also similar for consumer and residential mortgage lending. Moreover, the Company primarily operates in one market area, 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. Accordingly, the Company has determined that it has one operating segment and thus one reporting segment.
Cash and Cash Equivalents
Cash and cash equivalents are defined as cash on hand, cash items in the process of collection, amounts due from banks and federal funds sold with an original maturity of three months or less. A portion of Lakeland’s cash on hand and on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements.
Investment Securities
Investment securities are classified as held to maturity or available for sale. Management determines the appropriate classification of investment securities at the time of purchase. Investments in securities, for which management has both the ability and intent to hold to maturity, are classified as held to maturity and carried at cost, adjusted for the amortization of premiums and accretion of discounts computed by the effective interest method. Investments in debt and equity securities, which management believes may be sold prior to maturity due to changes in interest rates, prepayment risk, liquidity requirements, or other factors, are classified as available for sale. Net unrealized gains and losses for such securities, net of tax effect, are reported as other

- 56 -

comprehensive income (loss) and excluded from the determination of net income. Gains or losses on disposition of investment securities are based on the net proceeds and the adjusted carrying amount of the securities sold using the specific identification method. Losses are recorded through the statement of income when the impairment is considered other-than-temporary, even if a decision to sell has not been made.
The Company evaluates its investment securities portfolio for impairment each quarter. In estimating other-than-temporary losses, the Company considers the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and whether the Company is more likely than not to sell the security before recovery of its cost basis. If a security has been impaired for more than twelve months, and the impairment is deemed other-than-temporary, a write down will occur in that quarter. If a loss is deemed to be other-than-temporary, it is recognized as a realized loss in the income statement with the security assigned a new cost basis.
If the Company intends to sell an impaired security, the Company records an other-than-temporary loss in an amount equal to the entire difference between the fair value and amortized cost. If a security is determined to be other-than-temporarily impaired, but the Company does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings in gain (loss) on securities, with the other portion of the loss recognized in other comprehensive income. If a determination is made that an equity security is other-than-temporarily impaired, the unrealized loss will be recognized as an other-than-temporary impairment charge in noninterest income as a component of gain (loss) on investment securities.
Loans and Leases and Allowance for Loan and Lease Losses
Loans and leases that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal and are net of unearned discount, unearned loan fees and an allowance for loan and lease losses.
Interest income is accrued as earned on a simple interest basis, adjusted for prepayments. All unamortized fees and costs related to the loan are amortized over the life of the loan using the interest method. Accrual of interest is discontinued on a loan or lease when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that full collection of interest and principal is doubtful. When a loan or lease is placed on such non-accrual status, all accumulated accrued interest receivable is reversed out of current period income.
Commercial loans and leases 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 borrowers 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 in full of interest or principal 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 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 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, 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.
The Company defines impaired loans as all non-accrual loans with recorded investments of $500,000 or greater. Impaired loans also include all loans modified as troubled debt restructurings. Loans and leases are considered impaired when, based on current information and events, it is probable that Lakeland will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments.
Impairment is measured based on the present value of expected cash flows discounted at the loan’s effective interest rate, or as a practical expedient, Lakeland may measure impairment based on a loan’s observable market price, or the fair value of the collateral, less estimated costs to sell, if the loan is collateral-dependent. Regardless of the measurement method, Lakeland measures impairment based on the fair value of the collateral when it is determined that foreclosure is probable. Most of Lakeland’s impaired loans are collateral-dependent. Shortfalls in collateral or cash flows are charged-off or specifically reserved for in the period the short-fall is identified. Charge-offs are recommended by the Chief Credit Officer and approved by the Board.
Lakeland groups impaired commercial loans under $500,000 into homogeneous pools and collectively evaluates them. Interest received on impaired loans and leases may be recorded as interest income. However, if management is not reasonably certain that an impaired loan and lease will be repaid in full, or if a specific time frame to resolve full collection cannot yet be reasonably determined, all payments received are recorded as reductions of principal.
Purchased Credit-Impaired (“PCI”) loans are loans acquired through acquisition or purchased at a discount that is due, in part, to credit quality. PCI loans are accounted for in accordance with ASC Subtopic 310-30 and are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance (i.e., the allowance for loan

- 57 -

losses). The difference between the undiscounted cash flows expected at acquisition and the initial carrying amount (fair value) of the covered loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of the loans. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or a valuation allowance. Reclassifications of the non-accretable difference to the accretable yield may occur subsequent to the loan acquisition dates due to increases in expected cash flows of the loans and results in an increase in yield on a prospective basis. Subsequent to acquisition date, further credit deterioration of a PCI loan will result in a valuation allowance recognized in the allowance for loan and lease losses.
Loans are classified as troubled debt restructured loans ("TDRs") 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, an extended moratorium of principal payments and/or an extension of the maturity date at a stated interest rate lower than the current market rate for a new loan with similar risk. Nonetheless, restructured loans are classified as impaired loans.
If a loan has been restructured, it will continue to be classified as a TDR until it is fully repaid or until it meets all of the following criteria: 1) the borrower is no longer experiencing financial difficulties, 2) the rate is not less than the rate provided for similar credit risk, 3) other terms are no less favorable than similar new debt and 4) no concessions were granted.
The allowance for loan and lease losses is the estimated amount considered necessary to cover probable and reasonably estimable incurred losses inherent in the loan portfolio at the balance sheet date. In determining the allowance, we make significant estimates and judgments, and, therefore, have identified the allowance as a critical accounting policy. The allowance is established through a provision for loan and lease losses charged against income. Loan principal considered to be uncollectible by management is charged against the allowance.
The allowance for loan and lease losses has been determined in accordance with U.S. GAAP. We are responsible for the timely and periodic determination of the amount of the allowance required. We believe that our allowance is adequate to cover identifiable losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable.
The determination of the adequacy of the allowance for loan and lease losses and the periodic provisioning for estimated losses included in the consolidated financial statements is the responsibility of management and the Board of Directors. Management performs a formal quarterly evaluation of the allowance for loan and lease losses. This quarterly process is performed by the credit administration department and approved by the Chief Credit Officer. All supporting documentation with regard to the evaluation process is maintained by the credit administration department. Each quarter, the evaluation along with the supporting documentation is reviewed by the finance department before approval by the Chief Credit Officer. The allowance evaluation is then presented to an Allowance for Loan and Lease Losses committee, which gives final approval to the allowance evaluation before presented to the Board of Directors for their approval.
Additionally, the Company continually evaluates, through its governance process, the development of the allowance for loan and lease losses methodology. During the 3 rd quarter of 2017, the Company refined and enhanced its quantitative framework by implementing loss migration periods to determine historical loss rates. It also enhanced its qualitative framework to complement the loss migration historical loss rates. These enhancements were implemented to increase the level of precision in the allowance for loan and lease losses and did not result in a material change in the required allowance for loan and lease losses.
The methodology employed for assessing the adequacy of the allowance consists of the following criteria:
• The establishment of specific reserve amounts for impaired loans and leases, including PCI loans.
• The establishment of reserves for pools of homogeneous loans and leases not subject to specific review, including impaired loans under $500,000, leases, 1 - 4 family residential mortgages, and consumer loans.
The establishment of reserve amounts for pools of homogeneous loans and leases are based upon the determination of historical loss rates, which are adjusted to reflect current conditions through the use of qualitative factors. The qualitative factors considered by the Company includes an evaluation of the results of the Company’s independent loan review function, the Company's reporting capabilities, the adequacy and expertise of Lakeland’s lending staff, underwriting policies, loss histories, trends in the portfolio, delinquency trends, economic and business conditions and capitalization rates. Since many of Lakeland’s loans depend on the sufficiency of collateral as a secondary source of repayment, any adverse trends in the real estate market could affect the underlying values available to protect Lakeland from losses.
Additionally, management determines the loss emergence periods for each loan segment, which are used to define loss migration periods and establish appropriate ranges for qualitative adjustments for each loan segment. The loss emergence period is the estimated time from the date of a loss event (such as a personal bankruptcy) to the actual recognition of the loss (typically via the first partial or full loan charge-off), and is determined based upon a study of our past loss experience by loan segment. All of the factors considered in the analysis of the adequacy of the allowance for loan and lease losses may be subject to

- 58 -

change. To the extent actual outcomes differ from management estimates, additional provisions for loan and lease losses may be required that would adversely impact earnings in future periods.
A loan that management designates as impaired is reviewed for charge-off when it is placed on non-accrual status with a resulting charge-off if the loan is not secured by collateral having sufficient liquidation value to repay the loan if the loan is collateral dependent or charged off if deemed uncollectible. For a loan that is not collateral dependent, a reserve may be established for any shortfall in expected cash flows. Charge-offs are recommended by the Chief Credit Officer and approved by the Board.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. Gains and losses on sales of loans are specifically identified and accounted for in accordance with U.S. GAAP which requires that an entity engaged in mortgage banking activities classify the retained mortgage-backed security or other interest, which resulted from the securitization of a mortgage loan held for sale, based upon its ability and intent to sell or hold these investments.
Premises and Equipment, Net
Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation. Depreciation expense is computed on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of the estimated useful lives of the improvements or the terms of the related leases.
Other Real Estate Owned and Other Repossessed Assets
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. Costs relating to holding the assets are charged to expense. An allowance for OREO or other repossessed assets is established, through charges to expense, to maintain properties at fair value less estimated costs to sell. Operating results of OREO and other repossessed assets, including rental income and operating expenses, are included in other expenses.
Mortgage Servicing
Lakeland performs various servicing functions on loans owned by others. A fee, usually based on a percentage of the outstanding principal balance of the loan, is received for these services. At December 31, 2017 and 2016 , Lakeland was servicing approximately $23.0 million and $26.9 million , respectively, of loans for others.
Lakeland originates certain mortgages under a definitive plan to sell or securitize those loans and service the loans owned by the investor. Upon the transfer of the mortgage loans in a sale or a securitization, Lakeland records the servicing assets retained. Lakeland records mortgage servicing rights and the loans based on relative fair values at the date of origination and evaluates the mortgage servicing rights for impairment at each reporting period. Lakeland also originates loans that it sells to other banks and investors and does not retain the servicing rights.
Mortgage Servicing Rights
When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. As of December 31, 2017 and 2016 , Lakeland had originated mortgage servicing rights of $88,000 and $124,000 , respectively.
Under the amortization measurement method, Lakeland subsequently measures servicing rights at fair value at each reporting date and records any impairment in value of servicing assets in earnings in the period in which the impairment occurs. The fair values of servicing rights are subject to fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. Servicing fee income, which is reported on the income statement as commissions and fees, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan, and are recorded as income when earned.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, put presumptively beyond the reach of the transferor and its creditors even in bankruptcy or other receivership, (2) the transferee obtains the right

- 59 -

(free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Derivatives
Lakeland enters into interest rate swaps (“swaps”) with loan customers to provide a facility to mitigate the fluctuations in the variable rate on the respective loans. These swaps are matched in offsetting terms to swaps that Lakeland enters into with an outside third party. The swaps are reported at fair value in other assets or other liabilities. Lakeland’s swaps qualify as derivatives, but are not designated as hedging instruments, thus any net gain or loss resulting from changes in the fair value is recognized in other noninterest income.
The credit risk associated with derivatives executed with customers is similar as that involved in extending loans and is subject to normal credit policies. Collateral is obtained based on management’s assessment of the customer. The positions of customer derivatives are recorded at fair value and changes in value are included in noninterest income on the consolidated statement of income.
Cash flow hedges are used primarily to minimize the variability in cash flows of assets or liabilities, or forecasted transactions caused by interest rate fluctuations. Changes in the fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income and are reclassified into the line item in the income statement in which the hedged item is recorded in the same period the hedged item affects earnings. Hedge ineffectiveness and gains and losses on the component of a derivative excluded in assessing hedge effectiveness are recorded in the same income statement line item.
Further discussion of Lakeland’s financial derivatives is set forth in Note 18 to the Consolidated Financial Statements.
Earnings Per Share
Earnings per share is calculated on the basis of the weighted average number of common shares outstanding during the year. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
Employee Benefit Plans
The Company has certain employee benefit plans covering substantially all employees. The Company accrues such costs as incurred.
We recognize the overfunded or underfunded status of pension and postretirement benefit plans in accordance with U.S. GAAP. Actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations are recognized as a component of Accumulated Other Comprehensive Income, net of tax effects, until they are amortized as a component of net periodic benefit cost.
Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in addition to net income from operations. Other comprehensive income (loss) includes items recorded directly in equity such as unrealized gains or losses on securities available for sale as well unrealized gains (losses) recorded on derivatives and benefit plans.
Goodwill and Other Identifiable Intangible Assets
Goodwill is presumed to have an indefinite useful life and is tested, at least annually, for impairment at the reporting unit level. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. For purposes of our goodwill impairment testing, we have identified a single reporting unit, community banking.
U.S. GAAP permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. The Company completed its annual qualitative assessment as of November 30, 2017 and concluded that there was less than a 50% probability that the fair value of the reporting unit is less than its carrying amount and, therefore, the two-step goodwill impairment test was not required.
Bank Owned Life Insurance
Lakeland invests in bank owned life insurance (“BOLI”). BOLI involves the purchasing of life insurance by Lakeland on a chosen group of employees. Lakeland is the owner and beneficiary of the policies. At December 31, 2017 and 2016 , Lakeland had $107.5 million and $72.4 million , respectively, in BOLI. Income earned on BOLI was $2.4 million , $2.6 million and $2.0

- 60 -

million for the years ended December 31, 2017 , 2016 and 2015 , respectively. BOLI is accounted for using the cash surrender value method and is recorded at its net realizable value.
Income Taxes
The Company accounts for income taxes under the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement and tax return purposes are allowance for loan and lease losses, core deposit intangibles, deferred loan fees and deferred compensation.
Variable Interest Entities
Management has determined that Lakeland Bancorp Capital Trust II and Lakeland Bancorp Capital Trust IV (collectively, “the Trusts”) qualify as variable interest entities. The Trusts issued mandatorily redeemable preferred stock to investors and loaned the proceeds to the Company. The Trusts hold, as their sole asset, subordinated debentures issued by the Company. The Company is not considered the primary beneficiary of the Trusts, therefore the Trusts are not consolidated in the Company’s financial statements.
The Company’s maximum exposure to the Trusts is $30.0 million at December 31, 2017 which is the Company’s liability to the Trusts and includes the Company’s investment in the Trusts.
The Federal Reserve has issued guidance on the regulatory capital treatment for the trust preferred securities issued by the Trusts. The rule retains the current maximum percentage of total capital permitted for trust preferred securities at 25% , but enacts other changes to the rules governing trust preferred securities that affect their use as part of the collection of entities known as “restricted core capital elements.” The rule allows bank holding companies to continue to count trust preferred securities as Tier 1 Capital. The Company’s capital ratios continue to be categorized as “well-capitalized” under the regulatory framework for prompt corrective action. Under the Collins Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, any new issuance of trust preferred securities by the Company would not be eligible as regulatory capital.
New Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board ("FASB") issued an update (ASU 2018-02) regarding the reclassification of certain tax effects from accumulated other comprehensive income. This update requires a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate tax rate. The amount of the reclassification would be the difference between the historical 35% corporate income tax rate and the newly enacted 21% corporate tax rate. This update would eliminate the stranded tax effects associated with the change in the federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 and would improve the usefulness of information reported to financial statement users. The amendments would be effective for all entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption of the amendments would be permitted including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued and all other entities for reporting periods for which financial statements have not yet been made available for issuance. An entity would apply the amendments in the update retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 is recognized. The Company elected to adopt this update in December 2017, and recorded a $420,000 increase to retained earnings and reduction to accumulated other comprehensive income.
In August 2017, the FASB issued an update intended to improve and simplify accounting rules around hedge accounting. Amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this update also make certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2019. The Company is still evaluating the impact that this guidance will have on its financial statements.
In July 2017, the FASB issued guidance which simplifies the accounting for certain financial instruments with down round features, a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings. The provisions of the new guidance related to down rounds are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this update is not expected to have a material impact on the Company’s financial statements because the Company does not have any equity-linked financial instruments that have such down round features.
In May 2017, the FASB issued an update which provides clarity and reduces diversity in practice when accounting for the modification of terms and conditions for share-based payment awards. Previous accounting guidance did not distinguish

- 61 -

between modifications which were substantive from modifications that were merely administrative. The accounting standards update requires entities to account for the effects of a modification unless the following three conditions are met: the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. This update will be effective for annual and interim periods beginning after December 15, 2017. The adoption of this update is not expected to have a material impact on the Company’s financial statements.
In March 2017, the FASB issued an update which shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. Under current GAAP, entities amortize the premium as an adjustment of yield over the contractual life of the instrument even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. The update shortens the amortization period for certain callable debt securities held at a premium and requires the premium be amortized to the earliest call date. This update will be effective for annual and interim periods beginning after December 15, 2018. Entities are required to apply the amendments on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of this update is not expected to have a material impact on the Company’s financial statements.
In March 2017, the FASB issued an update which changes the presentation of net periodic pension cost and net periodic postretirement benefit cost in a company’s income statement. The amendment requires that an employer report the service cost component in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendment is effective for annual and interim periods beginning after December 15, 2017. Because the Company has minimal benefit plans that require the measurement of net periodic pension cost and net periodic post retirement benefit cost, the adoption of this update is not expected to have an impact on the Company’s financial statements.
In January 2017, the FASB issued an update to simplify the test for goodwill impairment. This amendment eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. This update will be effective for the Company’s financial statements for annual years beginning after December 15, 2019. The adoption of this update is not expected to have a material impact on the Company’s financial statements.
In January 2017, the FASB issued an update that clarifies the definition of a business as it pertains to business combinations. This amendment affects all companies and other reporting organizations that must determine whether they have sold or acquired a business. This update will be effective for the Company’s financial statements for fiscal years beginning after December 15, 2017. The adoption of this update is not expected to have an impact on the Company’s financial statements.
In September 2016, the FASB issued an accounting standards update to address diversity in presentation in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2017. The adoption of this update is not expected to have an impact on the Company’s consolidated balance sheet or statement of income.
In June 2016, the FASB issued an accounting standards update pertaining to the measurement of credit losses on financial instruments. This update requires the measurement of all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. This update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2019. The Company is currently evaluating its existing systems and data to support the new standard as well as assessing the impact that the guidance will have on the Company's consolidated financial statements. The Company has formed a working group under the direction of the chief risk officer that is comprised of individuals from the credit, risk management, finance and project management areas. The Company has been developing an implementation plan as well as considering various software providers and consultants to aid it in implementation.
In March 2016, the FASB issued an accounting standards update to simplify employee share-based payment accounting. The areas for simplification in this update involve several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standard specifically requires excess tax benefits and tax deficiencies to be recorded in the income statement when awards vest or are settled. The Company adopted this accounting standards update in the first quarter of 2017. As a result, during 2017, the Company recorded $587,000 in excess tax benefits in the income statement. The Company elected to continue

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its existing practice of estimating the number of awards that will be forfeited. The Company elected to apply the cash flow classification guidance prospectively, and therefore, prior periods have not been adjusted.
In March 2016, the FASB issued an accounting standards update that requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met, including the “clearly and closely related” criterion. The amendments in this update clarify the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The Company adopted this accounting standards update in the first quarter of 2017. The adoption of this update did not have an impact on the Company’s financial statements.
In February 2016, FASB issued accounting guidance that requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period, with early adoption permitted. A modified retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently assessing the impact of the new guidance on its consolidated financial statements by reviewing its existing lease contracts and service contracts that may include embedded leases. The Company expects to record an increase to assets and liabilities as a result of recognizing a right-of-use asset and a lease liability for its operating lease commitments.
In January 2016, the FASB issued an accounting standards update intended to improve the recognition and measurement of financial instruments. Specifically, the accounting standards update requires all equity instruments, with the exception of those that are accounted for under the equity method of accounting, to be measured at fair value with changes in the fair value recognized through net income. Additionally, public business entities are required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The amendments in this update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this update required an adjustment on January 1, 2018 from other comprehensive income to retained earnings for the amount of the unrealized gain on equity securities as of December 31, 2017. Thereafter, any increases or decreases to the market value on these equity securities will be recorded through the consolidated statement of income.
In May 2014, the FASB issued an accounting standards update that clarifies the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In 2016, the FASB issued further implementation guidance regarding revenue recognition. This additional guidance included clarification on certain principal versus agent considerations within the implementation of the guidance as well as clarification related to identifying performance obligations and licensing. The guidance also requires new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations. The guidance along with its updates is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. In evaluating this standard, management has determined that the majority of revenue earned by the Company is from revenue streams not included in the scope of this standard. The Company has assessed its revenue streams and reviewed contracts potentially affected by the guidance including deposit related fees, interchange fees, investment commissions, merchant fee income and other noninterest income sources to determine the potential impact the new guidance is expected to have on the Company’s consolidated financial statements. The Company adopted the guidance on January 1, 2018 using the modified retrospective method. The Company does not expect a cumulative-effect adjustment to opening retained earnings as a result of adopting this standard.


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NOTE 2 - ACQUISITIONS
Harmony Bank
On July 1, 2016 , the Company completed its acquisition of Harmony Bank (“Harmony”), a bank located in Ocean County, New Jersey. Effective upon the opening of business on July 1, 2016, Harmony was merged into Lakeland Bank. Harmony operated three branches in Ocean County, New Jersey. This merger allowed the Company to expand its presence to Ocean County. The merger agreement provided that shareholders of Harmony would receive 1.25 shares of the Company’s common stock for each share of Harmony Bank common stock that they owned at the effective time of the merger. The Company issued an aggregate of 3,201,109 shares of its common stock in the merger. Outstanding Harmony stock options were paid out in cash at the difference between $14.31 (Lakeland’s closing stock price on July 1, 2016 of $11.45 multiplied by 1.25 ) and the average strike price of $9.07 for a total cash payment of $869,000 .
During 2017, the Company revised the estimate of the fair value of the acquired assets as of the acquisition date as a result of additional information obtained. The adjustment, net of tax, related to the fair market value of certain loans and the valuation of core deposit intangible, resulted in a $685,000 increase to goodwill.
The acquisition was accounted for under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed in the acquisition were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition, including the use of a third party valuation specialist. The following table summarizes the estimated fair value of the acquired assets and liabilities assumed at the date of acquisition for Harmony, net of cash consideration paid.
 
 
(in thousands)
Cash and cash equivalents
$
27,809

Securities available for sale
7,474

Securities held to maturity
6,885

Federal Home Loan Bank stock
780

Loans
259,985

Premises and equipment
3,125

Goodwill
11,147

Identifiable intangible assets
1,088

Accrued interest receivable and other assets
8,146

Total assets acquired
326,439

Deposits
(278,060
)
Other borrowings
(9,314
)
Other liabilities
(2,411
)
Total liabilities assumed
(289,785
)
Net assets acquired
$
36,654

Loans acquired in the Harmony acquisition were recorded at fair value, and there was no carryover related to the allowance for loan and lease losses. The fair value of loans acquired from Harmony was estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted for estimated future credit losses and the rate of prepayments. Projected cash flows were then discounted to present value using a risk-adjusted market rate for similar loans.
The following is a summary of the loans accounted for in accordance with ASC 310-30 that were acquired in the Harmony acquisition as of the closing date.
 
 
Acquired
Credit
Impaired
Loans
 
(in thousands)
Contractually required principal and interest at acquisition
$
1,264

Contractual cash flows not expected to be collected (non-accretable difference)
(398
)
Expected cash flows at acquisition
866

Interest component of expected cash flows (accretable difference)
(97
)
Fair value of acquired loans
$
769


- 64 -

The core deposit intangible totaled $691,000 and is being amortized over its estimated useful life of approximately 10 years using an accelerated method. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes.
The fair value of deposit liabilities with no stated maturities such as checking, money market and savings accounts, was assumed to equal the carrying amounts since these deposits are payable on demand. The fair values of certificates of deposits and IRAs represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit.
Pascack Bancorp
On January 7, 2016 , the Company completed its acquisition of Pascack Bancorp, Inc. (“Pascack”), a bank holding company headquartered in Waldwick, New Jersey. Pascack was the parent of Pascack Community Bank, which operated 8 branches in Bergen and Essex Counties in New Jersey. This acquisition enabled the Company to broaden its presence in Bergen and Essex counties. Effective as of the close of business on January 7, 2016, Pascack merged into the Company, and Pascack Community Bank merged into Lakeland Bank. The merger agreement provided that the shareholders of Pascack would receive, at their election, for each outstanding share of Pascack common stock that they owned at the effective time of the merger, either 0.9576 shares of Lakeland Bancorp common stock or $11.35 in cash, subject to proration as described in the merger agreement, so that 90% of the aggregate merger consideration was shares of Lakeland Bancorp common stock and 10% was cash. Lakeland Bancorp issued 3,314,284 shares of its common stock in the merger and paid approximately $4.5 million in cash, including the cash paid in connection with the cancellation of Pascack stock options. Outstanding Pascack stock options were paid out in cash at the difference between $11.35 and an average strike price of $7.37 for a total cash payment of $122,000 . This transaction resulted in $15.3 million of goodwill and generated $1.5 million in core deposit intangibles.
The acquisition was accounted for under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed in the acquisition were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition, including the use of a third party valuation specialist. The following table summarizes the estimated fair value of the acquired assets and liabilities assumed at the date of acquisition for Pascack, net of cash consideration paid.
 
 
(in thousands)
Cash and cash equivalents
$
40,942

Securities held to maturity
3,925

Federal Home Loan Bank stock
2,962

Loans
319,575

Premises and equipment
14,438

Goodwill
15,311

Identifiable intangible assets
1,514

Accrued interest receivable and other assets
6,672

Total assets acquired
405,339

Deposits
(304,466
)
Other borrowings
(57,308
)
Other liabilities
(6,344
)
Total liabilities assumed
(368,118
)
Net assets acquired
$
37,221

Loans acquired in the Pascack acquisition were recorded at fair value, and there was no carryover related to the allowance for loan and lease losses. The fair value of loans acquired from Pascack was estimated using cash flow projections based on remaining maturity and repricing terms. Cash flows were adjusted for estimated future credit losses and the rate of prepayments. Projected cash flows were then discounted to present value using a risk-adjusted market rate for similar loans.
The following is a summary of the loans accounted for in accordance with ASC 310-30 that were acquired in the Pascack acquisition as of the closing date.
 

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Acquired
Credit
Impaired
Loans
 
(in thousands)
Contractually required principal and interest at acquisition
$
4,932

Contractual cash flows not expected to be collected (non-accretable difference)
4,030

Expected cash flows at acquisition
902

Interest component of expected cash flows (accretable difference)
85

Fair value of acquired loans
$
817

The core deposit intangible totaled $1.5 million and is being amortized over its estimated useful life of approximately 10 years using an accelerated method. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes.
The fair value of deposit liabilities with no stated maturities such as checking, money market and savings accounts, was assumed to equal the carrying amounts since these deposits are payable on demand. The fair values of certificates of deposits and IRAs represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit.
Direct costs related to the Pascack and Harmony acquisitions were expensed as incurred. During the years ended December 31, 2016 and 2015, the Company incurred $4.1 million and $1.2 million respectively, of merger and acquisition integration-related expenses, which have been separately stated in the Company’s consolidated statements of income.

 


- 66 -

NOTE 3 - EARNINGS PER SHARE
The Company uses the two class method to compute earnings per common share. Participating securities include non-vested restricted stock and non-vested restricted stock units. The following tables present the computation of basic and diluted earnings per share for the periods presented.
 
Year Ended December 31, 2017
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
 
 
(in thousands, except per share amounts)
Basic earnings per share
 
 
 
 
 
 
Net income available to common shareholders
 
$
52,580

 
47,438

 
$
1.11

Less: earnings allocated to participating securities
 
(480
)
 
—

 
(0.01
)
Net income available to common shareholders
 
$
52,100

 
47,438

 
$
1.10

Effect of dilutive securities
 
 
 
 
 
 
Stock options and restricted stock
 
—

 
236

 
(0.01
)
Diluted earnings per share
 
 
 
 
 
 
Net income available to common shareholders plus assumed conversions
 
$
52,100

 
47,674

 
$
1.09




Year Ended December 31, 2016
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
 
 
(in thousands, except per share amounts)
Basic earnings per share
 
 
 
 
 
 
Net income available to common shareholders
 
$
41,518

 
42,912

 
$
0.97

Less: earnings allocated to participating securities
 
(396
)
 
—

 
(0.01
)
Net income available to common shareholders
 
$
41,122

 
42,912

 
$
0.96

Effect of dilutive securities
 
 
 
 
 
 
Stock options and restricted stock
 
—

 
202

 
(0.01
)
Diluted earnings per share
 
 
 
 
 
 
Net income available to common shareholders plus assumed conversions
 
$
41,122

 
43,114

 
$
0.95


 
Year Ended December 31, 2015
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
 
 
(in thousands, except per share amounts)
Basic earnings per share
 
 
 
 
 
 
Net income available to common shareholders
 
$
32,481

 
37,844

 
$
0.86

Less: earnings allocated to participating securities
 
(263
)
 
—

 
(0.01
)
Net income available to common shareholders
 
$
32,218

 
37,844

 
$
0.85

Effect of dilutive securities
 
 
 
 
 
 
Stock options and restricted stock
 
—

 
149

 
—

Diluted earnings per share
 
 
 
 
 
 
Net income available to common shareholders plus assumed conversions
 
$
32,218

 
$
37,993

 
$
0.85

There were no antidilutive options to purchase common stock to be excluded from the above computations.


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NOTE 4 - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and the fair value of the Company’s available for sale and held to maturity investment securities are as follows:
 
 
December 31, 2017
 
December 31, 2016
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
(in thousands)
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and U.S. government agencies
 
$
148,968

 
$
78

 
$
(1,791
)
 
$
147,255

 
$
118,537

 
$
102

 
$
(1,280
)
 
$
117,359

Mortgage-backed securities, residential
 
419,538

 
479

 
(5,763
)
 
414,254

 
406,851

 
1,174

 
(4,487
)
 
403,538

Mortgage-backed securities, multifamily
 
10,133

 
7

 
(63
)
 
10,077

 
10,192

 
30

 
(35
)
 
10,187

Obligations of states and political subdivisions
 
51,289

 
448

 
(417
)
 
51,320

 
48,868

 
391

 
(933
)
 
48,326

Debt securities
 
5,000

 
140

 
—

 
5,140

 
5,350

 
63

 
(1
)
 
5,412

Equity securities
 
15,545

 
3,000

 
(456
)
 
18,089

 
17,314

 
5,000

 
(432
)
 
21,882

 
 
$
650,473

 
$
4,152

 
$
(8,490
)
 
$
646,135

 
$
607,112

 
$
6,760

 
$
(7,168
)
 
$
606,704

 
 
December 31, 2017
 
December 31, 2016
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
(in thousands)
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
 
$
33,415

 
$
24

 
$
(402
)
 
$
33,037

 
$
33,553

 
$
144

 
$
(430
)
 
$
33,267

Mortgage-backed securities, residential
 
54,991

 
249

 
(978
)
 
54,262

 
38,706

 
369

 
(598
)
 
38,477

Mortgage-backed securities, multifamily
 
1,957

 
—

 
(22
)
 
1,935

 
2,059

 
—

 
(44
)
 
2,015

Obligations of states and political subdivisions
 
43,318

 
306

 
(188
)
 
43,436

 
71,284

 
269

 
(385
)
 
71,168

Debt securities
 
6,004

 
14

 
—

 
6,018

 
2,012

 
51

 
—

 
2,063

 
 
$
139,685

 
$
593

 
$
(1,590
)
 
$
138,688

 
$
147,614

 
$
833

 
$
(1,457
)
 
$
146,990


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The following table lists contractual maturities of investment securities classified as available for sale and held to maturity. 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
 
 
Amortized
 
Fair
 
Amortized
 
Fair
December 31, 2017
 
Cost
 
Value
 
Cost
 
Value
 
 
(in thousands)
Due in one year or less
 
$
9,387

 
$
9,387

 
$
16,385

 
$
16,401

Due after one year through five years
 
109,655

 
108,999

 
38,986

 
38,903

Due after five years through ten years
 
56,380

 
55,577

 
23,568

 
23,392

Due after ten years
 
29,835

 
29,752

 
3,798

 
3,795

 
 
205,257

 
203,715

 
82,737

 
82,491

Mortgage-backed securities
 
429,671

 
424,331

 
56,948

 
56,197

Equity securities
 
15,545

 
18,089

 
—

 
—

Total securities
 
$
650,473

 
$
646,135

 
$
139,685

 
$
138,688


The following table shows proceeds from sales of securities, gross gains and gross losses on sales and calls of securities for the periods indicated:
 
 
Years Ended December 31,
   
 
2017
 
2016
 
2015
 
 
(in thousands)
Sale proceeds
 
$
4,500

 
$
15,654

 
$
33,613

Gross gains
 
2,539

 
370

 
304

Gross losses
 
(15
)
 
—

 
(63
)

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 $400.4 million and $443.4 million at December 31, 2017 and 2016 , respectively, were pledged to secure public deposits and for other purposes required by applicable laws and regulations.
The following table indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2017 and 2016 :
December 31, 2017
 
Less than 12 Months
 
12 Months or Longer
 
Total
   
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Number of
Securities
 
Fair Value
 
Unrealized
Losses
 
 
(dollars in thousands)
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and U.S. government agencies
 
$
80,391

 
$
646

 
$
54,769

 
$
1,145

 
27

 
$
135,160

 
$
1,791

Mortgage-backed securities, residential
 
199,387

 
1,723

 
157,739

 
4,040

 
118

 
357,126

 
5,763

Mortgage-backed securities, multifamily
 
—

 
—

 
5,088

 
63

 
1

 
5,088

 
63

Obligations of states and political subdivisions
 
9,612

 
77

 
12,970

 
340

 
39

 
22,582

 
417

Equity securities
 
—

 
—

 
9,657

 
456

 
2

 
9,657

 
456

 
 
$
289,390

 
$
2,446

 
$
240,223

 
$
6,044

 
187

 
$
529,613

 
$
8,490

HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
 
$
15,371

 
$
95

 
$
6,720

 
$
307

 
4

 
$
22,091

 
$
402

Mortgage-backed securities, residential
 
26,090

 
426

 
19,203

 
552

 
25

 
45,293

 
978

Mortgage-backed securities, multifamily
 
1,935

 
22

 
—

 
—

 
2

 
1,935

 
22

Obligations of states and political subdivisions
 
15,353

 
56

 
6,028

 
132

 
23

 
21,381

 
188

 
 
$
58,749

 
$
599

 
$
31,951

 
$
991

 
54

 
$
90,700

 
$
1,590


- 69 -

December 31, 2016
 
Less than 12 Months
 
12 Months or Longer
 
Total
   
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Number of
securities
 
Fair Value
 
Unrealized
Losses
 
 
(dollars in thousands)
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and U.S. government agencies
 
$
94,153

 
$
1,280

 
$
—

 
$
—

 
18

 
$
94,153

 
$
1,280

Mortgage-backed securities, residential
 
292,873

 
4,078

 
15,453

 
409

 
91

 
308,326

 
4,487

Mortgage-backed securities, multifamily
 
5,178

 
35

 
—

 
—

 
1

 
5,178

 
35

Obligations of states and political subdivisions
 
29,904

 
933

 
—

 
—

 
54

 
29,904

 
933

Debt securities
 
350

 
1

 
—

 
—

 
1

 
350

 
1

Equity securities
 
6,030

 
94

 
4,720

 
338

 
2

 
10,750

 
432

 
 
$
428,488

 
$
6,421

 
$
20,173

 
$
747

 
167

 
$
448,661

 
$
7,168

HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
 
$
17,147

 
$
430

 
$
—

 
$
—

 
3

 
$
17,147

 
$
430

Mortgage-backed securities, residential
 
27,909

 
535

 
1,061

 
63

 
15

 
28,970

 
598

Mortgage-backed securities, multifamily
 
2,015

 
44

 
—

 
—

 
2

 
2,015

 
44

Obligations of states and political subdivisions
 
50,302

 
384

 
401

 
1

 
43

 
50,703

 
385

 
 
$
97,373

 
$
1,393

 
$
1,462

 
$
64

 
63

 
$
98,835

 
$
1,457


Management has evaluated the securities in the above table and has concluded that none of the securities with unrealized losses has impairments that are other-than-temporary. Fair value below cost is solely due to interest rate movements and is deemed temporary.
Investment securities, including the mortgage-backed securities and corporate securities, are evaluated on a periodic basis to determine if factors are identified that would require further analysis. In evaluating the Company’s securities, management considers the following items:
•
The Company’s ability and intent to hold the securities, including an evaluation of the need to sell the security to meet certain liquidity measures, or whether the Company has sufficient levels of cash to hold the identified security in order to recover the entire amortized cost of the security;
•
The financial condition of the underlying issuer;
•
The credit ratings of the underlying issuer and if any changes in the credit rating have occurred;
•
The length of time the security’s fair value has been less than amortized cost; and
•
Adverse conditions related to the security or its issuer if the issuer has failed to make scheduled payments or other factors.
If the above factors indicate an additional analysis is required, management will perform a discounted cash flow analysis evaluating the security.
As of December 31, 2017 , the equity securities included investments in other financial institutions for market appreciation purposes. These equities had a purchase price of $2.2 million and market value of $5.2 million as of December 31, 2017 .
As of December 31, 2017 , equity securities also included $12.9 million in investment funds that do not have a quoted market price, but use net asset value per share or its equivalent to measure fair value. The investment funds include $3.3 million in funds that are primarily invested in community development loans that are guaranteed by the Small Business Administration (SBA). Because the funds are primarily guaranteed by the federal government there are minimal changes in market value between accounting periods. These funds can be redeemed within 60 day’s notice at the net asset value less unpaid management fees with the approval of the fund manager. As of December 31, 2017 , the net amortized cost equaled the market value of the investment. There are no unfunded commitments related to this investment. The investment funds also include $9.6 million in funds that are invested in government guaranteed loans, mortgage-backed securities, small business loans and other instruments supporting affordable housing and economic development. The Company may redeem these funds at the net asset value calculated at the end

- 70 -

of the current business day less any unpaid management fees. As of December 31, 2017 , the amortized cost of these securities was $10.1 million and the fair value was $9.6 million . There are no restrictions on redemptions for the holdings in these investments other than the notice required by the fund manager. There are no unfunded commitments related to this investment.

