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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, 2019.
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO                     .
Commission file number: 000-17820

LAKELAND BANCORP, INC.

(Exact name of registrant as specified in its charter)
New Jersey
22-2953275
(State or other jurisdiction of
incorporation  or organization) 
 (I.R.S. Employer
Identification No.)

250 Oak Ridge Road, Oak Ridge, New Jersey 07438
 (Address of principal executive offices and zip code)
(973) 697-2000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol
 
Name of exchange on which registered
Common Stock, no par value
 
LBAI
 
The Nasdaq Stock Market

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 every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☒    Accelerated filer ☐    Non-accelerated filer ☐  Smaller reporting company ☐  Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by 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, 2019, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $780,779,539, based on the closing sale price as reported on the NASDAQ Global Select Market.

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The number of shares outstanding of the registrant’s common stock, as of February 25, 2020, was 50,513,886.
DOCUMENTS INCORPORATED BY REFERENCE:
Lakeland Bancorp, Inc. Proxy Statement for its 2020 Annual Meeting of Shareholders (Part III).

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LAKELAND BANCORP, INC.
Form 10-K Index
 
 
PAGE
 
 
 
Item 1.
1
Item 1A.
11
Item 1B.
19
Item 2.
19
Item 3.
20
Item 3A.
21
Item 4.
22
 
 
 
 
Item 5.
22
Item 6.
24
Item 7.
25
Item 7A.
48
Item 8.
49
Item 9.
96
Item 9A.
97
Item 9B.
99
 
 
 
 
 
Item 10.
99
Item 11.
99
Item 12.
99
Item 13.
99
Item 14.
99
 
 
 
 
 
Item 15.
100
Item 16.
102
103

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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”). Lakeland currently operates 52 branch offices located throughout Bergen, Essex, Morris, Ocean, Passaic, Somerset, Sussex, and Union counties in New Jersey and in Highland Mills, New York; six New Jersey regional commercial lending centers in Bernardsville, Iselin, Jackson, Montville, Teaneck and Waldwick; and one New York commercial lending center to serve the Hudson Valley region. Lakeland offers an extensive suite of financial products and services for businesses and consumers.
The Company has grown through a combination of organic growth and acquisitions. Since 1998, the Company has acquired eight community banks with an aggregate asset total of approximately $2.28 billion, including its most recent acquisition of Highlands State Bank and its parent, Highlands Bancorp, Inc. ("Highlands Bancorp"), which was completed on January 4, 2019. 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, 2019, Lakeland Bancorp had total consolidated assets of $6.7 billion, total consolidated deposits of $5.3 billion, total consolidated loans, net of the allowance for loan losses, of $5.1 billion and total consolidated stockholders’ equity of $725.3 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.
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 commercial real estate loans, commercial and industrial loans, 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. Through Lakeland’s equipment financing division, the Company provides a financing 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. Lakeland 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, interest-bearing checking accounts, money market accounts, certificates of deposit, internet banking, secured and unsecured loans, consumer installment loans, mortgage loans, and safe deposit services.
Other Services
Investment advisory services for individuals and businesses are also available. Additionally, through Lakeland Title Group LLC, the Bank provides commercial title insurance services and life insurance products through Lakeland Financial Services Agency, Inc.

-1-


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, financial technology 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, 2019, the Company had 692 full-time equivalent employees. None of these employees is 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 has also elected financial holding company status under the Modernization Act, as further discussed below. 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 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.

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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.
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.

-3-


•
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”) imposes a variety of corporate governance, accounting and corporate reporting obligations upon public companies, designed in general to promote 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 blackout periods;
•
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.

-4-


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;
•
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.

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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. 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.
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 applicable 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.

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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 implemented 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 revised 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:
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Common Equity Tier 1 Capital Ratio of 4.5% (this is referred to as the “CET1”);
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Tier 1 Capital Ratio (CET1 capital plus “Additional Tier 1 capital”) of 6.0%; and
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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).
The Basel Rules also require a “capital conservation buffer.” As of the full phase-in on January 1, 2019, Lakeland Bancorp and Lakeland Bank were 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:
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CET1 of 7.0%;
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Tier 1 Capital Ratio of 8.5%; and
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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 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.

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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.
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. With the capital conservation buffer fully phased in as of January 1, 2019, the capital ratios applicable to depository institutions under the Basel Rules exceed the ratios to be considered well-capitalized under the prompt corrective action regulations.
As of December 31, 2019, Lakeland Bancorp and Lakeland Bank met all capital requirements under the Basel Rules as then in effect, including the fully phased-in capital conservation buffer requirement.
The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “EGRRCPA”) was signed into law in May 2018. The EGRRCPA, among other matters, amended the Federal Deposit Insurance Act to require federal banking agencies to develop a specified Community Bank Leverage Ratio (the ratio of a bank's Tier 1 capital to its average total consolidated assets) for banks with assets of less than $10 billion. Qualifying participating banks that exceed this ratio shall be deemed to comply with all other capital and leverage requirements. In September 2019, the FDIC approved a final rule allowing community banks with a leverage capital ratio of at least 9% to be considered in compliance with Basel III capital requirements and exempt from the Basel Rules calculations. Under the final rule, banks with less than $10 billion in assets may elect the Community Bank Leverage Ratio framework if they meet the 9% ratio and if they hold 25% or less of assets in off-balance sheet exposures, and 5% or less of assets in trading assets and liabilities. For institutions that fall below the 9% capital requirement but remain above 8%, the final rule establishes a two-quarter grace period to either meet the qualifying criteria again or comply with the generally applicable capital rule. An eligible financial institution that opts into this new framework and then fails to satisfy this new framework after expiration of the grace period will then be required to satisfy the generally applicable capital requirements. Management is still reviewing the Community Bank Leverage Ratio framework, but does not expect that Lakeland Bancorp or Lakeland Bank will elect to use the Community Bank Leverage Ratio framework.
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. The Volcker Rule prohibits a covered 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. In 2019, the federal regulators jointly issued final rules to amend the Volcker Rule in a manner consistent with statutory amendments made pursuant to EGRRCPA, to exclude from the Volcker Rule's prohibitions and restrictions banking entities that have total consolidated assets equal to $10 billion or less and total trading assets and liabilities equal to 5% or less of total consolidated assets. The Company does not own any interests in any hedge funds or private equity funds that are designated “Covered Funds” under the Volcker Rule.

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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.
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. When the Deposit Insurance Fund (DIF) Reserve Ratio is at or above 1.38% in a given quarter, credits will be applied to banks' assessment payments. The Company began receiving the Small Bank Assessment credit in the third quarter of 2019 and, as a result, made no FDIC assessment payments in the third and fourth quarter of 2019. The Company paid $908,000 in total FDIC assessments in 2019 and $1.6 million in 2018.
In addition to deposit insurance assessments, the FDIC was 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 remained outstanding. The last of the remaining FICO bonds matured in September 2019 with the final FICO assessment collected in 2019. Lakeland paid FICO premiums of approximately $17,000 in 2019 and $149,000 in 2018.
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 applied 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.
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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:
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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.
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") require 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 government-sponsored enterprise ("GSE"), Federal Housing Administration ("FHA") and Veterans Affairs ("VA") underwriting and eligibility guidelines may, for a period not to exceed seven years, meet the QM Rule 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.