- 71 -

NOTE 5 - LOANS AND LEASES AND OTHER REAL ESTATE
The following sets forth the composition of Lakeland’s loan and lease portfolio:
 
 
 
December 31,
   
 
2017
 
2016
 
 
(in thousands)
Commercial, secured by real estate
 
$
2,831,184

 
$
2,556,601

Commercial, industrial and other
 
340,400

 
350,228

Leases
 
75,039

 
67,016

Real estate - residential mortgage
 
322,880

 
349,581

Real estate - construction
 
264,908

 
211,109

Home equity and consumer
 
322,269

 
339,360

Total loans and leases
 
4,156,680

 
3,873,895

Less deferred fees
 
(3,960
)
 
(3,297
)
Loans and leases, net of deferred fees
 
$
4,152,720

 
$
3,870,598

At December 31, 2017 and December 31, 2016 , Lakeland had $1.1 billion and $942.0 million in loans pledged for potential borrowings at the Federal Home Loan Bank of New York (“FHLB”). As of December 31, 2017 and 2016 , home equity and consumer loans included overdraft deposit balances of $966,000 and $364,000 , respectively.
Purchased Credit Impaired Loans
The carrying value of loans acquired in the Pascack acquisition and accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” was $190,000 at December 31, 2017 , which was $627,000 less than the balance at the time of acquisition on January 7, 2016 . In the first quarter of 2017, one of the Pascack purchased credit impaired loans totaling $127,000 experienced further credit deterioration and was fully charged off. Also in the second quarter of 2017, one of the Pascack PCI loans totaling $218,000 was fully paid off. The carrying value of loans acquired in the Harmony acquisition was $520,000 at December 31, 2017 which was $249,000 less than the balance at acquisition date on July 1, 2016. In the second quarter of 2017, a Harmony PCI loan with a net value of $247,000 was fully paid off.
Under ASC Subtopic 310-30, PCI loans may be aggregated and accounted for as pools of loans if the loans being aggregated have common risk characteristics. The Company elected to account for the loans with evidence of credit deterioration individually rather than aggregate them into pools.
The following table presents changes in the accretable yield for PCI loans (in thousands):
 
 
Years Ended December 31,
   
 
2017
 
2016
Balance, beginning of period
 
$
145

 
$
—

Acquisitions
 
—

 
182

Accretion
 
(202
)
 
(98
)
Net reclassification non-accretable difference
 
186

 
61

Balance, end of period
 
$
129

 
$
145

Portfolio Segments
Lakeland currently manages its credit products and the respective exposure to credit losses (credit risk) by the following specific portfolio segments which are levels at which Lakeland develops and documents its systematic methodology to determine the allowance for loan and lease losses attributable to each respective portfolio segment. These segments are:
•
Commercial, secured by real estate - consists of commercial mortgage loans secured by owner occupied properties and non-owner occupied properties. The loans secured by owner occupied properties involve a variety of property types to conduct the borrower’s operations. The primary source of repayment for this type of loan is the cash flow from the business and is based upon the borrower’s financial health and the ability of the borrower and the business to repay. The loans secured by non-owner occupied properties involve investment properties for warehouse, retail, office space, etc., with a history of occupancy and cash flow. This commercial real estate category contains mortgage loans to the developers and owners of

- 72 -

commercial real estate where the borrower intends to operate or sell the property at a profit and use the income stream or proceeds from the sale to repay the loan.
•
Commercial, industrial and other - are loans made to provide funds for equipment and general corporate needs. Repayment of a loan primarily uses the funds obtained from the operation of the borrower’s business. Commercial loans also include lines of credit that are utilized to finance a borrower’s short-term credit needs and/or to finance a percentage of eligible receivables and inventory.
•
Leases - includes a small portfolio of equipment leases, which consists of leases primarily for essential equipment used by small to medium sized businesses.
•
Real estate - residential mortgage - contains permanent mortgage loans principally to consumers secured by residential real estate. Residential real estate loans are evaluated for the adequacy of repayment sources at the time of approval, based upon measures including credit scores, debt-to-income ratios, and collateral values. Loans may be either conforming or non-conforming.
•
Real estate - construction - construction loans, as defined, are intended to finance the construction of commercial properties and include loans for the acquisition and development of land. Construction loans represent a higher degree of risk than permanent real estate loans and may be affected by a variety of factors such as the borrower’s ability to control costs and adhere to time schedules and the risk that constructed units may not be absorbed by the market within the anticipated time frame or at the anticipated price. The loan commitment on these loans often includes an interest reserve to pay interest charges on the outstanding balance of the loan.
•
Home equity and consumer - includes primarily home equity loans and lines, installment loans, personal lines of credit and automobile loans. The home equity category consists mainly of loans and revolving lines of credit to consumers which are secured by residential real estate. These loans are typically secured with second mortgages on the homes, although many are secured with first mortgages. Other consumer loans include installment loans used by customers to purchase automobiles, boats and recreational vehicles.
Non-accrual and Past Due Loans
The following schedule sets forth certain information regarding Lakeland’s non-accrual loans and leases, its other real estate owned and other repossessed assets, and accruing troubled debt restructurings (“TDRs”) (in thousands):
 
 
 
At December 31,
   
 
2017
 
2016
Commercial, secured by real estate
 
$
5,890

 
$
10,413

Commercial, industrial and other
 
184

 
167

Leases
 
144

 
153

Real estate - residential mortgage
 
3,860

 
6,048

Real estate - construction
 
1,472

 
1,472

Home equity and consumer
 
2,105

 
2,151

Total non-accrual loans and leases
 
13,655

 
20,404

Other real estate and other repossessed assets
 
843

 
1,072

TOTAL NON-PERFORMING ASSETS
 
$
14,498

 
$
21,476

Troubled debt restructurings, still accruing
 
$
11,462

 
$
8,802

Non-accrual loans included $2.7 million and $2.4 million of TDRs for the years ended December 31, 2017 and 2016 , respectively. As of December 31, 2017 , the Company had $2.7 million in residential mortgages and consumer home equity loans included in the table above that were in the process of foreclosure.
An age analysis of past due loans, segregated by class of loans as of December 31, 2017 and 2016 is as follows:

- 73 -

December 31, 2017
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater
Than
89 Days
 
Total
Past Due
 
Current
 
Total Loans
and Leases
 
Recorded
Investment Greater
than 89 Days and
Still Accruing
 
 
(in thousands)
Commercial, secured by real estate
 
$
3,663

 
$
1,082

 
$
3,817

 
$
8,562

 
$
2,822,622

 
$
2,831,184

 
$
—

Commercial, industrial and other
 
80

 
121

 
56

 
257

 
340,143

 
340,400

 
—

Leases
 
496

 
139

 
144

 
779

 
74,260

 
75,039

 
—

Real estate - residential mortgage
 
939

 
908

 
3,137

 
4,984

 
317,896

 
322,880

 
—

Real estate - construction
 
—

 
—

 
1,472

 
1,472

 
263,436

 
264,908

 
—

Home equity and consumer
 
1,258

 
310

 
1,386

 
2,954

 
319,315

 
322,269

 
200

 
 
$
6,436

 
$
2,560

 
$
10,012

 
$
19,008

 
$
4,137,672

 
$
4,156,680

 
$
200

December 31, 2016
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater
Than
89 Days
 
Total
Past Due
 
Current
 
Total Loans
and Leases
 
Recorded
Investment Greater
than 89 Days and
Still Accruing
 
 
(in thousands)
Commercial, secured by real estate
 
$
6,082

 
$
1,234

 
$
9,313

 
$
16,629

 
$
2,539,972

 
$
2,556,601

 
$
—

Commercial, industrial and other
 
1,193

 
213

 
42

 
1,448

 
348,780

 
350,228

 
—

Leases
 
132

 
78

 
153

 
363

 
66,653

 
67,016

 
—

Real estate - residential mortgage
 
2,990

 
1,057

 
5,330

 
9,377

 
340,204

 
349,581

 
—

Real estate - construction
 
3,409

 
—

 
1,472

 
4,881

 
206,228

 
211,109

 
—

Home equity and consumer
 
1,260

 
129

 
2,049

 
3,438

 
335,922

 
339,360

 
10

 
 
$
15,066

 
$
2,711

 
$
18,359

 
$
36,136

 
$
3,837,759

 
$
3,873,895

 
$
10


Impaired Loans
Lakeland’s policy regarding impaired loans is discussed in Note 1 – Summary of Accounting Policies – Loans and Leases and Allowance for Loan and Lease Losses. The Company defines impaired loans as all non-accrual loans with recorded investments of $500,000 or greater. Impaired loans also includes all loans modified in troubled debt restructurings. The following tables represent the Company's impaired loans at December 31, 2017, 2016 and 2015.
 

- 74 -

December 31, 2017
 
Recorded
Investment in
Impaired Loans
 
Contractual
Unpaid
Principal
Balance
 
Related
Allowance
 
Interest
Income
Recognized
 
Average
Investment in
Impaired Loans
 
 
(in thousands)
Loans without related allowance:
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
 
$
12,155

 
$
12,497

 
$
—

 
$
366

 
$
12,774

Commercial, industrial and other
 
618

 
618

 
—

 
25

 
618

Leases
 
—

 
—

 
—

 
—

 
—

Real estate - residential mortgage
 
963

 
980

 
—

 
15

 
996

Real estate - construction
 
1,471

 
1,471

 
—

 
—

 
1,471

Home equity and consumer
 
—

 
—

 
—

 
—

 
6

Loans with related allowance:
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
 
5,381

 
5,721

 
454

 
206

 
5,029

Commercial, industrial and other
 
164

 
164

 
9

 
14

 
283

Leases
 
65

 
65

 
30

 
—

 
29

Real estate - residential mortgage
 
781

 
919

 
4

 
27

 
940

Real estate - construction
 
—

 
—

 
—

 
—

 
—

Home equity and consumer
 
993

 
1,026

 
8

 
52

 
1,090

Total:
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
 
$
17,536

 
$
18,218

 
$
454

 
$
572

 
$
17,803

Commercial, industrial and other
 
782

 
782

 
9

 
39

 
901

Leases
 
65

 
65

 
30

 
—

 
29

Real estate - residential mortgage
 
1,744

 
1,899

 
4

 
42

 
1,936

Real estate - construction
 
1,471

 
1,471

 
—

 
—

 
1,471

Home equity and consumer
 
993

 
1,026

 
8

 
52

 
1,096

 
 
$
22,591

 
$
23,461

 
$
505

 
$
705

 
$
23,236


- 75 -

December 31, 2016
 
Recorded
Investment in
Impaired Loans
 
Contractual
Unpaid
Principal
Balance
 
Related
Allowance
 
Interest
Income
Recognized
 
Average
Investment in
Impaired Loans
 
 
(in thousands)
Loans without related allowance:
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
 
$
12,764

 
$
13,195

 
$
—

 
$
229

 
$
13,631

Commercial, industrial and other
 
603

 
603

 
—

 
24

 
1,109

Leases
 
—

 
—

 
—

 
—

 
—

Real estate - residential mortgage
 
1,880

 
3,146

 
—

 
16

 
2,430

Real estate - construction
 
1,471

 
1,471

 
—

 
—

 
12

Home equity and consumer
 
139

 
139

 
—

 
—

 
388

Loans with related allowance:
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
 
5,860

 
6,142

 
392

 
273

 
6,549

Commercial, industrial and other
 
349

 
349

 
12

 
17

 
360

Leases
 
—

 
—

 
—

 
—

 
1

Real estate - residential mortgage
 
1,031

 
1,100

 
31

 
30

 
1,011

Real estate - construction
 
—

 
—

 
—

 
—

 
—

Home equity and consumer
 
1,188

 
1,211

 
94

 
59

 
1,184

Total:
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
 
$
18,624

 
$
19,337

 
$
392

 
$
502

 
$
20,180

Commercial, industrial and other
 
952

 
952

 
12

 
41

 
1,469

Leases
 
—

 
—

 
—

 
—

 
1

Real estate - residential mortgage
 
2,911

 
4,246

 
31

 
46

 
3,441

Real estate - construction
 
1,471

 
1,471

 
—

 
—

 
12

Home equity and consumer
 
1,327

 
1,350

 
94

 
59

 
1,572

 
 
$
25,285

 
$
27,356

 
$
529

 
$
648

 
$
26,675

 

- 76 -

December 31, 2015
 
Recorded
Investment in
Impaired Loans
 
Contractual
Unpaid
Principal
Balance
 
Related
Allowance
 
Interest
Income
Recognized
 
Average
Investment in
Impaired Loans
 
 
(in thousands)
Loans without related allowance:
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
 
$
14,065

 
$
14,712

 
$
—

 
$
344

 
$
12,928

Commercial, industrial and other
 
209

 
887

 
—

 
14

 
749

Leases
 
—

 
—

 
—

 
—

 
—

Real estate - residential mortgage
 
2,195

 
2,242

 
—

 
—

 
2,096

Real estate - construction
 
—

 
—

 
—

 
—

 
94

Home equity and consumer
 
574

 
575

 
—

 
5

 
762

Loans with related allowance:
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
 
5,721

 
5,918

 
598

 
271

 
6,249

Commercial, industrial and other
 
1,023

 
1,023

 
77

 
32

 
717

Leases
 
6

 
6

 
1

 
—

 
—

Real estate - residential mortgage
 
832

 
865

 
73

 
37

 
840

Real estate - construction
 
380

 
380

 
21

 
13

 
308

Home equity and consumer
 
1,001

 
1,013

 
73

 
54

 
1,006

Total:
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
 
$
19,786

 
$
20,630

 
$
598

 
$
615

 
$
19,177

Commercial, industrial and other
 
1,232

 
1,910

 
77

 
46

 
1,466

Leases
 
6

 
6

 
1

 
—

 
—

Real estate - residential mortgage
 
3,027

 
3,107

 
73

 
37

 
2,936

Real estate - construction
 
380

 
380

 
21

 
13

 
402

Home equity and consumer
 
1,575

 
1,588

 
73

 
59

 
1,768

 
 
$
26,006

 
$
27,621

 
$
843

 
$
770

 
$
25,749

Interest which would have been accrued on impaired loans and leases during 2017 , 2016 and 2015 was $1.5 million , $1.7 million and $1.6 million , respectively.
Credit Quality Indicators
The class of loans are determined by internal risk rating. Management closely and continually monitors the quality of its loans and leases and assesses the quantitative and qualitative risks arising from the credit quality of its loans and leases. It is the policy of Lakeland to require that a Credit Risk Rating be assigned to all commercial loans and loan commitments. The Credit Risk Rating System has been developed by management to provide a methodology to be used by Loan Officers, Department Heads and Senior Management in identifying various levels of credit risk that exist within Lakeland’s loan portfolios. The risk rating system assists Senior Management in evaluating Lakeland’s loan portfolio, analyzing trends and determining the proper level of required reserves to be recommended to the Board. In assigning risk ratings, management considers, among other things, a borrower’s debt service coverage, earnings strength, loan to value ratios, industry conditions and economic conditions. Management categorizes loans and commitments into a one (1) to nine (9) numerical structure with rating 1 being the strongest rating and rating 9 being the weakest. Ratings 1 through 5W are considered “Pass” ratings. “Pass” ratings on loans are given to loans that management considers to be of acceptable or better quality. A rating of 5W, or “Watch” is a loan that requires 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. Rating 6, “Other Assets Especially Mentioned” is used for loans exhibiting 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. Rating 7, “Substandard,” is used on loans that 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. Rating 8, “Doubtful,” are loans 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. Rating 9, “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 shows Lakeland’s commercial loan portfolio as of December 31, 2017 and 2016 , by the risk ratings discussed above (in thousands):

- 77 -

December 31, 2017
 
Commercial,
Secured by
Real Estate
 
Commercial,
Industrial
and  Other
 
 
RISK RATING
 
Real Estate -
Construction
1
 
$
—

 
$
392

 
$
—

2
 
—

 
26,968

 
—

3
 
76,824

 
35,950

 
—

4
 
862,537

 
96,426

 
15,502

5
 
1,779,908

 
150,928

 
246,806

5W - Watch
 
47,178

 
8,779

 
—

6 - Other assets especially mentioned
 
40,245

 
8,670

 
—

7 - Substandard
 
24,492

 
12,287

 
2,600

8 - Doubtful
 
—

 
—

 
—

9 - Loss
 
—

 
—

 
—

Total
 
$
2,831,184

 
$
340,400

 
$
264,908

December 31, 2016
 
Commercial,
Secured by
Real Estate
 
Commercial,
Industrial
and  Other
 
 
RISK RATING
 
Real Estate -
Construction
1
 
$
—

 
$
1,449

 
$
—

2
 
—

 
26,743

 
—

3
 
82,102

 
36,644

 
—

4
 
729,281

 
135,702

 
28,177

5
 
1,615,331

 
129,366

 
175,595

5W - Watch
 
68,372

 
6,395

 
1,223

6 - Other assets especially mentioned
 
33,015

 
5,242

 
—

7 - Substandard
 
28,500

 
8,687

 
6,114

8 - Doubtful
 
—

 
—

 
—

9 - Loss
 
—

 
—

 
—

Total
 
$
2,556,601

 
$
350,228

 
$
211,109

This table does not include residential mortgage loans, consumer loans, or leases because they are evaluated on their payment status as pass or substandard, which is defined as non-accrual or past due 90 days or more.
Allowance for Loan and Lease Losses
The following table details activity in the allowance for loan and lease losses by portfolio segment and the related recorded investment in loans and leases for the years ended December 31, 2017 and 2016 :
 

- 78 -

December 31, 2017
 
Commercial,
Secured by
Real Estate
 
Commercial,
Industrial
and  Other
 
Leases
 
Real
Estate  -
Residential
Mortgage
 
Real Estate -
Construction
 
Home
Equity and
Consumer
 
Total
 
 
(in thousands)
Beginning balance
 
$
21,223

 
$
1,723

 
$
548

 
$
1,964

 
$
2,352

 
$
3,435

 
$
31,245

Charge-offs
 
(762
)
 
(477
)
 
(305
)
 
(441
)
 
(609
)
 
(852
)
 
(3,446
)
Recoveries
 
396

 
172

 
59

 
5

 
31

 
903

 
1,566

Provision
 
4,847

 
895

 
328

 
29

 
957

 
(966
)
 
6,090

Ending balance
 
$
25,704

 
$
2,313

 
$
630

 
$
1,557

 
$
2,731

 
$
2,520

 
$
35,455

Ending balance: Individually evaluated for impairment
 
$
454

 
$
9

 
$
30

 
$
4

 
$
—

 
$
8

 
$
505

Ending balance: Collectively evaluated for impairment
 
25,250

 
2,304

 
600

 
1,553

 
2,731

 
2,512

 
$
34,950

Ending balance
 
$
25,704

 
$
2,313

 
$
630

 
$
1,557

 
$
2,731

 
$
2,520

 
$
35,455

LOANS AND LEASES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: Individually evaluated for impairment
 
$
17,536

 
$
782

 
$
65

 
$
1,744

 
$
1,471

 
$
993

 
$
22,591

Ending balance: Collectively evaluated for impairment
 
2,812,941

 
339,618

 
74,974

 
321,136

 
263,437

 
321,273

 
$
4,133,379

Ending balance: Loans acquired with deteriorated credit quality
 
707

 
—

 
—

 
—

 
—

 
3

 
$
710

Ending balance (1)
 
$
2,831,184

 
$
340,400

 
$
75,039

 
$
322,880

 
$
264,908

 
$
322,269

 
$
4,156,680

 
(1)
Excludes deferred fees

- 79 -

December 31, 2016
 
Commercial,
Secured by
Real Estate
 
Commercial,
Industrial
and Other
 
Leases
 
Real
Estate -
Residential
Mortgage
 
Real Estate -
Construction
 
Home
Equity and
Consumer
 
Total
 
 
(in thousands)
Beginning balance
 
$
20,223

 
$
2,637

 
$
460

 
$
2,588

 
$
1,591

 
$
3,375

 
$
30,874

Charge-offs
 
(410
)
 
(796
)
 
(366
)
 
(1,103
)
 
—

 
(1,980
)
 
(4,655
)
Recoveries
 
297

 
202

 
31

 
8

 
18

 
247

 
803

Provision
 
1,113

 
(320
)
 
423

 
471

 
743

 
1,793

 
4,223

Ending balance
 
$
21,223

 
$
1,723

 
$
548

 
$
1,964

 
$
2,352

 
$
3,435

 
$
31,245

Ending balance: Individually evaluated for impairment
 
$
392

 
$
12

 
$
—

 
$
31

 
$
—

 
$
94

 
$
529

Ending balance: Collectively evaluated for impairment
 
20,831

 
1,711

 
548

 
1,933

 
2,352

 
3,341

 
$
30,716

Ending balance
 
$
21,223

 
$
1,723

 
$
548

 
$
1,964

 
$
2,352

 
$
3,435

 
$
31,245

LOANS AND LEASES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: Individually evaluated for impairment
 
$
18,624

 
$
952

 
$
—

 
$
2,911

 
$
1,471

 
$
1,327

 
$
25,285

Ending balance: Collectively evaluated for impairment
 
2,536,858

 
349,001

 
67,016

 
346,670

 
209,638

 
338,019

 
$
3,847,202

Ending balance: Loans acquired with deteriorated credit quality
 
1,119

 
275

 
—

 
—

 
—

 
14

 
$
1,408

Ending balance (1)
 
$
2,556,601

 
$
350,228

 
$
67,016

 
$
349,581

 
$
211,109

 
$
339,360

 
$
3,873,895

 
(1)
Excludes deferred fees
 

Lakeland also maintains a reserve for unfunded lending commitments which are included in other liabilities. This reserve was $2.5 million for each of the years ended December 31, 2017 and December 31, 2016 . Lakeland analyzes the adequacy of the reserve for unfunded lending commitments in conjunction with its analysis of the adequacy of the allowance for loan and lease losses. For more information on this analysis, see “Risk Elements” in Management’s Discussion and Analysis.
Troubled Debt Restructurings ("TDRs")
TDRs are those loans where significant concessions have been made to borrowers experiencing financial difficulties. Restructured loans typically involve a modification of terms such as a reduction of the stated interest rate lower than the current market rate of a new loan with similar risk, an extended moratorium of principal payments and/or an extension of the maturity date. Lakeland considers the potential losses on these loans as well as the remainder of its impaired loans when considering the adequacy of the allowance for loan losses.

- 80 -

The following table summarizes loans and leases that have been restructured during the periods presented:
   
 
For the Year Ended December 31, 2017
 
For the Year Ended December 31, 2016
   
 
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
 
(dollars in thousands)
Commercial, secured by real estate
 
8

 
$
4,618

 
$
4,618

 
1

 
$
303

 
$
303

Commercial, industrial and other
 
2

 
124

 
124

 
—

 
—

 
—

Leases
 
6

 
65

 
65

 
—

 
—

 
—

Real estate - residential mortgage
 
—

 
—

 
—

 
1

 
255

 
255

Home equity and consumer
 
—

 
—

 
—

 
3

 
285

 
285

 
 
16

 
$
4,807

 
$
4,807

 
5

 
$
843

 
$
843

The following table presents loans and leases modified as TDRs within the previous 12 months from December 31, 2017 and 2016 that have defaulted during the subsequent twelve months:
   
 
For the Year Ended December 31, 2017
 
For the Year Ended December 31, 2016
   
 
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
 
 
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Leases
 
2

 
$
35

 
—

 
$
—

Real estate - residential mortgage
 
—

 
—

 
1

 
255

Home equity and consumer
 
—

 
—

 
1

 
162

 
 
2

 
$
35

 
2

 
$
417

Related Party Loans
Lakeland has entered into lending transactions in the ordinary course of business with directors, executive officers, principal stockholders and affiliates of such persons on similar terms, including interest rates and collateral, as those prevailing for comparable transactions with other borrowers not related to Lakeland. At December 31, 2017 and 2016 , loans to these related parties amounted to $27.5 million and $22.3 million , respectively. There were new loans of $9.7 million to related parties and repayments of $4.5 million from related parties in 2017 .
Mortgages Held for Sale
Residential mortgages originated by the bank and held for sale in the secondary market are carried at the lower of cost or fair market value. Fair value is generally determined by the value of purchase commitments on individual loans. Losses are recorded as a valuation allowance and charged to earnings. As of December 31, 2017 , Lakeland had $456,000 in mortgages held for sale compared to $1.7 million as of December 31, 2016 .
Lease Receivables
Future minimum lease payments of lease receivables are expected as follows (in thousands):
2018
$
26,796

2019
20,356

2020
15,113

2021
9,046

2022
3,280

Thereafter
448

 
$
75,039


- 81 -

Other Real Estate and Other Repossessed Assets
At December 31, 2017 , Lakeland had other real estate and other repossessed assets of $843,000 and $0 , respectively. The other real estate that the Company held at December 31, 2017 consisted of $843,000 in residential property acquired as a result of foreclosure proceedings or through a deed in lieu of foreclosure. At December 31, 2016 , Lakeland had other real estate and other repossessed assets of $1.1 million and $9,000 , respectively. The other real estate that the Company held at December 31, 2016 consisted of $1.1 million in residential property acquired as a result of foreclosure proceedings or through a deed in lieu of foreclosure. For the years ended December 31, 2017 , 2016 and 2015 , Lakeland had writedowns of $98,000 , $0 and $119,000 , respectively, on other real estate and other repossessed assets which are included in other real estate and repossessed asset expense in the Consolidated Statement of Income.
NOTE 6 - PREMISES AND EQUIPMENT
 
 
 
Estimated
 
December 31,
 
 
Useful Lives
 
2017
 
2016
 
 
 
 
(in thousands)
Land
 
Indefinite
 
$
10,626

 
$
10,981

Buildings and building improvements
 
10 to 50 years
 
46,985

 
49,475

Leasehold improvements
 
10 to 25 years
 
12,953

 
12,967

Furniture, fixtures and equipment
 
2 to 30 years
 
26,923

 
33,692

 
 
 
 
97,487

 
107,115

Less accumulated depreciation and amortization
 
 
 
47,174

 
54,879

 
 
 
 
$
50,313

 
$
52,236

Depreciation expense was $5.0 million , $5.0 million and $4.0 million for the years ended December 31, 2017 , 2016 and 2015 , respectively.
NOTE 7 - TIME DEPOSITS
At December 31, 2017 , the schedule of maturities of certificates of deposit is as follows (in thousands):
Year
 
2018
$
555,167

2019
107,251

2020
43,460

2021
31,254

2022
296

 
$
737,428



NOTE 8 - DEBT
Lines of Credit
As a member of the Federal Home Loan Bank of New York (FHLB), Lakeland has the ability to borrow overnight based on the market value of collateral pledged. As of December 31, 2017 and 2016 , there were no overnight borrowings from the FHLB. As of December 31, 2017 , Lakeland also had overnight federal funds lines available for it to borrow up to $210.0 million . Lakeland borrowed $80.0 million and $32.0 million against these lines as of December 31, 2017 and 2016 , respectively. Lakeland may also borrow from the discount window of the Federal Reserve Bank of New York based on the market value of collateral pledged. Lakeland had no borrowings with the Federal Reserve Bank of New York as of December 31, 2017 or 2016 .
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
Short-term borrowings at December 31, 2017 and 2016 consisted of short-term securities sold under agreements to repurchase and federal funds purchased. Securities underlying the agreements were under Lakeland’s control. The following tables summarize information relating to securities sold under agreements to repurchase and federal funds purchased for the years presented. For purposes of the tables, the average amount outstanding was calculated based on a daily average.
 

- 82 -

Federal Funds Purchased
 
2017
 
2016
 
2015
 
 
(dollars in thousands)
Balance at December 31
 
$
80,000

 
$
32,000

 
$
115,000

Interest rate at December 31
 
1.71
%
 
0.85
%
 
0.65
%
Maximum amount outstanding at any month-end during the year
 
$
168,784

 
$
133,434

 
$
130,000

Average amount outstanding during the year
 
$
13,264

 
$
8,708

 
$
22,734

Weighted average interest rate during the year
 
1.42
%
 
0.71
%
 
0.45
%
Securities Sold Under Agreements to Repurchase
 
2017
 
2016
 
2015
 
 
(dollars in thousands)
Balance at December 31
 
$
44,936

 
$
24,354

 
$
36,234

Interest rate at December 31
 
0.02
%
 
0.02
%
 
0.02
%
Maximum amount outstanding at any month-end during the year
 
$
44,936

 
$
32,872

 
$
40,140

Average amount outstanding during the year
 
$
28,480

 
$
27,535

 
$
31,293

Weighted average interest rate during the year
 
0.03
%
 
0.03
%
 
0.03
%
Other Borrowings
FHLB Debt
At December 31, 2017 , advances from the FHLB totaling $172.0 million , with a weighted average interest rate of 1.69% , will mature within 4 years. These advances are collateralized by certain securities and first mortgage loans.
At December 31, 2016 , advances from the FHLB totaling $220.9 million , with a weighted average interest rate of 1.81% , will mature within 4 years. These advances are collateralized by certain securities and first mortgage loans.

FHLB debt matures as follows (in thousands):
 
2018
$
50,896

2019
40,263

2020
50,881

2021
29,971

 
$
172,011


In the first quarter of 2017, the Company repaid an aggregate of $34.0 million in advances from the FHLB and recorded $638,000 in long-term debt prepayment fees.
Long-term Securities Sold Under Agreements to Repurchase
At December 31, 2017 , Lakeland had $20.0 million in long-term securities sold under agreements to repurchase compared to $40.0 million at December 31, 2016 . These borrowings are collateralized by certain securities. The borrowings had a weighted average interest rate of 2.25% and 3.26% on December 31, 2017 and December 31, 2016 , respectively. The remaining $20.0 million matures in 2018. In the first quarter of 2017, the Company repaid an aggregate of $20.0 million in long-term securities sold under agreements to repurchase and recorded $2.2 million in long-term debt prepayment fees.
 
The above FHLB debt and long-term securities sold under agreements to repurchase are collateralized by certain securities. At times the market value of securities collateralizing our borrowings may decline due to changes in interest rates and may necessitate our lenders to issue a “margin call” which requires Lakeland to pledge additional securities to meet that margin call. As of December 31, 2017 , the Company had $73.7 million in mortgage-backed securities pledged for its short-term and long-term securities sold under agreements to repurchase.

- 83 -

Subordinated Debentures
On September 30, 2016 , the Company completed an offering of $75.0 million of fixed to floating rate subordinated notes due September 30, 2026 . The notes will bear interest at a rate of 5.125% per annum until September 30, 2021 and will then reset quarterly to the then current three-month LIBOR plus 397 basis points until maturity in September 30, 2026 , or their earlier redemption. The debt is included in Tier 2 capital for the Company. Debt issuance costs totaled $1.5 million and are being amortized to maturity. Subordinated debt is presented net of issuance costs on the consolidated balance sheet.
In May 2007 , the Company issued $20.6 million of junior subordinated debentures due August 31, 2037 to Lakeland Bancorp Capital Trust IV, a Delaware business trust. The distribution rate on these securities was 6.61% for 5 years and floats at LIBOR plus 152 basis points thereafter. The debentures are the sole asset of the Trust. The Trust issued 20,000 shares of trust preferred securities, $1,000 face value, for total proceeds of $20.0 million . The Company’s obligations under the debentures and related documents, taken together, constitute a full, irrevocable and unconditional guarantee on a subordinated basis by the Company of the Trust’s obligations under the preferred securities. The preferred securities are callable by the Company on or after August 1, 2012, or earlier if the deduction of related interest for federal income taxes is prohibited, treatment as Tier I capital is no longer permitted, or certain other contingencies arise. The preferred securities must be redeemed upon maturity of the debentures in 2037 . On August 3, 2015 , the Company acquired and extinguished $10.0 million of Lakeland Bancorp Capital Trust IV debentures and recorded a $1.8 million gain on the extinguishment of debt.
In June 2003 , the Company issued $20.6 million of junior subordinated debentures due June 30, 2033 to Lakeland Bancorp Capital Trust II, a Delaware business trust. The distribution rate on these securities was 5.71% for 5 years and floats at LIBOR plus 310 basis points thereafter. The debentures are the sole asset of the Trust. The Trust issued 20,000 shares of trust preferred securities, $1,000 face value, for total proceeds of $20.0 million . The Company’s obligations under the debentures and related documents, taken together, constitute a full, irrevocable and unconditional guarantee on a subordinated basis by the Company of the Trust’s obligations under the preferred securities. The preferred securities are callable by the Company on or after June 30, 2008, or earlier if the deduction of related interest for federal income taxes is prohibited, treatment as Tier I capital is no longer permitted, or certain other contingencies arise. The preferred securities must be redeemed upon maturity of the debentures in 2033 .
In June 2016 , the Company entered into two cash flow swaps totaling $30.0 million in order to hedge the variable cash outflows associated with the junior subordinated debentures issued to Lakeland Capital Trust II and Lakeland Capital Trust IV. For more information please see Note 18 – Derivatives.

NOTE 9 - STOCKHOLDERS’ EQUITY
On December 14, 2016, the Company successfully completed an at-the-market common stock issuance. A total of 2,739,650 shares of the Company’s common stock were sold at a weighted average price of $18.25 , representing gross proceeds to the Company of approximately $50.0 million . Net proceeds from the transaction, after the sales commission and other expenses, were approximately $48.7 million .
On July 1, 2016, the Company completed its acquisition of Harmony Bank, a bank located in Ocean County, New Jersey. Lakeland Bancorp issued an aggregate of 3,201,109 shares of its common stock in the merger. Outstanding Harmony stock options were paid out in cash at the difference between $14.31 (Lakeland’s closing stock price on July 1, 2016 of 11.45 multiplied by 1.25 ) and the average strike price of $9.07 for a total cash payment of $869,000 .
On January 7, 2016, the Company completed its acquisition of Pascack Bancorp, Inc. (“Pascack”), a bank holding company headquartered in Waldwick, New Jersey. Lakeland Bancorp issued 3,314,284 shares of its common stock in the merger and paid approximately $4.5 million in cash, including the cash paid in connection with the cancellation of Pascack stock options. Outstanding Pascack stock options were paid out in cash at the difference between $11.35 and an average strike price of $7.37 for a total cash payment of $122,000 .

NOTE 10 - INCOME TAXES
The components of income taxes are as follows:
 
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
 
 
(in thousands)
Current tax provision
 
$
10,565

 
$
22,308

 
$
16,991

Deferred tax expense (benefit)
 
16,904

 
(987
)
 
(824
)
Total provision for income taxes
 
$
27,469

 
$
21,321

 
$
16,167


- 84 -


The Tax Cuts and Jobs Act was enacted on December 22, 2017, resulting in changes in the U.S. corporate tax rates, business-related exclusions, deductions and credits. Enactment of the Tax Cuts and Jobs Act requires the Company to reflect the changes associated with the law's provisions in its consolidated financial statements as of and for the year ended December 31, 2017. The Company recorded an increase in its net deferred tax asset of $1.3 million to reflect the reduction in the federal corporate income tax rate from 35% to 21%.

During 2017, the Company implemented a tax planning strategy which resulted in an increase in deferred tax liabilities, a higher deferred tax provision and an $1.9 million excise tax recorded through current tax expense . Consequently, as a result of the Tax Cuts and Jobs Act being passed and the effect of the tax planning strategy, the net impact on the financial statements was $602,000 in additional tax expense.  

The income tax provision reconciled to the income taxes that would have been computed at the statutory federal rate of 35% is as follows:  
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
 
 
(in thousands)
Federal income tax, at statutory rates
 
$
28,017

 
$
21,994

 
$
17,028

Increase (deduction) in taxes resulting from:
 
 
 
 
 
 
Tax-exempt income
 
(1,652
)
 
(1,671
)
 
(1,467
)
Excise tax on real estate investment trust ("REIT") dividend
 
1,945

 
—

 
—

Adjustment to net deferred tax asset for Tax Cuts and Jobs Act
 
(1,343
)
 
—

 
—

State income tax, net of federal income tax effect
 
931

 
552

 
132

Excess tax benefits from employee share-based payments
 
(587
)
 
—

 
—

Other, net
 
158

 
446

 
474

Provision for income taxes
 
$
27,469

 
$
21,321

 
$
16,167


- 85 -

The net deferred tax asset consisted of the following:
 
 
December 31,
 
 
2017
 
2016
Deferred tax assets:
 
(in thousands)
Allowance for loan and lease losses
 
$
10,662

 
$
13,775

Stock based compensation plans
 
769

 
1,095

Purchase accounting fair market value adjustments
 
1,441

 
2,752

       Non-accrued interest
 
394

 
730

Deferred compensation
 
2,007

 
2,648

Depreciation and amortization
 
805

 
1,486

Other-than-temporary impairment loss on investment securities
 
77

 
255

Unrealized losses on securities available for sale
 
1,108

 
292

Other, net
 
675

 
767

Gross deferred tax assets
 
17,938

 
23,800

Deferred tax liabilities:
 
 
 
 
Core deposit intangible from acquired companies
 
664

 
1,366

Undistributed income from subsidiary not consolidated for tax return purposes (REIT)
 
12,015

 
924

Deferred loan costs
 
1,169

 
1,545

Prepaid expenses
 
524

 
641

Deferred gain on securities
 
116

 
194

Unfunded pension benefits
 
7

 
18

Unrealized gains on hedging derivative
 
229

 
361

Other
 
357

 
841

Gross deferred tax liabilities
 
15,081

 
5,890

Net deferred tax assets
 
$
2,857

 
$
17,910

In 2016, the Company recorded net deferred tax assets (liabilities) of $4.4 million and ( $164,000 ) as a result of the acquisitions of Pascack and Harmony, respectively.
The Company evaluates the realizability of its deferred tax assets by examining its earnings history and projected future earnings and by assessing whether it is more likely than not that carryforwards would not be realized. Based upon the majority of the Company’s deferred tax assets having no expiration date, the Company’s earnings history, and the projections of future earnings, the Company’s management believes that it is more likely than not that all of the Company’s deferred tax assets as of December 31, 2017 will be realized.
The Company evaluates tax positions that may be uncertain using a recognition threshold of more likely than not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. The Company had no unrecognized tax benefits or related interest or penalties at December 31, 2017 or 2016.
The Company is subject to U.S. federal income tax law as well as income tax of various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few significant exceptions, the Company is no longer subject to U.S. federal examinations by tax authorities for the years before 2015 or to state and local examinations by tax authorities for the years before 2014 .
NOTE 11 - EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
The Company has a profit sharing plan for all its eligible employees. The Company’s discretionary annual contribution to the plan is determined by its Board of Directors. Annual contributions are allocated to participants on a point basis with accumulated benefits payable at retirement, or, at the discretion of the plan committee, upon termination of employment. Contributions made by the Company were $600,000 a year for years ended 2016 and 2015. There were no contributions made by the Company in 2017.