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2018 Regulatory Reform
The EGRRCPA, enacted in May 2018, repeals or modifies certain provisions of the Dodd-Frank Act and eases certain regulations on smaller banks. Highlights of the EGRRCPA include, among other items: (i) simplifying capital calculations for eligible community banks that elect to opt into the new Community Bank Leverage Ratio framework; (ii) modifying risk weight exposures, allowing banks to classify certain credit facilities as regular commercial real estate exposures instead of high volatility commercial real estate exposures for purposes of calculating their risk-weighted capital requirements; (iii) expanding the definition of qualified mortgages which may be held in portfolio; and (iv) excluding from “banking entities” subject to the Volcker Rule certain firms that have total consolidated assets equal to $10 billion or less and total trading assets and liabilities equal to 5% or less of total consolidated assets. See “Capital Requirements” and “Volcker Rule” above.
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 losses may not be adequate to cover actual losses.
Like all commercial banks, Lakeland Bank maintains an allowance for loan losses to provide for loan defaults and non-performance. If our allowance for loan losses is not adequate to cover actual loan losses, we may be required to significantly increase future provisions for loan losses, which could materially and adversely affect our operating results. Our allowance for loan losses is determined by analyzing historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan resolution, the opinions of our regulators, changes in the size and composition of the loan 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 losses. While we believe that our allowance for loan 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 losses or that the regulators will not require us to increase this allowance. Future increases in our allowance for loan losses could materially and adversely affect our earnings and profitability.
A change in accounting standards, which is effective for the Company beginning January 1, 2020, could also cause an increase in Lakeland’s allowance for loan losses. In June 2016, the FASB issued an accounting standards update (ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments), pertaining to the measurement of credit losses on financial instruments ("CECL"). 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. The new standard will be mandatory for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. This differs significantly from the "incurred loss" model required under current GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will significantly affect how we determine our allowance for loan losses and will require us to increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses.

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On December 21, 2018, the banking agencies approved a final rule modifying their regulatory capital rules and providing an option to phase in over a period of three years the day-one regulatory capital effects of the CECL model. The final rule also revises the agencies' other rules to reflect the update to the accounting standards. The final rule became effective on April 1, 2019. In October 2019, four federal banking agencies issued a request for comment on a proposed interagency policy statement on the new CECL methodology. The policy statement proposes to harmonize the agencies' policies on allowances for credit losses with the FASB's new accounting standards. Specifically the statement (1) updates concepts and practices from prior policy statements issued in December 2006 and July 2001 and specifies which prior guidance documents are no longer relevant; (2) describes the appropriate CECL methodology, in light of Topic 326, for determining allowances for credit losses ("ACL") on financial assets measured at amortized cost, net investments in leases and certain off-balance sheet credit exposures; and (3) describes how to estimate an ACL for an impaired available-for-sale debt security in line with Topic 326. The proposed policy statement would be effective at the time that each institution adopts the new standards required by FASB. Management is still evaluating whether it will choose the three-year phase-in option.
Based on an analysis performed on our loan portfolio as of December 31, 2019, we expect an increase in our allowance for loan losses (and our reserves for unfunded commitments) ranging from 10% to 25%. The final number will be dependent on the refinement of our overall methodology primarily related to our qualitative adjustments and purchased credit deteriorated loans, and certain assumptions, which we are currently finalizing and expect to be completed in the coming weeks. The increase will result in a one-time cumulative effect adjustment to our allowance for loan losses, and a corresponding decrease to retained earnings as of the January 1, 2020 effective date. Any future quarterly changes to our allowance will depend on the current state of the economy, forecasted macroeconomic conditions and the composition of our loan portfolio at the time.
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 49% of total risk-based capital at December 31, 2019. The Bank’s total reported CRE loans to total capital was 431% at December 31, 2019, while the Bank’s CRE portfolio has increased by 49% over the preceding 36 months. The growth rate of the preceding 36 months included the acquisition of Highlands State 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 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 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.
In addition, the “ability to repay” and “Qualified Mortgage” rules promulgated as required by the Dodd-Frank Act (as amended or supplemented to date, including by the EGRRCPA (see "2018 Regulatory Reform," above)), 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.

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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:
•
loan delinquencies may increase;
•
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 and the metropolitan New York area, could adversely affect our business. A decline in real estate values in New Jersey and the metropolitan New York area 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 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. The legislation remains pending, and 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.
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:
•
inflation or deflation
•
excess growth or recession;
•
a rise or fall in unemployment;
•
tightening or expansion of the money supply;
•
domestic and international disorder;
•
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 can increase significantly as a result of the interest rate environment.
The transition from LIBOR as a reference rate may adversely impact our net income.
In 2017, the United Kingdom's Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate ("LIBOR"). This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, it is not possible to predict, at this time, whether and to what extent banks will continue to provide submissions for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become an accepted alternative to LIBOR, or what the effect of any such changes in views or alternative may be on the markets for LIBOR-indexed financial instruments.
In particular, regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among other things, published recommended fall-back language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., the Secured Overnight Financing Rate as the recommended alternative to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments. At this time, it is not possible to predict whether these specific recommendations and proposals will be broadly accepted, whether they will continue to evolve, and what the effect of their implementation may be on the markets for floating-rate financial instruments.
We have a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR could create considerable costs and additional risk. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.
Declines in value may adversely impact our investment portfolio.
As of December 31, 2019, the Company had approximately $755.9 million and $124.0 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

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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 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 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.
The Company embarked on a digital strategy initiative in 2019, which impacts all operational areas of the Bank. There are no guarantees that enhancing the Company's digital capabilities will expand Lakeland's market presence as a community bank or result in an ability to better compete long-term in a fast-paced digital marketplace. In addition, the cost of implementation and the anticipated increase in revenue may not occur as expected.
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.

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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.
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.
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,” banks and bank holding companies are required to maintain a capital conservation buffer on top of minimum risk-weighted asset ratios. The capital conservation buffer was fully phased in on January 1, 2019. In September 2019, the regulatory agencies adopted a final rule, effective January 1, 2020, creating a Community Bank Leverage Ratio framework for institutions with total consolidated assets of less than $10 billion and that meet other qualifying criteria. The Community Bank Leverage Ratio Framework provides for a simpler measure of capital adequacy for qualifying institutions. Qualifying institutions that elect to use the Community Bank Leverage Ratio framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules and to have met the well-capitalized ratio requirements. Management is still reviewing the Community Bank Leverage Ratio framework, but does not expect that Lakeland Bancorp or Lakeland Bank will elect to use the framework.
Banking institutions which do not maintain capital in excess of the Basel Rule standards including 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.

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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,” as a general matter, banks and bank holding companies are required to maintain a capital conservation buffer on top of minimum risk-weighted asset ratios. 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.
It is now more than two years since 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"). As of year-end 2018, we had completed the process of determining the accounting under ASC Topic 740, Income Taxes, for the income tax effects of the Tax Act, as discussed in the related notes to the consolidated financial statements. The Company has therefore disclosed the impact that the Tax Act had on its financial position and the results of operations. However, additional 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% lowered the Company's income tax expense as a percent of its taxable income in 2019 and 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 imposed higher limitations on the deductibility of interest and property tax expenses, which may have adversely impacted, and may continue to adversely impact, the property values of real estate used to secure loans and may have created, and may continue to 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 and state 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.

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Recent New Jersey legislative changes may increase tax expense.
Legislation in New Jersey that was enacted in July 2018 increased our state income tax liability and could increase our overall tax expense. The legislation imposes a temporary surtax on corporations earning New Jersey allocated income in excess of $1.0 million of 2.5% for tax years beginning on or after January 1, 2018 through December 31, 2019, and of 1.5% for tax years beginning on or after January 1, 2020 through December 31, 2021. The new legislation also requires combined filing for members of an affiliated group for tax years ending on or after July 31, 2019, and limits the deductibility of dividends received. These changes are not temporary. Regulations implementing the legislative changes have not yet been issued, so we cannot yet fully evaluate the impact of the legislation on our overall tax expense. However, the new legislation may cause us to lose the benefit of certain of our tax management strategies and may cause our total tax expense to increase.
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 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 are required to test our goodwill at least annually. Our valuation methodology for assessing impairment requires management to consider a variety of factors, including the current market price of our common shares, the estimated net present value of our assets and liabilities and information concerning the terminal valuation of similarly situated insured depository institutions.  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.

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 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 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.
Lakeland currently operates 52 branch offices located throughout Bergen, Essex, Morris, Ocean, Passaic, Somerset, Sussex, and Union counties in New Jersey and in Highland Mills, New York; six New Jersey regional commercial lending centers in Bernardsville, Iselin, Jackson, Montville, Teaneck and Waldwick; and one New York commercial lending center to serve the Hudson Valley region. 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 $47.6 million at December 31, 2019. As of December 31, 2019, 28 of the Company’s facilities were owned and 35 were leased for various terms.

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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.

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ITEM 3A - Information about our Executive Officers.
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 62
 
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 F. Splaine, Jr.
Age 54
 
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 65
 
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).

Paul Ho Sing Loy
Age 59
 
2019
 
Executive Vice President and Chief Information Officer of the Company (January 2019 - Present); Executive Vice President and Chief Information Officer of the Bank (May 2017 - Present); Senior Vice President and Director of Business Solutions, Associated Bank (2012 - 2017); Delivery Manager for Systems in Motion, a technology outsourcing firm (2011 - 2012); Principal Consultant for Jordan Jaden Partners, a technology and management consulting firm (2003 - 2011); Senior IT positions at Wells Fargo, Bank of America and Citibank (1983 - 2003).
Ellen Lalwani Age 56
 
2018
 
Executive Vice President and Chief Banking Officer of the Company and the Bank (January 2020); Executive Vice President and Chief Retail Officer of the Company and the Bank (January 2018 - January 2020); Senior Vice President and Director of Retail Sales of the Bank (August 2008 - January 2018).
Timothy J. Matteson, Esq.
Age 50
 
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 52
 
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 61
 
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).



-21-


ITEM 4 - Mine Safety Disclosures.
Not applicable.
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, 2019, there were approximately 3,058 shareholders of record of the common stock.
The following chart compares the Company’s cumulative total shareholder return (on a dividend reinvested basis) over the past five years commencing December 31, 2014 and ending December 31, 2019 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 2019

CHART-C6EEFB4BCAF75466B72.JPG
Company/Market/Peer Group
 
12/31/2014
 
12/31/2015
 
12/31/2016
 
12/31/2017
 
12/31/2018
 
12/31/2019
Lakeland Bancorp, Inc.
 
$
100.00

 
$
103.90

 
$
177.66

 
$
178.99

 
$
141.01

 
$
170.54

NASDAQ Market Index
 
100.00

 
106.96

 
116.45

 
150.96

 
146.67

 
200.50

Regional Northeast Banks
 
100.00

 
104.61

 
145.41

 
152.23

 
132.88

 
160.72



-22-


The following table presents information regarding shares of our common stock repurchased during the fourth quarter of 2019.
Period
 
Total Number of Shares (or Units) Purchased (1)
 
Weighted Average Price Paid per Share (or Unit)
 
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
October 1 to October 31, 2019
 
—

 
$
—

 
—

 
2,524,458

November 1 to November 30, 2019
 
—

 
—

 
—

 
2,524,458

December 1 to December 31, 2019
 
—

 
—

 
—

 
2,524,458


(1)On October 24, 2019, the Company announced that its Board of Directors authorized a new share repurchase program. Under the repurchase program, the Company may repurchase up to 2,524,458 shares of its common stock, or approximately 5% of its outstanding shares of common stock at September 30, 2019. Repurchases may be made from time to time through a combination of open market and privately negotiated repurchases. The specific timing, price and quantity of repurchases will be at the discretion of the Company and will depend on a variety of factors, including general market conditions, the trading price of the common stock, legal and contractual requirements and the Company's financial performance. No shares were purchased by the Company pursuant to such share repurchase program or otherwise.


-23-


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 selected financial data set forth below has been derived from the Company’s audited consolidated financial statements.
 
 
At or for the Years Ended December 31,
(in thousands, except per share data)
 
2019
 
2018
 
2017
 
2016
 
2015
 
 
 
Income Statement
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
256,487

 
$
213,121

 
$
190,204

 
$
163,296

 
$
127,514

Interest expense
 
60,453

 
39,562

 
24,966

 
17,647

 
10,874

Net interest income
 
196,034

 
173,559

 
165,238

 
145,649

 
116,640

Provision for loan losses
 
2,130

 
4,413

 
6,090

 
4,223

 
1,942

Noninterest income excluding gains on investment securities and gain on debt extinguishment
 
26,300

 
22,893

 
22,911

 
20,960

 
19,090

Gains on sales of investment securities
 
—

 
—

 
2,524

 
370

 
241

Gain (loss) on equity securities
 
496

 
(583
)
 
—

 
—

 
—

Gain on early debt extinguishment
 
—

 
—

 
—

 
—

 
1,830

Merger related expenses
 
3,178

 
464

 
—

 
4,103

 
1,152

Long-term debt prepayment fee
 
—

 
—

 
2,828

 
—

 
2,407

Noninterest expenses
 
123,578

 
110,703

 
101,706

 
95,814

 
83,652

Income before income taxes
 
93,944

 
80,289

 
80,049

 
62,839

 
48,648

Income tax provision
 
23,272

 
16,888

 
27,469

 
21,321

 
16,167

Net income
 
$
70,672

 
$
63,401

 
$
52,580

 
$
41,518

 
$
32,481

Per-Share Data
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
50,477

 
47,578

 
47,438

 
42,912

 
37,844

Diluted
 
50,642

 
47,766

 
47,674

 
43,114

 
37,993

Earnings per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
1.39

 
$
1.32

 
$
1.10

 
$
0.96

 
$
0.85

Diluted
 
$
1.38

 
$
1.32

 
$
1.09

 
$
0.95

 
$
0.85

Cash dividend per common share
 
$
0.49

 
$
0.45

 
$
0.40

 
$
0.37

 
$
0.33

Book value per common share
 
$
14.36

 
$
13.14

 
$
12.31

 
$
11.65

 
$
10.57

Tangible book value per common share (1)
 
$
11.18

 
$
10.22

 
$
9.38

 
$
8.70

 
$
7.62

Balance Sheet
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale and other (4)
 
$
794,878

 
$
667,840

 
$
658,711

 
$
621,803

 
$
456,436

Investment securities held to maturity
 
123,975

 
153,646

 
139,685

 
147,614

 
116,740

Loans, net of deferred fees
 
5,137,823

 
4,456,733

 
4,152,720

 
3,870,598

 
2,965,200

Goodwill and other identifiable intangible assets
 
160,591

 
138,201

 
138,795

 
139,091

 
111,519

Total assets
 
6,711,236

 
5,806,093

 
5,405,639

 
5,093,131

 
3,869,550

Total deposits
 
5,293,779

 
4,620,670

 
4,368,748

 
4,092,835

 
2,995,572

Total core deposits (2)
 
4,422,975

 
3,863,632

 
3,631,320

 
3,547,927

 
2,652,251

Term borrowings
 
284,036

 
286,145

 
296,913

 
365,650

 
303,143

Total stockholders’ equity
 
725,263

 
623,739

 
583,122

 
550,044

 
400,516

Performance Ratios
 
 
 
 
 
 
 
 
 
 
Return on average assets
 
1.12
%
 
1.15
%
 
1.00
%
 
0.90
%
 
0.89
%
Return on average tangible common equity (1)
 
13.16
%
 
13.78
%
 
12.24
%
 
12.19
%
 
11.58
%
Return on average equity
 
10.14
%
 
10.59
%
 
9.25
%
 
8.75
%
 
8.28
%
Efficiency ratio (1)(3)
 
54.83
%
 
56.09
%
 
53.40
%
 
56.74
%
 
60.94
%
Net interest margin (tax equivalent basis)
 
3.33
%
 
3.36
%
 
3.38
%
 
3.41
%
 
3.47
%
Loans to deposits
 
97.05
%
 
96.45
%
 
95.06
%
 
94.57
%
 
98.99
%
Capital Ratios
 
 
 
 
 
 
 
 
 
 
Common equity to asset ratio
 
10.81
%
 
10.74
%
 
10.79
%
 
10.80
%
 
10.35
%
Tangible common equity to tangible assets (1)
 
8.62
%
 
8.57
%
 
8.44
%
 
8.30
%
 
7.69
%
Tier 1 leverage ratio
 
9.41
%
 
9.39
%
 
9.12
%
 
9.07
%
 
8.70
%
Tier 1 risk-based capital ratio
 
11.02
%
 
11.27
%
 
10.87
%
 
10.85
%
 
10.53
%
Total risk-based capital ratio
 
13.40
%
 
13.71
%
 
13.40
%
 
13.48
%
 
11.61
%
CET1 ratio
 
10.46
%
 
10.62
%
 
10.18
%
 
10.11
%
 
9.54%


1.
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.
2.
Core deposits represent all deposits with the exception of time deposits.
3.
Ratio represents noninterest expense, excluding long-term debt prepayment fee, merger related expenses 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.
4.
Includes investment in equity securities, Federal Home Loan Bank and other membership stock, at cost.