- 86 -

Benefit Obligations from Somerset Hills Acquisition
Somerset Hills, acquired by the Company in 2013, entered into a non-qualified Supplemental Executive Retirement Plan (“SERP”) with its former Chief Executive Officer and its Chief Financial Officer which entitles them to a benefit of $48,000 and $24,000 , respectively, per year for 15 years after the earlier of retirement or death. The former chief executive officer and the beneficiary of the Chief Financial Officer are currently being paid out under the plan. As of December 31, 2017 and 2016 , the Company had a liability of $702,000 and $717,000 , respectively, for these SERPs and recognized an expense of $33,000 , $0 and $95,000 in 2017 , 2016 and 2015 , respectively.
401(k) plan
The Company has a 401(k) plan covering substantially all employees providing they meet eligibility requirements. The Company matches 50% of the first 6% contributed by the participants to the 401(k) plan. The Company’s contributions in 2017 , 2016 and 2015 totaled $1.0 million , $911,000 and $760,000 , respectively.
Supplemental Executive Retirement Plans
In December 2003 , the Company entered into a supplemental executive retirement plan (SERP) agreement with its former CEO that provides annual retirement benefits of $150,000 a year for a 15 year period when the former CEO reached the age of 65 . Our former CEO retired and is receiving annual retirement benefits pursuant to the plan. In 2008 , the Company entered into a SERP agreement with its current CEO that provides annual retirement benefits of $150,000 for a 15 year period when the CEO reaches the age of 65 . In November 2008 , the Company entered into a SERP with a Regional President that provides annual retirement benefits of $90,000 a year for a 10 year period upon his reaching the age of 65 . In December 2015 , the Company entered into a SERP with a former Regional President that provides $84,500 a year for a 15 year period upon his reaching the age of 66 in November 2016. The Company intends to fund its obligations under the deferred compensation arrangements with the increase in cash surrender value of bank owned life insurance policies. In 2017 , 2016 and 2015 , the Company recorded compensation expense of $261,000 , $746,000 and $814,000 , respectively, for these plans. The accrued liability for these plans was $3.5 million for each of the years ended December 31, 2017 and 2016.
Deferred Compensation Agreement
In February 2015 , the Company entered into a Deferred Compensation Agreement with its CEO where it would contribute $16,500 monthly into a deferral account which would earn interest at an annual rate of the Company’s prior year return on equity, provided that the Company’s return on equity remained in a range of 0% to 15% . The Company has agreed to make such contributions each month that the CEO is actively employed from February 2015 through December 31, 2022. The expense incurred in 2017 , 2016 and 2015 was $244,000 , $222,000 and $188,000 , respectively, and the accrued liability at December 31, 2017 and 2016 was $654,000 and $410,000 , respectively. Following the CEO’s normal retirement date, he shall be paid out in 180 consecutive monthly installments.
Elective Deferral Plan
In March 2015 , the Company established an Elective Deferral Plan for eligible executives in which the executive may elect to contribute a portion of his base salary and bonus to a deferral account which will earn an interest rate of 75% of the Company’s prior year return on equity provided that the return on equity remains in the range of 0% to 15% . The Company recorded an expense of $55,000 , $22,000 and $3,000 in 2017 , 2016 and 2015 , respectively, and had a liability recorded of $916,000 and $512,000 at December 31, 2017 and 2016 , respectively.
NOTE 12 - DIRECTORS RETIREMENT PLAN
The Company provides a retirement plan that directors appointed to the board prior to 2009 who completed five years of service may retire and receive benefit payments ranging from $5,000 through $17,500 per annum, depending upon years of credited service, for a period of ten years. This plan is unfunded. The following tables present the status of the plan and the components of net periodic plan cost for the years then ended. The measurement date for the accumulated benefit obligation is December 31 of the years presented.
 

- 87 -

 
 
December 31,
 
 
2017
 
2016
 
 
(in thousands)
Accrued plan cost included in other liabilities
 
$
673

 
$
671

Amount not recognized as component of net postretirement benefit cost
 
 
 
 
Recognized in accumulated other comprehensive income
 
 
 
 
Net actuarial gain
 
$
28

 
$
(2
)
Unrecognized prior service cost
 
—

 
—

Amounts not recognized as a component of net postretirement benefit (benefit)
 
$
28

 
$
(2
)

 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
 
 
(in thousands)
Net periodic plan cost included the following components:
 
 
 
 
 
 
Service cost
 
$
21

 
$
19

 
$
19

Interest cost
 
23

 
26

 
46

Amortization of prior service cost
 
3

 
12

 
13

 
 
$
47

 
$
57

 
$
78

A discount rate of 3.30% , 3.68% and 3.87% was assumed in the plan valuation for 2017 , 2016 and 2015, respectively. As the benefit amount is not dependent upon compensation levels, a rate of increase in compensation assumption was not utilized in the plan valuation.
The director’s retirement plan holds no plan assets. The benefits expected to be paid in each of the next five years and in aggregate for the five years thereafter are as follows (in thousands):
 
 
2018
$
75

2019
63

2020
63

2021
37

2022
37

2023-2027
240

The Company expects its contribution to the director’s retirement plan to be $75,000 in 2018 .
The amount in accumulated other comprehensive income expected to be recognized as a component of net periodic benefit cost in 2018 is $0 .
NOTE 13 - STOCK-BASED COMPENSATION
Employee Stock Option Plans
The Company’s shareholders approved the 2009 Equity Compensation Program, which authorizes the granting of incentive stock options, supplemental stock options, restricted shares and restricted stock units to employees of the Company, including those employees serving as officers and directors of the Company. The plan authorizes the issuance of up to 2.3 million shares in connection with options and awards granted under the 2009 program. The Company’s stock option grants under this plan expire 10 years from the date of grant, ninety days after termination of service other than for cause, or one year after death or disability of the grantee. In 2014, the Company began issuing restricted stock units (RSUs), some of which have performance conditions attached to them. The Company generally issues shares for option exercises from its treasury stock using the cost method or issues new shares if no treasury shares are available.
The Company established the 2000 Equity Compensation Program which authorizes the granting of incentive stock options, supplemental stock options and restricted stock to employees of the Company, which includes those employees serving as officers and directors of the Company. The plan authorized 2,613,185 shares of common stock of the Company. All of the Company’s stock option grants expire 10 years from the date of grant, thirty days after termination of service other than for cause, or one year after death or disability of the grantee. The Company has no option or restricted stock awards with market or performance

- 88 -

conditions attached to them under the 2000 Equity Compensation Program. No further awards will be granted from the 2000 program.
The Company has outstanding stock options issued to its directors as well as options assumed under the Somerset Hills’ stock option plans at the time of merger. As of December 31, 2017 and 2016 , respectively, 81,442 and 111,829 options granted to directors were outstanding. As of December 31, 2017 and 2016 , there were 20,774 and 23,415 options outstanding, respectively, under the Somerset Hills’ stock option plans.
Excess tax benefits of stock based compensation were $587,000 , $43,000 and $59,000 for the years 2017 , 2016 and 2015 , respectively.
A summary of the status of the Company’s option plans as of December 31, 2017 and the changes during the year ending on that date is represented below.
 
 
Number of
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
(in Years)
 
Aggregate
Intrinsic
Value
Outstanding, beginning of year
 
135,250

 
$
8.79

 
4.18
 
$
1,450,533

Granted
 
—

 
—

 
 
 
 
Exercised
 
(33,023
)
 
9.72

 
 
 
 
Expired
 
—

 
—

 
 
 
 
Forfeited
 
(11
)
 
7.97

 
 
 
 
Outstanding, end of year
 
102,216

 
$
8.49

 
4.27
 
$
1,101,806

Options exercisable at year-end
 
102,216

 
$
8.49

 
4.27
 
$
1,101,806

A summary of the Company’s non-vested options under the Company’s option plans as of December 31, 2017 and changes for the year then ended is presented below.
 
 
Number of
Shares
 
Weighted-
Average
Grant-date
Fair Value
Non-vested, Balance at of January 1, 2017
 
10,501

 
$
3.31

Granted
 
—

 
—

Vested
 
(10,501
)
 
3.31

Non-vested, December 31, 2017
 
—

 
$
—

As of December 31, 2017 , there was no unrecognized compensation expense related to unvested stock options under the 2009 Equity Compensation Program. Compensation expense recognized for stock options was $14,000 , $35,000 and $35,000 for 2017 , 2016 and 2015 , respectively.
The aggregate intrinsic values of options exercised in 2017 and 2016 were $337,000 and $292,000 , respectively. Exercise of stock options during 2017 and 2016 resulted in cash receipts of $321,000 and $285,000 , respectively. The total fair value of options that vested in 2017 and 2016 were $35,000 and $35,000 , respectively.
Information regarding the Company’s restricted stock for the year ended December 31, 2017 is as follows:
 
 
Number  of
Shares
 
Weighted
Average
Price
Outstanding, Balance at of January 1, 2017
 
42,875

 
$
9.72

Granted
 
13,176

 
18.20

Vested
 
(32,904
)
 
9.79

Forfeited
 
(165
)
 
10.34

Outstanding, December 31, 2017
 
22,982

 
$
14.44

In 2017 , the Company granted 13,176 shares of restricted stock to non-employee directors at a grant date fair value of $18.20 per share under the Company’s 2009 Equity Compensation Program. These shares will vest over a one year period,

- 89 -

totaling $240,000 in compensation expense. In 2016 , the Company granted 23,952 shares of restricted stock to non-employee directors at a grant date fair value of $10.02 per share under the Company’s 2009 Equity Compensation Program. These shares vested over a one year period, totaling $240,000 in compensation expense. No restricted stock was granted in 2015 .
The total fair value of the restricted stock vested during the year ended December 31, 2017 was approximately $322,000 . Compensation expense recognized for restricted stock was $287,000 , $353,000 and $497,000 in 2017 , 2016 and 2015 , respectively. There was approximately $6,000 in unrecognized compensation expense related to restricted stock grants as of December 31, 2017 , which is expected to be recognized over a period of 0.09 years.
In 2017 , the Company granted 132,523 RSUs at a weighted average grant date fair value of $19.92 per share under the Company’s 2009 Equity Compensation Program. These units vest within a range of two to three years. A portion of these RSUs will vest subject to certain performance conditions in the restricted stock unit agreement. There are also certain provisions in the compensation program which state that if a holder 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 restricted stock units is expected to average approximately $880,000 per year over a three year period. In 2016 , the Company granted 180,926 RSUs at a weighted average grant date fair value of $10.45 per share under the Company’s 2009 Equity Compensation Program. These units vest within a range of two to three years. Compensation expense on these restricted stock units is expected to average approximately $630,000 per year over a three year period. In 2015 , the Company granted 137,009 RSUs at a weighted average grant date fair value of $11.08 per share under the Company’s 2009 Equity Compensation Program. Compensation expense on these restricted stock units is expected to average $506,000 per year over a three year period. Compensation expense for restricted stock units was $2.0 million , $1.5 million and $1.1 million in 2017 , 2016 and 2015 , respectively. There was approximately $1.8 million in unrecognized compensation expense related to restricted stock units as of December 31, 2017 , which is expected to be recognized over a period of 1.10 years.
Information regarding the Company’s RSUs and changes during the year ended December 31, 2017 is as follows:
 
 
Number of
RSUs
 
Weighted
Average
Price
Outstanding, Balance at of January 1, 2017
 
302,344

 
$
10.76

Granted
 
132,523

 
19.92

Vested
 
(148,585
)
 
13.01

Forfeited
 
(18,550
)
 
12.45

Outstanding, December 31, 2017
 
267,732

 
$
13.93

NOTE 14 - COMMITMENTS AND CONTINGENCIES
Lease Obligations
Lakeland is obligated under various non-cancelable operating leases on building and land used for office space and banking purposes. These leases contain renewal options and escalation clauses. Rent expense under long-term operating leases amounted to approximately $3.1 million , $3.2 million and $2.7 million for the years ended December 31, 2017 , 2016 and 2015 , respectively, including rent expense to related parties of $144,000 in 2017 , $141,000 in 2016 , and $143,000 in 2015 . At December 31, 2017 , the minimum commitments under all noncancellable leases with remaining terms of more than one year and expiring through 2033 are as follows (in thousands):
Year
 
2018
$
3,185

2019
3,045

2020
2,853

2021
2,635

2022
2,329

Thereafter
15,785

 
$
29,832

Litigation
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.

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NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
Lakeland is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they become payable. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement Lakeland has in particular classes of financial instruments.
Lakeland’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. Lakeland uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Lakeland generally requires collateral or other security to support financial instruments with credit risk. The approximate contract amounts are as follows:
 
 
December 31,
 
 
2017
 
2016
 
 
(in thousands)
Financial instruments whose contract amounts represent credit risk
 

 

Commitments to extend credit
 
$
966,441

 
$
921,979

Standby letters of credit and financial guarantees written
 
14,832

 
15,170

At December 31, 2017 and 2016 there were $20,000 and $10,000 , respectively, in commitments to lend additional funds to borrowers whose terms have been modified in troubled debt restructurings.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Lakeland evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Lakeland upon extension of credit, is based on management’s credit evaluation.
Standby letters of credit are conditional commitments issued by Lakeland to guarantee the payment by or performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Lakeland holds deposit accounts, residential or commercial real estate, accounts receivable, inventory and equipment as collateral to support those commitments for which collateral is deemed necessary. The extent of collateral held for those commitments at December 31, 2017 and 2016 varies based on management’s credit evaluation.
Lakeland issues financial and performance letters of credit. Financial letters of credit require Lakeland to make payment if the customer fails to make payment, as defined in the agreements. Performance letters of credit require Lakeland to make payments if the customer fails to perform certain non-financial contractual obligations. Lakeland defines the initial fair value of these letters of credit as the fees received from the customer. Lakeland records these fees as a liability when issuing the letters of credit and amortizes the fee over the life of the letter of credit.
The maximum potential undiscounted amount of future payments of these letters of credit as of December 31, 2017 was $14.8 million and they expire through 2024 . Lakeland’s exposure under these letters of credit would be reduced by actual performance, subsequent termination by the beneficiaries and by any proceeds that Lakeland obtained in liquidating the collateral for the loans, which varies depending on the customer.
As of December 31, 2017 , Lakeland had $966.4 million in loan and lease commitments, with $620.4 million maturing within one year, $181.1 million maturing after one year but within three years, $42.2 million maturing after three years but within five years, and $122.7 million maturing after five years. As of December 31, 2017 , Lakeland had $14.8 million in standby letters of credit, with $12.9 million maturing within one year, $1.9 million maturing after one year but within three years, $31,000 maturing after three years but within five years and $80,000 maturing after five years.
Lakeland grants loans primarily to customers in New Jersey, the Hudson Valley Region in New York State, and surrounding areas. Certain of Lakeland’s consumer loans and lease customers are more diversified nationally. Although Lakeland has a diversified loan portfolio, a large portion of its loans are secured by commercial or residential real property. Although Lakeland has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent upon the economy. Commercial and standby letters of credit were granted primarily to commercial borrowers.


- 91 -

NOTE 16 - COMPREHENSIVE INCOME (LOSS)
The Company reports comprehensive income (loss) in addition to net income (loss) from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.
The following table shows the changes in the balances of each of the components of other comprehensive income for the periods presented.
 
 
Year Ended December 31, 2017
   
 
Before
Tax Amount
 
Tax Benefit
(Expense)
 
Net of
Tax Amount
 
 
(in thousands)
Unrealized losses on available for sale securities
 
 
 
 
 
 
Unrealized holding losses arising during period
 
$
(1,406
)
 
$
503

 
$
(903
)
Reclassification adjustment for net gains realized in net income
 
(2,524
)
 
884

 
(1,640
)
Net unrealized losses on available for sale securities
 
(3,930
)
 
1,387

 
(2,543
)
Unrealized gain on derivatives
 
57

 
(20
)
 
37

Change in pension liabilities
 
(27
)
 
11

 
(16
)
Other comprehensive loss, net
 
$
(3,900
)
 
$
1,378

 
$
(2,522
)
 
 
Year Ended December 31, 2016
 
 
Before
Tax Amount
 
Tax Benefit
(Expense)
 
Net of
Tax Amount
 
 
(in thousands)
Unrealized losses on available for sale securities
 
 
 
 
 
 
Unrealized holding losses arising during period
 
$
(1,816
)
 
$
778

 
$
(1,038
)
Reclassification adjustment for net gains realized in net income
 
(370
)
 
137

 
(233
)
Net unrealized losses on available for sale securities
 
(2,186
)
 
915

 
(1,271
)
Unrealized gain on derivatives
 
1,033

 
(361
)
 
672

Change in pension liabilities
 
70

 
(28
)
 
42

Other comprehensive loss, net
 
$
(1,083
)
 
$
526

 
$
(557
)
 
 
Year Ended December 31, 2015
 
 
Before
Tax Amount
 
Tax Benefit
(Expense)
 
Net of
Tax Amount
 
 
(in thousands)
Unrealized losses on available for sale securities
 
 
 
 
 
 
Unrealized holding losses arising during period
 
$
(375
)
 
$
155

 
$
(220
)
Reclassification adjustment for net gains realized in net income
 
(241
)
 
84

 
(157
)
Net unrealized losses on available for sale securities
 
(616
)
 
239

 
(377
)
Change in pension liabilities
 
3

 
1

 
4

Other comprehensive loss, net
 
$
(613
)
 
$
240

 
$
(373
)


- 92 -

 
 
Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
 
Unrealized
Gains 
(Losses)
on Derivatives
 
Pension
Items
 
Total
 
 
(in thousands, net of tax)
Balance at of January 1, 2017
 
$
(117
)
 
$
672

 
$
38

 
$
593

Other comprehensive income (loss) before classifications
 
(903
)
 
37

 
(16
)
 
(882
)
Amounts reclassified from accumulated other comprehensive income
 
(1,640
)
 
—

 
—

 
(1,640
)
Net current period other comprehensive income (loss)
 
(2,543
)

37


(16
)

(2,522
)
Adjustment for implementation of ASU 2018-02
 
(572
)
 
153

 
(1
)
 
(420
)
Balance at December 31, 2017
 
$
(3,232
)

$
862


$
21


$
(2,349
)
 
 
 
 
 
 
 
 
 
Balance at of January 1, 2016
 
$
1,154

 
$
—

 
$
(4
)
 
$
1,150

Other comprehensive income (loss) before classifications
 
(1,038
)
 
672

 
42

 
(324
)
Amounts reclassified from accumulated other comprehensive income
 
(233
)
 
—

 
—

 
(233
)
Net current period other comprehensive income (loss)
 
(1,271
)
 
672

 
42

 
(557
)
Balance at December 31, 2016
 
$
(117
)
 
$
672

 
$
38

 
$
593

 
 
 
 
 
 
 
 
 
Balance at of January 1, 2015
 
$
1,531

 
$
—

 
$
(8
)
 
$
1,523

Other comprehensive income (loss) before classifications
 
(220
)
 
—

 
4

 
(216
)
Amounts reclassified from accumulated other comprehensive income
 
(157
)
 
—

 
—

 
(157
)
Net current period other comprehensive income (loss)
 
(377
)
 
—

 
4

 
(373
)
Balance at December 31, 2015
 
$
1,154

 
$
—

 
$
(4
)
 
$
1,150



NOTE 17 - 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 on particular valuation techniques.
The Company’s assets that are measured at fair value on a recurring basis are its available for sale investment securities and its interest rate swaps. The Company obtains fair values on its securities using information from a third party servicer. If quoted prices for securities are available in an active market, those securities are classified as Level 1 securities. The Company has U.S. Treasury Notes and certain equity securities that are classified as Level 1 securities. Level 2 securities were primarily comprised

- 93 -

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 using current market terms (including interest rates and fees), the remaining terms of the agreements and the credit worthiness of the counter-party as of the measurement date (Level 2).
The following table sets forth the Company’s financial assets that were accounted for at fair value on a recurring basis as of the periods presented by level within the fair value hierarchy. During the years ended December 31, 2017 and 2016 , the Company did not make any transfers between recurring Level 1 fair value measurements and recurring Level 2 fair value measurements. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
 
December 31, 2017
 
Quoted Prices in
Active  Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Fair
Value
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
Investment securities, available for sale
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
 
$
5,415

 
$
141,840

 
$
—

 
$
147,255

Mortgage-backed securities
 
—

 
424,331

 
—

 
424,331

Obligations of states and political subdivisions
 
—

 
51,320

 
—

 
51,320

Corporate debt securities
 
—

 
5,140

 
—

 
5,140

Equity securities
 
5,147

 
12,942

 
—

 
18,089

Total securities available for sale
 
10,562

 
635,573

 
—

 
646,135

Other Assets(1)
 
—

 
6,555

 
—

 
6,555

Total Assets
 
$
10,562

 
$
642,128

 
$
—

 
$
652,690

Liabilities:
 
 
 
 
 
 
 
 
Other Liabilities(1)
 
$
—

 
$
5,465

 
$
—

 
$
5,465

Total Liabilities
 
$
—

 
$
5,465

 
$
—

 
$
5,465

 
(1)
Derivatives
December 31, 2016
 
Quoted Prices in
Active  Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Fair
Value
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
Investment securities, available for sale
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
 
$
5,931

 
$
111,428

 
$
—

 
$
117,359

Mortgage-backed securities
 
—

 
413,725

 
—

 
413,725

Obligations of states and political subdivisions
 
—

 
48,326

 
—

 
48,326

Corporate debt securities
 
—

 
5,412

 
—

 
5,412

Equity securities
 
7,748

 
14,134

 
—

 
21,882

Total securities available for sale
 
13,679

 
593,025

 
—

 
606,704

Other Assets(1)
 
—

 
3,378

 
—

 
3,378

Total Assets
 
$
13,679

 
$
596,403

 
$
—

 
$
610,082

Liabilities:
 
 
 
 
 
 
 
 
Other Liabilities(1)
 
$
—

 
$
2,345

 
$
—

 
$
2,345

Total Liabilities
 
$
—

 
$
2,345

 
$
—

 
$
2,345

 
(1)
Derivatives

- 94 -

The following table sets forth the Company’s financial assets subject to fair value adjustments (impairment) on a non-recurring basis. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
December 31, 2017
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
Fair Value
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
Impaired loans and leases
 
$
—

 
$
—

 
$
22,591

 
$
22,591

Loans held for sale
 
—

 
456

 
—

 
456

Other real estate owned and other repossessed assets
 
—

 
—

 
843

 
843

 
December 31, 2016
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
Fair Value
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
Impaired loans and leases
 
$
—

 
$
—

 
$
25,285

 
$
25,285

Loans held for sale
 
—

 
1,742

 
—

 
1,742

Other real estate owned and other repossessed assets
 
—

 
—

 
1,072

 
1,072

Impaired loans and leases are evaluated and valued at the time the loan is identified as impaired at the lower of cost or market value. Because most of Lakeland’s impaired loans are collateral dependent, fair value is generally measured based on the value of the collateral, less estimated costs to sell, securing these loans and leases and is classified at a level 3 in the fair value hierarchy. Collateral may be real estate, accounts receivable, inventory, equipment and/or other business assets. The value of the real estate is assessed based on appraisals by qualified third party licensed appraisers. The appraisers may use the income approach to value the collateral using discount rates (with ranges of 5 - 11% ) or capitalization rates (with ranges of 5 - 10% ) to evaluate the property. The value of the equipment may be determined by an appraiser, if significant, inquiry through a recognized valuation resource, or by the value on the borrower’s financial statements. Field examiner reviews on business assets may be conducted based on the loan exposure and reliance on this type of collateral. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Impaired loans and leases are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.
The Company has a held for sale loan portfolio that consists of residential mortgages that are being sold in the secondary market. The Company records these mortgages at the lower of cost or fair market value. Fair value is generally determined by the value of purchase commitments.
Other real estate owned (OREO) and other repossessed assets, representing property acquired through foreclosure or deed in lieu of foreclosure, are carried at fair value less estimated disposal costs of the acquired property. Fair value on other real estate owned is based on the appraised value of the collateral using discount rates or capitalization rates similar to those used in impaired loan valuation. The fair value of other repossessed assets is estimated by inquiry through a recognized valuation resource.
Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Changes in economic conditions, locally or nationally, could impact the value of the estimated amounts of impaired loans, OREO and other repossessed assets.
Fair Value of Certain Financial Instruments
Estimated fair values have been determined by the Company using the best available data and an estimation methodology suitable for each category of financial instruments. Management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.
The estimation methodologies used, the estimated fair values, and recorded book balances at December 31, 2017 and December 31, 2016 are outlined below.
This summary, as well as the table below, excludes financial assets and liabilities for which carrying value approximates fair value. For financial assets, these include cash and cash equivalents. For financial liabilities, these include noninterest-bearing demand deposits, savings and interest-bearing transaction accounts and federal funds sold and securities sold under agreements to repurchase. The estimated fair value of demand, savings and interest-bearing transaction accounts is the amount payable on demand at the reporting date. Carrying value is used because there is no stated maturity on these accounts, and the customer has

- 95 -

the ability to withdraw the funds immediately. Also excluded from this summary and the following table are those financial instruments recorded at fair value on a recurring basis, as previously described.
The fair value of investment securities held to maturity was measured using information from the same third-party servicer used for investment securities available for sale using the same methodologies discussed above. Investment securities held to maturity includes $9.8 million in short-term municipal bond anticipation notes and $1.0 million in subordinated debt that are non-rated and do not have an active secondary market or information readily available on standard financial systems. As a result, the securities are classified as Level 3 securities. Management performs a credit analysis before investing in these securities.
Federal Home Loan Bank of New York ("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 at December 31, 2017 and December 31, 2016 has been valued using a present value discounted cash flow where market prices were not available. The discount rate used in these calculations is the estimated current market rate for new loans with similar credit risk. The valuation of our loan portfolio is consistent with accounting guidance but does not fully incorporate the exit price approach.
For fixed maturity certificates of deposit, fair value was 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 values of commitments to extend credit and standby letters of credit are deemed immaterial.
The following table presents the carrying values, fair values and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2017 and December 31, 2016 :
 
December 31, 2017
 
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
 
$
139,685

 
$
138,688

 
$
—

 
$
127,901

 
$
10,787

Federal Home Loan and other membership bank stock
 
12,576

 
12,576

 
—

 
12,576

 
—

Loans and leases, net
 
4,117,265

 
4,114,516

 
—

 
—

 
4,114,516

Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
737,428

 
732,417

 
—

 
732,417

 
—

Other borrowings
 
192,011

 
189,080

 
—

 
189,080

 
—

Subordinated debentures
 
104,902

 
97,244

 
—

 
—

 
97,244


- 96 -

December 31, 2016
 
Carrying Value
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
 
(in thousands)
Financial Assets:
 
 
 
 
 
 
 
 
 
 
Investment securities held to maturity
 
$
147,614

 
$
146,990

 
$
—

 
$
111,403

 
$
35,587

Federal Home Loan and other membership bank stock
 
15,099

 
15,099

 
—

 
15,099

 
—

Loans and leases, net
 
3,839,353

 
3,832,465

 
—

 
—

 
3,832,465

Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
544,908

 
543,399

 
—

 
543,399

 
—

Other borrowings
 
260,866

 
264,586

 
—

 
264,586

 
—

Subordinated debentures
 
104,784

 
94,476

 
—

 
—

 
94,476


NOTE 18 - DERIVATIVES
Lakeland is a party to interest rate derivatives that are not designated as hedging instruments. Under a program, Lakeland executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Lakeland executes with a third party, such that Lakeland minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties. As of December 31, 2017 and 2016 , Lakeland had $500,000 and $7.5 million , respectively, in securities pledged for collateral on its interest rate swaps.
In June 2016, the Company entered into two cash flow hedges in order to hedge the variable cash outflows associated with its floating rate subordinated debentures (See Note 8). The notional value of these hedges was $30.0 million . The Company’s objective in using the cash flow hedge is to add stability to interest expense and to manage its exposure to interest rate movements. The Company used interest rate swaps designated as cash flow hedges which involved the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. In these particular hedges the Company is paying a third party an average of 1.10% in exchange for a payment at 3 month LIBOR . The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the year ended December 31, 2017 , the Company did not record any hedge ineffectiveness. The Company recognized $29,000 of accumulated other comprehensive income that was reclassified into interest expense during 2017 . The Company did not enter into any hedges in 2017.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s debt. During the next twelve months, the Company estimates that $178,000 will be reclassified as a decrease to interest expense should the rate environment remain the same.
The following table presents summary information regarding these derivatives for the periods presented (dollars in thousands):

- 97 -

December 31, 2017
 
Notional Amount
 
Average
Maturity (Years)
 
Weighted Average
Rate Fixed
 
Weighted Average
Variable Rate
 
Fair Value
Classified in Other Assets:
 
 
 
 
 
 
 
 
 
 
  3rd Party interest rate swaps
 
$
110,076

 
8.8
 
3.87
%
 
1 Mo. LIBOR + 2.11%
 
$
3,634

  Customer interest rate swaps
 
82,760

 
11.5
 
4.74
%
 
1 Mo. LIBOR + 2.21%
 
1,831

  Interest rate swap (cash flow hedge)
 
30,000

 
3.5
 
1.10
%
 
3 Mo. LIBOR
 
1,090

Classified in Other Liabilities:
 
 
 
 
 
 
 
 
 
 
  Customer interest rate swaps
 
$
110,076

 
8.8
 
3.87
%
 
1 Mo. LIBOR + 2.11%
 
$
(3,634
)
  3rd party interest rate swaps
 
82,760

 
11.5
 
4.74
%
 
1 Mo. LIBOR + 2.21%
 
(1,831
)
December 31, 2016
 
Notional Amount
 
Average
Maturity (Years)
 
Weighted Average
Rate Fixed
 
Weighted Average
Variable Rate
 
Fair Value
Customer interest rate swaps
 
$
129,252

 
10.9
 
4.03
%
 
1 Mo. LIBOR + 2.10%
 
$
(2,345
)
3rd party interest rate swaps
 
(129,252
)
 
10.9
 
4.03
%
 
1 Mo. LIBOR + 2.10%
 
2,345

Interest rate swap (cash flow hedge)
 
30,000

 
4.5
 
1.10
%
 
3 Mo. LIBOR
 
1,033

NOTE 19 - REGULATORY MATTERS
The Bank Holding Company Act of 1956 restricts the amount of dividends the Company can pay. Accordingly, dividends should generally only be paid out of current earnings, as defined.
The New Jersey Banking Act of 1948 restricts the amount of dividends paid on the capital stock of New Jersey chartered banks. Accordingly, no dividends shall be paid by such banks on their capital stock unless, following the payment of such dividends, the capital stock of Lakeland will be unimpaired, and: (1) Lakeland will have a surplus, as defined, of not less than 50% of its capital stock, or, if not, (2) the payment of such dividend will not reduce the surplus, as defined, of Lakeland. Under these limitations, approximately $507.9 million was available for payment of dividends from Lakeland to the Company as of December 31, 2017 .
The Company and Lakeland are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possible additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Lakeland’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s and Lakeland’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and Lakeland’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulations to ensure capital adequacy require the Company and Lakeland to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2017 , that the Company and Lakeland met all capital adequacy requirements to which they are subject.
As of December 31, 2017 , the most recent notification from the FDIC categorized Lakeland as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Lakeland must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 capital and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution’s category.
As of December 31, 2017 and 2016 , the Company and Lakeland have the following capital ratios based on the then current regulations:
 

- 98 -

 
 
Actual
 
For Capital
Adequacy Purposes with Capital Conservation Buffer
 
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
December 31, 2017
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
 
(dollars in thousands)
Total capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
$
589,047

 
13.40
%
 
>  $
 
406,477

 
>  9.25%

 
 
 
N/A

 
N/A
Lakeland
 
563,910

 
12.86
%
 
 
 
405,552

 
9.25
%
 
>  $
 
438,435

 
>  10.00%
Tier 1 capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
$
477,453

 
10.87
%
 
>  $
 
318,590

 
>  7.25%

 
 
 
N/A

 
N/A
Lakeland
 
525,979

 
12.00
%
 
 
 
317,865

 
7.25
%
 
>  $
 
350,748

 
>  8.00%
Common equity Tier 1 capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
$
447,453

 
10.18
%
 
>  $
 
252,675

 
>  5.75%

 
 
 
N/A

 
N/A
Lakeland
 
525,979

 
12.00
%
 
 
 
252,100

 
5.75
%
 
>  $
 
284,983

 
>  6.50%
Tier 1 capital (to average assets)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
$
477,453

 
9.12
%
 
>  $
 
209,431

 
>  4.00%

 
 
 
N/A

 
N/A
Lakeland
 
525,979

 
10.06
%
 
 
 
209,239

 
4.00
%
 
>  $
 
261,548

 
>  5.00%
 
 
Actual
 
For Capital
Adequacy Purposes with Capital Conservation Buffer
 
To Be Well Capitalized Under
Prompt Corrective Action
Provisions
December 31, 2016
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
 
(dollars in thousands)
Total capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
$
549,391

 
13.48
%
 
>  $
 
351,431

 
>  8.625%

 
 
 
N/A

 
N/A
Lakeland
 
530,458

 
13.03
%
 
 
 
350,996

 
8.625
%
 
>  $
 
406,952

 
>  10.00
Tier 1 capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
$
442,124

 
10.85
%
 
>  $
 
269,940

 
>  6.625%

 
 
 
N/A

 
N/A
Lakeland
 
496,737

 
12.21
%
 
 
 
269,605

 
6.625
%
 
>  $
 
325,561

 
>  8.00
Common equity Tier 1 capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
$
412,124

 
10.11
%
 
>  $
 
208,821

 
>  5.125%

 
 
 
N/A

 
N/A
Lakeland
 
496,737

 
12.21
%
 
 
 
208,563

 
5.125
%
 
>  $
 
264,519

 
>  6.50
Tier 1 capital (to average assets)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
$
442,124

 
9.07
%
 
>  $
 
194,927

 
>  4.00%

 
 
 
N/A

 
N/A
Lakeland
 
496,737

 
10.21
%
 
 
 
194,691

 
4.00
%
 
>  $
 
243,364

 
>  5.00
The final rules implementing the Basel Committee on Banking Supervisions capital guidelines for U.S. Banks became effective for the Company on January 1, 2015, with full compliance with all the final rule’s requirements phased in over a multi-year schedule, to be fully phased in by January 1, 2019. The Basel Rules require a “capital conservation buffer.” The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and increases by 0.625% every January 1 until it reaches 2.5% on January 1, 2019.
NOTE 20 - GOODWILL AND OTHER INTANGIBLE ASSETS
The Company recorded goodwill of $136.4 million and $135.7 million at December 31, 2017 and December 31, 2016 , respectively, which includes $11.1 million from the Harmony merger in 2016, $15.3 million from the Pascack merger in 2016 and $110.0 million from prior acquisitions.

- 99 -

Core deposit intangible was $2.4 million on December 31, 2017 compared to $3.3 million on December 31, 2016 . The Company recorded $691,000 , $1.5 million and $2.7 million in core deposit intangible for the Harmony, Pascack and Somerset Hills acquisitions, respectively. In 2017 , it has amortized $654,000 in core deposit intangible. The estimated future amortization expense for each of the succeeding five years ended December 31 is as follows (in thousands):
 
For the Year Ended
 
 
2018
 
$
594

2019
 
505

2020
 
415

2021
 
326

2022
 
236


NOTE 21 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS
 
 
December 31,
 
 
2017
 
2016
 
 
(in thousands)
ASSETS
 
 
 
 
Cash and due from banks
 
$
17,695

 
$
11,675

Investment securities, available for sale
 
5,158

 
7,757

Investment securities, held to maturity
 
1,000

 
1,000

Investment in subsidiaries
 
659,180

 
631,500

Other assets
 
6,013

 
5,018

TOTAL ASSETS
 
$
689,046

 
$
656,950

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Other liabilities
 
$
1,022

 
$
2,122

Subordinated debentures
 
104,902

 
104,784

Total stockholders’ equity
 
583,122

 
550,044

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
689,046

 
$
656,950

CONDENSED STATEMENTS OF OPERATIONS
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
 
 
(in thousands)
INCOME
 
 
 
 
 
 
Dividends from subsidiaries
 
$
26,665

 
$
20,687

 
$
23,376

Other income
 
2,750

 
199

 
1,987

TOTAL INCOME
 
29,415

 
20,886

 
25,363

EXPENSE
 
 
 
 
 
 
Interest on subordinated debentures
 
5,091

 
2,171

 
1,009

Noninterest expenses
 
377

 
442

 
605

TOTAL EXPENSE
 
5,468

 
2,613

 
1,614

Income before (benefit) provision for income taxes
 
23,947

 
18,273

 
23,749

Income taxes (benefit) provision
 
(2,018
)
 
(845
)
 
67

Income before equity in undistributed income of subsidiaries
 
25,965

 
19,118

 
23,682

Equity in undistributed income of subsidiaries
 
26,615

 
22,400

 
8,799

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
 
$
52,580

 
$
41,518

 
$
32,481


- 100 -

CONDENSED STATEMENTS OF CASH FLOWS
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
 
 
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
 
Net income
 
$
52,580

 
$
41,518

 
$
32,481

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
 
 
Gain on securities
 
(2,539
)
 
—

 
(29
)
Amortization of subordinated debt costs
 
118

 
30

 
—

Gain on early extinguishment of debt
 
—

 
—

 
(1,830
)
Excess tax benefits
 
587

 
—

 
—

(Increase) decrease in other assets
 
(1,927
)
 
(922
)
 
3,861

(Decrease) increase in other liabilities
 
(17
)
 
1,010

 
176

Equity in undistributed income of subsidiaries
 
(26,615
)
 
(22,400
)
 
(8,799
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
 
22,187

 
19,236

 
25,860

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
 
Net cash used in acquisition
 
—

 
(5,356
)
 
—

Purchases of available for sale securities
 
(79
)
 
(62
)
 
(56
)
Purchases of held to maturity securities
 
—

 
—

 
(1,000
)
Proceeds from sale of available for sale securities
 
3,217

 
—

 
29

Contribution to subsidiary
 
—

 
(124,373
)
 
—

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
 
3,138


(129,791
)
 
(1,027
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
 
Cash dividends paid on common stock
 
(18,853
)
 
(16,007
)
 
(12,586
)
Proceeds from issuance of common stock, net
 
—

 
48,678

 
22

Proceeds from issuance of subordinated debt, net
 
—

 
73,516

 
—

Redemption of subordinated debentures, net
 
—

 
—

 
(8,170
)
Retirement of restricted stock
 
(773
)
 
(206
)
 
(254
)
Excess tax benefits
 
—

 
43

 
59

Exercise of stock options
 
321

 
285

 
124

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
 
(19,305
)
 
106,309

 
(20,805
)
Net increase (decrease) in cash and cash equivalents
 
6,020

 
(4,246
)
 
4,028

Cash and cash equivalents, beginning of year
 
11,675

 
15,921

 
11,893

CASH AND CASH EQUIVALENTS, END OF YEAR
 
$
17,695

 
$
11,675

 
$
15,921

















- 101 -



ITEM 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable


ITEM 9A – Controls and Procedures.

Disclosure Controls

As of the end of the period covered by this Annual Report on Form 10-K, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) pursuant to Securities Exchange Act Rule 15d-15(b).
 
Based on their evaluation as of December 31, 2017, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective in ensuring that the information required to be disclosed by the Company in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC 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.
Management’s Report on Internal Control Over Financial Reporting
The management of Lakeland Bancorp, Inc. and its subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.
 The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the board of directors of the Company; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions or because of declines in the degree of compliance with policies or procedures.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013).

As of December 31, 2017, based on management’s assessment, the Company’s internal control over financial reporting was effective.

Our independent registered public accounting firm, KPMG LLP, audited our internal control over financial reporting as of December 31, 2017. Their report, dated February 28, 2018, expressed an unqualified opinion on our internal control over financial reporting.

- 102 -



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 December 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting

- 103 -



Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors
Lakeland Bancorp, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Lakeland Bancorp, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements), and our report dated February 28, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
 
 
 
 
Short Hills, New Jersey
February 28, 2018
 
 
 
 

- 104 -


ITEM 9B – Other Information.
None.