-24-


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 losses), corporate objectives and other financial and business matters. The words “anticipates,” “projects,” “intends,” “estimates,” “expects,” “believes,” “plans,” “may,” “will,” “should,” “could,” and other similar expressions are intended to identify such forward-looking statements. The Company cautions that these forward-looking statements are necessarily speculative and speak only as of the date made, and are subject to numerous assumptions, risks and uncertainties, all of which may change over time. Actual results could differ materially from such forward-looking statements.
In addition to the risk factors disclosed 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; and customers’ acceptance of Lakeland’s products and services.
The above-listed risk factors are not necessarily exhaustive, particularly as to possible future events, and new risk factors may emerge from time to time. Certain events may occur that could cause the Company’s actual results to be materially different than those described in the Company’s periodic filings with the Securities and Exchange Commission. Any statements made by the Company that are not historical facts should be considered to be forward-looking statements. The Company is not obligated to update and does not undertake to update any of its forward-looking statements made herein.
Strategy
The Company, through its wholly owned subsidiary, Lakeland Bank, currently operates 52 banking offices located in Northern and Central New Jersey and 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, 2019, the Company has acquired eight community banks with an aggregate asset total of approximately $2.28 billion at the date of the respective acquisitions, including the recent acquisition of Highlands Bancorp. On January 4, 2019, the Company completed its acquisition of Highlands Bancorp, Inc., with four branches and assets totaling approximately $496.5 million. All acquired banks have been merged into Lakeland and their holding companies, if applicable, have been merged into the Company. 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. In 2019, the Company embarked on a digital strategy initiative, impacting all operational areas of Lakeland. Enhancing the Company's digital capabilities will allow Lakeland to expand its market presence as a community bank, as well as compete long-term in a fast-paced digital marketplace.
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” in the discussion below.

-25-


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 has consolidated and closed branches in markets where it may have more branches than necessary, including three branches in each of 2018 and 2019 (including two of the four acquired Highlands branches), permitting it to expand and open two new branches in areas of opportunity. One branch was opened during 2017 located in Highland Mills, New York, to support the Hudson Valley Region and another during 2019 in Clifton, New Jersey, to support the Paterson and Passaic markets.
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. The allowance for loan loss is a significant estimate implicit in these financial statements and is described below. 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 losses. The allowance for loan 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 losses charged against income. Loan principal considered to be uncollectible by management is charged against the allowance.
The allowance for loan 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 losses and the periodic provisioning for estimated losses included in the consolidated financial statements is the responsibility of management and the Board of Directors. Management performs a formal quarterly evaluation of the allowance for loan losses. This quarterly process is performed by the credit administration department and approved by the Chief Credit Officer. All supporting documentation with regard to the evaluation process is maintained by the credit administration department. Each quarter, the evaluation along with the supporting documentation is reviewed by the finance department before approval by the Chief Credit Officer. The allowance evaluation is then presented to an Allowance for Loan Losses committee, which gives final approval to the allowance evaluation before being presented to the Board of Directors for their approval.
The methodology employed for assessing the adequacy of the allowance consists of the following criteria:
•
The establishment of specific reserve amounts for impaired loans, including purchase-credit impaired loans.
•
The establishment of reserves for pools of homogeneous loans not subject to specific review, including impaired loans under $500,000, equipment finance loans, 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 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.

-26-


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 Company's Board of Directors.
Lakeland groups impaired commercial loans under $500,000 into homogeneous pools and collectively evaluates them. Interest received on impaired loans may be recorded as interest income. However, if management is not reasonably certain that an impaired loan 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 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 losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods.
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, 2019 represented a year of continued growth for the Company. As discussed in this management’s discussion and analysis:
•
Net income was $70.7 million, or $1.38 per diluted share, for the year ended December 31, 2019 compared to net income of $63.4 million, or $1.32 per diluted share, for 2018.
•
Excluding merger-related expenses pertaining to the Company’s January 2019 acquisition of Highlands Bancorp, Inc. ("Highlands") of $2.4 million, tax-effected, net income for the year ended December 31, 2019 was $73.0 million, or $1.43 per diluted share.
•
In 2019, return on average assets was 1.12%, return on average common equity was 10.14% and return on average tangible common equity was 13.16%. Excluding merger related expenses these ratios in 2019 were 1.16%, 10.48%, and 13.60%, respectively. This compared to 2018 ratios of return on average assets of 1.15%, return on average common equity of 10.59% and return on average tangible common equity of 13.78%.
•
Total loans increased by $681.1 million, or 15%, from December 31, 2018 to December 31, 2019, including $425.0 million from Highlands.
•
Total deposits increased $673.1 million, or 15%, from December 31, 2018 to December 31, 2019, including $409.6 million from Highlands.
•
The Company’s net interest margin was 3.33% for 2019 compared to 3.36% for 2018.
•
On January 4, 2019, the Company completed its acquisition of Highlands. This acquisition added $496.5 million in total assets. For more information, please see Note 2 in Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K.

-27-


Net Income
Net income for 2019 was $70.7 million, or $1.38 per diluted share, compared to net income of $63.4 million, or $1.32 per diluted share, in 2018. The major contributing factor to the increase in net income was an increase in net interest income of $22.5 million from 2018 to 2019 due primarily to an increase in average interest-earning assets resulting from the Highlands merger and organic growth. An increase in yield on interest-earning assets also contributed to the increase in net interest income, partially offset by an increase in the cost of interest-bearing liabilities.
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 2019 was $196.4 million, compared to $174.0 million in 2018, resulting primarily from growth in average earning assets of $713.5 million. The net interest margin decreased from 3.36% in 2018 to 3.33% in 2019 primarily as a result of a 34 basis point increase in the cost of interest-bearing liabilities. The increase in the cost of interest-bearing liabilities is primarily attributable to the rise in short-term market interest rates and increasing competition for deposits. The effect of the increase in the cost of funds on net interest income was partially mitigated by an increase in the yield on interest-earning assets of 24 basis points and an increase in interest income earned on free funds (interest-earning assets funded by noninterest-bearing liabilities) resulting from an increase in average noninterest-bearing deposits of $108.4 million. The components of net interest income is 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 for 2019 and 2018 is presented on a tax equivalent basis assuming a 21% tax rate, while rates for 2017 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.
 
 
2019 vs. 2018
 
2018 vs. 2017
 
 
Increase (Decrease)
Due to Change in:
 
Total
Change
 
Increase (Decrease)
Due to Change in:
 
Total
Change
(in thousands)
 
Volume
 
Rate
 
Volume
 
Rate
 
INTEREST INCOME
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
$
30,622

 
$
9,770

 
$
40,392

 
$
11,420

 
$
9,381

 
$
20,801

Taxable investment securities and other
 
1,488

 
1,524

 
3,012

 
655

 
1,068

 
1,723

Tax-exempt investment securities
 
(277
)
 
25

 
(252
)
 
(657
)
 
(249
)
 
(906
)
Federal funds sold
 
114

 
47

 
161

 
(85
)
 
764

 
679

Total interest income
 
31,947

 
11,366


43,313


11,333


10,964


22,297

INTEREST EXPENSE
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
 
7

 
35

 
42

 
2

 
15

 
17

Interest-bearing transaction accounts
 
3,191

 
9,255

 
12,446

 
279

 
8,246

 
8,525

Time deposits
 
2,396

 
3,744

 
6,140

 
1,782

 
3,696

 
5,478

Borrowings
 
1,233

 
1,030

 
2,263

 
(377
)
 
953

 
576

Total interest expense
 
6,827


14,064


20,891


1,686


12,910


14,596

NET INTEREST INCOME
 
$
25,120


$
(2,698
)

$
22,422


$
9,647


$
(1,946
)

$
7,701


-28-


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 for 2019 and 2018 are computed on a tax equivalent basis assuming a 21% tax rate, while rates for 2017 is computed on a tax equivalent basis assuming a 35% tax rate. 
 
 
2019
 
2018
 
2017
(dollars in thousands)
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans (1)
 
$
4,938,298

 
$
233,535

 
4.73
%
 
$
4,283,401

 
$
193,143

 
4.51
%
 
$
4,024,257

 
$
172,342

 
4.28
%
Taxable investment securities and other
 
799,103

 
19,722

 
2.47
%
 
736,241

 
16,710

 
2.27
%
 
706,167

 
14,987

 
2.12
%
Tax-exempt securities
 
70,271

 
1,911

 
2.72
%
 
80,456

 
2,163

 
2.69
%
 
104,267

 
3,069

 
2.94
%
Federal funds sold (2)
 
87,997

 
1,720

 
1.95
%
 
82,096

 
1,559

 
1.90
%
 
92,295

 
880

 
0.95
%
Total interest-earning assets
 
5,895,669

 
256,888

 
4.36
%
 
5,182,194

 
213,575

 
4.12
%
 
4,926,986

 
191,278

 
3.88
%
Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
(39,840
)
 
 
 
 
 
(36,804
)
 
 
 
 
 
(33,148
)
 
 
 
 
Other assets
 
466,825

 
 
 
 
 
383,524

 
 
 
 
 
373,723

 
 
 
 
TOTAL ASSETS
 
$
6,322,654

 
 
 
 
 
$
5,528,914

 
 
 
 
 
$
5,267,561

 
 
 
 
LIABILITIES AND STOCKHOLDERS EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings accounts
 
$
500,650

 
$
335

 
0.07
%
 
$
489,742

 
$
293

 
0.06
%
 
$
486,821

 
$
276

 
0.06
%
Interest-bearing transaction accounts
 
2,653,404

 
31,157

 
1.17
%
 
2,301,065

 
18,711

 
0.81
%
 
2,241,259

 
10,186

 
0.45
%
Time deposits
 
922,412

 
17,756

 
1.92
%
 
778,180

 
11,616

 
1.49
%
 
623,257

 
6,138

 
0.98
%
Borrowings
 
385,365

 
11,205

 
2.87
%
 
340,414

 
8,942

 
2.63
%
 
357,978

 
8,366

 
2.34
%
Total interest-bearing liabilities
 
4,461,831

 
60,453

 
1.35
%
 
3,909,401

 
39,562

 
1.01
%
 
3,709,315

 
24,966

 
0.67
%
Noninterest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
 
1,092,827

 
 
 
 
 
984,445

 
 
 
 
 
959,298

 
 
 
 
Other liabilities
 
70,959

 
 
 
 
 
36,541

 
 
 
 
 
30,268

 
 
 
 
Stockholders’ equity
 
697,037

 
 
 
 
 
598,527

 
 
 
 
 
568,680

 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
6,322,654

 
 
 
 
 
$
5,528,914

 
 
 
 
 
$
5,267,561

 
 
 
 
Net interest income/spread
 
 
 
196,435

 
3.00
%
 
 
 
174,013

 
3.11
%
 
 
 
166,312

 
3.21
%
Tax equivalent basis adjustment
 
 
 
401

 
 
 
 
 
454

 
 
 
 
 
1,074

 
 
NET INTEREST INCOME
 
 
 
$
196,034

 
 
 
 
 
$
173,559

 
 
 
 
 
$
165,238

 
 
Net interest margin (3)
 
 
 
 
 
3.33
%
 
 
 
 
 
3.36
%
 
 
 
 
 
3.38
%
(1)
Includes non-accrual 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 $213.6 million in 2018 to $256.9 million in 2019, an increase of $43.3 million, or 20%. The increase in interest income resulted from higher volumes of interest earning assets primarily due to the Highlands acquisition and organic growth. Also impacting the increase in interest income was an increase in the loan portfolio yield primarily resulting from the higher interest rate environment and accretion income on loans resulting from the Highlands acquisition. The average balance of loans increased $654.9 million compared to 2018, while the yield on average loans of 4.73% in 2019 was 22 basis points greater than 2018. The yield on average taxable investment securities increased 20 basis points, while the yield on tax-exempt investment securities increased three basis points compared to 2018.

-29-


Interest income on a tax equivalent basis increased from $191.3 million in 2017 to $213.6 million in 2018, an increase of $22.3 million, or 12%. The increase in interest income was primarily a result of organic growth in loans as well as an increase in interest rates caused by the increases in the federal funds rate and prime rate during 2018. The average balance of loans increased $259.1 million compared to 2017, while the yield on average loans of 4.51% in 2018 was 23 basis points greater than 2017. The yield on average taxable investment securities increased 15 basis points, while the yield on tax-exempt investment securities decreased 25 basis points compared to 2017. The decrease in yield on average tax-exempt investment securities was due primarily to a reduction in tax equivalent income resulting from the Tax Cuts and Jobs Act of 2017.
Total interest expense increased from $39.6 million in 2018 to $60.5 million in 2019, an increase of $20.9 million. Total average interest-bearing liabilities increased $552.4 million as a result of organic growth and the Highlands acquisition. The cost of average interest-bearing liabilities increased from 1.01% in 2018 to 1.35% in 2019 largely driven by competitive pressures and higher market interest rates. The cost of interest-bearing transaction accounts and time deposits increased by 36 basis points and 43 basis points, respectively, while the cost of borrowings increased 24 basis points compared to 2018. The increase in the cost of interest-bearing transaction accounts and time deposits compared to 2018 was a result of the higher rate environment as well as the impact of money market deposit account promotions and higher rates offered on certificates of deposit.
Total interest expense increased from $25.0 million in 2017 to $39.6 million in 2018, an increase of $14.6 million, or 58%, primarily due to the increasing interest rate environment. The cost of average interest-bearing liabilities increased from 0.67% in 2017 to 1.01% in 2018 primarily due to an increasingly competitive market for deposits resulting from a higher interest rate environment as well as an increase in the cost of borrowing. The cost of interest-bearing transaction accounts and time deposits increased by 36 basis points and 51 basis points, respectively, while the cost of borrowings increased 29 basis points compared to 2017. The increase in the cost of interest-bearing transaction accounts was due primarily to increases in yields on public funds deposits as many of the accounts are indexed to the Fed Funds rate. A money market deposit account promotion also contributed to the increase in the cost of interest-bearing transaction accounts. Average time deposits increased from $623.3 million in 2017 to $778.2 million in 2018 primarily as a result of the Company's certificate of deposit promotion beginning in the last half of 2017.
Provision for Loan Losses
In determining the provision for loan losses, management considers national and local economic conditions; trends in the portfolio including orientation to specific loan types or industries; experience, ability and depth of lending management in relation to the complexity of the portfolio; adequacy and adherence to policies, procedures and practices; levels and trends in delinquencies, impaired loans and net charge-offs and the results of independent third party loan reviews.
The provision for loan losses decreased from $4.4 million in 2018 to $2.1 million in 2019. The decreased provision during 2019 was primarily a result of net recoveries in 2019 compared to net charge-offs in 2018. For more information, please see the discussion under "Risk Elements" below.
The provision for loan and lease losses decreased from $6.1 million in 2017 to $4.4 million in 2018. The decreased provision during 2018 was primarily a result of continued low charge-offs and a reduction in non-accrual loans.
Noninterest Income
Noninterest income of $26.8 million in 2019 increased by $4.5 million compared to 2018. Included in noninterest income in 2019, was a $496,000 gain on equity securities compared to losses of $583,000 in 2018. In addition, swap income of $3.2 million increased $1.2 million compared to 2018 due primarily to increase in demand resulting from changes in the yield curve. Commissions and fees increased $688,000 compared to 2018 due primarily to an increase in investment services income and commercial loan fees, while service charges on deposit accounts increased $621,000 due primarily to deposit growth. Income on bank owned life insurance at $2.7 million decreased $516,000 compared to 2018 due primarily to higher insurance proceeds received in 2018. Other income of $1.2 million in 2019 was $1.0 million higher than 2018 due primarily to $1.2 million in gains during 2019 resulting from payoffs of purchased credit impaired loans. Noninterest income represented 12% of total revenue in 2019. Total revenue is defined as net interest income plus noninterest income.
Noninterest income of $22.3 million in 2018 decreased by $3.1 million compared to 2017. Included in noninterest income in 2018, was a $583,000 loss on equity securities compared to $2.5 million in gains on sales of investment securities in 2017. In 2018 there was a $561,000 loss on sales of premises and equipment compared to $838,000 in gains in 2017. Noninterest income in 2017 also included a $342,000 gain on the payoff of an acquired loan. Noninterest income for 2018 had increases in commissions and fees of $684,000 and an increase in income on bank owned life insurance of $902,000, which included death benefit income. Gains on sale of loans decreased $507,000 in 2018 compared to 2017, while swap income increased from $982,000 in 2017 to $2.0 million in 2018. Noninterest income represented 11% of total revenue in 2018.