PART III
ITEM 10 – Directors, Executive Officers and Corporate Governance.
The Company responds to this Item by incorporating by reference the material responsive to this Item in the Company’s definitive proxy statement for its 2018 Annual Meeting of Shareholders.
ITEM 11 - Executive Compensation.
The Company responds to this Item by incorporating by reference the material responsive to this Item in the Company’s definitive proxy statement for its 2018 Annual Meeting of Shareholders.
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The Company responds to this Item by incorporating by reference the material responsive to this Item in the Company’s definitive proxy statement for its 2018 Annual Meeting of Shareholders.
EQUITY COMPENSATION PLAN INFORMATION
The following table gives information about the Company’s common stock that may be issued upon the exercise of options under the Company’s Amended and Restated 2000 Equity Compensation Program and the Company’s 2009 Equity Compensation Program as of December 31, 2017. These plans were the Company’s only equity compensation plans in existence as of December 31, 2017. The 2009 Equity Compensation Program is the successor to the 2000 Equity Compensation Program, and no additional awards will be granted under the 2000 Equity Compensation Program. No warrants or rights may be granted, or are outstanding, under the 2000 or the 2009 Equity Compensation Programs.

 
Plan Category
 
(a)
Number Of
Securities To Be
Issued Upon
Exercise  Of
Outstanding
Options, Warrants
and Rights
 
(b)
Weighted-Average
Exercise Price Of
Outstanding Options,
Warrants  and Rights
 
(c)
Number Of Securities
Remaining Available
For Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected In Column (a))
Equity Compensation Plans Approved by Shareholders
 
372,156

 
$
8.89

 
1,266,067

Equity Compensation Plans Not Approved by Shareholders
 
—

 
—

 
—

TOTAL
 
372,156

 
$
8.89

 
1,266,067

 
The number in column (a) does not include a total of 20,774 shares of Lakeland common stock that are issuable upon the exercise of options assumed in the Somerset Hills merger with a weighted average exercise price of $6.91 .

ITEM 13 - Certain Relationships and Related Transactions, and Director Independence.
The Company responds to this Item by incorporating by reference the material responsive to this Item in the Company’s definitive proxy statement for its 2018 Annual Meeting of Shareholders.

ITEM 14 - Principal Accounting Fees and Services.
The Company responds to this Item by incorporating by reference the material responsive to this Item in the Company’s definitive proxy statement for its 2018 Annual Meeting of Shareholders.

- 105 -


PART IV
ITEM 15 - Exhibits and Financial Statement Schedules.

(a) 1.    The following portions of the Company’s consolidated financial statements are set forth in Item 8 of this Annual Report:

(i)    Consolidated Balance Sheets as of December 31, 2017 and 2016.
(ii)    Consolidated Statements of Operations for each of the three years in the period ended December 31, 2017.
(iii)    Consolidated Statements of Changes in Stockholders’ Equity for each of the three years in the period ended
December 31, 2017.
(iv)    Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2017.
(v)    Notes to Consolidated Financial Statements.
(vi)    Report of Independent Registered Public Accounting Firm.
    
(a) 2.    Financial Statement Schedules

All financial statement schedules are omitted as the information, if applicable, is presented in the consolidated financial statements or notes thereto.

(a) 3.    Exhibits

 
 
3.1
 
 
3.2
 
 
3.3
 
 
3.4
 
 
4.1
 
 
4.2
 
 
10.1 +

- 106 -


10.2 +
 
 
10.3 +
 
 
10.4 +
 
 
10.5 +
 
 
10.6 +
 
 
10.7 +
 
 
10.8 +
 
 
10.9 +
 
 
10.10 +
 
 
10.11 +
 
 
10.12 +
 
 
10.13 +
 
 
10.14 +

- 107 -


10.15 +
 
 
10.16 +
 
 
10.17 +
 
 
10.18 +
 
 
10.19 +
 
 
10.20 +
 
 
10.21 +
 
 
10.22 +
 
 
10.23 +
 
 
10.24 +
 
 
10.25 +
 
 
10.26 +
 
 
10.27 +
 
 
10.28 +


- 108 -


10.29
 
 
10.30 +
 
 
10.31 +
 
 
12.1
 
 
21.1
 
 
23.1
 
 
24.1
 
 
31.1
 
 
31.2
 
 
32.1
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
+ Denotes management contract or compensatory plan, contract or arrangement.
ITEM 16 – Form 10-K Summary.
Not applicable.

- 109 -


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
 
 
 
 
Dated: February 28, 2018
 
 
 
By:
 
/s/ Thomas J. Shara
 
 
 
 
 
 
Thomas J. Shara
 
 
 
 
 
 
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
 
Capacity
 
Date
 
 
 
/s/ Bruce D. Bohuny*
  
Director
 
February 28, 2018
Bruce D. Bohuny
 
 
 
 
 
 
 
/s/ Mary Ann Deacon*
  
Director
 
February 28, 2018
Mary Ann Deacon
 
 
 
 
 
 
 
/s/ Edward B. Deutsch*
  
Director
 
February 28, 2018
Edward B. Deutsch
 
 
 
 
 
 
 
/s/ Brian Flynn*
  
Director
 
February 28, 2018
Brian Flynn
 
 
 
 
 
 
 
/s/ Mark J. Fredericks*
  
Director
 
February 28, 2018
Mark J. Fredericks
 
 
 
 
 
 
 
/s/ Janeth C. Hendershot*
  
Director
 
February 28, 2018
Janeth C. Hendershot
 
 
 
 
 
 
 
/s/ Lawrence R. Inserra, Jr.*
  
Director
 
February 28, 2018
Lawrence R. Inserra, Jr.
 
 
 
 
 
 
 
/s/ Thomas J. Marino*
  
Director
 
February 28, 2018
Thomas J. Marino
 
 
 
 
 
 
 
/s/ Robert E. McCracken*
  
Director
 
February 28, 2018
Robert E. McCracken
 
 
 
 
 
 
 
/s/ Robert B. Nicholson, III*
  
Director
 
February 28, 2018
Robert B. Nicholson, III
 
 
 
 

- 110 -
Table of Contents



Signature
 
Capacity
 
Date
 
 
 
/s/ Joseph P. O’Dowd*
  
Director
 
February 28, 2018
Joseph P. O’Dowd
 
 
 
 
/s/ Thomas J. Shara
  
Director, President and Chief Executive Officer (Principal Executive Officer)
 
February 28, 2018
Thomas J. Shara
 
 
 
 
 
 
 
/s/ Stephen R. Tilton, Sr.*
  
Director
 
February 28, 2018
Stephen R. Tilton, Sr.
 
 
 
 
 
 
 
 
 
/s/ Thomas Splaine
  
Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
 
February 28, 2018
Thomas Splaine
 
 
 
 
*By:
 
/s/ Thomas J. Shara

 
 
 
February 28, 2018
 
 
Thomas J. Shara
Attorney-in-Fact
 
 
 
 

- 111 -
Exhibit 10.29

CERTAIN MATERIAL (DENOTED HEREIN BY “*****”) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.


MASTER AGREEMENT

(“ Agreement ”) dated as of October 31, 2017 (“ Effective Date ”) between Fiserv Solutions, LLC, a Wisconsin limited liability company with offices located at 255 Fiserv Drive, Brookfield, Wisconsin 53045 (“ Fiserv ” or “Vendor” ), and Lakeland Bank, with offices located 250 Oak Ridge Road, Oak Ridge, NJ 07438, (“ Client ”).
    

Fiserv and Client hereby agree as follows:

1. Deliverables .
(a)     General . Fiserv, itself and through its Affiliates (as defined herein), agrees to provide to Client, and Client agrees to obtain from Fiserv, the services (including without limitation implementation, conversion, operational and technical support, development, professional, consulting, and training services) (“ Services ”) and products (“ Products ”) (collectively, “ Deliverables ”) described in the attached Exhibits, subject to the terms set forth in this Agreement and in the applicable Exhibit. “ Affiliate ” means an entity that controls, is controlled by, or is under common control with a party, where “control” means the direct or indirect ownership of more than 50% of the voting securities of such entity or party. Each party shall remain liable for the performance of such party’s Affiliate(s). Each Exhibit will be deemed to incorporate all of the terms of this Agreement. Use of the term “ Exhibit ” throughout this Agreement shall include any Schedules attached to such Exhibit. Exhibits and Schedules attached as of the Effective Date are listed below.
Attachment 1 to the Agreement
Fee Exhibit to the Agreement
Performance Measures Exhibit to the Agreement
ASP (Application Service Provider) Services Exhibit to the Agreement
Applicable Schedules are identified under Section 1 of the ASP Services Exhibit
Software Products Exhibit to the Agreement
Applicable Schedules are identified under Section 1 of the Software Products Exhibit

Additional Entities and Deliverables . The parties or their Affiliates may add Deliverables to this Agreement by adding via amendment an appropriate new Exhibit or Schedule to this Agreement incorporating the added Deliverables and/or Affiliates, as applicable. When Deliverables are received by an Affiliate of Client or provided by a Fiserv Affiliate under an Exhibit or Schedule, such Affiliate is a party to such Exhibit or Schedule, and then for the purposes of that Exhibit, references to “Client” or “Fiserv” in this Agreement will be deemed to include the applicable Client Affiliate or Fiserv Affiliate. An Affiliate’s execution of an amendment to receive or provide Deliverables as set forth in an Exhibit or Schedule shall constitute such Affiliate’s agreement to be bound by the terms and conditions of this Agreement.
(b)     Management Committee . Each of the parties agrees to appoint, at least one and no more than four with the numbers of members from each party being equal, and maintain at least three (3) members of its management team to serve on a management committee (the “ Management Committee ”). Until that time, the initial Client–appointed members of the Management Committee shall be the Client CAO, CIO, Director of Enterprise Solutions, and CISO and the initial Fiserv–appointed members of the Management Committee shall be Fiserv client partner, *****, and *****. Client and Fiserv each may change any of the members whom it appoints to the Management Committee at any time upon notice to the other.


Fiserv Confidential – Limited    Page 1





(i)
Management Committee Purpose . The Management Committee is hereby authorized by each of the parties to be responsible for the following:
(A)
general oversight of Fiserv’s performance of the Services, including, without limitation review of SLA reports;
(B)
general oversight of the Fiserv / Client relationship;
(C)
review of Fiserv’s product roadmaps, including new releases, new modules, inventory of available products and services including published message sets for Communicator Advantage, and potential for Client to participate as a beta test or to be an early adopter;
(D)
review of Client business objectives in relation to Deliverables; and
(E)
escalation and review of potential disputes or operational issues arising under the Agreement;

(ii)
Management Committee Meetings .  The Management Committee will meet at least quarterly (or such other frequency as agreed between the parties) at a designated site or by conference call or video conference, as may be agreed by the members of the Management Committee.

(iii)
Management Committee Direction . Decisions of the Management Committee will be made by consensus and shall binding on the parties only when such decisions are in writing and signed by all Management Committee members of both Client and Fiserv.

1. Fees for Deliverables .
(a)     General . Client agrees to pay Fiserv: (i) fees for Deliverables as specified in the Exhibits, and (ii) out-of-pocket and other additional charges pursuant to Section 2(c), and (iii) Taxes as defined in this Section 2(d).
(b)     Adjustment . Except as otherwise set forth in an Exhibit or Schedule and beginning January 1, 2021, fees may be increased annually effective each January 1 upon 30 days’ notice to Client, such increase shall be limited to the increase in the U.S. Department of Labor, Consumer Price Index for All Urban Consumers (“ CPI ”) for the most recently available 12-month period preceding such anniversary date, or *****.
(c)     Additional Charges . Client shall pay travel and living expenses and other out-of-pocket expenses reasonably incurred by Fiserv in connection with the Deliverables. As applicable, such out-of-pocket expenses shall be incurred in accordance with Fiserv’s then-current corporate travel and expense policy. If a pre-authorized out-of-pocket expense is listed in an Exhibit, such expense may be changed to reflect changes issued by the applicable vendor so long as the increase is a pass through of the amount of the change by such vendor, with no additional mark up by Fiserv. Fiserv shall provide substantiation of such increase upon request by Client.
(d)     Taxes . Client shall pay all sales, use, excise, value added, withholdings and other taxes and duties however designated that are levied by any taxing authority relating to the Deliverables, excluding taxes based on Fiserv’s income or revenues (“ Taxes ”). All fees or any other charges under any Exhibit are exclusive of Taxes, and any such Taxes shall be separately stated on each applicable invoice. Client shall reimburse Fiserv for those Taxes that Fiserv is required to remit on behalf of Client.
(e)     Payment Terms . Client shall pay fees to Fiserv through the Automated Clearing House (“ ACH ”) which are due and payable upon Client’s receipt of invoice; except that Client may withhold fees invoiced for Deliverables to the extent such fees are disputed by Client in good faith and Client provides Fiserv with written notice and explanation of such good faith dispute within 45 days of receipt of the invoice. The parties shall work together to resolve any such dispute prior to the next invoice and Client agrees to promptly pay Fiserv any amounts due Fiserv following resolution of any such dispute. If any invoiced amounts not disputed in good faith in accordance with this Section remain unpaid 45 days after Client’s receipt of such invoice, and 10 days after receipt by Client from Fiserv that such invoice is unpaid for such 45 days, and until such invoice amount is paid in full, Client shall pay a monthly late charge based on the unpaid amounts equal to the lesser of 1.0% or the highest amount allowed by law. With the exception of amounts disputed in good faith as set forth herein: (i) Client shall neither make nor assert any right of deduction or set-off from amounts invoiced except by application of Fiserv issued


Fiserv Confidential – Limited    Page 2





credit against such invoice and (ii) invoices submitted by Fiserv shall be deemed correct as of one year after the date of receipt of invoice by Client. Fiserv’s failure to send an invoice shall not relieve Client of its obligation to pay any amounts due and owing; provided that Client shall not be obligated to pay fees for Services which are first invoiced more than: 90 days if for Bundled Fees; or one-year for all other fees; after the date on which such Services were delivered.
(f)     Assumptions . Fees set forth in the Schedules for each of the Deliverables are based on completion of the initial term of all Schedules. If Deliverables are reduced for any reason other than Fiserv’s material uncured breach pursuant to Section 9(b)(i) or (iii) of the Agreement or if Bundled Services (as defined in Section 1(b) of the Fee Exhibit) are terminated pursuant to Section 10(a) or (b) of the ASP Services Exhibit, Client shall reimburse Fiserv for unamortized credits based on the Bundle Percentage (as defined in Section 1(e) of the Fee Exhibit) of the terminated Deliverable(s). In such event, any such credits and all rebates, discounts, and incentives will no longer be granted through the remainder of the term for any terminated Deliverables.
(g)     Third Party Fees . Any Third Party services, hardware or software provided by Fiserv as part of the Deliverables shall be identified in the applicable Schedule or the Fee Exhibit to the Agreement. Notwithstanding Section 2(b) above, fees associated with such Third Party services, hardware, or software are subject to change upon increase from the Third Party, so long as the increase is a pass through of the amount of the change by such Third Party, with no additional mark up by Fiserv, effective 60 days after receipt by Client of notice of such increase. Fiserv shall provide substantiation of such increase upon request by Client. All Third Party fees that are not included in the Bundled Fee shall be conspicuously disclosed in detail and reflected in the Fee Exhibit referenced in Section 1(a) and annexed hereto.
(h)     Regulatory and Compliance.
1.
Except for changes Fiserv makes to maintain the functionality of the Deliverables in accordance with Federal law provided to Fiserv clients using the same Deliverable, Fiserv may charge Client for Client’s share (allocated pro-rata among those number of clients receiving the change) of direct Fiserv costs of maintaining regulatory compliance as required by Section 7(a)(iv) below and/or meeting relevant third party standards (such as PCI-SSC’s Payment Card Industry Data Security Standard).
2.
If Client desires a change in the manner in which the Deliverables must be provided or performed as a result of Client’s interpretation of a federal law or regulation or an implementation of a Deliverable with respect to state law or state regulations (a “Regulatory Change”), Client shall request such change in writing. If a Regulatory Change is included in the Deliverables for Fiserv’s clients generally that receive the applicable Deliverable to which the Regulatory Change relates, such change will be provided to Client without additional charge. If the Regulatory Change is not provided to Fiserv’s clients generally without additional charge, Fiserv shall consider Client’s request to develop the Regulatory Change and if the Regulatory Change is so developed, shall allocate the development fees pro-rata among the number of clients receiving the change, including Client. If Regulatory Change is not a change Fiserv is making for the client base other than Client, then the parties agree such changes will be customizations requested by Client and will be provided by Fiserv upon execution of an applicable statement of work setting forth such changes and payment of the rates applicable for such services.
  
2. Confidentiality and Ownership . The provisions of this Section 3 survive any termination or expiration of this Agreement.
(a)     Definitions .
(i)
“ Client Information ” means the following types of information of Client and its Affiliates obtained or accessed by Fiserv from or on behalf of Client or its Affiliates in connection with this Agreement or any discussions


Fiserv Confidential – Limited    Page 3





between the parties regarding potential Client acquisitions or new services and products to be added to this Agreement: (A) trade secrets information, data, specifications, algorithms, routines, subroutines, source codes, know-how, processes, ideas, inventions, network configurations, system architecture, materials, designs, flow charts, drawings, formulas and formulations, methodology, strategies and practice, trade dress and/or any other proprietary information relating to the current and/or future business and operations of a Client, any information, material or data provided by third party vendors of Client, and any and all compilations, manipulations, derivations, summaries, extracts, analyses, studies and reports prepared by Client based on the data disclosed by Fiserv (including that of any Client Third Party supplier or licensor), information and documentation regarding Client’s business requirements; (B) customer lists, business plans, information security plans, business continuity plans, business or financial information, including such information relating to data processing, personnel, marketing and business plans, sales, customers, pricing, costs, cost estimates, cost projections and quotations, proprietary software programs, technical information about computer software and firmware, including computer programs and related documentation, screen displays, functional and design specifications, information about existing, new or envisioned products, product features, and/or services and their development and performance; (C) any personally identifiable information, defined as information that can be identified to a particular person without unreasonable effort, such as the names and social security numbers of Client’s individual customers, any Personal Information and Consumer Information (defined below) (collectively referred to as “ Client PII ”); and (D) any other information received from or on behalf of Client or its Affiliates that Fiserv could reasonably be expected to know is confidential or other information which Client identifies in writing as confidential before or within thirty (30) days after disclosure to Fiserv..
(ii)
“ Consumer Information ” means any record about an individual, whether in paper, electronic, or other form, that is a consumer report or is derived from a consumer report. Consumer information also includes a compilation of such records. Consumer information does not include information that does not identify individuals, such as aggregate information or blind data. For purposes of this definition, “consumer report” has the meaning as defined in Fair Credit Reporting Act, 15 U.S.C. 1681 et seq., as such law is amended from time to time.
(iii)
“ Personal Information ” means any nonpublic information that can be identified to a particular person that is submitted by Client to Fiserv or received by Fiserv on behalf of Client. Personal Information includes without limitation an individual’s name, address or telephone number, in conjunction with the individual’s Social Security number, driver’s license number, account number, credit or debit card number, or personal identification number or password that would permit access to an account of the individual, including any combination of information that would allow a person to log onto or access an account of the individual, such as user name and password or password and account number.
(iv)
“ Fiserv Information ” means the following types of information of Fiserv and its Affiliates obtained or accessed by Client from or on behalf of Fiserv or its Affiliates in connection with this Agreement or any discussions between the parties regarding potential acquisitions or new services and products to be added to this Agreement: (A) trade secrets and proprietary information (including that of any Fiserv client, supplier, or licensor); (B) client lists, business plans, information security plans, business continuity plans, all information and documentation regarding the Deliverables, all software Products (including software modifications and documentation, databases, training aids, and all data, code, techniques, algorithms, methods, logic, architecture, and designs embodied or incorporated therein), and the terms and conditions of this Agreement; (C) any personally identifiable information, defined as information that can identified to a particular person without unreasonable effort, such as the names and social security numbers of Fiserv employees; and (D) any other information and data received from or on behalf of Fiserv or its Affiliates that Client could reasonably be expected to know is confidential.
(v)
“ Information ” means Client Information and/or Fiserv Information, as applicable. No obligation of confidentiality applies to any Information that: (A) the receiving entity (“ Recipient ”) already possesses without obligation of confidentiality, develops independently without reference to Information of the disclosing entity


Fiserv Confidential – Limited    Page 4





(“ Discloser ”), or rightfully receives without obligation of confidentiality from a third party; or (B) is or becomes publicly available without Recipient’s breach of this Agreement.
(vi)
“ Security Breach : means,
(A)    an intrusion, security breach, or unauthorized access to Fiserv’s systems or facilities that compromises the security, confidentiality or integrity of records, data or other information, whether in paper, electronic, or other form, maintained by Fiserv containing Client Information obtained by Fiserv from Client or received by Fiserv on behalf of relating in any way to Client; or
(B)    any other theft, loss of confidentiality or unauthorized access, use or disclosure of any Client Information, whether in paper, electronic, or other form, obtained by Fiserv from Client or received by Fiserv on behalf of or relating in any way to Client.
(b)     Obligations .
i.
Confidentiality . Recipient agrees to hold as confidential all Information it receives from the Discloser. All Information shall remain the property of Discloser or its suppliers and licensors. Recipient will use the same care and discretion to avoid disclosure of Information as it uses with its own similar information that it does not wish disclosed, but in no event less than a reasonable standard of care and no less than is required by law. Recipient may only use Information for the lawful purposes contemplated by this Agreement, including in the case of Fiserv use of Client Information for fulfilling its obligations under this Agreement, performing, improving and enhancing the Deliverables, and developing data analytics models to produce analytics-based offerings. Client agrees that prior to providing Fiserv access to any Client PII, Client shall ensure that any necessary consent has been obtained that is required by law or regulation for Fiserv to access the information and to use it pursuant to the terms set forth in this Agreement. Fiserv specifically agrees not to use or disclose any “non-public personal information” about Client’s customers in any manner prohibited by Title V of the Gramm-Leach-Bliley Act or the regulations issued thereunder (“ GLB ”), as applicable to Fiserv. Recipient may disclose Information to: (A) its employees and employees of permitted subcontractors and Affiliates who have a need to know; (B) its attorneys and accountants as necessary in the ordinary course of its business; and (C) any other person with Discloser’s prior written consent. Before disclosure to any of the above persons, Recipient will have a written agreement with (or in the case of clause (B) a professional obligation of confidentiality from) such person sufficient to require that person to treat Information in accordance with the requirements of this Agreement, and Recipient will remain responsible for any breach of this Section 3 by any of the above person. Fiserv as Recipient may also disclose Client Information to third party vendors designated by Client.
ii.
Required Disclosure . Recipient may disclose Information to the extent required by law or legal process, provided that: (A) Recipient gives Discloser prompt notice, if legally permissible, so that Discloser may seek a protective order; (B) Recipient reasonably cooperates with Discloser (at Discloser’s expense) in seeking such protective order; and (C) all Information shall remain subject to the terms of this Agreement in the event of such disclosure.
iii.
Return of Information. At Recipient’s option, Information will be returned to Discloser or destroyed and rendered unrecoverable (except as may be contained in back-up files created in the ordinary course of business that are recycled in the ordinary course of business over an approximate 30- to 90-day period or such longer period as required by applicable law) at the termination or expiration of this Agreement or the applicable Exhibit and, upon Discloser’s request, Recipient will certify to Discloser in writing that it has complied with the requirements of this sentence. Recipient acknowledges that any breach of this Section 3 may cause irreparable harm to Discloser for which monetary damages alone may be insufficient, and Recipient therefore acknowledges that Discloser shall have the right to seek injunctive or other equitable relief against such breach or threatened breach, in addition to all other remedies available to it at law or otherwise.
iv.
Notice of Unauthorized Access . Recipient agrees that it shall have its authorized representative notify Discloser within two business days upon becoming aware of any incident of unauthorized access to any


Fiserv Confidential – Limited    Page 5





Information of Discloser following such party’s incident management process; provided, however, as it relates to Client PII, Fiserv will provide notice as set forth in Section 4(a) of this Agreement, and as it relates to Fiserv Information within the Fiserv System, Client will provide such notice as soon as possible
(c)    In the event of a Security Breach, except to the extent such Security Breach was caused by acts or omissions of Client, its Affiliates or its or their representatives:
(i)
Fiserv shall fully cooperate with Client in rectifying such disclosure, including providing Client with all necessary information Client needs in notifying all affected Client customers. Client shall reasonably determine the content and means of delivery of the customer notice using the most cost-effective means of communication under the circumstances.

(ii)
Subject to Section 7, Fiserv will bear all direct out-of-pocket costs and expenses of reasonable and legally required remediation to the extent incurred by Client as a result of a Security Breach (“Remediation Costs”). Fiserv acknowledges that, in addition to the above, the foregoing obligation covers the costs directly incurred by Client in notifying affected parties of a Security Breach and purchasing identity theft remediation services including credit monitoring for affected parties up to 12 months and up to 24 months in cases of Security Breach involving Client PII.

(iii)
Prior to incurring any Remediation Costs, Client will first consult with Fiserv and, when possible, allow Fiserv to perform the relevant service or remedial action that is the basis for the proposed Remediation Cost in lieu of a third party or Client, with the objective of mitigating redundant efforts and third party expenses. In addition, prior to initially incurring Remediation Costs, Client will engage in a good faith discussion with Fiserv regarding the remedial activities Client intends to perform, including a discussion about the activities that Fiserv can provide for Client, all with the objective of mitigating duplicative work and performing remedial action in the most efficient way possible, except for Client’s communications with its customers.


(d)     Ownership . With the exception of Client Information which Fiserv acknowledges and agrees is the sole and exclusive property of Client and Client’s affiliates and in which Fiserv and its affiliates disclaims any and all rights or interests, all information, reports, studies, object and source code (including without limitation the Deliverables and all modifications, enhancements, additions, upgrades, or other works based thereon or related thereto), flow charts, diagrams, specifications, and other tangible or intangible material of any nature whatsoever produced through or as a result of or related to any of the Deliverables (collectively, “ Works ”) or development of any data analytics or usage models hereunder, and all patents, copyrights, and other proprietary rights related to such Works and models, shall be the sole and exclusive property of Fiserv, its Affiliates or their third party providers. Nothing in the Agreement shall convey to Client any title to or ownership of any Deliverables, Works, or models. Client hereby irrevocably assigns and transfers to Fiserv, its Affiliates or their third party providers all rights, title, and interest in any such Works and models. Client may use any Works other than an Open Source Component provided to or rightfully accessed by Client solely as necessary to use the Deliverables in accordance with the applicable terms and conditions of this Agreement. “ Open Source Component ” means software which Fiserv or its Affiliates includes in Deliverables that is subject to an Open Source License. “ Open Source License ” means a license identified as an open source license by the Open Source Initiative ( www.opensource.org ) or any substantially similar license.
(e)     Restrictions . Without limiting any other obligation set forth in this Section 3, Client shall not use, transfer, distribute, interface, integrate, or dispose of any information or content contained in Deliverables in any manner other than as specifically authorized in this Agreement or that competes with the business of Fiserv. Except as expressly authorized in an Exhibit, Client shall not: (i) use the Deliverables to provide services to third parties; or (ii) reproduce, republish or offer any part of the Deliverables (or compilations based on any part of the Deliverables) for sale or distribution in any form over or through any medium. The restrictions set forth in this paragraph shall not apply to an Open Source Component to the extent such restrictions conflict with the terms of the applicable Open Source License. Neither Fiserv nor its affiliates shall directly establish depository


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institutions that provide those financial services or products as provided by Client within Client’s geographic markets existing as of the Live Production Date.
3. Information Security .
(a)     General . Fiserv and its subcontractors have implemented and shall maintain an information security program that is designed to meet the following objectives: (i) protect the security and confidentiality of customer information (as defined in GLB); (ii) protect against any anticipated threats or hazards to the security or integrity of such information; (iii) protect against unauthorized access to or use of such information; (iv) ensure the proper disposal of “consumer information” (information obtained from “consumer reports” as defined in the Fair Credit Reporting Act); and (v) to comply with all applicable information security laws. Upon Client’s written request, Fiserv shall allow Client to review any associated audit reports, regulatory examination reports (or summaries thereof as permitted by such regulators having jurisdiction over Fiserv) summaries of test results or equivalent measures taken by Fiserv to assess whether its information security program meets the foregoing objectives, to the extent and on the same terms such information is made generally available to Fiserv’s other clients. Fiserv shall also take reasonable and appropriate measures to prevent and correct incidents of unauthorized access to Client PII or Client’s “sensitive customer information” (as defined in GLB), including notification to Client as soon as possible, but in no event more than 48 business hours from when Fiserv learns of the unauthorized access, based on the circumstances of any such incident with such notice including identification of the types of data compromised and the Client customers impacted, to the extent such information is known by Fiserv at the time of such initial notice. Fiserv agrees to subsequently report to Client the corrective action(s) taken by Fiserv in response to such incident and to promptly disclose to Client details relating to any such incident as necessary or appropriate for Client to comply with applicable law. As required by an applicable industry security organization (e.g. Payment Card Industry Security Standards Council PCI-SSC) or the applicable regulatory agency having jurisdiction over Client, Fiserv may disclose information regarding any such incident to such organization and such agency.
(b)     Fiserv Program . Within 30 days of Client’s written request, Fiserv shall provide to Client a summary of Fiserv’s written information security program for the applicable Services received by Client, and thereafter upon Client’s request will provide updates on the status of such information security program.
(c)     Data Encryption . As applicable to the Deliverables received by Client, Client agrees to comply with Fiserv’s then-current data encryption policies and controls regarding transmission to and from Fiserv of tapes, images, and records maintained and produced by Fiserv for Client in connection with the Deliverables (“ Client Files ”), or other data transmitted to and from Fiserv in connection with the Deliverables (collectively with Client Files, “ Data ”). Fiserv will provide Client with any data encryption policy changes within (ten) 10 days prior to such change being published and available for client use. If Client requests or requires Fiserv to send, transmit, or otherwise deliver Data to Client or any third party in a non-compliant format or manner, or Client (or third party on Client’s behalf) sends, transmits or otherwise delivers Data to Fiserv in a non-compliant format or manner, then, notwithstanding any other provision of this Agreement: (i) Client understands and accepts all risk of transmitting Data in an unencrypted or otherwise noncompliant format; and (ii) Client releases, discharges, and shall indemnify and hold harmless Fiserv and its employees, officers, directors, agents, and Affiliates from any and all liability, damage, or other loss under this Agreement or otherwise suffered by or through Client or suffered by any of the indemnified entities arising out of the transmission, destruction, or loss of such Data, including without limitation any information security or privacy breach related to such Data which otherwise would have been prevented were such Data encrypted.
(d)     Examination of Client Files . Client Files may be subject to examination by such federal, state, or other governmental regulatory agencies as may have jurisdiction over Client’s business to the same extent as such records would be subject if maintained by Client on its own premises. Client agrees that Fiserv may give all reports, summaries, or information contained in or derived from the data or information in Fiserv’s possession relating to Client when legally required to do so by a regulatory or government agency with jurisdiction over Client’s business or upon Client’s written request and direction. Fiserv shall notify Client of such legal demand immediately upon receipt and in advance of disclosure, if permitted by applicable federal or state law, so as to provide Client with the opportunity to seek a protective order or similar relief. Fiserv reserves the right to charge Client at Professional Service Rates for any assistance provided in response to regulatory requests, government agency requests, and legal process requests such as subpoena or search warrant, in each case to the extent related to Client, Client Files and/or Client Information, whether issued during or after the term of this Agreement.


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4.
Infringement Claims.
(a)    Fiserv shall, at its expense, defend Client against any third party claim or action specifically alleging that a Deliverable as provided by Fiserv under an Exhibit infringes a United States patent, copyright, trademark, or other proprietary right of such third party (“ Infringement Claim ”) and shall pay all amounts payable by Client that are specifically attributable to the Infringement Claim under any final, non-appealable judgment, verdict, or court order entered by a court of competent jurisdiction or monetary settlement agreed in writing by Fiserv in respect of any Infringement Claim, provided that Client: (i) promptly notifies Fiserv in writing of such Infringement Claim within 60 days of such Infringement Claim arising; (ii) promptly grants Fiserv the sole right to control the defense and disposition of such Infringement Claim, where such control includes the right to choose legal counsel and negotiate any settlement that does not result in monetary obligation of Client or non-monetary obligations to Client other than termination of use of the applicable Deliverable under 5(b)(ii) below; and (iii) provides Fiserv with reasonable and prompt cooperation and assistance in the defense and disposition of such Infringement Claim.
(b)    In resolution of an Infringement Claim, Fiserv, at its sole option and expense, may: (i) either (A) procure for Client the right to continue to use the Deliverable, as applicable, or (B) provide a replacement or modification for the Deliverable, as applicable, so as to avoid infringement; or (ii) if neither option under (i) above is reasonably practical in Fiserv’s sole opinion, Fiserv may, upon written notice to Client, stop providing the applicable Deliverable and terminate the applicable Schedule (or part thereof) and Client’s use of the Deliverable, and references to such Deliverable (and any fees in connection therewith) shall automatically be removed from the Agreement upon no less than 6 months, however Fiserv shall use its best efforts to provide up to 12 months prior notice to Client of such termination so as to enable Client to contract for similar services or products or otherwise prepare for such terminated Deliverables. Solely with respect to such termination and prepaid, one-time license fees for a terminated Deliverable, Fiserv shall pay to Client a pro rata refund of the prepaid, one-time license fees paid by Client for the infringing Deliverable or portion thereof, depreciated on a five-year straight line basis commencing on the effective date of the applicable Schedule for such Deliverable. In the event that such terminated Deliverables are part of the Bundled Services Fiserv shall reduce the Bundled Fee by the applicable Bundle Percentage for any such terminated Deliverable. Client shall not pay any termination fee and Fiserv will provide deconversion services for such terminated Deliverable at no charge to Client. For example, if ***** was an infringing product and Fiserv could not provide (A) or (B) above and Fiserv exercised the option under (ii) above: Fiserv would reduce the Bundled Fee by *****% ($***** at current Bundled Fee of $*****). In addition the Bundle Percentages for remaining content in the Bundled Services would need to be recalculated and documented via an amendment to the Agreement to reflect the updated percentages with ***** (in this example) removed from the Bundled Services and the Bundled Fee but such recalculation will be effective at the time of termination of such services notwithstanding the parties’ execution of such an amendment.
(c)    Notwithstanding the foregoing, Fiserv shall have no liability for any Infringement Claim (or any other claim or action) to the extent based upon or arising from: (i) use of any part of a Deliverable in combination with materials or software not provided by Fiserv (except as expressly specified in the Agreement); (ii) modifications to any Deliverable made by Client or any third party; (iii) use of other than the current release or version of any Deliverable if infringement would have been avoided by use of such current release; (iv) use of any part of any Deliverable other than for its intended use and otherwise in accordance with the applicable documentation and the terms of this Agreement; (v) Deliverables created or provided based on Fiserv’s adherence to Client’s specifications or instructions, or Fiserv’s use of any materials provided by Client in connection with any Deliverables, to the extent the alleged infringement arose from such Client-provided specifications, instructions and/or materials; or (vi) any third party Products or materials provided by Fiserv except to the extent the third party Products or materials are embedded in a Fiserv-owned Deliverable.
(d)    THE OBLIGATIONS SET FORTH IN THIS SECTION 5 ARE FISERV’S ENTIRE LIABILITY AND CLIENT’S SOLE AND EXCLUSIVE REMEDY FOR ANY INFRINGEMENT CLAIM OR OTHER SUCH MISAPPROPRIATION CLAIM, AND CLIENT HEREBY EXPRESSLY WAIVES ANY OTHER LIABILITY ON THE PART OF FISERV ARISING THEREFROM.


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5. Hiring and Employment .
(a)     Background Checks . Neither party shall knowingly permit any of its employees to have access to the premises, records or data of the other party when such employee: (i) uses drugs illegally; or (ii) has been convicted of a crime in connection with a dishonest act or a breach of trust, as set forth in Section 19 of the Federal Deposit Insurance Act, 12 U.S.C. 1829(a) (a “ Conviction ”). Consistent with Fiserv’s employment practices and those of its subcontractors, newly hired Fiserv employees and those of its subcontractors are required to pass both a pre-employment criminal background check and are required to pass a pre-employment drug screening, as permitted by law, and Fiserv periodically confirms that employees and those of its subcontractors have not acquired any Convictions subsequent to hiring. Upon Client’s reasonable request not more than every six months, Fiserv shall provide to Client confirmation of the foregoing for those of Fiserv’s employees and its subcontractors who will have access to Client facilities or Client’s networks and computer systems. The results of all such background checks shall be retained solely by Fiserv or the third party performing such screening on behalf of Fiserv.
(b)     Equal Employment . Fiserv agrees that it shall abide by the requirements of Presidential Executive Order 11246, appearing at 41 CFR §§60-1.4(a), 60-300.5(a), 60-741.5(a), and as amended by the Executive Order dated July 21, 2014. These regulations prohibit discrimination against qualified individuals based on their status as protected veterans or individuals with disabilities, and prohibit discrimination against all individuals based on their race, color, religion, sex, sexual orientation, gender identity, or national origin. Moreover, these regulations require that covered prime contractors and subcontractors take affirmative action to employ and advance in employment qualified individuals without regard to race, color, religion, sex, sexual orientation, gender identity, national origin, protected veteran status or disability.
(c)     Non-Solicitation . Neither party, without the prior written consent of the other, shall directly or indirectly solicit for employment, advise or recommend to any other person that they employ or solicit for employment or retention as a consultant, any Restricted Employee (as defined herein) while such person is employed by the party and for a period of 12 months starting on the earlier of (i) termination of such Restricted Employee’s employment with the party or (ii) termination or expiration of this Agreement. “Restricted Employee” means any former or current employee of such party or its Affiliates that the other party became aware of or came into contact with during Fiserv’s provision of Deliverables under this Agreement. This section shall not prevent either party from presenting or placing advertisements in the normal course of business for open positions that are not directly targeted at the other party’s employees or consultants.