-30-


Noninterest Expense
Noninterest expense in 2019 totaled $126.8 million, which was $15.6 million more than the $111.2 million reported for 2018 and includes $3.2 million in expenses related to the acquisition of Highlands compared to $464,000 in 2018. Salaries and employee benefits increased $8.7 million, from the same period last year, as a result of additions to staff from the merger, additions to support continued growth, normal merit increases and increases in benefits costs. Net occupancy expense increased $874,000 due primarily to a branch write-down and the addition of the Highlands branches. FDIC insurance expense decreased $1.2 million in 2019, compared to 2018 due to assessment credits from the FDIC, resulting from the insurance fund reserve ratio exceeding the required level. Marketing expense increased $508,000 primarily due to advertising in new locations as a result of the merger with Highlands, while data processing expense increased $1.3 million compared to the prior year period due primarily to the continued expansion and improvement of the Company's digital infrastructure as well as increases related to the Highlands merger. Other expenses increased $1.3 million due primarily to increased consulting expense and donations.
Noninterest expense totaling $111.2 million increased $6.6 million in 2018 from 2017. During 2017, the Company incurred $2.8 million in long-term debt prepayment penalties, and in 2018, the Company incurred $464,000 in merger related expenses. Excluding the 2017 long-term debt prepayment fees and 2018 merger expenses, the resulting $9.0 million net increase was primarily due to a $7.4 million increase in salary and employee benefit costs resulting from additions to our staff to support continued growth, as well as normal merit increases and higher benefit costs. The Company also recorded a life insurance payout related to a BOLI death benefit received in the third quarter of 2018. Data processing expense was $3.6 million, an increase of $1.6 million resulting from the Company’s expansion and improvement of its digital infrastructure. Stationery, supplies and postage and marketing expense decreased $172,000 and $238,000, respectively, while telecommunication expense and ATM and debit card expense increased $162,000 and $144,000, respectively.
The efficiency ratio, a non-GAAP measure, expresses the relationship between noninterest expense (excluding long-term debt prepayment fees, merger related expenses and core deposit amortization) to total tax-equivalent revenue (excluding gains and/or losses on securities and gain and/or losses on debt extinguishment). In 2019, the Company’s efficiency ratio on a tax equivalent basis was 54.83% compared to 56.09% in 2018 and 53.40% in 2017.
 
 
For the Year Ended December 31,
(dollars in thousands)
 
2019
 
2018
 
2017
 
2016
 
2015
Calculation of Efficiency Ratio (a Non-GAAP Measure)
 
 
 
 
 
 
 
 
 
 
Total noninterest expense
 
$
126,756

 
$
111,167

 
$
104,534

 
$
99,917

 
$
87,211

Less:
 
 
 
 
 
 
 
 
 
 
Amortization of core deposit intangibles
 
(1,182
)
 
(594
)
 
(654
)
 
(734
)
 
(415
)
Merger related expenses
 
(3,178
)
 
(464
)
 
—

 
(4,103
)
 
(1,152
)
Long-term debt prepayment fee
 
—

 
—

 
(2,828
)
 
—

 
(2,407
)
Noninterest expense, as adjusted
 
$
122,396

 
$
110,109

 
$
101,052

 
$
95,080

 
$
83,237

Net interest income
 
$
196,034

 
$
173,559

 
$
165,238

 
$
145,649

 
$
116,640

Noninterest income
 
26,796

 
22,310

 
25,435

 
21,330

 
21,161

Total revenue
 
222,830

 
195,869

 
190,673

 
166,979

 
137,801

Plus: Tax-equivalent adjustment on municipal securities
 
401

 
454

 
1,074

 
962

 
857

Less: Gains on sales of investment securities and debt extinguishment
 
—

 
—

 
(2,524
)
 
(370
)
 
(2,071
)
Total revenue, as adjusted
 
$
223,231

 
$
196,323

 
$
189,223

 
$
167,571

 
$
136,587

Efficiency ratio (Non-GAAP)
 
54.83
%
 
56.09
%
 
53.40
%
 
56.74
%
 
60.94
%
Income Taxes
The Company’s effective income tax rate was 24.8%, 21.0% and 34.3%, in the years ended December 31, 2019, 2018 and 2017, respectively. The effective tax rate increase from 2018 to 2019 was primarily a result of a technical bulletin issued by the New Jersey Division of Taxation during the second quarter of 2019 that provided guidance on which entities are to be included in the combined tax return. The effective tax rate decrease from 2017 to 2018 was primarily as a result of the change in tax rates resulting from the Tax Cuts and Jobs Act of 2017 (the "Tax Act") and the changes in New Jersey tax law during 2018.



-31-


Financial Condition
Total assets increased from $5.81 billion at December 31, 2018 to $6.71 billion at December 31, 2019, an increase of $905.1 million, or 16%. Loans, net of deferred fees, were $5.14 billion, an increase of $681.1 million, or 15%, from $4.46 billion at December 31, 2018. Total deposits were $5.29 billion, an increase of $673.1 million, or 15%, from December 31, 2018. Total assets at year-end 2018 increased $400.5 million, or 7%, from year-end 2017.
With the completion of the Highlands merger in January 2019, the Company recorded the assets acquired and the liabilities assumed in the acquisition at their estimated fair values as of the acquisition date. Total assets acquired were $496.5 million, total loans and total deposits acquired were $426.1 million and $409.6 million, respectively.
Loans
Lakeland primarily serves New Jersey, the Hudson Valley region in New York and the surrounding areas. Its equipment finance division serves a broader market with a primary focus on the Northeast.
Gross loans of $5.14 billion increased by $680.5 million from December 31, 2018, primarily in the commercial loans secured by real estate category. Commercial loans secured by real estate increased $531.8 million, or 17%, from December 31, 2018 to December 31, 2019, $332.8 million of which was from the Highlands acquisition. Commercial, industrial and other loans increased $95.2 million, or 28%, $44.7 million of which was from the Highlands acquisition. Additionally, equipment finance increased $23.2 million, or 26% during 2019. Gross loans of $4.46 billion at December 31, 2018 increased by $303.8 million from December 31, 2017, primarily in the commercial loans secured by real estate category.
The following table sets forth the classification of Lakeland’s gross loans by major category as of December 31 for each of the last five years:
 
 
December 31,
(in thousands)
 
2019
 
2018
 
2017
 
2016
 
2015
 
 
 