6. Warranties .
(a)     By Fiserv . Fiserv warrants that: (i) no contractual obligations exist that would prevent Fiserv from entering into this Agreement; (ii) it has the requisite authority to execute, deliver, and perform its obligations under this Agreement; (iii) project services will be provided in a professional and workmanlike manner, and (iv) it will comply with all laws and regulatory requirements applicable to Fiserv operations used in the performance of its obligations under this Agreement;
(b)     By Client . Client represents and warrants that: (i) no contractual obligations exist that would prevent Client from entering into this Agreement; (ii) it has the requisite authority to execute, deliver, and perform its obligations under this Agreement; (iii) it will comply with all laws and regulatory requirements applicable to Client’s receipt and use of Deliverables and (iv) it shall not use Deliverables for any activities in violation of any laws or regulations, including, but not limited to, wrongful transmission of copyrighted material, sending of threatening or obscene materials, or misappropriation of exportation of trade or national secrets..
(c)     Limited Warranties . THE WARRANTIES STATED ABOVE AND IN THE EXHIBITS OR SCHEDULES, IF ANY, ARE LIMITED WARRANTIES AND ARE THE ONLY WARRANTIES MADE BY THE PARTIES. FISERV DOES NOT REPRESENT THAT THE DELIVERABLES MEET CLIENT’S REQUIREMENTS OR THAT THE OPERATION OF THE DELIVERABLES WILL BE UNINTERRUPTED OR ERROR-FREE. CLIENT ACKNOWLEDGES THAT IT HAS INDEPENDENTLY EVALUATED THE DELIVERABLES AND THEIR APPLICATION TO CLIENT’S NEEDS. FISERV DISCLAIMS, AND CLIENT HEREBY EXPRESSLY WAIVES, ALL OTHER REPRESENTATIONS, CONDITIONS, OR WARRANTIES, EXPRESS AND IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT AND ANY WARRANTIES ARISING FROM A COURSE OF DEALING OR USAGE OR TRADE. CLIENT MAY NOT MAKE ANY WARRANTY OF ANY KIND, EXPRESS OR


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IMPLIED, ON BEHALF OF FISERV, ITS AFFILIATES OR THEIR RESPECTIVE THIRD PARTY PROVIDERS OR LICENSORS TO ANY AUTHORIZED USERS OR ANY OTHER PARTY IN CONNECTION WITH THE DELIVERABLES WITHOUT FISERV’S EXPRESS PRIOR WRITTEN CONSENT.
(d)    OPEN SOURCE COMPONENTS USED SEPARATELY FROM DELIVERABLES (“ Stand Alone Usage ”) ARE PROVIDED ON AN “AS IS” BASIS. FISERV DISCLAIMS, AND CLIENT EXPRESSLY WAIVES, ALL REPRESENTATIONS, CONDITIONS AND WARRANTIES, EXPRESS AND IMPLIED, WITH RESPECT TO THE STAND ALONE USAGE, INCLUDING WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT AND ANY ARISING BY STATUTE OR FROM A COURSE OF DEALING OR USAGE OR TRADE.
7. Limitation of Liability .
(a)    IN NO EVENT SHALL FISERV BE LIABLE FOR LOSS OF GOODWILL, OR FOR SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE, EXEMPLARY, OR TORT DAMAGES ARISING OUT OF OR RELATING TO THIS AGREEMENT, REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT, CONTRACT, OR OTHERWISE.
(b)    EXCEPT FOR CLAIMS RELATED TO PROPRIETARY RIGHTS, PAYMENT OBLIGATIONS, NEITHER PARTY MAY ASSERT ANY CLAIM AGAINST THE OTHER RELATED TO THIS AGREEMENT MORE THAN 3 YEARS AFTER SUCH CLAIM ACCRUED.
(c)    FISERV’S AGGREGATE LIABILITY TO CLIENT AND ANY THIRD PARTY FOR ANY AND ALL CLAIMS OR OBLIGATIONS RELATING TO THIS AGREEMENT SHALL BE LIMITED TO THE ***** (THE “ CAP ”). THE AMOUNT OF ANY AVAILABLE CAP SHALL BE REDUCED BY AMOUNTS PREVIOUSLY PAID AND APPLIED TO ANY OTHER CAP, SO THAT IN NO EVENT SHALL FISERV’S AGGREGATE LIABILITY TO CLIENT FOR ANY AND ALL CLAIMS OR OBLIGATIONS RELATING TO THIS AGREEMENT EXCEED THE CAP.
8. Term and Termination .
(a) Term . The initial term of this Agreement shall begin on the Effective Date and shall remain in effect for 84 months following the date the Account Processing Services (Premier) are Available (as defined in Section 2(a) of the Fee Exhibit which describes when Fees start). Unless written notice of non-renewal of the Agreement is provided by either party at least 18 months prior to expiration of the initial term or any renewal term, this Agreement and its Exhibits shall automatically renew for additional terms of two (2) years. To the extent any Exhibit or Schedule is in effect after termination or expiration of the Agreement then, as to any such Exhibit or Schedule, the Agreement shall continue in effect until termination or expiration of such Exhibit or Schedule.

(b) Termination . In addition to termination rights set forth in any Exhibit:
(i)
Material Breach . Either party may, upon written notice to the other, terminate: (A) any Service or Schedule if the other party materially breaches its obligations under that Exhibit or Schedule or under this Agreement with respect to that Service or Schedule; or (B) this Agreement if the other party materially breaches its obligations with respect to the non-breaching party’s Information, including Client’s violation of Section 3 of the Software Products Exhibit; and the breaching party fails to cure such material breach within 60 days, or such other number of days as mutually agreed between the parties, as to a breach under clause (A) and 15 days, or such other number of days as mutually agreed between the parties, as to a breach under clause (B) in either case, following its receipt of written notice stating, with particularity and in reasonable detail, the nature of the claimed breach.
(ii)
Non-payment . Except for amounts disputed in good faith pursuant to Section 2(e) of this Agreement, if any invoice remains unpaid by Client 45 days after due, Fiserv may, upon ten (10) days prior written notice to Client during which time client does not cure such payment default, terminate: (A) the Schedule and/or Client’s access to and/or use of Deliverables to which the payment failure relates; or (B) this Agreement if the unpaid amounts constitute a material portion of annual charges due under this Agreement.


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(iii)
Bankruptcy . Fiserv and Client will each have the right, at its option, to terminate this Agreement (A) upon sixty (60) days written notice to the other party in the event such other party commits an act of bankruptcy or becomes the subject of any proceeding under the Bankruptcy Code and such action or proceeding is not dismissed by the end of such 60-day period, or (B) upon written notice in the event a party becomes insolvent or if any substantial part of a party’s property becomes subject to any levy, seizure, assignment, application, or sale for or by any creditor or governmental agency and such action or proceeding is not dismissed by the end of such 60-day period. The foregoing optional termination right shall be limited to the non-breaching and non-debtor party.
(c) Holdover . Upon any termination or expiration of the Agreement, in whole or in part, Services provided after the applicable termination date, expiration date, or final processing date specified by Client will be provided subject to Fiserv’s capacity and Client shall pay for such Services at then current fees under the applicable Schedule plus a holdover premium of *****, unless such holdover is due to Fiserv’s action or inaction.
(d) Remedies . Unless expressly stated in an Exhibit or Schedule specific to a remedy set forth therein, remedies contained in this Section 9 are cumulative and are in addition to the other rights and remedies available to the parties under this Agreement, by law or otherwise. The parties acknowledge and agree that Client shall be placing critical and material reliance on Fiserv’s ongoing operations in connection with the Deliverables provided under this Agreement. The parties further acknowledge and agree that the interruption of Fiserv’s operations as a result of an actual breach of Section 9(b)(i) by Fiserv (“Fiserv Material Breach”) or Fiserv commits an act of bankruptcy, becomes the subject of any proceeding under the Bankruptcy Code, becomes insolvent or if any substantial part of a party’s property becomes subject to any levy, seizure, assignment, application, or sale for or by any creditor or governmental agency, all pursuant to Section 9(b)(iii) (“Fiserv Bankruptcy”) may cause irreparable injury and damages to Client which would not be compensable with monetary damages alone. Accordingly, the parties agree that upon the occurrence of an actual Fiserv Material Breach or Fiserv Bankruptcy that would interrupt the operations of Fiserv and its ability to provide the Deliverables under the Agreement (within the established SLA standards) that are critical to Client’s operations, Client shall be entitled to seek appropriate equitable remedies, including injunctive relief and specific performance of its obligations under this Agreement (directly or through a special receiver or similar regulatory or judicial appointee), in addition to all other remedies available to the Client in law, equity or otherwise, for any such Fiserv Material Breach or Fiserv Bankruptcy, as applicable. In such a situation, Fiserv agrees that Client may petition the court having jurisdiction for such injunctive relief to ensure that Client shall continue to receive the Deliverables that are critical to Client operations for the duration of the Term of the Agreement without having to post a bond or other security.
9. Dispute Resolution . Before initiating legal action against the other party relating to a dispute herein, the parties agree to work in good faith to resolve disputes and claims arising out of this Agreement. To this end, either party may request that each party designate an officer or other management employee with authority to bind such party, or alternatively escalate to the Management Committee, to meet to resolve the dispute or claim. If the dispute is not resolved within 30 days of the commencement of informal efforts under this paragraph, either party may pursue formal legal action. This paragraph will not apply if expiration of the applicable time for bringing an action is imminent and will not prohibit a party from pursuing injunctive or other equitable relief to which it may be entitled.
10. Audit .
(a) Fiserv Operations and Security . Client acknowledges and agrees that Fiserv is subject to certain examinations by the Federal Financial Institutions Examination Council (“ FFIEC ”) regulators and agencies. Client acknowledges and agrees that reports of such examination of Fiserv business units may be available to Client directly from the relevant FFIEC agencies. Fiserv will provide Client information, to the extent allowed by the FFIEC, on any material findings that directly impact the Services, including MRA’s (“Matters Requiring Attention”) promptly but in no event later than 30 days following such issuance. Fiserv employs an internal auditor responsible for reviewing the integrity of its processing environments and internal controls. Unless prohibited by applicable law or regulation, Fiserv shall provide the necessary information reasonably requested by Client with respect to Fiserv’s Affiliates, including without limitation, each Affiliate’s business continuity, disaster recovery and security matrices or other plans or documentation, as necessary in order for Client to comply with its prudential regulators’ directives. In the event such information is not reasonably and readily available, Fiserv shall provide an estimate of or a not to exceed quote for producing such information.


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(b) Independent Audit . Fiserv provides for periodic independent audits of its data centers performing Services, which shall include an annual SSAE 18 SOC audit, or other audit to the extent required by law or regulation. Fiserv shall provide Client with a copy of such independent audit report of the Fiserv service center providing Services within a reasonable time after its completion. If material deficiencies affecting the Services are noted in such audit report, Fiserv will develop and implement an action plan to address and resolve any such deficiencies within a commercially reasonable time at Fiserv’s expense. Upon Client request, except with respect to any security report-related charges that Client is currently paying to Fiserv as of the Effective Date, Fiserv shall provide Client with a copy of such independent SSAE 18 SOC audit report(s) (“SOC Reports”) to Client for no additional charge. Upon Client request, as major code changes (such as a release level) are made, Fiserv will provide Client with a copy of a redacted application penetration test report performed by either Fiserv or third-party resources, in each case, compliant with FFIEC guidance and examination as detailed above in Section 11(a). In addition, upon Client request, Fiserv will provide an external facing infrastructure penetration test attestation from Fiserv’s qualified PCI assessor as applicable per specific service.
(c) Billing Records . Upon Client’s reasonable request in writing no more frequently than once every 6 months, Fiserv shall provide Client with documentation supporting the amounts invoiced by Fiserv hereunder for the 12-month period preceding such Client request. If such documentation reveals the amounts paid to Fiserv exceed the amounts to which Fiserv is entitled and such amounts are verified as mutually agreed between the parties, Fiserv shall promptly remit or otherwise credit to Client the amount of such overpayment. Conversely, if such documentation reveals the amounts paid to Fiserv are less than the amounts owed, Client shall promptly remit the amount of such underpayment to Fiserv. Invoices dated prior to the review period hereunder shall be presumed to be correct, subject to the review and confirmatory procedures described herein. Fiserv reserves the right to charge Client for any assistance required in connection with such an audit at Professional Service Rates provided that such audits do not reflect any calculation errors, in which case Client shall be entitled to recover the reasonable costs of such audit provided that the discrepancy is in Client’s favor and is greater than $*****. Upon Client’s reasonable request in writing no more frequently than once every 12 months, Fiserv shall provide Client with documentation supporting the amounts invoiced by Fiserv hereunder for the 12-month period preceding such Client request, unless previously produced to Client. If such documentation reveals the amounts paid to Fiserv exceed the amounts to which Fiserv is entitled and such amounts are verified as mutually agreed between the parties, Fiserv shall promptly remit or otherwise credit to Client the amount of such overpayment. Conversely, if such documentation reveals the amounts paid to Fiserv are less than the amounts owed, Client shall promptly remit the amount of such underpayment to Fiserv.
(d) FCPA . That the employees, temporary workers, agents, consultants, partners, officers, directors, members or representatives of Fiserv and its approved subcontractors performing services or other activities under the Agreement (each and any of the foregoing individuals, for the purpose of this clause, a “Fiserv Representative”) shall comply with the U.S. Foreign Corrupt Practices Act and all other applicable anti-corruption laws.  Fiserv Representatives shall not directly or indirectly pay, offer, give, promise to pay or authorize the payment of, any portion of the compensation received in connection with the Agreement or any other monies or other things of value in connection with its performance to a Government Official, defined below, to obtain or retain business or secure any improper advantage nor shall they permit such actions by a third party in connection with the Agreement.  For purposes hereof, a “Government Official” is defined in the Act cited above.
(e) Client PII Location .  Except as otherwise expressly set forth in an Exhibit or Schedule, Fiserv will not store Client PII at any facility outside of the United States without Client’s written consent.  For avoidance of doubt, Fiserv and its subcontractors shall be permitted to access Client PII from a location outside of the United States via computer networks or systems, and such remote access shall in no event be deemed a breach of this provision, provided that Fiserv agrees to use technology and security processes that prevent such personnel from saving, printing or recording such Client PII accessed remotely.
(f) Access to Client Location or Environments . To the extent applicable to the Deliverables, Client is responsible for providing Fiserv remote and/or on-site access to Client’s environments for the provision of Deliverables. While assigned to provide Deliverables at a Client location either via remote access or otherwise visiting Client’s facilities, Fiserv and any subcontractors of Fiserv shall comply and shall cause its personnel to comply with Client’s reasonable policies and procedures and other reasonable instructions or directions issued by Client that are provided to Fiserv applicable to Client personnel at those facilities, and comply with all reasonable requests of Client personnel, as applicable, pertaining to personal and professional conduct and otherwise conduct themselves in a professional and businesslike manner; provided, however, that


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such procedures and rules must be provided to Fiserv in writing and reasonably in advance of Fiserv personnel’s arrival at or required access to Client’s facility or environments. If Fiserv’s compliance will require Fiserv to incur unusual or material expenses associated with such Client procedures and rules, Fiserv shall advise Client of such expenses and unless Client proposes a different way to comply without such expenses being incurred, Client shall reimburse Fiserv for such expenses unless otherwise mutually agreed in writing between the parties.
11. Insurance
(a) Fiserv Insurance . Fiserv shall secure and maintain throughout the term of this Agreement at its sole cost and expense the following insurance coverage with insurance carriers rated “A-XI” or higher by A. M. Best Corporation. The insurance requirements set forth in this Agreement shall be maintained by Fiserv and will not limit, in any manner, the liabilities and obligations assumed by Fiserv under the Agreement.
(i)
Commercial General Liability Insurance covering bodily injury, property damage, and including contractual liability coverage, with a combined single limit of $1,000,000 per occurrence and $2,000,000 general aggregate.
(ii)
Workers Compensation insurance providing coverage pursuant to statutory requirements; and Employer's Liability Insurance with limits of:
(A)    $1,000,000 each accident
(B)    $1,000,000 policy limit
(C)    $1,000,000 each employee.
(iii)
Commercial Automobile Liability Insurance with combined bodily Injury and property damage limits of $1,000,000.
(iv)
Commercial Umbrella Liability Insurance with per occurrence and aggregate limits of $5,000,000, with the liability insurance required under clauses (i), (ii), and (iii) above scheduled as underlying.
(v)
Commercial Crime Insurance, including, but not limited to Employee Dishonesty and Computer Fraud for the theft of property with limits of $5,000,000 per loss and $10,000,000 in the aggregate. The crime insurance should include coverage for third parties, which shall cover loss of or damage to money, securities, and other property sustained by Client, or for which Client holds for others, committed by an identified Fiserv employee, acting alone or in collusion with other persons.
(vi)
All-risk property insurance covering Fiserv’s real and personal property at replacement cost value.
(vii)
Professional Liability and/or Technology Errors and Omissions Liability covering acts, errors and omissions arising out of Fiserv’s performance or failure to perform its services under this Agreement, including but not limited to (a) technology and other professional services and products, (b) media content, (c) network security and privacy breaches, and (d) privacy related regulatory actions, with limits of $10,000,000 per occurrence and in the aggregate. Such insurance shall be maintained in force at all times during the terms of the Agreement and for a period of 2 years thereafter for services completed during the term of the Agreement.
During the term of this Agreement (or for any insurance coverage periods as may be described in this Agreement), Fiserv shall provide Client with a certificate of insurance (annually and upon request of Client as evidence of each of the foregoing coverages naming Client, its affiliates, subsidiaries and assigns as additional insureds with respect to the Commercial General Liability Insurance coverage above. Fiserv shall notify Client in the event that any policy for the insurance required above is cancelled or otherwise terminates, unless that policy is promptly replaced by another policy in accordance with the foregoing requirements, but in no event greater than 30 days. Coverage shall be deemed to be primary and non-contributory with a Waiver of Subrogation clause in favor of Client for Commercial General Liability and Workers Compensation where available. It is understood and agreed Client does not in any way represent that the types or the


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limits of insurance specified above are sufficient or adequate to protect Fiserv’s interests or liabilities. Failure of Fiserv to secure the insurance policies required pursuant to this section or to provide certificates of insurance as required herein, shall not be a waiver of the requirements and shall be an event of default pursuant to this Agreement. Fiserv shall be solely responsible for assuring that its agents, employees, designees, subsidiaries and subcontractors which may be involved in providing services are adequately insured to protect Fiserv’s interests.
(b) Client Insurance . Client shall obtain and maintain at its own expense any required Fidelity Bond and casualty and business interruption insurance coverage for loss of records from fire, disaster, or other causes.
12. General .
(a) Binding Agreement; Assignment by Client . This Agreement is binding upon the parties, their participating Affiliates, and their respective successors and permitted assigns. Neither this Agreement nor any part thereof or interest therein may be sold, assigned, transferred, pledged, or otherwise disposed of by Client, whether pursuant to change of control by operation of law or otherwise, without (i) Fiserv’s prior written consent, which shall not be unreasonably withheld or unduly delayed, and (ii) if applicable to the Deliverables assigned, Client’s payment of additional fees for incremental volume associated with such transfer at Fiserv’s current contracted rates, as set forth in the Fee Exhibit. The sale of 50% or more of Client’s common stock, the sale of all or substantially all of Client’s assets, or any merger in which Client is not the surviving organization, shall not be deemed a “transfer” subject to the provisions of this paragraph or requiring Fiserv’s consent.
(b) Assignment by Fiserv . Client agrees that Fiserv may assign all or part of this Agreement to Fiserv Affiliates and may subcontract any obligations to be performed hereunder; provided that any such Affiliates and subcontractors shall be required to comply with all applicable terms and conditions of this Agreement, and Fiserv shall remain primarily liable for the performance of any such Affiliates and subcontractors. Other than as set forth herein, Fiserv may not assign all or part of this Agreement without Client’s prior written consent, which shall not be unreasonably withheld or unduly delayed provided that the parties acknowledge and agree that such assignment would require that any successor assignee be subject to Client’s vendor due diligence, including regulatory review.
(c) The rights and obligations of the Agreement shall inure to and be binding upon the parties and their permitted successors and assignees.
(d) Entire Agreement . This Agreement, including its Exhibits and Schedules, which are expressly incorporated herein by reference, constitutes the complete and exclusive statement of the agreement between the parties as to the subject matter hereof and effective immediately on the date the Account Processing Services are Available supersedes all previous agreements with respect thereto, including, but not limited to, the list of agreements superseded in Attachment 1 to the Agreement, and the terms of all existing or future purchase orders or other acknowledgments. The parties further agree that if either party discovers a superseded Schedule or other agreement that needs to be incorporated into this Agreement that they will cooperate in good faith to amend this Agreement to make the necessary correction. In addition, Attachment 1 to the Agreement also contains a list of continuing agreements applicable to the ongoing delivery of Services that are independent of this Agreement and remain in effect subject to the terms of the applicable agreement listed. Each party hereby acknowledges that it has not been induced to enter into this Agreement by virtue of, and is not relying on, any representation made by the other party not embodied herein, any term sheets or other correspondence preceding the execution of this Agreement, or any prior course of dealing between the parties, including without limitation any statements concerning product or service usage or the financial condition of the parties. The protections of this Agreement shall apply to actions of the parties performed in preparation for and anticipation of the execution of this Agreement.
(e) Amendments. Changes to this Agreement must be in writing and signed by duly authorized representatives of the parties and any attempted change to the contrary shall be considered null and void.
(f) Conflict . If the terms of any Exhibit or Schedule to this Agreement conflict with the terms of this Agreement, this Agreement shall control unless the applicable Exhibit or Schedule expressly states that its terms control. If the terms of any Schedule conflict with the terms of the Exhibit to which such Schedule is attached, the terms of the Schedule shall control.


Fiserv Confidential – Limited    Page 14





(g) Severability . If any provision of this Agreement is held to be unenforceable or invalid, the other provisions of this Agreement shall continue in full force and effect.
(h) Governing Law; Jury Trial Waiver . This Agreement will be governed by the substantive laws of the State of New York, without reference to provisions relating to conflict of laws. The United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement. Both parties agree to waive any right to have a jury participate in the resolution of any dispute or claim between the parties or any of their respective Affiliates arising under this Agreement.
(i) Force Majeure . With the exception of Client’s payment obligations, neither party shall be responsible for delays or failures in performance with respect to the Deliverables (“ Performance Failure ”) resulting from acts of God, acts of civil or military authority, fire, flood, strikes, war, epidemics, pandemics, shortage of power, telecommunications or Internet service interruptions or other acts or causes reasonably beyond the control of that party (“ Force Majeure Event ”) provided the affected party is without fault in causing such delay, uses all reasonable diligence to mitigate the effects of the Force Majeure event and restore normal operations as soon as possible, and implements its Business Continuity Plan and Disaster Recovery Plan in accordance with their terms, as applicable in Section 7 of the ASP Services Exhibit.
(j) Notices . Any written notice required or permitted to be given hereunder shall be given by:
(i)
Registered or Certified Mail, Return Receipt Requested, postage prepaid; or
(ii)
nationally recognized overnight courier service to the other party at the addresses listed on page 1 or to such other address or person as a party may designate in writing.
Any written notice to Fiserv shall also include a copy to the following address: Fiserv, 255 Fiserv Drive, Brookfield, Wisconsin, 53045, ATTN: General Counsel.
Notices to Client shall be:
Lakeland Bank
250 Oak Ridge Road
Oak Ridge, NJ 07438
Attn: Chief Information Officer

Copy to:

Lakeland Bank
250 Oak Ridge Road
Oak Ridge, NJ 07438
Attn: Office of General Counsel

All such written notices shall be effective upon receipt. The provisions of this Section shall not apply to communications required in the regular course of providing or using the Deliverables where written notice is not required. Such communications or requests may be made via email.

(k) No Waiver . The failure of either party to insist on strict performance of any of the provisions hereunder shall not be construed as the waiver of any subsequent default of a similar nature.
(l) Prevailing Party . The prevailing party in any arbitration, suit, or action brought by one party against the other party to enforce the terms of this Agreement or any rights or obligations hereunder, shall be entitled to receive, in addition to such other relief as the arbitrators or court may award, its reasonable costs and expenses, including without limitation all attorneys’ fees, expert witness fees, litigation-related expenses and arbitrator and court or other costs incurred in such proceeding or otherwise in connection with bringing such arbitration, suit, or action. For purposes of this Agreement, a party is “prevailing” if that party prevails on the central issue (as determined by the highest dollar value of associated cost or judgment) raised in the action or claim, regardless of the amount of damages awarded or otherwise owed, if any. A party may prevail by judgment or decision in that party’s favor, consent decree, settlement agreement or voluntary dismissal with or without prejudice.


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(m) Survival . All rights and obligations of the parties under this Agreement that, by their nature, do not terminate with the expiration or termination of this Agreement shall survive the expiration or termination of this Agreement.
(n) Publicity . Client and Fiserv shall have the right to make general references about each other and the type of Deliverables being provided hereunder to third parties, such as auditors, regulators, financial analysts, and prospective customers and clients, provided that in so doing Client or Fiserv does not breach Section 3 of this Agreement. Fiserv may issue a press release regarding this Agreement, including its renewal and the addition of Deliverables provided that specific financial aspects of the Agreement are not disclosed, subject to Client’s review and approval, which shall not be unreasonably withheld or unduly delayed.
(o) Marks . Except as authorized herein, neither party will use the name, trademark, service mark, logo or other identifying marks of the other or any of their respective Affiliates (“collectively Marks ”) in any sales, marketing, or publicity activities, materials, or website display without the prior written consent of the other. Any such authorized or approved use shall at all times comply with the authorizing party’s Trademark Usage Guidelines (or such other requirements and/or guidelines) which are set forth, with respect to Fiserv, on Fiserv’s corporate website and other requirements issued or otherwise made available by either party.
(p) Client Content . For those Deliverables which require Fiserv to brand or otherwise identify Client, including without limitation any ASP Services which involve the creation of a Web site to be used in connection with Client’s Web site, Client will provide to Fiserv any of Client’s trademarks, trade names, service marks, service names, third party links, information, specifications, materials, designs, logos, copy or other such works, marks or content (collectively “ Client Content ”) that Client desires Fiserv to use in providing such ASP Services and Client hereby grants to Fiserv, and its Affiliates and/or third party providers, as applicable, a non-exclusive, non-assignable right to use during the term of this Agreement the Client Content in connection with the Deliverables or for the purposes otherwise specified in this Agreement.
(q) Independent Contractors . Client and Fiserv expressly agree they are acting as independent contractors and under no circumstances shall any of the employees of one party be deemed the employees of the other for any purpose. Except as expressly authorized herein or in the Exhibits, this Agreement shall not be construed as authority for either party to act for the other party in any agency or other capacity, or to make commitments of any kind for the account of or on behalf of the other.
(r) No Third Party Beneficiaries . Except as expressly set forth in any Exhibit hereto, no third party shall be deemed to be an intended or unintended third party beneficiary of this Agreement.
(s) Counterparts; Signatures . This Agreement and any Exhibits hereto may be executed in counterparts, each of which shall be deemed an original and which shall together constitute one instrument. Signatures transmitted by facsimile or electronically via PDF or similar file delivery method shall have the same effect as an original signature, provided that in no event shall the Agreement or any amendment or other document hereunder be executed by placing or inserting a digital signature file into such document.
(t) Client agrees that Fiserv is authorized to share Client Information with Client’s third party contractors, as requested by Client in a documented form, including without limitation electronic mail. 
(u) In the event of any conflict, ambiguity or inconsistency between this Schedule and the Agreement, or any other document which may be annexed hereto, the terms of this Schedule shall govern.
                                                            
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date.
For Client:                        For Fiserv:
Lakeland Bank                          Fiserv Solutions, LLC
By: /s/ Timothy J. Matteson              By: /s/ Todd Horvath                


Fiserv Confidential – Limited    Page 16





Name: Timothy J. Matteson                 Name: Todd Horvath                
Title: EVP, CAO, GC & Corp Sec          Title:     Authorized Signatory            
Date: October 31, 2017          Date: October 31, 2017                


Fiserv Confidential – Limited    Page 17






Attachment 1 to the Agreement
List of Existing Agreements Superseded

1.
Master Agreement, dated on or about May27/May 28, 2009, between Fiserv Solutions, Inc. and Lakeland Bank and all related Exhibits, Schedules, Attachments, Appendices and any subsequent Amendments, SOWs or Work Orders;
2.
Software License Agreement, dated December 30, 2010 between Fiserv Solutions, Inc. and Lakeland Bank and all related Exhibits, Schedules, Attachments, Appendices and any subsequent Amendments, SOWs, or Work Orders;
3.
E-Commerce Services Agreement, dated November 5, 2010 between Fiserv Solutions, Inc. and Lakeland Bank and related Exhibits, Schedules, Attachments, Appendices and any subsequent Amendments, SOWs, or Work Orders;
4.
Equipment Sale Agreement, dated January 3, 2011 between Fiserv Solutions, Inc. and Lakeland Bank and all related hardware and software Schedules, Addendums, Appendices and any subsequent Amendments.

List of Existing Agreements Continuing
1.
Allpoint Network, Card Issuer Services Agreement, Lakeland Bank – Fiserv Solutions, Inc., dated June 5, 2013 by and among Lakeland Bank, ATM National LLC d/b/a Allpoint and Fiserv Solutions, Inc. and all related Schedules and any subsequent Amendments.
2.
Confidentiality Agreement by and among, Fiserv Solutions LLC, Diebold Nixdorf, Inc. and Lakeland Bank dated April 11, 2017.
3.
Amendment regarding Accel network participation to the Master Agreement dated October 31, 2017 to be executed and dated contemporaneously.
























Fiserv Confidential – Limited    Page 18







Fee Exhibit
to the Agreement
1.
Fees .

(a)
Implementation and Initial One-time Fees


Implementation of Bundled Services and Deliverables set forth on Attachment 2 to the Fee Exhibit
$*****


(b)
Base Monthly Recurring Fees - $***** (the “Bundled Fee” ) each month for the Services listed below and as detailed in Attachment 1 to this Fee Exhibit (the “ Bundled Services ”). Services included in the Deliverables as of the Effective Date but not covered by the Bundled Fee are set forth in section 1(c) below.

*****

(c)
Separately Priced Services Fees. For any Services not identified as included in the Bundled Fee, the fees for such Services are on-demand as utilized by Client and as set forth in Attachment 2 to this Fee Exhibit.

(d)
Flex Credit . Fiserv agrees to provide Client a flex credit in the amount of $***** one-time and $***** monthly (“ Flex Credit ”) with respect to the Products and Services to be provided under this Agreement.  In addition, Fiserv agrees to provide Client an additional Flex Credit of $***** per month when Fiserv makes Commercial Center Services Available (as defined herein) when Client chooses to implement Commercial Center Services. The Flex Credit may be applied by Client during the initial term of this Agreement against any Fiserv monthly invoice for Products or Services provided under this Agreement, subject to the following: (i) Client shall provide Fiserv’s indicated designee with notice (which may be via email) of Client’s election to use any portion of the Flex Credit; (ii) elimination of any services included in this Agreement as of the Effective Date or a reduction in actual customer or member accounts converted and/or processed could result in a reduction of the total Flex Credit; and (iii) the Flex Credit may not be applied to any third party software or services, out-of-pocket expenses, equipment costs, third party costs, or Taxes. In the event of termination of this Agreement, the ASP Services Exhibit, the Software Products Exhibit, or any Schedule for which all or any portion of the Flex Credit was applied during the initial term; Client will reimburse Fiserv for the prorated amount (based on the number of months in the initial term and the remaining number of months after such termination and an initial Flex Credit amount of $*****) of Flex Credit applied by Client pursuant to this subsection.  For clarity, such reimbursement shall be in addition to any applicable termination fee due from Client, and any unused Flex Credit remaining upon expiration of the initial term shall be forfeited by Client.

(e)
Allocation of Bundled Fees among Deliverables . Each of the Bundled Services represents a portion of the Bundled Fee. The table below defines what portion of the Bundled Fee is represented by specific Services within the Bundled Services (the “ Bundle Percentage ”). The Bundle Percentage times the Bundled Fee equals the portion of the Bundled Fee applicable to a specific Product or Service. The Bundle Percentage will be used to adjust the Bundle Fees in the event of (a) a partial delivery of services where a Deliverable within the Bundled Services is not deployed by mutual agreement; or (b) partial termination of the Bundled Services where an Early Termination Fee is applicable; or (c) other termination of services as permitted under this Agreement. The parties agree that the Bundle Percentage and Bundled Fee will be adjusted if there are any additions of or terminations of Products or Services included in the Bundled Services (each, a “ Bundle Percentage Change ”). In the event of any Bundle Percentage Change, the proposed Bundle Percentage Change will be presented to Client and upon the parties agreement, negotiated in good faith, the final approved Bundle Percentage Change will be set forth in an amendment hereto executed by both parties, and the change to the Bundled Fee will be implemented on the first day of the next billing cycle.



Fiserv Confidential – Limited    Page 19





*****

2. Payment Timetable . The terms set forth below shall apply to all Deliverables added after the Effective Date, unless otherwise stated in the applicable Schedule, SOW or purchase order.

(a)
Monthly Fees . Subject to the Annual Increase as set forth in Section 2(b) of the Agreement, Client shall pay Fiserv the monthly fees set forth herein in accordance with the Agreement on a monthly basis (prorated in the initial month based on when starting) unless otherwise indicated beginning (i) when Fiserv makes the applicable Deliverable Available (as defined herein) or (ii) for any Services related to a third party, beginning the earlier of when Fiserv makes the applicable Deliverable Available to Client or when Fiserv begins being billed by such third party. “ Available ” shall mean the date when (i) each applicable Deliverable is made available in a live production environment after such Deliverable has been tested and meets the applicable acceptance criteria or (ii) such Deliverable is actually used by Client in live production, whichever is the earlier. The parties agree to work in good faith to implement the Deliverables included as of the Effective Date to be made Available together with or before the date the Account Processing Services are made Available provided that in any event Client agrees to implement each Deliverable on or before such mutually agreed date. In the event that the parties mutually agree to delay the Available date of the Account Processing Services, such mutually agreed upon date shall be no later than 45 days from the original Available Date as agreed upon in the SOW for the Initial Professional Services.

(b)
Initial License Fees . For any applicable License Fees outside the Bundled Fee, License Fees are due and payable as follows: 50% of the initial License fees as set forth in this Exhibit or any Schedule shall be due and payable in full on the Effective Date, and the remaining 50% of the initial License fees as set forth in this Exhibit or any Schedule shall be due and payable in full no later than the earlier of (i) the date Fiserv makes such Software Available or (ii) 12 months following the Effective Date.

(c)
Additional License Fees . For any applicable additional license fees outside the Bundled Fee, Client shall pay additional license fees upon receipt of an invoice that reflects the (i) increase in License Metrics, (ii) effective date of each new Schedule, if and as mutually agreed in writing in such Schedule, or (iii) upon amendment of such Schedule, if and as mutually agreed in writing in such Schedule.

(d)
Initial Maintenance Fees . For any applicable Maintenance Fees outside the Bundled Fee, Client shall pay the Maintenance Fees specified in this Exhibit annually in advance beginning on the Effective Date prorated to December 31 of that calendar year, and thereafter on or before January 1 st for the next calendar year. Maintenance Fees shall be subject to Annual Adjustment as set forth in Section 2(a) the Agreement. Client shall pay additional Maintenance Fees for (i) increases above the License Metrics (ii) delivery of new Software releases, Enhancements (as defined in the Software Products Exhibit), or additions provided by Fiserv at the rates specified in this Fee Exhibit or at rates mutually agreed in writing between the parties if not stated in such Fee Exhibit. In addition, Client shall be entitled to a prorated refund of any applicable Maintenance Fees that have been paid in advance for licensed Software on any agreements, amendments, exhibits or schedules calculated to the date any such Deliverable that is replacing previously licensed Software is made Available.

(e)
Additional Maintenance Fees . For any applicable Maintenance Fees outside the Bundled Fee, in addition to the Annual Adjustment, Maintenance Fees may be subject to increase following: (i) changes in License Metrics set forth in the applicable Schedule, (ii) delivery of Enhancements purchased by Client (as defined in the Software Products Exhibit), (iii) Modifications (as defined in the Software Products Exhibit) or additions provided by Fiserv as a result of Client-requested development services as set forth in a SOW (as defined in the Account Processing Services Schedule to the ASP Services Exhibit) mutually agreed by both parties, or (iv) licensing of additional Software. Client shall pay additional maintenance fees under this Section prorated to the anniversary of the current payment date of Maintenance Fees and annually in advance thereafter coterminous with the then current payment date of Maintenance Fees.


Fiserv Confidential – Limited    Page 20






(f)
Intentionally Omitted.

(g)
Initial Implementation and Conversion Services Fees . Initial Professional Services Fees shall be due and payable as follows: 50% shall be due and payable on the Effective Date and the remaining 50% of such fees on the date the applicable Professional Services are completed. Any changes in scope requested by Client shall be mutually agreed between the parties in writing before adding the associated scope of work and associated fees at the Professional Service Rates.

(h)
Subscription Services Fees . Client shall pay fees for Subscription Services which shall commence on the date on which Subscription Services are first made Available to Client and shall be invoiced from such date to the anniversary of the then-current term and then annually in advance on the anniversary of each term. In addition to the Annual Adjustment, Subscription Services fees may be subject to increase following: changes in accounts processed; asset size; user seats; end user accounts, or other limitations set forth in the Schedule offering Subscription Services or from time to time upon reasonable notice to Client in the event fees are increased by Fiserv’s third party service provider.


3. Fees Related to Acquisitions.

Conversion Charges in the event of Acquisition .
Provided Client is current in its obligations under this Agreement, if Client merges with, combines with, or acquires (“ Combination ”) a third party financial institution (“ Acquired Entity ”) or if Client is a acquired by, merges with, combines with a third party financial institution (“ Acquiring Entity ”) and Client is the surviving entity, and such Acquired Entity or Acquiring Entity at the time of such Combination is in an agreement with Fiserv and receiving the same or similar Deliverables that are the subject matter of this Agreement, Fiserv agrees that the fees charged to Client for standard conversion services of the Acquired Entity or Acquiring Entity accounts shall not exceed the following:
Acquired Entity or Acquiring Entity Asset Size (prior to combination with Client’s assets)
Fees for standard conversion services
Less than $*****
$*****
Above $***** and less than $*****
$*****
Above $***** and less than $*****
$*****
Above $*****
As mutually agreed to by the parties at such time (provided, however, Fiserv shall have no obligation to provide conversion services until fees for such services are agreed upon and paid).
 

4. Professional Services Rate (for additional Professional Services requested during the term).   During the initial term of Services under this Agreement, Fiserv will provide professional services at the rates set forth below, subject to annual increase set forth in Section 2(b)  of the Agreement (the “ Professional Services Rates ”):

Professional Services
Hourly Rate
Accelerated Rate (applicable if Client requests urgent response or accelerated delivery)
Standard Blended Rate
$***** (Onshore)
$***** (Off-shore)
***** times the Hourly Rate



Fiserv Confidential – Limited    Page 21





If Client’s requested schedule triggers the Accelerated Rate, Fiserv will notify Client and Client shall have the opportunity to reset the schedule based on timing that does not trigger the Accelerated Rate.

5. Deconversion Services Fees .
In the event Client deconverts from all or substantially all of the Bundled Services, Fiserv agrees that the fees for standard deconversion services (which will include not more than two test cuts and one live cut of data of data readily available in the Fiserv Systems at the time of such file cuts) requested by Client in connection with the Deliverables then in effect under the Agreement will not exceed the amounts as set forth below:

Deconversion during initial term
Up to ***** Open Accounts
***** – ***** Open Accounts
***** + Open Accounts
$*****
$*****
$*****

In the event that only a portion of the Bundled Services are terminated and deconversion services are requested for that portion of the Bundled Services which are terminated, the fees for standard deconversion services for such terminated Bundled Services will not exceed a reasonable portion of the deconversion fee above as attributable to such terminated services based on such terminated services Bundled Percentage, or percentage of total fees for any terminated service not in the Bundled Fee. Any deconversion of Deliverables not included in the Bundled Services will be at then current rates for such deconversion.

As part of deconversion services, Fiserv will make available to Client all data available in the Fiserv systems, such data to be provided in the standard file formats included in the standard deconversion services. Non-standard data, volumes of history or file formats will be charged based on Fiserv’s then-current deconversion rates.

6. Pricing for Optional Services. The Products and Services listed below are not included in the Deliverables provided under the Agreement as of the Effective Date. Client may elect to add such Products and Services at Fiserv’s then current fees for such. In the event Client elects to add any of the optional products or services listed below during the first 6 months following the Effective Date, the table below identifies prices for such subject to completion of an amendment to the Agreement between the parties that adds the product or services.

*****
 

Attachment 1 to Fee Exhibit
Details of Bundled Services

*****



















Fiserv Confidential – Limited    Page 22











Attachment 2 to Fee Exhibit
Fees for Deliverables not included in Bundled Fee



1.
Implementation of Bundled Services and Deliverables One-Time Fees

    
Description
One Time Amount
*****
$*****
*****
$*****
*****
$*****
*****
$*****
*****
$*****
*****
$*****
*****
$*****
*****
$*****
*****
$*****
*****
$*****
*****
$*****
*****
$*****
*****
$*****
*****
$*****
*****
$*****
Total
$*****


2.
***** Bill Payment and Delivery Services Schedule Fees
Overnight Check – Fees Due Fiserv (Transaction Fee) :                         $*****
Fiserv will directly debit the Customer account for the configurable fee that Client elects to charge the Customer and will include a line item on the invoice for the credit(s) to Client associated with any amount in excess of the Wholesale Transaction Fee listed above.
Same-Day Bill Payment – Fees Due Fiserv (Transaction Fee) :                     $*****
Fiserv will directly debit the Customer account for the configurable fee that Client elects to charge the Customer and will include a line item on the invoice for the credit(s) to Client associated with any amount in excess of the Wholesale Transaction Fee listed above. Should same day or real time bill pay become the service standard, instead of exception, this fee will be discontinued, unless the parties otherwise agree.


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Customer Service :
First Tier Customer Care:    Not elected by Client, $***** per active user per month
Second Tier Customer Care:    Included in Bundled Services
Customer Care System Access:
First ***** users    Included in Bundled Services
Each additional block of ***** users    $***** per month
FraudNet
Monthly Transaction Volume
Monthly Processing Fee
***** – *****
$***** per month
***** – *****
$***** per month
***** – *****
$***** per month
***** – *****
$***** per month
***** – *****
$***** per month
***** – *****
$***** per month
***** – *****
$***** per month
***** – *****
$***** per month
***** – *****
$***** per month
***** – *****
$***** per month

Miscellaneous .
*****

Postage: Notwithstanding any provision to the contrary in this Exhibit or the Agreement, in the event that the United States Postal Service raises its postage rates, Fiserv may, without prior notice to Client, increase its fees commensurately. Such increase in postal charges shall become effective coincident with the effective date of the United States Postal Service increase in such charges.

3.
*****


4.
Item Processing Services Schedule Fees

*****    

The above prices are based on prior volume information provided by Client. Actual monthly volumes processed will determine the applicable service fee costs.
Applicable state tax will also be included in monthly bill.
Travel & expenses not included.


5.
*****
    


Fiserv Confidential – Limited    Page 24





    
1.1.
Bundled Fees do not include additional network connectivity that may be required with Fiserv supported systems.
1.2.
Future ***** integrations will require additional one-time implementation and/or professional services fees.
1.3.
Base Package Monthly User Subscription Fees includes those ***** included in base package. Separate ***** pricing will be available for enhanced packages, subject to the mutual agreement of the parties.

1.
Miscellaneous Fees :
2.1.
Fiserv reserves the right to pass through to Client, at Fiserv’s cost, any documented fees or expenses that may be imposed by carriers or other telecommunications services required in the delivery of the ***** to Users (e.g. ***** for certification and program updates to its network).
2.2.
Changes: To change configured items after initial set-up or to receive additional training, Fiserv’s then current Professional Services Rates will apply.

*****


Fiserv Confidential – Limited    Page 25





Performance Measures Exhibit
to Master Agreement between Fiserv Solutions LLC
and Lakeland Bank

A.      General

This Performance Measures Exhibit sets forth certain measurements of Fiserv’s performance with respect to various Deliverables provided under this Agreement (the “ Performance Measures ”). Fiserv shall perform the Services (Maintenance Services with respect to the Software) in accordance with the applicable standard level of performance identified in this Exhibit during normal business operations (i.e., live production, and not during non-production, disaster recovery or back-up operations) (the “ SLA ”s). On an annual basis, Fiserv and Client shall review and consider the Performance Measures and any associated SLA to determine whether there needs to be any additions, subtractions and/or revisions to such Performance Measures. Upon adding any Deliverables under this Agreement, the parties will also consider whether appropriate Performance Measures should be added to this Exhibit with respect to such Deliverables. All such changes to this Exhibit shall be mutually agreed in writing by the parties.

This Exhibit includes the Performance Measures, target performance, and each associated SLA (as defined below) for Services set forth in the following Schedules and as described in the Attachments to this Exhibit:

*****

B.
Service Level Exclusions . Fiserv will not be responsible for, and may exclude from the calculation of compliance with any SLA, any failure to meet the SLA if and to the extent that such failure to meet a SLA is caused by any of the following (each a “ Service Level Exclusion ”):
1.
downtime during Maintenance Windows (as defined for each applicable Deliverable) or downtime during any emergency / preventative maintenance provided advance notice has been given to Client for such downtime (Fiserv will use commercially reasonable efforts to limit its emergency / preventative maintenance downtime to those hours of operation least impacted by customer usage. Emergency / preventative maintenance will be performed during peak on-line processing hours only when required to sustain mission critical functionality (“ Emergency Maintenance ”); Emergency Maintenance shall only be excluded from the calculation of compliance with an SLA to the extent arising from causes outside of Fiserv’s control.
2.
Actions or inactions of Client or its third-parties (including Client’s customers and any instructions or direction given by Client);
3.
a Force Majeure Event;
4.
failure of the data communications carrier lines between Client and Fiserv’s System outside of Fiserv’s control;
5.
a ‘denial of service’ attack outside of Fiserv’s control; or
6.
Fiserv’s compliance with any instructions or direction of Client.


Fiserv Confidential – Limited    Page 26







C.
Report
Fiserv will provide to Client a monthly report for each month during the term of the Agreement. Such monthly report will include the performance achieved with respect to each SLA for the month covered by the report. Client shall have thirty (30) days to review such report and provide written notice to Fiserv of any discrepancies relating to such report. If Client provides such notice and thereafter provides a subsequent written notice that the discrepancies have been resolved between Fiserv and Client or in the alternative if Client fails to give notice of any discrepancies within the required time frame, the report will be final.

D.      Service Credits

For any calendar month in which Fiserv fails to meet an SLA as set forth in this Exhibit Fiserv will, to the extent provided in the applicable Section of this Exhibit below, apply a credit (“ Service Credit ”) to the next invoice for fees due to Fiserv by Client. The Service Credit will be calculated by multiplying the Applicable Credit Percentage (as identified in each of the applicable Sections of this Exhibit) times the portion of the Bundled Fee payable for such month for the applicable Service for which the SLA has not been met, or for Services not in the Bundled Fee, by multiplying the Applicable Credit Percentage times the average of the invoices for the most recent six months for that Service.

If Fiserv fails to meet the same SLA for three or more consecutive months, then the Service Credit for the third month, and each successive month that same service failure continues without an intervening month in which the SLA is met, will be twice the applicable Service Credit shown herein.

E.      Additional Terms

1.
Except in the event of service or system failures that rise to the level of a breach of the Agreement (e.g., a chronic failure of the Fiserv System, chronic Service failure or repeated outages), the remedies available for intermittent service failures in the ordinary course of business ( including monetary credits with respect to applicable Services) are the exclusive remedies available to Client for Fiserv’s failure to meet any SLA; provided, however, this shall not be construed as a waiver of Client’s rights and remedies available to Client for Fiserv’s breach of this Agreement. IN NO EVENT SHALL SERVICE CREDITS HEREUNDER BE CONSIDERED A PENALTY; RATHER, SUCH SERVICE CREDITS ARE A GENUINE ESTIMATE OF REDUCED VALUE TO CLIENT RESULTING FROM FISERV’S FAILURE TO MEET THE SLA SET FORTH HEREIN, SUCH REDUCED VALUE TO CLIENT BEING DIFFICULT OR IMPOSSIBLE TO CALCULATE IN ADVANCE. Failure to achieve SLAs or Target Performance (as defined for each applicable Service in the applicable Sections of this Exhibit) is not in itself intended to imply, or be construed or interpreted as, breach or negligence on the part of Fiserv in connection with its carrying out its duties and obligations under this Agreement.

2.
In the event Fiserv does not meet a service level as stated in this Exhibit on any Attachment hereto for either *****, then Client’s sole and exclusive remedy and Fiserv’s entire liability shall be for Client, within ***** days after such non-conformity, to notify Fiserv of such Non-conformities and elect to terminate the specific Schedule without further obligation or liability by written notice to Fiserv (such notice to identify the effective date of termination).

3.
For purposes of these SLAs, a “ Business Day ” is defined as each day, Monday through Friday, which is not a Federal Reserve holiday. Fiserv shall provide support services during Business Days within the hours noted in Section F below, unless indicated as 24 x 7 in the table below. As part of the implementation services, and as updated from time to time, Fiserv shall provide the applicable support guidelines for Client to report issues for each Service.



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F.      Support Center Hours for the following ASP Services:
    
*****

G.
If Fiserv determines, in its reasonable discretion, that any support issues are caused by any action of a Client or its End Users, including without limitation abuse or misuse of the Services, any modification or addition to the Services not authorized or performed by Fiserv or any failure of the Client to maintain its technology or the Services, or any other circumstance outside of Fiserv’s control, then Fiserv reserves the right to charge for any work performed by Fiserv in investigating such problem at Professional Services Rates. Any troubleshooting or assistance requested by a Client in connection with any such problems shall be provided at Fiserv’s sole discretion and at Professional Services Rates.
H.
Client Support Standards

The response, resolution times, and other support obligations in this Section H apply only to Client’s production environment of Software or Services under the Agreement as of the Effective date

1.
Client shall use the referenced telephone number for reporting Severity Level One and Severity Level two Non-conformities in Software (as defined in the Software Products Exhibit) or any issues with availability or errors in the Services (each a “Support Issue”). Client shall use the applicable Fiserv support website / case management tool to report Non-conformities other than Severity Level One and Severity Level Two.

2.
Technical Support. Fiserv shall provide technical support for a Support Issue associated with the Software or Modification, respectively, as follows:
2.1
Definitions:
2.1.1
“ Communication Update ” shall mean a communication from Fiserv to Client whether verbal or in writing of the current status with regard to in resolving the Service Issue. For clarity, Communication Update need not occur if no change in status has occurred with regard to resolution of the Service Issue unless otherwise mutually agreed between the parties.
2.1.2
” Severity Level ” shall mean:
a.
Severity Level One : A Non-conformity or Specification Non-conformity that renders the Software inoperable or unavailable.
b.
Severity Level Two : A Non-conformity or Specification Non-conformity that causes significant financial or operational impact or impacts a significant number of customer accounts and no cost effective circumvent procedure (a “work around”) is available.
c. Severity Level Three : A Non-conformity or Specification Non-conformity that has impact on the Client’s ability to perform its normal business functions, but for which a work around is available and Client can still operate while the Non-conformity or Specification exists.
d.
Severity Level Four : A Non-conformity that is minor or cosmetic where there is no loss of functionality or performance degradation.
e.
Severity Level Five : A Client Inquiry about the Software or a request for project services, such as customization, training, etc.
2.2
Response and Resolution times. Fiserv shall use commercially reasonable efforts to adhere to the following Severity Level response/resolution times.
2.2.1
Severity Level One : Fiserv and Client shall as soon as reasonably practicable but within no more than 60 minutes assign technical personnel as necessary to any reported Severity Level One and Fiserv and Client will each diligently and continuously utilize its commercially reasonable efforts to correct such Service Issue, correct the Non-conformity/Specification Non-conformity or utilize a circumvent procedure to restore Service or Software operation or availability as soon as reasonably practicable, but in any event within 24


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hours of notice of the issue and identification replication or reconstruction, as applicable of the Non-conformity/Specification Non-conformity, and communicate to Client in accordance with the Communication Table below provided.
2.2.2
Severity Level Two : Upon receiving notice of any Severity Level Two, Fiserv and Client shall promptly assign technical personnel and will each use its commercially reasonable efforts to correct or utilize a circumvent procedure to eliminate the Service Issue or correct the Non-conformity/Specification Non-conformity within 5 Business Days of notice of the issue and identification, replication or reconstruction of the Non-conformity/Specification Non-conformity, and communicate to Client in accordance with the Communication Table below.
2.2.3
Severity Level Three : Upon receiving notice of any Severity Level Three, Fiserv and Client shall promptly assign technical personnel and will each use its commercially reasonable efforts to correct or utilize a circumvent procedure to eliminate the Service Issue or Non-conformity/Specification Non-conformity within 15 Business Days of notice of the issue and identification, replication or reconstruction of the Non-conformity/Specification Non-conformity, or within a future maintenance release, whichever is appropriate for the issue, and communicate to Client in accordance with the Communication Table below
2.2.4
Severity Level Four : Upon receiving notice of any Severity Level Four, Fiserv and Client will each use its commercially reasonable efforts to correct or utilize a circumvent procedure to eliminate the Non-conformity. Fiserv may deliver a Software code correction in a future base release of the Software that is still open for development changes at the time of identification, isolation, and replication/reconstruction of the Non-conformity.
2.2.5
Severity Level Five : Upon receiving a Client Inquiry regarding the Software or applicable functionality, Fiserv will use commercially reasonable efforts to respond.
2.2.6
With respect to the above, the parties acknowledge that if resolution requires a code fix to be made to the Software, additional time may be necessary than if a code fix is not required.
2.3
Communication . In the event Client reports Non-conformity/Specification Non-conformity Fiserv shall use commercially reasonable efforts to provide a Communication Update within the timeframes defined in the Communication Table herein. Escalation of the case may be made to the next level of management within both Fiserv's and Client’s organization if the applicable timeframe defined in Communication Table is not met.
Communication Table

*****
2.4
Root Cause Analysis
Upon Client request, Fiserv shall promptly provide, at no additional charge to Client, a root cause analysis prepared by Fiserv to address a Severity Level 1 or 2 Non-conformity or a Service Issue.
2.5
Reporting Non-conformities and Support Contacts
Client’s Non-conformity report should contain Client’s company name and the phone number and email address of the person reporting the call; the proposed severity level (in accordance with the definitions provided by Fiserv); the Software for which Client is reporting a Non-conformity; and the platform on which the Software is installed. Client’s Non-conformity reports should contain all initial pertinent information and logs, transcripts, etc. transmitted promptly to Fiserv in a secure method. Failure to do so will result in a delay of the Non-conformity resolution.
Fiserv reserves the right to re-prioritize a Non-conformity designation that is not reasonably consistent with Fiserv definitions. If Fiserv does so, Fiserv shall so advise Client in writing and shall cooperate with Client to come to an agreement on level of severity. Fiserv’s response is provided at multiple levels to best match the need of the issues. Fiserv will use the appropriate support level to focus attention on the most critical issues first, and will cooperate with Client in coming to agreement on which is the appropriate level of support for a given issue.
 
I.
RTO/RPO. Notwithstanding any SLA listed in this Exhibit, Fiserv will use reasonable efforts to return Services in the event of a Disaster in accordance with the following recovery time objective


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(“RTO”) recovery point objective (“RPO”). During any Disaster, the SLAs otherwise set forth in this Exhibit shall not apply.
*****



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ASP Services Exhibit to Master Agreement

1.
ASP / Processing Services . The parties shall add individual Schedules to this ASP Services Exhibit for Fiserv’s provision of ASP, processing, or other service bureau Services to Client. The terms of this ASP Services Exhibit shall apply to the Services set forth in Schedules attached to this Exhibit, which are listed below and as may be added by amendment after the Effective Date. If optional services are listed on a Schedule to this Exhibit, such optional services shall become part of the Agreement upon Client’s use of such optional services.
*****

(a)
Additional Services .
i.
New Services . The parties shall add additional individual Schedules to this ASP Services Exhibit for Fiserv’s provision of any additional ASP, processing, or other service bureau Services required by Client
ii.
Optional Services . If optional services are listed on a Schedule to this Exhibit, such optional services shall become part of the Agreement upon Client’s use of such optional services.
2.
Fiserv System and Client Systems . Fiserv systems used in the delivery of Services (the “ Fiserv System ”) and Client’s networks and computer systems (“ Client Systems ”) contain information and computer software that are proprietary and confidential information of the respective parties, their suppliers, and licensors. Each party agrees (a) not to attempt to circumvent the devices employed by the other party to prevent unauthorized access thereto, including without limitation modifications, decompiling, disassembling, and reverse engineering thereof and (b) to reasonably maintain its respective systems in order to provide or receive, as applicable, the Deliverables as set forth in the Agreement. The restrictions set forth in this paragraph shall not apply to an Open Source Component to the extent such restrictions conflict with the terms of the applicable Open Source License.
3.
Fiserv Obligations .
(a) Client Policies . While assigned to provide Services at a Client location or otherwise visiting Client’s facilities, Fiserv employees will: (i) comply with Client’s reasonable safety and security procedures and other reasonable Client rules applicable to Client personnel at those facilities to the extent such procedures and rules are provided to Fiserv in writing and in advance, (ii) comply with all reasonable requests of Client personnel, as applicable, pertaining to personal and professional conduct, and (iii) otherwise conduct themselves in a professional and businesslike manner.
(b) Changes . Fiserv may make changes in its methods of delivering the Services, including but not limited to operating procedures, type of equipment or software resident at, and the location of Fiserv’s service center(s); provided, however, such changes will not materially and negatively impact the functionality provided to Client in the Services. Fiserv will notify Client prior to implementing any material change that affects Client’s normal operating procedures, reporting, or internal service costs.
(c) Client Systems Access . If Fiserv accesses Client Systems, Fiserv will: (i) use this access only to provide Services to Client; and (ii) ensure that the Fiserv System includes up-to-date anti-viral software designed to prevent viruses from reaching Client Systems through the Fiserv System.
(d) Security Testing . Fiserv may use a reputable third party to provide monitoring, penetration and intrusion testing with respect to certain Services. Upon Client’s written request, Fiserv agrees to provide Client with a copy of its most recent security certification, if any, for the applicable Fiserv service center providing such Services.
(e) Services Warranties . Fiserv represents and warrants that: (i) Services will conform to the specifications set forth in the applicable technical or operational documentation provided to Client by Fiserv or in the Schedules to this Exhibit


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(“ Service Documentation ”); (ii) Fiserv will perform Services accurately provided that Client supplies accurate data and information, and follows the procedures described in all Service Documentation and notices; (iii) Fiserv personnel will exercise due care in provision of Services; and (iv) functionality provided by the Fiserv System will enable Client to comply in all material respects with Federal regulations generally applicable to Fiserv’s clients in the industry in which the functionality is intended to be used.
(f) Error Correction . In the event of an error or other default caused by Fiserv personnel, systems, or equipment, Fiserv shall correct such error or default at no additional charge to Client, provided that Client supplies Fiserv with a written request for correction of the error within the following number of days (i) 60 days for statement-only errors that do not also constitute a system or posting error; and (ii) 14 days for batch processing and all other errors. Notwithstanding the foregoing, with regard to errors or defaults attributable in whole or in part to Client, Client customers, or Client’s third party servicers acting on Client’s behalf, (collectively, “ Client Errors ”) Fiserv will use commercially reasonable efforts to correct such error or default at Client’s expense. Client shall pay Fiserv for such efforts at Professional Service Rates.
4.
Client Obligations.
(a) Procedures . Client agrees to comply with Fiserv’s procedures and operating instructions for use of Services and the Fiserv System as such procedures and instructions are provided by Fiserv to Client.
(b) Communication Lines, Terminals, Equipment, Software .
i.
Unless otherwise mutually agreed in writing between the parties, Client shall obtain and maintain at its own expense such equipment, including without limitation, telecommunication connections, as may be necessary or appropriate to facilitate the proper use and receipt of the Services. Client shall be responsible for paying for all supplies to be used by Client in connection with the Services.
ii.
All communication lines, terminals, equipment, computer software, and interface devices required to access the Fiserv System and to transmit and receive data and information between Client’s location(s), Fiserv’s service center(s), and/or other necessary location(s) (collectively, “ Client Equipment ”) are subject to approval by Fiserv and shall be compatible with the Fiserv System. Communication lines between Fiserv service centers shall be Fiserv’s responsibility. Client is responsible for the expense of either procuring Client Equipment from Fiserv or providing Client Equipment itself. Fiserv shall provide Client with a list of compatible equipment and software. Client agrees to pay Fiserv on a time and materials basis at Professional Service Rates for recertification of the Fiserv System resulting from Client’s use of non-compatible Client Equipment. If Fiserv provides such items, Client agrees to pay charges relating to the installation and use of Client Equipment as set forth in the Schedules to this Exhibit.
(c) Input . Client shall be solely responsible for the input, transmission, or delivery to and from Fiserv (whether delivered to or from Client site(s) or any applicable clearinghouse, regulatory agency, or Federal Reserve Bank), of all information and data required by Fiserv to perform Services unless Client has retained Fiserv to handle such responsibilities, as specifically set forth in Schedules to this Exhibit. The information and data shall be provided in a format and manner mutually agreed between the parties. Client shall determine and be responsible for the authenticity and accuracy of all information and data submitted to Fiserv from either Client or third parties on Client’s behalf.
(d) Client Personnel . Client shall designate appropriate Client personnel for training in the use of the Services, shall supply Fiserv with reasonable access to Client’s site during normal business hours for Implementation Services, and shall cooperate with Fiserv personnel in their performance of Services.
(e) Client Review; Responsibility for Accounts . Client shall review all appropriate reports furnished by Fiserv for accuracy, and shall work with Fiserv to reconcile any out of balance conditions or discrepancies. As applicable, Client shall be responsible for balancing its accounts each Business Day and notifying Fiserv promptly of any errors or discrepancies. If Client so notifies Fiserv, Fiserv shall, at its expense, promptly recompute accounts affected by discrepancies solely caused by the Fiserv System (in accordance with Section 5(f) above) or provide for another mutually agreeable resolution. If Client notifies Fiserv of Client Errors, Fiserv shall advise Client whether Fiserv can correct or assist in resolving Client Errors and the terms (including estimated fees at Professional Service Rates) under which Fiserv shall undertake the same. Upon


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acceptance by Client, Fiserv will use commercially reasonable efforts to correct or assist in resolving such Client Errors. Reconstruction of Client Errors or related error conditions will be done at Professional Service Rates.
(f) Client Systems . Client shall ensure that Client Systems: (i) are capable of passing and/or accepting data from and/or to the Fiserv System, and (ii) include up-to-date anti-viral software designed to prevent viruses from reaching the Fiserv System through Client Systems.
(g) Client Content . Client will provide all Client Content in HTML format (or other format as mutually agreed between the parties) and otherwise in accordance with guidelines set forth, from time to time, by Fiserv. If Fiserv must convert any Client Content into such format (if Fiserv is able to and does so at its own discretion), Client will pay for such conversion at Professional Service Rates.
(h) Client Web Sites . Client shall be solely responsible for: (i) registering and maintaining its Web site(s) used in connection with any Services, including without limitation registering and maintaining all Internet addresses relating thereto, (ii) providing reasonable security for such Web site(s) and users of such Web site(s), and (iii) performing any other actions or providing any other functionalities required by any federal state or local law, rule or regulation. Client shall have sole editorial control over its Web sites, and Client shall be responsible for providing access through its Web sites to any relevant Services. Client agrees to provide appropriate copyright attribution to Fiserv as creator and designer of copyrighted materials, including without limitation Fiserv-created Web sites, through an appropriate legend or other such designation, as applicable.
(i) Client Instructions . As part of any applicable implementation process and ongoing as needed to provide the Services, Fiserv shall advise Client when Fiserv requires instruction or guidance from Client in order to perform the Services. Accordingly, Client will provide to Fiserv all requested instruction and guidance necessary to perform the Services. Client acknowledges and agrees that Fiserv will rely upon and act in accordance with all such instructions as provided, and Client assumes all risk for the consequences of any such instructions Client gives (or fails to give) and Fiserv’s reliance thereon. Fiserv shall have no obligation to check for any errors or omissions in any such instructions and/or to correct, cancel or amend any action pursuant to any Service(s) once Fiserv has received instructions to complete such action.
(j) Indemnity Regarding Services . Client shall, at its expense, indemnify and hold harmless Fiserv and its Affiliates, and their officers, directors, employees against: (i) any and all third party claims arising from an allegation that any of Client Content provided to Fiserv in connection with the Services, or Fiserv’s use thereof violates the proprietary rights of a third party (“ Client Content Claim ”); (ii) any and all third party claims or actions arising out of (A) the use by Client of the Fiserv System in a manner other than that provided in the Agreement, or (B; and (iii) any and all third party claims or actions arising out of the use by Client or its customers of the Fiserv System in breach of the Agreement, and Client shall pay all amounts payable by Fiserv under any judgment, verdict, or court order entered by a court of competent jurisdiction or settlement agreed upon by Client in any such action (iv) with the exception of claims regarding Fiserv’s gross negligence or willful misconduct, claims by third parties through Client, arising out of the performance and non-performance of Services by Fiserv, provided that such indemnity shall not preclude Client’s recovery of damages from Fiserv pursuant to the terms and subject to the limitations of the Agreement. In such event, Client shall have the sole right to control the defense and disposition of such claim, provided that Client shall be obligated to mitigate any damages payable related to such claim, and Fiserv shall provide Client with reasonable cooperation and assistance in the defense and disposition of such claim provided, however, that Client shall not settle any such claim or threatened claim in a manner that would require Fiserv to perform, without Fiserv’s prior written consent, or contains a stipulation to or admission or acknowledgment of, any liability or wrongdoing (whether in contract, tort or otherwise) on the part of Fiserv, or otherwise adversely affects Fiserv’s rights or interest without Fiserv’s prior written consent, which consent shall not be unreasonably withheld, delayed or conditioned; and provided, further, however, that Fiserv may at all times, engage counsel of Fiserv’s choice and at Fiserv’s expense provided such engagement shall not interfere or disrupt Client’s rights and obligations under Subsection (iii) above. If the assistance and cooperation requested by Client of Fiserv requires Fiserv to incur additional out of pocket expense, Fiserv shall notify Client prior to incurring such expense, and if Client requests Fiserv still to proceed, Client shall reimburse Fiserv for such expense.
5.
Business Continuity / Disaster Recovery .
(a) General . Fiserv maintains a business continuity plan (“ Business Continuity Plan ”) for each Service that describes measures it will implement to recover from a Disaster. A “ Disaster ” shall mean any unplanned impairment or interruption


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of those systems, resources or processes that enable standard performance of the applicable Service’s functionality. Each Business Continuity Plan shall include a plan for the recovery of critical technology systems (a “ Disaster Recovery Plan ”), as well as procedures for restoring business operations at the primary location or at a designated recovery site, if necessary. Prior to the Live Production Date, Fiserv shall work with Client to establish a plan for alternative communications in the event of a Disaster, which plan shall be periodically updated but not less than annually during the Term.
(b) Disaster Occurrence . Fiserv shall notify Client as soon as possible after declaring a Disaster and shall comply with the Business Continuity Plan. Fiserv shall move the processing of Client’s standard services to the recovery site as expeditiously as possible if operations cannot be satisfactorily restored (in Fiserv’s sole discretion) at the primary location. If a recovery site is used, Fiserv shall coordinate the cut-over to back-up telecommunication facilities with the appropriate carriers. Client shall maintain adequate records of all transactions under the reasonable control of Client during the period of service interruption and shall have personnel available to assist Fiserv in implementing the switchover to the recovery site. During a Disaster, optional or on-request services shall be provided by Fiserv only to the extent adequate capacity exists at the recovery site and only after stabilizing the provision of base services.
(c) Disaster Recovery Test . Fiserv shall test the Disaster Recovery Plan periodically. Client agrees to participate in and assist Fiserv with such test, if requested by Fiserv. Upon Client’s request, test results will be made available to Client’s management, regulators, auditors, and insurance underwriters.
(d) No Warranty . Client understands and agrees that the Business Continuity Plan is designed to minimize, but not eliminate, risks associated with a Disaster affecting Fiserv’s service center(s). No performance standards shall be applicable for the duration of a Disaster. Client maintains responsibility for adopting a disaster recovery plan relating to disasters affecting Client’s facilities and for securing business interruption insurance or other insurance necessary for Client’s protection. Fiserv agrees to release information necessary to allow Client’s development of a disaster recovery plan that operates in concert with the Business Continuity Plan.
6.
Termination; Deconversion .
(a) Convenience; Early Termination . If Client terminates the Agreement or reduces (other than as a result of account attrition or volume fluctuation in the ordinary course of business) or terminates Services for any reason other than pursuant to Section 9(b)(i) or (iii) of the Agreement, and if required under the terms and conditions of the Fee Exhibit or a Schedule, Client shall pay a termination fee based on the remaining unused term of the Services, Such fee shall be determined by multiplying the average of the monthly invoices (net of/excluding any pass-through charges such as, but not limited to, postage) for each Service received by Client during the 6-month period preceding the effective date of termination (or if no monthly invoice has been received, the estimated monthly billing for each Service to be received hereunder) by percentage listed below times the remaining months of the term, plus any unamortized Flex Credit existing on Fiserv’s books on the date of termination based upon a beginning Flex Credit amount of $***** (collectively “ Termination Fee ”) as follows:
Year 1 – *****%
Year 2 – *****%
Year 3 – *****%
Year 4 – *****%
Year 5 – *****%
Year 6 – *****%
Year 7 – *****%
Each Renewal Term – *****%

Example 1: Termination occurs in the seventh month of year 1 (78 months remaining), the monthly fee is $***** average for the previous six months, the straight-line monthly amount of unamortized flex credit is $***** per month. The


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termination fee would be ($***** x *****% x 78 months) plus ($***** x 78 months) = $*****. This example assumes all solutions are implemented in month one – actual service implementations will occur over time which would reduce the actual calculated fee.
Example 2: Termination occurs in the first month of year 4 (48 months remaining), the monthly fee is $***** average for the previous six months, the straight-line monthly amount of unamortized flex credit is $***** per month. The termination fee would be ($***** x *****% x 48 months) plus ($***** x 48 months) = $*****. Note: monthly fees will likely increase over time due to organic growth, acquisition, and new content.
(b) Defaults . If Client:
i.
fails to cure its material breach or fails to pay amounts due, each as set forth in Section 9(b) of the Agreement; or
ii.
deconverts any significant data from the Fiserv System either without Fiserv’s prior written consent, unless otherwise permitted under the Agreement;
then, in any such event, Fiserv may, upon written notice, terminate the Agreement in whole or in part and be entitled to recover from Client as liquidated damages for such early termination an amount equal to the Termination Fee.
(c) Liquidated Damages . Client understands and agrees that Fiserv losses incurred as a result of early termination of the Agreement, this Exhibit, or any Schedule would be difficult or impossible to calculate as of the effective date of termination since they will vary based on, among other things, the number of clients using the Fiserv System on the date the Agreement (or applicable part thereof) terminates. Accordingly, the amounts set forth in Sections 6(a) and 6(b) above and Section 2(f) of the Agreement represent Client’s agreement to pay and Fiserv’s agreement to accept as liquidated damages (and not as a penalty) such amount for any such termination. In the event of any conflict between the terms of the Agreement and this ASP Services Exhibit, this Exhibit shall control.
(d) Return of Client Files . Upon expiration or termination of the Agreement or any Schedule to this Exhibit, Fiserv shall furnish to Client such copies of Client Files as Client may request in a Fiserv standard format, and shall provide such information and assistance as is reasonable and customary to enable Client to deconvert from the Fiserv System; provided, however, that Client authorizes Fiserv to retain Client Files until: (i) Fiserv is paid in full for all amounts due for all Services provided through the date such Client Files are returned to Client; (ii) Fiserv is paid its then standard rates for the services necessary to return such Client Files; (iii) if the Agreement or applicable Schedule is being terminated, Fiserv is paid any applicable termination fee pursuant to Sections 9(a) or (b) above; and (iv) Client has returned or destroyed all Fiserv Information in accordance with Section 3(b)(iii) of the Agreement. Fiserv shall be permitted to destroy Client Files any time after 30 days from the final use of Client Files for processing, unless otherwise specified in a Schedule.
(e) Miscellaneous . Client is responsible for the deinstallation and return shipping of any Fiserv-owned equipment located on Client’s premises.
(f) Discount of Certain Fees Relating to Merger Involving Client . If Client acquires or merges with an organization that is, at the time of the merger, a user of Fiserv services substantially similar to the Services, Fiserv will allow an early termination of the non-surviving organization’s agreement with Fiserv (the “Acquired Agreement”) upon satisfaction of all of the following terms and conditions:
(i) The continuing Fiserv agreement with the surviving organization (the “Surviving Agreement”) must have at least as many months remaining under its then-current term as the number of months remaining in the then-current term of the Acquired Agreement as of the date of termination of the Acquired Agreement.

(ii) The Surviving Agreement may not be an agreement with a financial institution in FDIC receivership if such agreement has been or will be repudiated.

(iii) The total fees for Deliverables paid to Fiserv under the Surviving Agreement shall not be less than the combined total of fees that would have been paid separately under each of the Surviving Agreement and Acquired Agreement for the remainder of their then-current terms.


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Example: The Acquired Agreement has monthly fees of $***** and 24 months remaining on term (total fees of $*****) and the Surviving Agreement has monthly fees of $***** and 48 months remaining on term (total fees of $*****) – total combined fees of $*****. Adding the Acquired Agreement volumes to the Surviving Agreement terms results in monthly fees of $***** and 48 months of remaining term (total fees of $*****). Since the $***** is greater than the $*****, this caveat would be satisfied.

(iv) Written notice of termination of the Acquired Agreement must be given no later than 60 days following completion of the acquisition transaction (i.e., legal close of the merger), with notification of the effective date of termination being no later than 90 days following completion of the acquisition transaction, with conversion completed within 12 months of the effective date of termination.

(v) If all requirements of this section are met, Fiserv agrees to accept a reduced early termination fee under the Acquired Agreement, equal to *****% of the full calculated early termination fee.

7.
Additional Fee Provisions .
Deconversion Charges . Client agrees to pay Fiserv’s deconversion charges based on the rates identified in the Fee Exhibit in connection with Client’s deconversion from the Fiserv System, the scope of such services to be mutually agreed in writing between the parties.
.
                                                    
*****


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Software Products Exhibit
to the Agreement


1. Software Products . The parties shall add individual Schedules to this Exhibit for Fiserv’s license of Software (as defined below which will be hosted by Client) and provision of related software maintenance services to Client. The terms of this Exhibit shall apply to any such Software and related services covered by the Schedules to this Exhibit, which are listed below and as may be added by amendment after the Effective Date.
Enterprise Performance Management Solutions Software Schedule
2.      Defined Terms .
(a) “ Computer System ” means the computer equipment and specified operating environment required for operation of the Software when installed, as identified in each Schedule and/or in the Documentation.
(b) “ Documentation ” means the technical end-user documentation for the Software, as delivered by Fiserv to Client with the Software, as may be updated by Fiserv from time to time as part of Maintenance Services.
(c) “ Enhancements ” means changes made to Software that add program features or functions not originally within the Software and that are provided upon payment of additional fees.
(d) “ Location ” means only the Client premises identified as such on each Schedule.
(e) “ Maintenance Fee ” means the annual (unless otherwise specified) fee set forth in each Schedule for Maintenance Services.
(f) “ Maintenance Services ” means maintenance services described in Section 5 below. Maintenance Services are available only with respect to the current and one prior release of Software.
(g) “ Modifications ” means changes or interfaces made to the Software through the Development Services (as defined in the Professional and Development Services Exhibit) for which special maintenance services and fees apply.
(h) “ Non-conformity ” means a failure of Software to perform in substantial accordance with the functions described in the Documentation, for which Client has provided sufficient information for Fiserv to replicate on a computer configuration that is comparable to the Computer System and under Fiserv’s control.
(i) “ Software ” means the standard, unmodified computer programs in object code (unless otherwise specified on the applicable Schedule), as specified in each Schedule, and any Open Source Components embedded in the Software.
(j) “ Software System ” means the Software and Third Party Software.
(k) “ Special Maintenance Fees ” means the annual fee set forth in the applicable schedule to the Professional and Development Services Exhibit or each Schedule for Maintenance Services.
(l) “ Special Maintenance Services ” means the Maintenance Services described in Section 6 below excluding the provisions of Section 5(a)(iii).
(m) “ Third Party ” means any party other than Fiserv and its agents and subcontractors, and Client.
(n) “ Third Party Software ” means the object code version of software that is owned or licensed by Third Parties and provided to Client by Fiserv. Third Party Software shall be identified as such on the applicable Schedule hereto. Third Party Software does not include Open Source Components or third party code (if any) that Fiserv embeds in the Software.


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(o) “ Total License Fee ” means the total sum specified in each Schedule to be paid by Client for the license to Use the Software granted to Client hereunder.
(p) “ Updates ” means, when and if made available through Maintenance Services to Fiserv’s other clients at no additional charge, changes made to correct Non-conformities, to maintain compatibility with new system software releases, or to improve existing features and functions within the Software, but does not include Enhancements or other new modules or products for which Fiserv charges a license fee. Updates provided hereunder are subject to all license rights and related restrictions set forth in this Exhibit with respect to the Software, but provision of Updates does not commence new warranty periods for the Software.
(q) “ Use ” means copying or loading any portion of Software from storage units or media into any equipment for the processing of data by Software, or the operation of any procedure or machine instruction utilizing any portion of either the computer program or instructional material supplied with Software at the Location. Use is limited to type of operations described in the Documentation solely to process Client’s own work, and is subject to any other restrictions or limitations set forth in each Schedule. Use specifically excludes any service bureau, time-share, training, or facilities management services to Third Parties without Fiserv’s prior written consent and Client’s payment of additional fees in accordance with mutually agreed terms. Use further excludes any right to enhance, modify, improve or create derivative works of the Software unless any such right is expressly granted in the applicable Schedule.
(r) “ Warranty Period ” means the period of time ending 90 days after the date of Acceptance as set forth in any Schedule or SOW.
3. License .
a)     License Grant . In consideration of Client’s payment of the fees, Fiserv agrees to furnish Software to Client and hereby grants to Client, a non-exclusive, nontransferable, non-sublicensable perpetual (subject to all termination provisions under this Exhibit or the Agreement) license or subscription right to Use the Software at the Location on the designated Computer System, subject to
(i)
Client continuing to obtain Maintenance Services from Fiserv, if this requirement is set forth in an Exhibit or SOW; and
(ii)
any additional limitations as to number of accounts, number of users, asset size, and other matters as specified in each Schedule (collectively referred to as “ License Metrics ”).
b)     Location Change . Upon 60 days advance notice to Fiserv, Client may change the Location if Client transfers its operations to a new location within the same country. Client shall contemporaneously uninstall/delete the Software from the prior Computer System following such transfer to the alternative Client location. Assistance by Fiserv related to the transfer shall be chargeable at Professional Service Rates plus any out-of-pocket expenses.
c)     License Copy . Client shall not copy any portions of the Software System, other than Open Source Components provided under an Open Source License that permits copying, except that Client may copy reasonable quantities of any Documentation, and may utilize non-production copies of the Software at the Location for
(i)
An unlimited number of test versions separate from archive, back-up, or emergency restart,
(ii)
for archive, back-up, or emergency restart purposes or to replace copy made on defective media.
The original, and all copies of Software and Documentation, and all parts thereof, are Fiserv’s property and shall include Fiserv’s copyright and other proprietary notices. Client agrees that it shall not remove or modify any markings, identification, copyright or other notices of Fiserv, their Affiliates or any Third Party from the Software System or Documentation.
d)     No Benchmarks . Client agrees that any performance information, analysis, or program benchmark test results shall be considered Fiserv Information and shall not be disclosed in violation of Section 3 of the Agreement or without Fiserv’s prior written consent. Disclosure to Client’s subcontractors and third party consultants who have a need to know is permitted, subject to current non-disclosure agreements being in place.