Commercial, secured by real estate
 
$
3,589,593

 
$
3,057,779

 
$
2,831,184

 
$
2,556,601

 
$
1,761,589

Commercial, industrial and other
 
431,934

 
336,735

 
340,400

 
350,228

 
307,044

Equipment finance
 
111,076

 
87,925

 
75,039

 
67,016

 
56,660

Real estate - residential mortgage
 
335,191

 
329,854

 
322,880

 
349,581

 
389,692

Real estate - construction
 
335,169

 
319,545

 
264,908

 
211,109

 
118,070

Home equity and consumer
 
337,977

 
328,609

 
322,269

 
339,360

 
334,891

Total loans
 
5,140,940

 
4,460,447

 
4,156,680

 
3,873,895

 
2,967,946

Deferred fees
 
(3,117
)
 
(3,714
)
 
(3,960
)
 
(3,297
)
 
(2,746
)
Loans, net
 
$
5,137,823

 
$
4,456,733

 
$
4,152,720

 
$
3,870,598

 
$
2,965,200

At December 31, 2019, there were no concentrations of loans exceeding 10% of total loans 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, 2019:
(in thousands)
 
Within
One Year
 
After One
but Within
Five Years
 
After Five
Years
 
Total
 
 
 
Commercial, secured by real estate
 
$
212,023

 
$
729,850

 
$
2,647,720

 
$
3,589,593

Commercial, industrial and other
 
195,559

 
137,016

 
99,359

 
431,934

Real estate - construction
 
121,159

 
77,832

 
136,178

 
335,169

Total commercial loans
 
$
528,741

 
$
944,698

 
$
2,883,257

 
$
4,356,696

Predetermined rates
 
$
117,766

 
$
676,775

 
$
292,143

 
$
1,086,684

Floating or adjustable rates
 
410,975

 
267,923

 
2,591,114

 
3,270,012

Total commercial loans
 
$
528,741

 
$
944,698

 
$
2,883,257

 
$
4,356,696



-32-


Risk Elements
Commercial loans are placed on a non-accrual status with all accrued interest and unpaid interest reversed if (a) because of the deterioration in the financial position of the borrower, they are maintained on a cash basis (which means payments are applied when and as received rather than on a regularly scheduled basis), (b) payment of all contractual principal and interest is not expected, or (c) principal and interest have been in default for a period of 90 days or more unless the obligation is both well-secured and in process of collection. Residential mortgage loans and closed-end consumer loans are placed on non-accrual status at the time principal and interest have been in default for a period of 90 days or more, except where there exists sufficient collateral to cover the defaulted principal and interest payments, and the loans are well-secured and in the process of collection. Open-end consumer loans secured by real estate are generally placed on non-accrual status and reviewed for charge-off when principal and interest payments are four months in arrears unless the obligations are well-secured and in the process of collection. Interest thereafter on such charged-off consumer loans is taken into income when received only after full recovery of principal. As a general rule, a non-accrual asset may be restored to accrual status when none of its principal or interest is due and unpaid and satisfactory payments have been received for a sustained period (usually six months), or when it otherwise becomes well-secured and in the process of collection.
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 other real estate owned and other repossessed assets as of December 31, for each of the last five years:
 
 
December 31,
(dollars in thousands)
 
2019
 
2018
 
2017
 
2016
 
2015
 
 
 
Commercial, secured by real estate
 
$
12,314

 
$
7,192

 
$
5,890

 
$
10,413

 
$
10,446

Commercial, industrial and other
 
1,539

 
1,019

 
184

 
167

 
103

Equipment finance
 
284

 
501

 
144

 
153

 
316

Real estate - residential mortgage
 
3,428

 
1,986

 
3,860

 
6,048

 
8,664

Real estate - construction
 
967

 
—

 
1,472

 
1,472

 
—

Home equity and consumer
 
2,606

 
1,432

 
2,105

 
2,151

 
3,167

Total non-accrual loans
 
21,138

 
12,130

 
13,655

 
20,404

 
22,696

Other real estate and other repossessed assets
 
563

 
830

 
843

 
1,072

 
983

Total non-performing assets
 
$
21,701

 
$
12,960

 
$
14,498

 
$
21,476

 
$
23,679

Non-performing assets as a percentage of total assets
 
0.32
%
 
0.22
%
 
0.27
%
 
0.42
%
 
0.61
%
Loans past due 90 days or more and still accruing
 
$
—

 
$
—

 
$
200

 
$
10

 
$
331

Troubled debt restructurings, still accruing
 
$
5,650

 
$
9,293

 
$
11,462

 
$
8,802

 
$
10,108

Non-accrual loans increased to $21.1 million on December 31, 2019 from $12.1 million at December 31, 2018 primarily in the commercial loans secured by real estate category, which increased $5.1 million due primarily to four loan relationships totaling $7.6 million. Additionally, residential mortgage and home equity and consumer non-accruals increased $1.4 million and $1.2 million, respectively, compared to December 31, 2018.
Non-accruals include four loan relationships between $500,000 and $1.0 million totaling $3.6 million, and five loan relationships exceeding $1.0 million totaling $9.4 million. All non-accrual loans are in various stages of litigation, foreclosure, or workout. Non-accrual loans included $1.6 million and $3.6 million in troubled debt restructurings as of December 31, 2019 and 2018, respectively.
At December 31, 2019 and 2018, Lakeland had $5.7 million and $9.3 million, respectively, in loans that were restructured and still accruing. Restructured loans that are still accruing 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 where the borrower has demonstrated the ability to repay based on the modified terms of the loan.    
For 2019, the gross interest income that would have been recorded, had the loans classified at year-end as impaired been performing in conformance with their original terms, was approximately $1.0 million. The amount of interest income actually recorded on those loans for 2019 was $426,000. The resultant loss of $601,000 for 2019 compares with prior year losses of $505,000 for 2018 and $785,000 for 2017.    

-33-


As of December 31, 2019, Lakeland had impaired loans totaling $22.1 million (consisting primarily of non-accrual and restructured loans), compared to $19.7 million at December 31, 2018. The valuation allowance of these loans is based primarily on the fair value of the underlying collateral. Based upon such evaluation, $352,000 has been allocated to the allowance for loan losses for impairment at December 31, 2019 compared to $338,000 at December 31, 2018. At December 31, 2019, Lakeland also had $47.7 million in loans that were rated substandard that were not classified as non-performing or impaired compared to $41.8 million at December 31, 2018.
There were no additional loans at December 31, 2019, 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 being included as non-accrual, past due or renegotiated at a future date.
The following table sets forth for each of the five years ended December 31, 2019, the historical relationships among the amount of loans outstanding, the allowance for loan losses, the provision for loan losses, the amount of loans charged off and the amount of loan recoveries:
 
 
Years Ended December 31,
(dollars in thousands)
 
2019
 
2018
 
2017
 
2016
 
2015
 
 
 
Allowance balance, beginning of the year
 
$
37,688

 
$
35,455

 
$
31,245

 
$
30,874

 
$
30,684

Loans charged off:
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
 
(544
)
 
(421
)
 
(762
)
 
(410
)
 
(1,821
)
Commercial, industrial and other
 
(645
)
 
(1,452
)
 
(477
)
 
(796
)
 
(205
)
Equipment finance
 
(414
)
 
(507
)
 
(305
)
 
(366
)
 
(548
)
Real estate - residential mortgage
 
(50
)
 
(131
)
 
(441
)
 
(1,103
)
 
(375
)
Real estate - construction
 
—

 
(248
)
 
(609
)
 
—

 
(20
)
Home equity and consumer
 
(283
)
 
(588
)
 
(852
)
 
(1,980
)
 
(1,511
)
Total loans charged off
 
(1,936
)
 
(3,347
)
 
(3,446
)
 
(4,655
)
 
(4,480
)
Recoveries:
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
 
251

 
468

 
396

 
297

 
2,221

Commercial, industrial and other
 
1,100

 
317

 
172

 
202

 
183

Equipment finance
 
332

 
23

 
59

 
31

 
26

Real estate - residential mortgage
 
66

 
10

 
5

 
8

 
63

Real estate - construction
 
126

 
17

 
31

 
18

 
106

Home equity and consumer
 
246

 
332

 
903

 
247

 
129

Total recoveries
 
2,121

 
1,167

 
1,566

 
803

 
2,728

Net recoveries (charge-offs)
 
185

 
(2,180
)
 
(1,880
)
 
(3,852
)
 
(1,752
)
Provision for loan losses
 
2,130

 
4,413

 
6,090

 
4,223

 
1,942

Allowance balance, end of year
 
$
40,003

 
$
37,688

 
$
35,455

 
$
31,245

 
$
30,874

Net charge-offs as a percentage of average loans outstanding
 
—
 %
 
0.05
%
 
0.05
%
 
0.11
%
 
0.06
%
Allowance as a percentage of year-end total loans outstanding
 
0.78
 %
 
0.84
%
 
0.85
%
 
0.81
%
 
1.04
%
Allowance as a percent of non-accrual loans
 
189.25
 %
 
310.70
%
 
259.65
%
 
153.13
%
 
136.03
%
The ratio of the allowance for loan losses to loans 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 Losses.”