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e)     Unauthorized Use . In the event Client, its officers, employees, agents, or subcontractors:

(i)
makes or distributes unauthorized Software copies or derivations; or
(ii)
uses Software at an unlicensed location or in violation of the License Metrics; or
(iii)
discloses the Software or any part thereof to any third party without Fiserv's prior written consent;
Client shall pay Fiserv an amount equal to ***** times Fiserv's then current license fee for the Software for each unauthorized copy or derivation, unauthorized use, or each disclosure made in violation of the Agreement (”Violation”), so long as Fiserv provides Client with notice of such Violation and Client does not cure same within 10 days of receipt of such notice. This payment shall be in addition to and not in lieu of Fiserv rights of termination hereunder and Fiserv’s right to seek additional damages and/or injunctive relief.

Notwithstanding anything set forth in this Software Products Exhibit, Client may grant access to, up to the license metrics, any Software to any of Client’s subcontractors and third party consultants used by Client, including any customers of Client, who require access and use of the Software in the course of conducting business with or providing goods and/or services to Client, and, if applicable, subject to current non-disclosure agreements being in place.
f)     Archive Use . Client shall maintain any such copies and the original at the Location and one Client archive site in the same country (“ Archive Site ”). Client may transport or transmit a copy of Software from the Location or the Archive Site to another location in the same country as the Location for back-up use when required by Computer System malfunction in an emergency or disaster situation, provided that
(i)
Client must promptly inform Fiserv of the emergency or disaster (but in no event later than five (5) days following the commencement of such use),
(ii)
Client must stop using such copy promptly after the Computer System and facility affected by the emergency or disaster is restored, and
(iii)
the copy or original is destroyed or returned to the Location or Archive Site when the malfunction is corrected.
g)     No Compile . Client shall not decompile, disassemble, or otherwise reverse engineer the Software System. This restriction shall not apply to an Open Source Component whose Open Source License terms prohibit this restriction.
h)     Client Computer System . Client shall obtain and maintain at its own expense such data processing and communications equipment and supplies as may be necessary or appropriate to facilitate the proper use of the Software System. Client is responsible for undertaking the proper supervision, control and management of its use of the Software, including:
(i)
assuring a proper Computer System configuration, and
(ii)
following generally accepted banking industry procedures for the security of data, accuracy of input and output, and back-up plans, including restart and recovery in the event of hardware or software error or malfunction.
i)     Third Party Terms . Unless otherwise provided in the Agreement or in a Schedule, Third Party Software is provided to Client under the following supplemental terms:
(i)
The Third Party Software modules set forth in the Schedules are hereby provided to Client in exchange for Client’s payment of the corresponding fees.
(ii)
Use of Third Party Software shall be restricted to use as part of the Software System.
(iii)
Client shall not remove or modify any program markings or notices of any third party provider’s, or its licensors’, proprietary rights
(iv)
Third Party Software is provided “as is”, by Fiserv and any responsibility of any Third Party Software owners shall be as set forth in any End User License Agreement, or similar type agreement, if any, between Client


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and such Third Party Software Owners. Fiserv’s aggregate liability for a default relating to any Third Party Software shall be limited to the amount paid by Client to Fiserv for the applicable Third Party Software and Fiserv shall not be liable for any indirect, incidental or consequential damages associated with use of Third Party Software.
(v)
Publication of benchmark tests of Third Party Software is permitted only in a writing signed by an authorized officer of Fiserv and the Third Party Software owner.
(vi)
Third Party Software owners are hereby designated as third party beneficiaries of this Subsection 3. h) of this Exhibit as it relates to their Third Party Software. Fiserv agrees to pass through to Client any Third Party Software warranties provided by the applicable Third Party Software owner, to the extent Fiserv is able to do so without negatively impacting or diminishing its contractual rights with such Third Party Software owner.
(vii)
A. Except as otherwise set forth in a Schedule to this Exhibit, Fiserv shall not provide maintenance services with respect to Third Party Software.
B. Client acknowledges that Client will obtain maintenance services with respect to Third Party Software and Client agrees to contract for such maintenance with the respective Third Party supplier(s) as long as this Exhibit and the applicable Schedule is in effect. Client shall pay any applicable maintenance fees, including those specified in the applicable Schedule.
4. Professional Services Terms . Any professional services, including development, implementation, conversion, and/or training services to be provided by Fiserv in connection with the Software, including the fees for such services, are set forth in the Professional and Development Services Exhibit, or as otherwise mutually agreed in writing between the parties.
5. Maintenance Services Terms . The terms of this Section 5 apply unless otherwise set forth in a Schedule and in the event of any inconsistencies, the terms and conditions in such Schedule shall apply.
(a) Maintenance Services . During each annual period for which Client has paid Maintenance Fees, Fiserv shall provide the following Maintenance Services to Client:
(i)
Unlimited telephone support during normal business hours to Client’s employees duly trained in the Use of the Software.
(ii)
Software program fixes or workarounds with respect to Non-conformities will be provided in accordance with any SLA Exhibit in any Schedule, following receipt of applicable notice from Client. Client agrees to provide Fiserv with reasonable assistance and information in connection therewith.
(iii)
Updates will be provided to Client and shall be installed by Client within the time frame specified by Fiserv. Training for Updates may be offered to Client at Professional Service Rates.
(b) Maintenance Term . Unless otherwise set forth in a particular Schedule, the initial term for Maintenance Services shall begin on the effective date of the applicable Schedule and continue coterminous with the Agreement unless either party provides written notice of non-renewal to the other party at least 90 days prior to the expiration of the then current term or as otherwise mutually agreed in writing between the parties. Any termination of Maintenance Services by Client shall be effective only at the end of the then-current term of the Agreement. Fiserv may terminate Maintenance Services upon at least 180 days prior notice to Client if the Software is superseded or replaced by a new release or version thereof, Client elects not to install such new release or version, and Fiserv, at its sole discretion, elects not to support the old release or version.
(c) *****.
(d) Services Not Covered . Should Fiserv’s review of the Non-conformity indicate, in Fiserv’s reasonable opinion, that the reported problem is not a Non-conformity but is due to other problems, including without limitation input not in accordance with the Documentation, Client’s abuse or misuse of the Software System, a change or addition to the Software System not performed by Fiserv, Client’s failure to properly maintain the Computer System, or Client’s failure to install the required


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current system software release, Update, fix or workaround as instructed by Fiserv (collectively a “ Non-Fiserv Problem ”) then:
(i)
Client shall pay Fiserv monthly as incurred for the work performed by Fiserv in investigating the Non-Fiserv Problem on a time and materials basis at Professional Service Rates, and
(ii)
At Client’s request, Fiserv shall advise Client whether Fiserv can correct or assist in resolving such Non-Fiserv Problem, and the terms (including estimated fees) under which Fiserv shall undertake the same. Upon acceptance by Client, Fiserv shall correct or assist in resolving the Non-Fiserv Problem in accordance with such terms, and Client shall pay Fiserv monthly as incurred for such work on a time and materials basis at Professional Service Rates.
(e) Network Related Problems Not Covered . Network-related problems and errors in non-production environments are not covered under Maintenance Services. If Fiserv provides such services, or any other maintenance services beyond those specified in this Section, Client shall pay for such services on a time and materials basis at Professional Service Rates.
(f) Support Coordinator . Fiserv’s provision of Maintenance Services is contingent upon Client’s designating at least one qualified contact person and alternate (collectively “ Support Coordinator ”) for each Schedule or for each product within a Schedule who will be Fiserv’s point of contact regarding Maintenance Services. Client may change the Support Coordinator by notifying Fiserv in writing. Telephone support questions from Client’s Software users will be directed to the Support Coordinator. Fiserv is not obliged to respond to inquiries other than from the Support Coordinator. Fiserv also requires that Client designate a secondary contact in addition to the Support Coordinator that will be authorized support contacts, one of whom will be available for contact by Fiserv during the standard support hours. For emergency situations, Fiserv will work with such other persons as identified and authorized by Client in advance subject to the other provisions of this Section 5.
(g) Maintenance Fees . Client shall pay the Maintenance Fee annually in advance for the Software licensed under each Schedule as set forth in each Schedule.
6. Equipment Terms .
(a) If Client purchases from Fiserv any components of the Computer System or any other Equipment, such purchase shall be in accordance with the terms specified in the Equipment Exhibit to the Agreement. If Client does not purchase the Computer System from Fiserv, Client is responsible for providing the Computer System or any other Equipment at its own expense. If Fiserv is to provide installation services for the Computer System or other Equipment, such services and related fees shall be set forth on the applicable Schedule.
(b) Fiserv shall not be responsible for the provision of any maintenance or repairs to the Computer System or of any parts or replacements for the Computer System.
(c) Notwithstanding the limitation of liability provisions set forth in the Agreement, Fiserv’s aggregate liability for a default relating to any Third Party equipment or Third Party Software shall be limited to the amount paid by Client to Fiserv for the applicable equipment or software.
7. Performance .
(a) Fiserv Access to Client Facility . Client shall give Fiserv access to the Location, Software System, and Computer System as necessary to enable Fiserv to provide services hereunder and shall make available information, facilities, and personnel reasonably required by Fiserv for the performance of its obligations hereunder.
(b) Client Training . Client agrees to train current and future support staff employees on Software technical and user operations, and shall require employees to complete ongoing training to maintain minimal proficiency.
(c) Location of Work . Work in determining the nature of any problem, performing professional services, or in making Software corrections, amendments, or additions may be carried out at Fiserv premises or the Location, at Fiserv’s option.


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(d) Software Certification . Client shall maintain accurate reports, and upon Fiserv’s request, Client shall provide Fiserv with written certification of, the following relating to Client’s Software System Use:
(i)
total number of Software System copies and Documentation related thereto;
(ii)
total number and location of workstations and servers on which the Software System is installed, operated, or accessed; and
(iii)
total number of accounts, users, or other measurement of Software System use for the licensing restrictions set forth in the applicable Schedule.
(e) Software Audit . Client shall permit Fiserv’s authorized representatives at all reasonable times during Client’s normal hours of operation to audit Client’s use of the Software System (such audit may occur at Client’s premises) to determine that the provisions of this Exhibit and the Agreement with regard to Software are being faithfully performed. Any such audit shall be conducted in such a manner as to minimize the disruption to Client’s business and/or the Use of the Software. If such audit reveals any misuse by Client, Client shall immediately terminate such misuse unless Fiserv otherwise agrees in writing to allow correction of the misuse by payment of appropriate additional fees in accordance with Section 3(e) of this Exhibit. If such noncompliance by Client is material, Client shall also pay Fiserv on a time and materials basis for conducting the audit at Professional Service Rates.
8. Warranties .
(a) Fiserv warrants that, during the Warranty Period, the Software will perform without the occurrence of a Non-conformity when operated on the Computer System and in compliance with the Documentation, this Exhibit, and the Agreement. Fiserv will provide replacements or corrections to Software that does not so perform where such failure is material, provided Fiserv is notified in writing of such failure during the Warranty Period. This warranty shall not apply if the Non-conformity results from the action or inaction of Client or a Third Party engaged by Client, including
(i)
change to the Software by Client or any Third Party engaged by Client,
(ii)
use of the Software in combination with non-Fiserv provided software, or by incorrect Use, or
(iii)
if the Software does not perform because data communication is interrupted.
Client acknowledges that the Software System is designed to operate on the Computer System and that the warranties given by Fiserv are conditional upon the procurement and maintenance by Client of the Computer System in accordance with the then current specified configuration provided by Fiserv.
(b) Intentionally Omitted.
(c) Fiserv warrants that the Maintenance Services and professional services provided under this Exhibit shall be performed in a professional and workmanlike manner. Client shall notify Fiserv in writing of any alleged warranty defect within thirty (30) days of the date the defective services were performed, and Fiserv shall correct the services at no additional charge to Client.
(d) OTHER THAN THE WARRANTY PROVIDED IN THE FIRST SENTENCE IN 8(A) ABOVE, FISERV DOES NOT WARRANT THAT ALL NON-CONFORMITIES CAN BE CORRECTED. IN THE EVENT THAT CLIENT HAS NOT COMPLIED WITH SECTION 8(A) ABOVE FISERV SHALL NOT BE LIABLE FOR LOSS OF OR DAMAGE TO CLIENT’S DATA RESULTING FROM CLIENT’S USE OF THE SOFTWARE. Client acknowledges that it is responsible for the results obtained from use of the Software, including without limitation the completeness, accuracy and content of such results. Client acknowledges further that it is responsible for independent verification and testing of any such results prior to using them in its business. The corrective actions provided by Fiserv as set forth in this Section 8 shall be Fiserv’s entire liability and Client’s sole and exclusive remedy for Fiserv’s breach of any of the foregoing warranties.
9. Title . Nothing in this Exhibit shall convey to Client any title to or any rights in Software, including but not limited to all proprietary rights or ownership of any modifications, enhancements, additions, updates, or other works based thereon


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or related thereto. Client’s sole right in relation to Software or any such other works is to Use the same in accordance with the terms and conditions hereof.
10. Intentionally Omitted .    
11. Export .
(a) Subject to restrictions regarding Location, territory, or other applicable geographic limitation set forth in a Schedule, Client shall not export, or re-export, directly or indirectly, any Software or any technical data derived therefrom to any country for which the United States Government or any agency thereof may require an export license or other government approval without first acquiring that license or approval.
(b) Client agrees that with respect to compliance with the U.S. export regulations: (i) Client will comply with such export regulations regarding the Software and technical data; (ii) Client will permit audits or reviews by Fiserv covering the Software and data export activity; (iii) Client understands that Fiserv reserves the right to refuse performance of its obligations hereunder in cases of noncompliance by Client of such export regulations; and (iv) Client will not engage in any transaction or activity with any party, firm, or company that is prohibited by applicable law.
Enterprise Performance Management Solutions Software Schedule
to Software Products Exhibit


1.
LICENSE AND LICENSE FEES.

1.1.     Software and License Fees . The following Software modules are hereby licensed to Client in exchange for Client’s payment of the fee set forth in the Fee Exhibit, subject to the additional limitations set forth in this Schedule:

SEE ATTACHED LICENSE CONTENT ATTACHMENT (INCORPORATED HEREIN BY REFERENCE)

1.2.     Third Party Software and License Fees . The following Third Party Software modules are hereby licensed to Client in exchange for Client’s payment of the of the fee set forth in the Fee Exhibit, subject to the additional limitations set forth in this Schedule (and any applicable third party terms herein):

SEE ATTACHED LICENSE CONTENT ATTACHMENT (INCORPORATED HEREIN BY REFERENCE)

1.3.     Computer System . The Computer System for this Schedule is specified in the Documentation.

1.4.     Location Information . The Location for this Schedule is the authorized location identified below. Client may change the Location in the event Client transfers its data processing to a new location within the same country in accordance with the terms set forth in the Agreement. However, Fiserv reserves the right to charge Client its standard Fiserv transfer fee for the proposed transfer.

*****

2.
MAINTENANCE SERVICES.

2.1.     Initial Term . The initial term of Maintenance Services for all Software licensed under this Schedule shall be 84 months from the Effective Date.

2.2.     Maintenance and Releases . Client must remain on a supported version of the Software licensed under this Schedule (“ Supported Release ”) in order to continue receiving Maintenance Services. Fiserv reserves the right to: (a) determine, in its sole discretion, whether to continue supporting any previous version(s) of a given Software program; and (b) upon at least 90 days prior notice to Client, terminate Maintenance Services for the applicable Software program if Client elects to remain on an unsupported version.



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3.
ADDITIONAL TERMS AND CONDITIONS.

3.1.     Effective Date . For purposes of this Schedule, “ Effective Date ” means the Effective Date of the Agreement.

3.2.     Disclosure of Client PII . Client agrees that it will only disclose Client PII if expressly requested by Fiserv as required to provide the applicable Services, and Client will ensure all Client PII has been removed from any screenshots, data files or other materials sent to Fiserv unless the inclusion of Client PII has been expressly requested by Fiserv.

3.3.     Reliance on Instructions . Fiserv may rely on all configuration requests, parameters, document input guidelines and other such instructions provided by Client, and provide the Software accordingly. Client assumes sole responsibility and liability for any issues, losses, claims or damages arising out of or relating to such instructions and Fiserv’s reliance upon such instructions.

3.4.     ADDITIONAL DISCLAIMER . THE SOFTWARE LICENSED UNDER THIS SCHEDULE AND ANY OUTPUTS THEREFROM (AND ANY ASSOCIATED DELIVERABLES, AND/OR INFORMATION OR MATERIALS PROVIDED): (I) ARE MEANT ONLY TO SUPPLEMENT ANY DUE DILIGENCE OR OTHER ACTIONS CLIENT WOULD TAKE IN OPERATING ITS BUSINESS OR OTHERWISE ENGAGING WITH ANY CUSTOMER OR OTHER PARTY; (II) ARE BASED ON THE CLIENT INPUT DATA, SPECIFICATIONS AND CONFIGURATIONS SELECTED BY CLIENT, EACH OF WHICH MAY AFFECT ACCURACY AND RELIABILITY; (III) ARE NOT INTENDED TO SUPPLY INVESTMENT, FINANCIAL, TAX, INFORMATION SECURITY OR LEGAL ADVICE; AND (IV) ARE PROVIDED ONLY AS A TOOL TO BE USED AS PART OF AN OVERALL COMPLIANCE PROGRAM (WHICH CLIENT IS SOLELY RESPONSIBLE FOR DETERMINING AND IMPLEMENTING).



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LICENSE CONTENT ATTACHMENT

*****

ADDITIONAL TERMS:
Previously Licensed Software : Software designated as “previously licensed” programs have been previously licensed by Client.  This Schedule is intended to supersede the parties’ (or their applicable Affiliates’) existing license agreement(s) for such Software programs. However, nothing in this Schedule or the Agreement will renew or extend any warranty or acceptance period for such previously licensed Software. The Maintenance Fees shown in this table for such Software will be applied incrementally based on current annual Maintenance Fees already paid by Client, if applicable. Fiserv will invoice Client on a pro rata basis for such incremental fees such that Client will not be double invoiced for any Maintenance Fees already paid for the current year’s Maintenance Services for any overlapping portion of the current annual period.

*****

Third Party Programs . For any licenses designated as “Third Party Software” above, such modules are licensed as Third Party Software programs. Furthermore, Client understands and agrees that the Software licensed under the Schedule may also contain certain third party code included with the Software (collectively, “ Third Party Programs ”). Use of such Third Party Programs (and Third Party Software licensed hereunder, if any) is limited solely to use in connection with the associated Software licensed under the Schedule and is subject to any additional limitations set forth herein or in any applicable Third Party Terms Addendum hereto specific to such Third Party Programs. In the event of a conflict between such additional terms and conditions and other terms of the Schedule or the Agreement, the additional terms and conditions shall control; provided however, to the extent comparable provisions in the Schedule or the Agreement are more restrictive than those set forth in these additional terms and conditions, the more restrictive provisions shall control. If Fiserv’s agreement with the applicable third party provider terminates, Fiserv may terminate the Schedule or the applicable portions thereof which rely on the applicable Third Party Program(s) (and/or Third Party Software); provided, however, that Fiserv will notify Client of any such termination as soon as commercially practicable, and Fiserv will attempt to offer Client a reasonable alternative solution, on mutually agreed upon terms, if commercially practicable.
    



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ORACLE SOFTWARE TERMS ADDENDUM

For purposes of any Third Party Programs provided by Oracle USA, Inc. or such other applicable third party provider on behalf of Oracle or its Affiliates (“ Provider ”) and licensed under the Schedule (or other such Exhibit, Schedule or attachment) to the Agreement to which that Schedule (or other such attachment is attached) (as amended, collectively, the “ Agreement ”) and to which this Addendum is attached (the “ Schedule ”), the following terms and conditions shall apply for such Third Party Programs. The terms of this Addendum are incorporated by reference into the Schedule. In the event of conflict, between the terms of this Addendum and the terms of the Schedule, the terms more restrictive on Client’s use of the Third Party Programs shall control.



1. The Third Party Programs (including any and all source code sent in connection therewith) are subject to a restricted license. Client may only use the Third Party Programs in unmodified form as part of and in connection with the corresponding Software program(s), as designated in the Third Party Software section of the Schedule, licensed under the Schedule in accordance with the terms set forth herein and otherwise under the Agreement. Client will use the Third Party Programs solely for Client’s internal business operations, subject to the terms of the Agreement. Notwithstanding the foregoing, Client may allow its agents, contractors or outsourcers to use the Third Party Programs on Client’s behalf for the purposes set forth in the Agreement, provided that Client shall at all times remain responsible for such agent’s, contractor’s and outsourcer’s compliance with the terms of this Agreement. Any third party technology that may be appropriate or necessary for use with some Third Party Programs may be specified in the documentation or otherwise provided to Client by Fiserv. Such technology is licensed to Client only for use with the Software licensed under the Schedule and is subject to the terms of the Schedule and the Agreement as well as any applicable third party license agreement(s) specified in the documentation or otherwise provided to Client by Fiserv or a Provider. Unless otherwise specified, in the event of conflict, the terms of any such third party license agreement shall govern. Client may not: (a) modify the Third Party Programs; (b) use the Third Party Programs for rental, timesharing, subscription service, hosting, or outsourcing; (c) remove or modify any markings or notices of a Provider’s or its licensors’ proprietary rights; (d) reverse engineer (unless required by law for interoperability), translate, disassemble or decompile any Third Party Programs or otherwise, the source code from the object code of any Third Party Programs (including without limitation the review of data structures or similar materials produced by the Third Party Programs); (e) duplicate or otherwise copy the Third Party Programs except for a sufficient number of copies to allow for the Client’s licensed use under the Agreement and one copy of any physical media containing the Third Party Programs for disaster recovery purposes; (f) publish or otherwise share any results of any benchmark tests run on the Third Party Programs; (g) make the programs available in any manner to any Third Party for use in the Third Party’s business operations; (h) create derivative works from any Third Party Program, provided that ownership of any unauthorized derivative works shall vest in the applicable Provider; or (i) use any trademarks, service marks or other marks or logos of any Provider without Fiserv’s and such Provider’s express prior written authorization. Notwithstanding any limitations set forth in the Agreement, Client will defend, indemnify and hold harmless Fiserv and its Affiliates (and their respective employees, officers and directors) against any claims, indemnification requests or such actions brought by or on behalf of a Provider resulting from Client’s breach of any of the foregoing.

2. Without limiting or modifying Fiserv’s ownership rights set forth in the Agreement, the Providers (and their licensors) retain all ownership and intellectual property rights to the Third Party Programs and any other materials or developments provided by the Provider under the Schedule. Nothing in the Schedule or the Agreement passes title in the Third Party Programs to Client or any other party.

3. Client agrees to install the Third Party Programs only on the hardware specified in the Agreement or as otherwise approved by Fiserv in writing. Client acknowledges and agrees that certain Third Party Programs are only appropriate for use or interoperation with certain equipment designated as “approved” by Fiserv’s applicable Provider. Notwithstanding anything to the contrary in the Agreement, Client shall not transfer the Software licensed under the Schedule from the Location specified herein, except for a temporary transfer in the event of a computer malfunction or other such disaster.

4. Notwithstanding anything to the contrary in the Agreement, Client shall not assign, give, or transfer the Software or any interest therein to any other individual or entity without the prior written consent of Fiserv and the Providers. If Client grants a security interest in the Software (and/or any services relating thereto), the secured party has no right to use or transfer the Software or such services.

5. Client agrees to treat all Third Party Programs in accordance with all confidentiality obligations set forth in the Agreement and, at least: (a) take all reasonable steps and the same protective precautions to protect the Third Party Programs from disclosure to third parties as Client would with its own proprietary and confidential information; and (b) refrain from disclosing any Third Party Program or proprietary information contained therein, except to its bona fide individuals whose access is necessary to enable such party to exercise its rights hereunder. Client agrees that, prior to disclosing any Third Party Program or proprietary information relating thereto to any third party, Client will obtain from that third party a written acknowledgment that such third party will be bound by the same terms as specified in this Section and the Agreement, as applicable, with respect to the Third Party Programs and such information.


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Notwithstanding anything to the contrary in the Agreement, except as it relates to “non-public personal information” of Client’s customers (as defined in Title V of GLB), the Provider’s obligation to maintain confidentiality of any Client information will not exceed 5 years from the date of disclosure.

6. Client shall discontinue all use of the Third Party Programs upon termination of the Schedule or the Agreement and shall destroy or return to Fiserv all copies of the Third Party Programs and documentation relating thereto.

7. Fiserv (on behalf of the Provider) shall have the right to audit Client’s use of the relevant Third Party Programs, at Fiserv’s expense, or to assign such audit right to the relevant Provider(s). Client agrees to provide reasonable assistance and access to information to Fiserv or the Provider(s), as applicable, in the course of such audit. Client agrees that Fiserv may share the results of such audit and a copy of the Agreement (and any relevant documents relating thereto) with the Providers.

8. EACH PROVIDER AND ITS LICENSORS DISCLAIM ALL OTHER WARRANTIES EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE EXCEPT TO THE EXTENT THAT ANY WARRANTIES IMPLIED BY LAW CANNOT BE VALIDLY WAIVED. NEITHER PROVIDER NOR ANY OF ITS THIRD PARTY SUPPLIERS SHALL HAVE ANY LIABILITY (INCLUDING A DISCLAIMER OF ANY DAMAGES, WHETHER DIRECT, INDIRECT, INCIDENTAL, SPECIAL, PUNITIVE OR CONSEQUENTIAL, INCLUDING WITHOUT LIMITATION ANY LOSS OF PROFITS, REVENUE, DATA OR DATA USE) TO CLIENT, ITS AUTHORIZED END USERS OR ANY THIRD PARTY AS A RESULT OF ANY SUCH PARTY, PERSON OR ENTITY’S USE OF THE THIRD PARTY PROGRAMS OR ANY SERVICES RELATED THERETO.

9. Fiserv may terminate any maintenance and support provided for the Third Party Programs upon written notice if Client fails to maintain and timely pay for such support. Client may have to pay reinstatement and/or other maintenance related fees if Client requests reinstatement after any cancellation or termination of maintenance or support for any Third Party Programs.

10. In the event of a transfer of the Third Party Programs to a separate Location and/or use in the event of a Disaster, all such use (and the timing of such transfer) will be subject to the terms of Oracle’s then-current Software Investment Guide, a copy of which Fiserv will make available to Client upon request.

11. Notwithstanding anything to the contrary in the Agreement, Client acknowledges that the Third Party Programs may contain open source software.

12. Notwithstanding anything to the contrary in the Agreement, the Uniform Computer Information Transactions Act shall not apply to the Schedule or the Software licensed hereunder.

13. For purposes of the Third Party Programs, the Providers are third party beneficiaries of the Schedule and the Agreement




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Exhibit 10.30
FIRST AMENDED CHANGE IN CONTROL AGREEMENT

THIS CHANGE IN CONTROL AGREEMENT (the "Agreement"), is dated as of the 1st day of January 2018, among Lakeland Bancorp, Inc. (the "Holding Company"), a New Jersey corporation, and Lakeland Bank (the "Bank"), a New Jersey chartered commercial bank, having offices at 250 Oak Ridge Road, Oak Ridge, New Jersey 07438 (the Holding Company and the Bank are collectively referred to herein as the "Company") and Ellen Lalwani (the "Executive"), and amends, restates and supersedes that certain Change in Control Agreement dated as of July 1, 2017.

BACKGROUND
WHEREAS , the Executive is or will be employed as Executive Vice President and Chief Retail Officer of the Bank; and
WHEREAS , the Company believes that the future services of the Executive are of great value to the Company and that it is important for the growth and development of the Company that the Executive continue in her position; and
WHEREAS , the Board of Directors of the Company (the “Board”) believes it is imperative that the Company be able to rely upon the Executive to continue in her position in the event that Holding Company receives any proposal from a third person concerning a possible business combination with, or acquisition of equities securities of, the Company, and that they be able to receive and rely upon her advice, if they request it, as to the best interests of the Company and its shareholders, without concern that the Executive might be distracted by the personal uncertainties and risks created by such a proposal; and
WHEREAS , to achieve that goal, and to retain the Executive’s services prior to any such activity, the Company and the Executive have agreed to enter into this Agreement to govern the Executive's termination benefits in the event of a Change in Control, as hereinafter defined;
NOW, THEREFORE , to assure the Company that it will have the continued dedication of the Executive and the availability of her advice and counsel notwithstanding the possibility, threat or occurrence of a bid to take over control of the Company, and to induce the Executive to remain in the employ of the Company, and for other good and valuable consideration, the Company and the Executive, each intending to be legally bound hereby agree as follows:

1.     Definitions
a. Cause .     For purposes of this Agreement "Cause" with respect to the termination by the Company of Executive's employment shall mean: (i) failure by the Executive to materially perform her duties for the Company under this Agreement after at least one warning in writing identifying specifically any such material failure and offering a reasonable opportunity to cure such failure; (ii) the willful engaging by the Executive in material misconduct which causes material injury to the Company; or (iii) conviction of a crime (other than a traffic violation), habitual drunkenness, drug abuse, or excessive absenteeism other than for illness, after a warning (with respect to drunkenness or absenteeism only) in writing to refrain from such behavior. No act or failure to act on the part of the Executive shall be considered willful unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the action or omission was in the best interest of the Company. The Company shall have the burden of proving Cause by clear and convincing evidence.
b. Change in Control .    For purposes of this Agreement, a “Change in Control” shall mean the occurrence of any of the following events with respect to the Holding Company:
(i) the consummation of any consolidation or merger of the Holding Company in which the Holding Company is not the continuing or surviving corporation or pursuant to which shares of the Holding Company's common stock ("Common Stock") would be converted into cash, securities or other property, other than a merger of the Holding Company in which the holders of the shares of the Holding Company's Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger; or
(ii) the consummation of any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Holding Company, other than to a subsidiary or affiliate; or
(iii) an approval by the shareholders of the Holding Company of any plan or proposal for the liquidation or dissolution of the Holding Company; or
(iv) any action pursuant to which any person (as such term is defined in Section 13(d) of the Exchange Act), corporation or other entity (other than any person who owns more than ten percent (10%) of the outstanding Common Stock on the date this Agreement is entered into, the Holding Company or any benefit plan sponsored by the Holding Company or any of its subsidiaries) shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of shares of capital stock entitled to vote generally for the election of directors of the Holding Company ("Voting Securities") representing fifty-one (51%) percent or more of the combined voting power of the Holding Company's then




outstanding Voting Securities (calculated as provided in Rule 13d-3(d) in the case of rights to acquire any such securities), unless, prior to such person so becoming such beneficial owner, the Board shall determine that such person so becoming such beneficial owner shall not constitute a Change in Control; or
(v) the individuals (x) who, as of the date on which the Agreement is entered into, constitute the Board (the "Original Directors") and (y) who thereafter are elected to the Board and whose election, or nomination for election, to the Board was approved by a vote of at least two thirds of the Original Directors then still in office (such Directors being called "Additional Original Directors " ) and (z) who thereafter are elected to the Board and whose election or nomination for election to the Board was approved by a vote of at least two thirds of the Original Directors and Additional Original Directors then still in office, cease for any reason to constitute a majority of the members of the Board.
c.      Contract Period . "Contract Period" shall mean the period
commencing the day immediately preceding a Change in Control and ending on the earlier of: (i) the second anniversary of the Change in Control; (ii) the date the Executive would attain age 65; or (iii) the death of the Executive.
d. Exchange Act . "Exchange Act" means the Securities Exchange Act of 1934, as amended.
e. Good Reason . When used with reference to a voluntary termination by Executive of her employment with the Company, "Good Reason " shall mean any of the following, if taken without Executive's express written consent:
(i) The assignment to Executive of any duties inconsistent with, or the reduction of authority, powers or responsibilities associated with, Executive's position, title, duties, responsibilities and status with the Company immediately prior to a Change in Control (a "Change in Assignment") or any removal of Executive from, or any failure to re-elect Executive to, any position(s) or office(s) Executive held immediately prior to such Change in Control. A change in position, title, duties, responsibilities and status or position(s) or office(s) following a Change in Control shall constitute a Change in Assignment unless the Executive's new title, duties and responsibilities are accepted in writing by the Executive, in the sole discretion of the Executive;
(ii) A reduction by the Company in Executive's annual base compensation as in effect immediately prior to a Change in Control;
(iii) A failure by the Company to continue for Executive any bonus plan in which Executive participated immediately prior to the Change in Control or a failure by the Company to continue Executive as a participant in such plan on at least the same basis as Executive participated in such plan prior to the Change in Control;
(iv) After a Change in Control, the Company's transfer of Executive to another geographic location outside of New Jersey or more than 25 miles from her present office location, except for required travel on the Company's business to an extent substantially consistent with Executive's business travel obligations immediately prior to such Change in Control;
(v) The failure by the Company to continue in effect for Executive any employee benefit plan, program or arrangement (including, without limitation any 401(k) plan, pension plan, life insurance plan, health and accident plan, disability plan, or stock option plan) in which Executive is participating immediately prior to a Change in Control (except that the Company may institute or continue plans, programs or arrangements providing Executive with substantially similar benefits); the taking of any action by the Company after a Change in Control which would adversely affect Executive's participation in or materially reduce Executive's benefits under, any of such plans, programs or arrangements, the failure to continue, or the taking of any action which would deprive Executive, of any material fringe benefit enjoyed by Executive immediately prior to such Change in Control; or the failure by the Company to provide Executive with the number of paid vacation days to which Executive was entitled immediately prior to such Change in Control; or
(vi) The failure by the Company to obtain an assumption in writing of the obligations of the Company to perform this Agreement by any successor to the Company and to provide such assumption to the Executive upon consummation of the event giving rise to the Change in Control.
2. Employment . During the Contract Period, the Company hereby agrees to employ the Executive, and the Executive hereby accepts employment, upon the terms and conditions set forth herein.
3. Position . During the Contract Period, the Executive shall be employed as Executive Vice President and Chief Retail Officer of the Company or such other corporate or divisional profit center as shall then be the principal successor to the business, assets and properties of the Company, with the same title and the same duties and responsibilities as before the Change in Control. The Executive shall devote her full time and attention to the business of the Company, and shall not during the Contract Period be engaged in any other business activity. This paragraph shall not be construed as preventing the Executive from managing any investments of her which do not require any service on her part in the operation of such investments.
4. Cash Compensation . The Company shall pay to the Executive salary and bonus compensation for her services during the Contract Period as follows:
a. Annual Salary . An Annual salary equal to the annual salary in effect immediately prior to Change in Control. The annual salary shall be payable in installments in accordance with the Company’s usual payroll method. The annual salary shall not be reduced during the Contract Period.
b. Annual Bonus . An Annual cash bonus equal to the highest annual bonus paid to the Executive during the three most recent fiscal years prior to the Change in Control. The bonus shall be payable at the time and in the manner which the Company paid such bonuses prior to the Change in Control.
5. Expenses and Fringe Benefits .     During the Contract Period, the Executive shall be entitled to reimbursement




for all business expenses incurred by her with respect to the business of the Company in the same manner and to the same extent as such expenses were previously reimbursed to her immediately prior to the Change in Control. If prior to the Change in Control, the Executive was entitled to the use of an automobile, he shall be entitled to the same use of an automobile at least comparable to the automobile provided to her prior to the Change in Control, and she shall be entitled to vacations and sick days, in accordance with the practices and procedures of the Company, as such existed immediately prior to the Change in Control. During the Contract Period, the Executive also shall be entitled to hospital, health, medical and life insurance, and any other benefits enjoyed, from time to time, by Executive officers of the Company, all upon terms as favorable as those enjoyed by other Executive officers of the Company. Notwithstanding anything in this section to the contrary, if the Company adopts any change in the expenses allowed to, or fringe benefits provided for, Executive officers of the Company, and such policy is uniformly applied to all Executive officers of the Company (and any successor or acquirer of the Company, if any), including the chief executive officer of such entities, then no such change shall be deemed to be contrary to this Section.
All reimbursements provided under this Agreement shall be made or provided in accordance with the requirements of Section 409A of the Code (as defined in Section 9 below), including, where applicable, the requirement that (i) any reimbursement is for expenses incurred during Executive's lifetime (or during a shorter period of time specified in this Agreement), (ii) the amount of expenses eligible for reimbursement during a calendar year may not affect the expenses eligible for reimbursement in any other calendar year, (iii) the reimbursement of an eligible expense will be made on or before the last day of the calendar year following the year in which the expense is incurred, and (iv) the right to reimbursement is not subject to liquidation or exchange for another benefit.
6. Termination for Cause . The Company shall have the right to terminate the Executive for Cause, upon written notice to her of the termination which notice shall specify the reasons for the termination. In the event of a valid termination for Cause, the Executive shall not be entitled to any further compensation or benefits under this Agreement.
7. Disability . During the Contract Period, if the Executive becomes permanently disabled, or is unable to perform her duties hereunder for six consecutive months, the Company may terminate the employment of the Executive. In such event, the Executive shall not be entitled to any further benefits under this Agreement other than payments under any disability policy which the Company may obtain for the benefit of senior officers generally.
8. Death Benefits . Upon the Executive's death during the Contract Period, the Executive shall be entitled to the benefits of any life insurance policy paid for by the Company which provides, permits and allows the Executive to name a beneficiary other than the Company, but her estate shall not be entitled to any further benefits under this Agreement or any other life insurance policy, except for such policies or benefits customarily provided to employees of the Bank.
9. Termination Without Cause or Resignation for Good Reason . The Company may terminate the Executive without Cause during the Contract Period by written notice to the Executive, or the Executive may resign for Good Reason during the Contract Period upon four weeks' prior written notice to the Company specifying the Good Reason. If the Company terminates the Executive's employment during the Contract Period without Cause or if the Executive resigns during the Contract Period for Good Reason, the Company shall, within 20 business days of the Executive's termination of employment, pay the Executive a lump sum equal to two times the highest annual compensation, including only salary and cash bonus, paid the Executive during any of the three calendar years immediately prior to the Change in Control (the "Lump Sum Payment"). During the remainder of the Contract Period, the Company also shall continue to provide the Executive with and pay for medical and hospital insurance, disability insurance and life insurance, as were provided and paid for at the time of the termination of her employment with the Company; provided , that such insurance coverage shall be provided only to the extent permitted under the terms and conditions of the Company's employee benefit plans. The Executive shall also have the right to purchase from the Company, at book value price, such automobile of the Company, if any, as was used by the Executive while employed by the Company; provided , that the Executive exercises such right within 10 days of her termination of employment and completes the purchase transaction within 30 days of her termination of employment. The Executive shall not have a duty to mitigate the damages suffered by her in connection with the termination by the Company of her employment without Cause or a resignation for Good Reason during the Contract Period.
The Lump Sum Payment is intended to be administered and interpreted in a manner such that it shall not be subject to “additional tax” within the meaning of Section 409A(a)(1)(B) of the Code. Notwithstanding any provision of this Agreement to the contrary, if and to the extent necessary to comply with the restriction in Section 409A(a)(2)(B) of the Code concerning payments to “specified employees,” the Lump Sum Payment shall be paid on the first business day of the seventh month following the Executive's separation from service with the Company, and shall be paid together with interest accrued during the period of such restriction at a rate, per annum, equal to the applicable federal short-term rate (compounded monthly) in effect under Section 1274(d) of the Code on the date of termination. Notwithstanding provision of this Agreement to the contrary, the Executive shall not be considered to have terminated employment with the Company for purposes of this Section 9 unless she would be considered to have incurred a “termination of employment” from the Company within the meaning of Treasury Regulation §1.409A-1(h)(1)(ii).
The Executive acknowledges that any tax liability incurred by the Executive under Section 409A of the Code is solely the responsibility of the Executive.
For purposes of the foregoing, the Executive’s salary and cash bonus shall be determined without regard to any reductions to such amounts made at the election of the Executive, including without limitation, reductions pursuant to any deferral election




under a 401(k) plan or deferred compensation plan or arrangement or contributions made under a “cafeteria plan” within the meaning of Section 125 of the Internal Revenue Code of 1986, as amended.
10. Resignation Without Good Reason . The Executive shall be entitled to resign from the employment of the Company at any time during the Contract Period without Good Reason, but upon such resignation the Executive shall not be entitled to any additional compensation for the time after which she ceases to be employed by the Company, and shall not be entitled to any of the other benefits provided hereunder. No such resignation shall be effective unless in writing with four weeks ' notice thereof.
11. Non-Disclosure of Confidential Information . In consideration of the covenants of the Company herein, the Executive agrees as follows:
a. The Executive hereby agrees and acknowledges that she has and has had access to or is aware of Confidential Information. The Executive hereby agrees that she shall keep strictly confidential and will not during and after her employment with the Company, without the Company's express written consent, divulge, furnish or make accessible to any person or entity, or make use of for the benefit of herself or others, any Confidential Information obtained, possessed, or known by her except as required in the regular course of performing the duties and responsibilities of her employment by the Company while in the employ of the Company, and that she will, prior to or upon the date on which her employment with the Company terminates (the "Date of Termination") deliver or return to the Company all such Confidential Information that is in written or other physical or recorded form or which has been reduced to written or other physical or recorded form, and all copies thereof, in her possession, custody or control. The foregoing covenant shall not apply to (i) any Confidential Information that becomes generally known or available to the public other than as a result of a breach of the agreements of the Executive contained herein, (ii) any disclosure of Confidential Information by the Executive that is expressly required by judicial or administrative order; provided however that the Executive shall have (x) notified the Company as promptly as possible of the existence, terms and circumstances of any notice, subpoena or other process or order issued by a court or administrative authority that may require her to disclose any Confidential Information, and (y) cooperated with the Company, at the Company's request, in taking legally available steps to resist or narrow such process or order and to obtain an order or other reliable assurance that confidential treatment will be given to such Confidential Information as is required to be disclosed.
b. For purposes of this Agreement, "Confidential Information" means all non-public or proprietary information, data, trade secrets, "know-how", or technology with respect to any products, designs, improvements, research, styles, techniques, suppliers, clients, markets, methods of distribution, accounting, advertising and promotion, pricing, sales, finances, costs, profits, financial condition, organization, personnel, business systems (including without limitation computer systems, software and programs), business activities, operations, budgets, plans, prospects, objectives or strategies of the Company.

12.     Post-Employment Obligations . In consideration of the covenants of the Company herein, the Executive agrees as follows:
a. The Executive agrees that while she is in the employ of the Company and for a one year period after the Date of Termination (unless such termination is by the Company without Cause), she shall not, without the prior written consent of the Company, directly or indirectly, and regardless of the reason for her ceasing to be employed by the Company, employ, solicit for employment, or advise or recommend to any other person that they employ or solicit for employment or retention as a consultant, any person who is, or was at any time within twelve (12) months prior to the Date of Termination, an employee of, or exclusive consultant to, the Company.
b. If the Executive commits a breach or is about to commit a breach, of any of the provisions of Sections 11 or 12 hereof, the Company shall have the right to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction without being required to post bond or other security and without having to prove the inadequacy of the available remedies at law, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company that money damages will not provide an adequate remedy to the Company. In addition, the Company may take all such other actions and remedies available to them under law or in equity and shall be entitled to such damages as they can show they have sustained by reason of such breach.
c. The parties acknowledge that the type and periods of restriction imposed in the provisions of Sections 11 and 12 hereof are fair and reasonable and are reasonably required for the protection of the Company and the goodwill associated with the business of the Company; and that the provisions of Sections 11 and 12 have been specifically negotiated by sophisticated parties and are given as an integral part of this Agreement.

13. No Effect Prior to Change in Control . This Agreement shall not affect any rights of the Company or the Executive prior to a Change in Control or any rights of the Executive granted in any other agreement, plan or arrangements. The rights, duties and benefits provided hereunder shall only become effective upon a Change in Control. If the employment of the Executive by the Company is terminated for any reason prior to a Change in Control, this Agreement shall thereafter be of no further force and effect.




14. Certain Reduction of Payments by the Company.
a. Anything in this Agreement to the contrary notwithstanding, prior to the payment of any compensation or benefits payable under Section 9 hereof, the certified public accountants of the Company immediately prior to a Change of Control (the " Certified Public Accountants") shall determine as promptly as practical and in any event within 20 business days following the termination of employment of Executive whether any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would more likely than not be nondeductible by the Company for Federal income purposes because of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and if it is then the aggregate present value of amounts payable or distributable to or for the benefit of Executive pursuant to this Agreement are hereinafter referred to as "Agreement Payments" shall be reduced (but not below zero) to the Reduced Amount. For purposes of this paragraph, the "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Company because of said Section 280G of the Code.
b. If under paragraph a of this section the Certified Public Accountants determine that any Payment would more likely than not be nondeductible by the Company because of Section 280G of the Code, the Company shall promptly give the Executive notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Executive may then elect, in her sole discretion, which and how much of the Agreement Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments equals the Reduced Amount), and shall advise the Company in writing of her election within 20 business days of her receipt of notice. If no such election is made by the Executive within such 20-day period, the Company may elect which and how much of the Agreement Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments equals the Reduced Amount) and shall notify the Executive promptly of such election. For purposes of this paragraph, present value shall be determined in accordance with Section 280G (d) (4) of the Code. All determinations made by the Certified Public Accountants shall be binding upon the Company and Executive and shall be made within 20 days of a termination of employment of Executive. The Company may suspend for a period of up to 30 days after termination of employment the Lump Sum Payment and any other payments or benefits due to the Executive under Section 9 hereof until the Certified Public Accountants finish the determination and the Executive (or the Company, as the case may be) elect how to reduce the Agreement Payments, if necessary. As promptly as practicable following such determination and the elections hereunder, the Company shall pay to or distribute to or for the benefit of Executive such amounts as are then due to Executive under this Agreement and shall promptly pay to or distribute for the benefit of Executive in the future such amounts as become due to Executive under this Agreement.
c. As a result of the uncertainty in the application of Section 280G of the Code, it is possible that Agreement Payments may have been made by the Company which should not have been made ("Overpayment") or that additional Agreement Payments which will have not been made by the Company could have been made ("Underpayment " ), in each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Certified Public Accountants, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or Executive which said Certified Public Accountant believe has a high probability of success, determines that an Overpayment has been made, any such Overpayment shall be treated for all purposes as a loan to Executive which Executive shall repay to the Company together with interest at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code; provided, however, that no amount shall be payable by Executive to the Company in and to the extent such payment would not reduce the amount which is subject to taxation under Section 4999 of the Code. In the event that the Certified Public Accountants, based upon controlling precedent, determine that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive together with interest at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code.
15. Severance Compensation and Benefits Not in Derogation of other Benefits. Anything to the contrary herein contained notwithstanding, the payment or obligation to pay any monies, or granting of any benefits, rights or privileges to Executive as provided in this Agreement now has or will have under any plans or programs of the Company, except that the Executive shall not be in lieu or derogation of the rights and privileges that the Executive now has or will have under any plans or programs of the Company, except that the Executive shall not be entitled to the benefits of any other plan or program of the Company expressly providing for severance or termination pay if the Executive is terminated without Cause or resigns for Good Reason after a Change in Control.
16. Miscellaneous . The terms of this Agreement shall be governed by, and interpreted and construed in accordance with the provisions of, the laws of New Jersey and, to the applicable, federal law. This Agreement supersedes all prior agreements and understandings with respect to the matters covered hereby. The amendment or termination of this Agreement may be made only in writing executed by the Company and the Executive, and no amendment or termination of this Agreement shall be effective unless and until made in such in writing. This Agreement shall be binding upon any successor (whether direct or indirect, by purchase, merge, consolidation, liquidation or otherwise) to all or substantially all of the assets of the Company. This Agreement is personal to the Executive and the Executive may not assign any of her rights or duties hereunder but this Agreement shall be enforceable by the Executive’s legal representatives, executors or administrators. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart.





IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its duly authorized representatives pursuant to the authority of its Board, and the Executive has personally executed this Agreement, all as of the day and year first written above.
                                        
                    
 
LAKELAND BANCORP, INC.
 
/s/ Thomas J. Shara
 
Thomas J. Shara
 
President and Chief Executive Officer

 
LAKELAND BANK
 
/s/ Thomas J. Shara
 
Thomas J. Shara
 
President and Chief Executive Officer
 
 
 
/s/ Ellen Lalwani
 
Ellen Lalwani
 
Executive






Exhibit 10.31
CHANGE IN CONTROL AGREEMENT

THIS CHANGE IN CONTROL AGREEMENT (the "Agreement"), is dated as of the 1 st day of January 2018, among Lakeland Bancorp, Inc. (the "Holding Company"), a New Jersey corporation, and Lakeland Bank (the "Bank"), a New Jersey chartered commercial bank, having offices at 250 Oak Ridge Road, Oak Ridge, New Jersey 07438 (the Holding Company and the Bank are collectively referred to herein as the "Company") and John F. Rath (the "Executive").

BACKGROUND
WHEREAS , the Executive is or will be employed as Executive Vice President and Chief Lending Officer of the Company; and
WHEREAS , the Company believes that the future services of the Executive are of great value to the Company and that it is important for the growth and development of the Company that the Executive continue in his position; and
WHEREAS , the Board of Directors of the Holding Company (the “Board”) believes it is imperative that the Company be able to rely upon the Executive to continue in his position in the event that Holding Company receives any proposal from a third person concerning a possible business combination with, or acquisition of equities securities of, the Company, and that they be able to receive and rely upon his advice, if they request it, as to the best interests of the Company and its shareholders, without concern that the Executive might be distracted by the personal uncertainties and risks created by such a proposal; and
WHEREAS , to achieve that goal, and to retain the Executives services prior to any such activity, the Company and the Executive have agreed to enter into this Agreement to govern the Executive's termination benefits in the event of a Change in Control, as hereinafter defined;
NOW, THEREFORE , to assure the Company that it will have the continued dedication of the Executive and the availability of his advice and counsel notwithstanding the possibility, threat or occurrence of a bid to take over control of the Company, and to induce the Executive to remain in the employ of the Company, and for other good and valuable consideration, the Company and the Executive, each intending to be legally bound hereby agree as follows:
1.     Definitions
a. Cause .     For purposes of this Agreement "Cause" with respect to the termination by the Company of Executive's employment shall mean: (i) failure by the Executive to materially perform his duties for the Company under this Agreement after at least one warning in writing identifying specifically any such material failure and offering a reasonable opportunity to cure such failure; (ii) the willful engaging by the Executive in material misconduct which causes material injury to the Company; or (iii) conviction of a crime (other than a traffic violation), habitual drunkenness, drug abuse, or excessive absenteeism other than for illness, after a warning (with respect to drunkenness or absenteeism only) in writing to refrain from such behavior. No act or failure to act on the part of the Executive shall be considered willful unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the action or omission was in the best interest of the Company. The Company shall have the burden of proving Cause by clear and convincing evidence.
b. Change in Control .    For purposes of this Agreement, a “Change in Control” shall mean the occurrence of any of the following events with respect to the Holding Company:
(i) the consummation of any consolidation or merger of the Holding Company in which the Holding Company is not the continuing or surviving corporation or pursuant to which shares of the Holding Company's common stock ("Common Stock") would be converted into cash, securities or other property, other than a merger of the Holding Company in which the holders of the shares of the Holding Company's Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger; or
(ii) the consummation of any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Holding Company, other than to a subsidiary or affiliate; or
(iii) an approval by the shareholders of the Holding Company of any plan or proposal for the




liquidation or dissolution of the Holding Company; or
(iv) any action pursuant to which any person (as such term is defined in Section 13(d) of the Exchange Act), corporation or other entity (other than any person who owns more than ten percent (10%) of the outstanding Common Stock on the date this Agreement is entered into, the Holding Company or any benefit plan sponsored by the Holding Company or any of its subsidiaries) shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of shares of capital stock entitled to vote generally for the election of directors of the Holding Company ("Voting Securities") representing fifty-one (51%) percent or more of the combined voting power of the Holding Company's then outstanding Voting Securities (calculated as provided in Rule 13d-3(d) in the case of rights to acquire any such securities), unless, prior to such person so becoming such beneficial owner, the Board shall determine that such person so becoming such beneficial owner shall not constitute a Change in Control; or
(v) the individuals (x) who, as of the date on which the Agreement is entered into, constitute the Board (the "Original Directors") and (y) who thereafter are elected to the Board and whose election, or nomination for election, to the Board was approved by a vote of at least two thirds of the Original Directors then still in office (such Directors being called "Additional Original Directors " ) and (z) who thereafter are elected to the Board and whose election or nomination for election to the Board was approved by a vote of at least two thirds of the Original Directors and Additional Original Directors then still in office, cease for any reason to constitute a majority of the members of the Board.
c.      Contract Period . "Contract Period" shall mean the period
commencing the day immediately preceding a Change in Control and ending on the earlier of: (i) the second anniversary of the Change in Control; (ii) the date the Executive would attain age 65; or (iii) the death of the Executive.
d. Exchange Act . "Exchange Act" means the Securities Exchange Act of 1934, as amended.
e. Good Reason . When used with reference to a voluntary termination by Executive of his employment with the Company, "Good Reason " shall mean any of the following, if taken without Executive's express written consent:
(i) The assignment to Executive of any duties inconsistent with, or the reduction of authority, powers or responsibilities associated with, Executive's position, title, duties, responsibilities and status with the Company immediately prior to a Change in Control (a "Change in Assignment") or any removal of Executive from, or any failure to re-elect Executive to, any position(s) or office(s) Executive held immediately prior to such Change in Control. A change in position, title, duties, responsibilities and status or position(s) or office(s) following a Change in Control shall constitute a Change in Assignment unless the Executive's new title, duties and responsibilities are accepted in writing by the Executive, in the sole discretion of the Executive;
(ii) A reduction by the Company in Executive's annual base compensation as in effect immediately prior to a Change in Control;
(iii) A failure by the Company to continue for Executive any bonus plan in which Executive participated immediately prior to the Change in Control or a failure by the Company to continue Executive as a participant in such plan on at least the same basis as Executive participated in such plan prior to the Change in Control;
(iv) After a Change in Control, the Company's transfer of Executive to another geographic location outside of New Jersey or more than 25 miles from his present office location, except for required travel on the Company's business to an extent substantially consistent with Executive's business travel obligations immediately prior to such Change in Control;
(v) The failure by the Company to continue in effect for Executive any employee benefit plan, program or arrangement (including, without limitation any 401(k) plan, pension plan, life insurance plan, health and accident plan, disability plan, or stock option plan) in which Executive is participating immediately prior to a Change in Control (except that the Company may institute or continue plans, programs or arrangements providing Executive with substantially similar benefits); the




taking of any action by the Company after a Change in Control which would adversely affect Executive's participation in or materially reduce Executive's benefits under, any of such plans, programs or arrangements, the failure to continue, or the taking of any action which would deprive Executive, of any material fringe benefit enjoyed by Executive immediately prior to such Change in Control; or the failure by the Company to provide Executive with the number of paid vacation days to which Executive was entitled immediately prior to such Change in Control; or
(vi) The failure by the Company to obtain an assumption in writing of the obligations of the Company to perform this Agreement by any successor to the Company and to provide such assumption to the Executive upon consummation of the event giving rise to the Change in Control.
2. Employment . During the Contract Period, the Company hereby agrees to employ the Executive, and the Executive hereby accepts employment, upon the terms and conditions set forth herein.
3. Position . During the Contract Period, the Executive shall be employed as Executive Vice President and Chief Lending Officer of the Company or such other corporate or divisional profit center as shall then be the principal successor to the business, assets and properties of the Company, with the same title and the same duties and responsibilities as before the Change in Control. The Executive shall devote his full time and attention to the business of the Company, and shall not during the Contract Period be engaged in any other business activity. This paragraph shall not be construed as preventing the Executive from managing any investments of his which do not require any service on his part in the operation of such investments.
4. Cash Compensation . The Company shall pay to the Executive salary and bonus compensation for his services during the Contract Period as follows:
a. Annual Salary . An Annual salary equal to the annual salary in effect immediately prior to Change in Control. The annual salary shall be payable in installments in accordance with the Company’s usual payroll method. The annual salary shall not be reduced during the Contract Period.
b. Annual Bonus . An Annual cash bonus equal to the highest annual bonus paid to the Executive during the three most recent fiscal years prior to the Change in Control. The bonus shall be payable at the time and in the manner which the Company paid such bonuses prior to the Change in Control.
5. Expenses and Fringe Benefits .     During the Contract Period, the Executive shall be entitled to reimbursement for all business expenses incurred by him with respect to the business of the Company in the same manner and to the same extent as such expenses were previously reimbursed to him immediately prior to the Change in Control. If prior to the Change in Control, the Executive was entitled to the use of an automobile, he shall be entitled to the same use of an automobile at least comparable to the automobile provided to him prior to the Change in Control, and he shall be entitled to vacations and sick days, in accordance with the practices and procedures of the Company, as such existed immediately prior to the Change in Control. During the Contract Period, the Executive also shall be entitled to hospital, health, medical and life insurance, and any other benefits enjoyed, from time to time, by Executive officers of the Company, all upon terms as favorable as those enjoyed by other Executive officers of the Company. Notwithstanding anything in this section to the contrary, if the Company adopts any change in the expenses allowed to, or fringe benefits provided for, Executive officers of the Company, and such policy is uniformly applied to all Executive officers of the Company (and any successor or acquirer of the Company, if any), including the chief executive officer of such entities, then no such change shall be deemed to be contrary to this Section.
All reimbursements provided under this Agreement shall be made or provided in accordance with the requirements of Section 409A of the Code (as defined in Section 9 below), including, where applicable, the requirement that (i) any reimbursement is for expenses incurred during Executive's lifetime (or during a shorter period of time specified in this Agreement), (ii) the amount of expenses eligible for reimbursement during a calendar year may not affect the expenses eligible for reimbursement in any other calendar year, (iii) the reimbursement of an eligible expense will be made on or before the last day of the calendar year following




the year in which the expense is incurred, and (iv) the right to reimbursement is not subject to liquidation or exchange for another benefit.

6. Termination for Cause . The Company shall have the right to terminate the Executive for Cause, upon written notice to him of the termination which notice shall specify the reasons for the termination. In the event of a valid termination for Cause, the Executive shall not be entitled to any further compensation or benefits under this Agreement.
7. Disability . During the Contract Period, if the Executive becomes permanently disabled, or is unable to perform his duties hereunder for six consecutive months, the Company may terminate the employment of the Executive. In such event, the Executive shall not be entitled to any further benefits under this Agreement other than payments under any disability policy which the Company may obtain for the benefit of senior officers generally.
8. Death Benefits . Upon the Executive's death during the Contract Period, the Executive shall be entitled to the benefits of any life insurance policy paid for by the Company which provides, permits and allows the Executive to name a beneficiary other than the Company, but his estate shall not be entitled to any further benefits under this Agreement or any other life insurance policy, except for such policies or benefits customarily provided to employees of the Bank.
9. Termination Without Cause or Resignation for Good Reason . The Company may terminate the Executive without Cause during the Contract Period by written notice to the Executive, or the Executive may resign for Good Reason during the Contract Period upon four weeks' prior written notice to the Company specifying the Good Reason. If the Company terminates the Executive's employment during the Contract Period without Cause or if the Executive resigns during the Contract Period for Good Reason, the Company shall, within 20 business days of the Executive's termination of employment, pay the Executive a lump sum equal to two times the highest annual compensation, including only salary and cash bonus, paid the Executive during any of the three calendar years immediately prior to the Change in Control (the "Lump Sum Payment"). During the remainder of the Contract Period, the Company also shall continue to provide the Executive with and pay for medical and hospital insurance, disability insurance and life insurance, as were provided and paid for at the time of the termination of his employment with the Company; provided , that such insurance coverage shall be provided only to the extent permitted under the terms and conditions of the Company's employee benefit plans. The Executive shall also have the right to purchase from the Company, at book value price, such automobile of the Company, if any, as was used by the Executive while employed by the Company; provided , that the Executive exercises such right within 10 days of his termination of employment and completes the purchase transaction within 30 days of his termination of employment. The Executive shall not have a duty to mitigate the damages suffered by him in connection with the termination by the Company of his employment without Cause or a resignation for Good Reason during the Contract Period.
The Lump Sum Payment is intended to be administered and interpreted in a manner such that it shall not be subject to “additional tax” within the meaning of Section 409A(a)(1)(B) of the Code. Notwithstanding any provision of this Agreement to the contrary, if and to the extent necessary to comply with the restriction in Section 409A(a)(2)(B) of the Code concerning payments to “specified employees,” the Lump Sum Payment shall be paid on the first business day of the seventh month following the Executive's separation from service with the Company, and shall be paid together with interest accrued during the period of such restriction at a rate, per annum, equal to the applicable federal short-term rate (compounded monthly) in effect under Section 1274(d) of the Code on the date of termination. Notwithstanding provision of this Agreement to the contrary, the Executive shall not be considered to have terminated employment with the Company for purposes of this Section 9 unless he would be considered to have incurred a “termination of employment” from the Company within the meaning of Treasury Regulation §1.409A-1(h)(1)(ii).
The Executive acknowledges that any tax liability incurred by the Executive under Section 409A of the Code is solely




the responsibility of the Executive.
For purposes of the foregoing, the Executive’s salary and cash bonus shall be determined without regard to any reductions to such amounts made at the election of the Executive, including without limitation, reductions pursuant to any deferral election under a 401(k) plan or deferred compensation plan or arrangement or contributions made under a “cafeteria plan” within the meaning of Section 125 of the Internal Revenue Code of 1986, as amended.
10. Resignation Without Good Reason . The Executive shall be entitled to resign from the employment of the Company at any time during the Contract Period without Good Reason, but upon such resignation the Executive shall not be entitled to any additional compensation for the time after which he ceases to be employed by the Company, and shall not be entitled to any of the other benefits provided hereunder. No such resignation shall be effective unless in writing with four weeks ' notice thereof.
11. Non-Disclosure of Confidential Information . In consideration of the covenants of the Company herein, the Executive agrees as follows:
a. The Executive hereby agrees and acknowledges that he has and has had access to or is aware of Confidential Information. The Executive hereby agrees that he shall keep strictly confidential and will not during and after his employment with the Company, without the Company's express written consent, divulge, furnish or make accessible to any person or entity, or make use of for the benefit of himself or others, any Confidential Information obtained, possessed, or known by him except as required in the regular course of performing the duties and responsibilities of his employment by the Company while in the employ of the Company, and that he will, prior to or upon the date on which his employment with the Company terminates (the "Date of Termination") deliver or return to the Company all such Confidential Information that is in written or other physical or recorded form or which has been reduced to written or other physical or recorded form, and all copies thereof, in his possession, custody or control. The foregoing covenant shall not apply to (i) any Confidential Information that becomes generally known or available to the public other than as a result of a breach of the agreements of the Executive contained herein, (ii) any disclosure of Confidential Information by the Executive that is expressly required by judicial or administrative order; provided however that the Executive shall have (x) notified the Company as promptly as possible of the existence, terms and circumstances of any notice, subpoena or other process or order issued by a court or administrative authority that may require him to disclose any Confidential Information, and (y) cooperated with the Company, at the Company's request, in taking legally available steps to resist or narrow such process or order and to obtain an order or other reliable assurance that confidential treatment will be given to such Confidential Information as is required to be disclosed.
b. For purposes of this Agreement, "Confidential Information" means all non-public or proprietary information, data, trade secrets, "know-how", or technology with respect to any products, designs, improvements, research, styles, techniques, suppliers, clients, markets, methods of distribution, accounting, advertising and promotion, pricing, sales, finances, costs, profits, financial condition, organization, personnel, business systems (including without limitation computer systems, software and programs), business activities, operations, budgets, plans, prospects, objectives or strategies of the Company.




12.     Post-Employment Obligations . In consideration of the covenants of the Company herein, the Executive agrees as follows:
a. The Executive agrees that while he is in the employ of the Company and for a one year period after the Date of Termination (unless such termination is by the Company without Cause), he shall not, without the prior written consent of the Company, directly or indirectly, and regardless of the reason for his ceasing to be employed by the Company, employ, solicit for employment, or advise or recommend to any other person that they employ or solicit for employment or retention as a consultant, any person who is, or was at any time within twelve (12) months prior to the Date of Termination, an employee of, or exclusive consultant to, the Company.
b. If the Executive commits a breach or is about to commit a breach, of any of the provisions of Sections 11 or 12 hereof, the Company shall have the right to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction without being required to post bond or other security and without having to prove the inadequacy of the available remedies at law, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company that money damages will not provide an adequate remedy to the Company. In addition, the Company may take all such other actions and remedies available to them under law or in equity and shall be entitled to such damages as they can show they have sustained by reason of such breach.
c. The parties acknowledge that the type and periods of restriction imposed in the provisions of Sections 11 and 12 hereof are fair and reasonable and are reasonably required for the protection of the Company and the goodwill associated with the business of the Company; and that the provisions of Sections 11 and 12 have been specifically negotiated by sophisticated parties and are given as an integral part of this Agreement.
13. No Effect Prior to Change in Control . This Agreement shall not affect any rights of the Company or the Executive prior to a Change in Control or any rights of the Executive granted in any other agreement, plan or arrangements. The rights, duties and benefits provided hereunder shall only become effective upon a Change in Control. If the employment of the Executive by the Company is terminated for any reason prior to a Change in Control, this Agreement shall thereafter be of no further force and effect.
14. Certain Reduction of Payments by the Company.
a. Anything in this Agreement to the contrary notwithstanding, prior to the payment of any compensation or benefits payable under Section 9 hereof, the certified public accountants of the Company immediately prior to a Change of Control (the " Certified Public Accountants") shall determine as promptly as practical and in any event within 20 business days following the termination of employment of Executive whether any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would more likely than not be nondeductible by the Company for Federal income purposes because of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and if it is then the aggregate present value of amounts payable or distributable to or for the benefit of Executive pursuant to this Agreement are hereinafter referred to as "Agreement Payments" shall be reduced (but not below zero) to the Reduced Amount. For purposes of this paragraph, the "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Company because of said Section 280G of the Code.
b. If under paragraph a of this section the Certified Public Accountants determine that any Payment would more likely than not be nondeductible by the Company because of Section 280G of the Code, the Company shall promptly give the Executive notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Executive may then elect, in his sole discretion, which and how much of the Agreement Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments equals the Reduced Amount), and shall advise the




Company in writing of his election within 20 business days of his receipt of notice. If no such election is made by the Executive within such 20-day period, the Company may elect which and how much of the Agreement Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments equals the Reduced Amount) and shall notify the Executive promptly of such election. For purposes of this paragraph, present value shall be determined in accordance with Section 280G (d) (4) of the Code. All determinations made by the Certified Public Accountants shall be binding upon the Company and Executive and shall be made within 20 days of a termination of employment of Executive. The Company may suspend for a period of up to 30 days after termination of employment the Lump Sum Payment and any other payments or benefits due to the Executive under Section 9 hereof until the Certified Public Accountants finish the determination and the Executive (or the Company, as the case may be) elect how to reduce the Agreement Payments, if necessary. As promptly as practicable following such determination and the elections hereunder, the Company shall pay to or distribute to or for the benefit of Executive such amounts as are then due to Executive under this Agreement and shall promptly pay to or distribute for the benefit of Executive in the future such amounts as become due to Executive under this Agreement.
c. As a result of the uncertainty in the application of Section 280G of the Code, it is possible that Agreement Payments may have been made by the Company which should not have been made ("Overpayment") or that additional Agreement Payments which will have not been made by the Company could have been made ("Underpayment " ), in each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Certified Public Accountants, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or Executive which said Certified Public Accountant believe has a high probability of success, determines that an Overpayment has been made, any such Overpayment shall be treated for all purposes as a loan to Executive which Executive shall repay to the Company together with interest at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code; provided, however, that no amount shall be payable by Executive to the Company in and to the extent such payment would not reduce the amount which is subject to taxation under Section 4999 of the Code. In the event that the Certified Public Accountants, based upon controlling precedent, determine that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive together with interest at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code.
15. Severance Compensation and Benefits Not in Derogation of other Benefits. Anything to the contrary herein contained notwithstanding, the payment or obligation to pay any monies, or granting of any benefits, rights or privileges to Executive as provided in this Agreement now has or will have under any plans or programs of the Company, except that the Executive shall not be in lieu or derogation of the rights and privileges that the Executive now has or will have under any plans or programs of the Company, except that the Executive shall not be entitled to the benefits of any other plan or program of the Company expressly providing for severance or termination pay if the Executive is terminated without Cause or resigns for Good Reason after a Change in Control.
16. Miscellaneous . The terms of this Agreement shall be governed by, and interpreted and construed in accordance with the provisions of, the laws of New Jersey and, to the applicable, federal law. This Agreement supersedes all prior agreements and understandings with respect to the matters covered hereby. The amendment or termination of this Agreement may be made only in writing executed by the Company and the Executive, and no amendment or termination of this Agreement shall be effective unless and until made in such in writing. This Agreement shall be binding upon any successor (whether direct or indirect, by purchase, merge, consolidation, liquidation or otherwise) to all or substantially all of the assets of the Company. This Agreement is personal to the Executive and the Executive may not assign any of his rights or duties hereunder but this Agreement shall be enforceable by the Executive’s legal representatives, executors or administrators. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart.





IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its duly authorized representatives pursuant to the authority of its Board, and the Executive has personally executed this Agreement, all as of the day and year first written above.
                                        
                    
 
LAKELAND BANCORP, INC.
 
/s/ Thomas J. Shara
 
Thomas J. Shara
 
President and Chief Executive Officer

 
LAKELAND BANK
 
/s/ Thomas J. Shara
 
Thomas J. Shara
 
President and Chief Executive Officer
 
 
 
/s/ John F. Rath
 
John F. Rath
 
Executive






Exhibit 12.1
STATEMENT OF RATIOS OF EARNINGS TO FIXED CHARGES
 
Ratio of earnings to fixed charges
 
Year ended December 31,
 
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
(Dollars in thousands)
Earnings:
 
 
 
 
 
 
 
 
 
 
Income from continuing operations before taxes
 
$
80,049

 
$
62,839

 
$
48,648

 
$
46,288

 
$
37,419

Fixed charges excluding deposits and preferred stock dividends:
 
9,403

 
8,206

 
6,015

 
4,764

 
4,402

Subtotal
 
89,452

 
71,045

 
54,663

 
51,052

 
41,821

Interest on deposits
 
16,600

 
10,512

 
5,755

 
5,064

 
6,089

Total
 
$
106,052

 
$
81,557

 
$
60,418

 
$
56,116

 
$
47,910

Fixed charges:
 
 
 
 
 
 
 
 
 
 
Interest excluding deposits
 
$
8,366

 
$
7,135

 
$
5,118

 
$
3,873

 
$
3,568

Interest component on rentals*
 
1,037

 
1,071

 
897

 
891

 
834

Preferred stock dividends
 
—

 
—

 
—

 
—

 
—

Subtotal
 
9,403

 
8,206

 
6,015

 
4,764

 
4,402

Interest on deposits
 
16,600

 
10,512

 
5,755

 
5,064

 
6,089

Total
 
$
26,003

 
$
18,718

 
$
11,770

 
$
9,828

 
$
10,491

Ratio of earnings to fixed charges:
 
 
 
 
 
 
 
 
 
 
Excluding interest on deposits
 
9.51

 
8.66

 
9.09

 
10.72

 
9.50

Including interest on deposits
 
4.08

 
4.36

 
5.13

 
5.71

 
4.57

 
*
Interest component on rentals estimated to be one-third of rentals.




Exhibit 21.1
LAKELAND BANCORP, INC.
SUBSIDIARIES OF THE REGISTRANT
 
 
 
Name
    
Jurisdiction of Incorporation
 
 
Lakeland Bank
    
New Jersey chartered bank
 
 
Lakeland NJ Investment Corporation
    
New Jersey
(wholly owned subsidiary of Lakeland Bank)
    
 
 
Lakeland Investment Corporation
    
Delaware
(wholly owned subsidiary of Lakeland NJ Investment Corporation)
    
 
 
Lakeland Equity, Inc.
    
Delaware
(wholly owned subsidiary of Lakeland Investment Corporation)
    
 
 
Lakeland Preferred Equity, Inc.
    
New Jersey
(wholly owned subsidiary of Lakeland Equity, Inc.)
    
 
 
NBSC Holdings, Inc.
    
New Jersey
(wholly owned subsidiary of Lakeland Bank)
    
 
 
NBSC Properties, Inc.
    
New Jersey
(wholly owned subsidiary of Lakeland Bank)
    
 
 
Lakeland Bancorp Capital Trust II
    
Delaware
 
 
Lakeland Bancorp Capital Trust IV
    
Delaware
 
 
Somerset Hills Investment Holdings Inc.
    
New Jersey
(wholly owned subsidiary of Lakeland Bank)
    
 
 
Lakeland Title Group LLC
    
New Jersey
(50% owned by Lakeland Bank)
    
 
 
Lakeland Wealth Management Services LLC
    
New Jersey
(wholly owned subsidiary of Lakeland Bank)
    
 
 
Sullivan Financial Services Inc.
    
New Jersey
(wholly owned subsidiary of Lakeland Bank)
    




Exhibit 23.1
Consent of Independent Registered Public Accounting Firm

 
 
 
 
 
 
The Board of Directors
Lakeland Bancorp, Inc.:
We consent to the incorporation by reference in the registration statements of Lakeland Bancorp, Inc. and subsidiaries (the Company) on Form S-3 (File No. 333-214441, effective December 23, 2016) and on Forms S-8 (File No. 333-189059, effective June 3, 2013; File No. 333-159664, effective June 2, 2009; File No. 333-125616, effective June 8, 2005; and File No. 333-34296, effective April 7, 2000) of the Company of our reports dated February 28, 2018, with respect to the consolidated balance sheets of the Company as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements), and the effectiveness of internal control over financial reporting as of December 31, 2017, which reports appear in the December 31, 2017 annual report on Form 10‑K of the Company.
.

/s/ KPMG LLP
 
 
Short Hills, New Jersey, February 28, 2018
 
 






Exhibit 24.1
POWER OF ATTORNEY

WHEREAS , the undersigned officers and directors of Lakeland Bancorp, Inc. desire to authorize Thomas J. Shara and Thomas F. Splaine, Jr., to act as their attorneys-in-fact and agents, for the purpose of executing and filing the registrant’s Annual Report on Form 10-K for the year ended December 31, 2017, including all amendments and supplements thereto,

NOW, THEREFORE,

KNOW ALL MEN BY THESE PRESENTS , that each person whose signature appears below constitutes and appoints Thomas J. Shara and Thomas F. Splaine, Jr., and each of them, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, to sign the registrant’s Annual Report on Form 10-K for the year ended December 31, 2017, including any and all amendments and supplements thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

IN WITNESS WHEREOF , the undersigned have executed this power of attorney in the following capacities as of January 17, 2018.
Signatures
 
Title
 
 
 
/s/ Bruce D. Bohuny
 
Director
Bruce D. Bohuny
 
 
 
 
 
/s/ Mary Ann Deacon
 
Director
Mary Ann Deacon
 
 
 
 
 
/s/ Edward B. Deutsch
 
Director
Edward B. Deutsch
 
 
 
 
 
/s/ Brian Flynn
 
Director
Brian Flynn
 
 
 
 
 
/s/ Mark J. Fredericks
 
Director
Mark J. Fredericks
 
 
 
 
 
/s/ Janeth C. Hendershot
 
Director
Janeth C. Hendershot
 
 
 
 
 
/s/ Lawrence R. Inserra, Jr.
 
Director
Lawrence R. Inserra, Jr.
 
 
 
 
 
/s/ Thomas J. Marino
 
Director
Thomas J. Marino
 
 
 
 
 
/s/ Robert E. McCracken
 
Director
Robert E. McCracken
 
 
 
 
 
/s/ Robert B. Nicholson, III
 
Director
Robert B. Nicholson, III
 
 
 
 
 
/s/ Joseph P. O࿽Dowd
 
Director
Joseph P. O࿽Dowd
 
 
 
 
 
/s/ Thomas J. Shara
 
Director, President and Chief Executive Officer (Principal Executive Officer)
Thomas J. Shara
 
 
 
 
 
/s/ Stephen R. Tilton, Sr.
 
Director
Stephen R. Tilton, Sr.
 
 
 
 
 
/s/ Thomas Splaine
 
Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
Thomas Splaine
 
 




Exhibit 31.1
Certification of Principal Executive Officer
I, Thomas J. Shara, certify that:

1.
I have reviewed this annual report on Form 10-K of Lakeland Bancorp, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 28, 2018
/s/ Thomas J. Shara
 
Thomas J. Shara
 
President and Chief Executive Officer
 
(Principal Executive Officer)
 




Exhibit 31.2
Certification of Principal Financial Officer
I, Thomas F. Splaine, Jr., certify that:

1.
I have reviewed this annual report on Form 10-K of Lakeland Bancorp, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 28, 2018
/s/ Thomas F. Splaine, Jr.
 
Thomas F. Splaine, Jr.

 
Executive Vice President and Chief Financial Officer
 
(Principal Financial Officer)
 




Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Lakeland Bancorp, Inc. (the “Company”) for the year ended December 31, 2017 filed with the Securities and Exchange Commission (the “Report”), Thomas J. Shara, President and Chief Executive Officer of the Company, and Thomas F. Splaine, Jr., Executive Vice President and Chief Financial Officer of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and consolidated results of operations of the Company for the periods presented.

Dated: February 28, 2018

By:
/s/ Thomas J. Shara
 
 
Thomas J. Shara
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
 
By:
/s/ Thomas F. Splaine, Jr.
 
 
Thomas F. Splaine, Jr.
 
 
Executive Vice President and Chief Financial Officer
 
 
(Principal Financial Officer)
 
This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.