-34-


Non-accrual loans increased from $12.1 million on December 31, 2018 to $21.1 million on December 31, 2019 and the allowance for loan losses was 0.78% of total loans on December 31, 2019 compared to 0.84% of total loans on December 31, 2018. The reduction in the allowance for loan losses as a percent of total loans was primarily due to the addition of the loans from the Highlands acquisition, which we accounted for under acquisition accounting and have no allowance for loan losses. Excluding the loans from prior acquisitions, the allowance as a percentage of total loans was 0.88% at December 31, 2019. 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 portfolio, management considers the allowance for loan losses to be adequate at December 31, 2019.
The overall balance of the allowance for loan losses of $40.0 million at December 31, 2019 increased $2.3 million from December 31, 2018, an increase of 6%. 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, 2018 to December 31, 2019 within the commercial, secured by real estate segment and in the commercial, industrial and other segment reflects loan growth in these segments, as well as an increase in non-performing loans.
The following table sets forth the allowance for loan losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan 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,
 
 
2019
 
2018
 
2017
 
2016
 
2015
 
 
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
 
$
28,950

 
69.8
%
 
$
27,881

 
68.5
%
 
$
25,704

 
68.0
%
 
$
21,223

 
66.1
%
 
$
20,223

 
59.4
%
Commercial, industrial and other
 
3,289

 
8.4
%
 
1,742

 
7.5
%
 
2,313

 
8.2
%
 
1,723

 
9.0
%
 
2,637

 
10.3
%
Equipment finance
 
957

 
2.2
%
 
987

 
2.0
%
 
630

 
1.8
%
 
548

 
1.7
%
 
460

 
1.9
%
Real estate - residential mortgage
 
1,725

 
6.5
%
 
1,566

 
7.4
%
 
1,557

 
7.8
%
 
1,964

 
9.0
%
 
2,588

 
13.1
%
Real estate - construction
 
2,672

 
6.5
%
 
3,015

 
7.2
%
 
2,731

 
6.4
%
 
2,352

 
5.4
%
 
1,591

 
4.0
%
Home equity and consumer
 
2,410

 
6.6
%
 
2,497

 
7.4
%
 
2,520

 
7.8
%
 
3,435

 
8.8
%
 
3,375

 
11.3
%
 
 
$
40,003

 
100.0
%
 
$
37,688

 
100.0
%
 
$
35,455

 
100.0
%
 
$
31,245

 
100.0
%
 
$
30,874

 
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 early adopted ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging and Topic 825, Financial Instruments, and reclassified securities with a book value of $20.8 million and an unrealized gain of $291,000 from held to maturity to securities available for sale during the fourth quarter of 2019.
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.

-35-


 
 
December 31,
(in thousands)
 
2019
 
2018
 
2017
 
 
 
U.S. Treasury and U.S. government agencies
 
$
166,982

 
$
173,952

 
$
180,670

Mortgage-backed securities, residential
 
578,108

 
502,003

 
469,245

Mortgage-backed securities, multifamily
 
50,935

 
22,803

 
12,034

Obligations of states and political subdivisions
 
72,182

 
83,414

 
94,638

Debt securities
 
11,668

 
10,092

 
11,144

 
 
$
879,875

 
$
792,264

 
$
767,731

In addition, the Company has an equity securities portfolio, which consists of investments in other financial institutions for market appreciation purposes and investments in community reinvestment funds, with a carrying value of $16.5 million, $15.9 million and $18.1 million, at December 31, 2019, 2018 and 2017, respectively.
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. 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, 2019, at book value:
(dollars in thousands)
 
Within
One Year
 
Over One
but Within
Five Years
 
Over Five
but Within
Ten Years
 
After Ten
Years
 
Total
Available for Sale
 
 
U.S. Treasury and U.S. government agencies
 
 
 
 
 
 
 
 
 
 
Amount
 
$
23,516

 
$
74,638

 
$
22,439

 
$
15,054

 
$
135,647

Yield
 
1.74
%
 
1.91
%
 
2.99
%
 
2.92
%
 
2.17
%
Mortgage-backed securities, residential
 
 
 
 
 
 
 
 
 
 
Amount
 
3

 
5,218

 
64,308

 
432,350

 
501,879

Yield
 
5.62
%
 
2.32
%
 
2.15
%
 
2.45
%
 
2.41
%
Mortgage-backed securities, multifamily
 
 
 
 
 
 
 
 
 
 
Amount
 
4,878

 
14,289

 
—

 
30,018

 
49,185

Yield
 
1.73
%
 
2.80
%
 
—
%
 
2.94
%
 
2.78
%
Obligations of states and political subdivisions
 
 
 
 
 
 
 
 
 
 
Amount
 
6,270

 
31,973

 
21,778

 
—

 
60,021

Yield
 
2.65
%
 
2.07
%
 
2.17
%
 
—
%
 
2.17
%
Debt securities
 
 
 
 
 
 
 
 
 
 
Amount
 
—

 
—

 
9,168

 
—

 
9,168

Yield
 
—
%
 
—
%
 
6.25
%
 
—
%
 
6.25
%
Total securities
 
 
 
 
 
 
 
 
 
 
Amount
 
$
34,667

 
$
126,118

 
$
117,693

 
$
477,422

 
$
755,900

Yield
 
1.91
%
 
2.07
%
 
2.63
%
 
2.50
%
 
2.42
%
(dollars in thousands)
 
Within
One Year
 
Over One
but Within
Five Years
 
Over Five
but Within
Ten Years
 
After Ten
Years
 
Total
Held to Maturity
 
 
U.S. Treasury and U.S. government agencies
 
 
 
 
 
 
 
 
 
 
Amount
 
$
5,104

 
$
23,030

 
$
3,201

 
$
—

 
$
31,335

Yield
 
1.60
%
 
2.04
%
 
3.38
%
 
—
%
 
2.11
%
Mortgage-backed securities, residential
 
 
 
 
 
 
 
 
 
 
Amount
 
—

 
116

 
1,759

 
74,354

 
76,229

Yield
 
—
%
 
5.03
%
 
2.17
%
 
2.44
%
 
2.44
%
Mortgage-backed securities, multifamily
 
 
 
 
 
 
 
 
 
 
Amount
 
999

 
—

 
751

 
—

 
1,750

Yield
 
2.33
%
 
—
%
 
—
%
 
—
%
 
1.33
%
Obligations of states and political subdivisions
 
 
 
 
 
 
 
 
 
 
Amount
 
2,217

 
8,072

 
1,114

 
758

 
12,161

Yield
 
2.26
%
 
2.04
%
 
2.21
%
 
2.00
%
 
2.09
%
Debt securities
 
 
 
 
 
 
 
 
 
 
Amount
 
—

 
—

 
2,500

 
—

 
2,500

Yield
 
—
%
 
—
%
 
6.25
%
 
—
%
 
6.25
%
Total securities
 
 
 
 
 
 
 
 
 
 
Amount
 
$
8,320

 
$
31,218

 
$
9,325

 
$
75,112

 
$
123,975

Yield
 
1.86
%
 
2.05
%
 
3.51
%
 
2.43
%
 
2.38
%
Other Assets
Assets included within "other assets" on the Company's balance sheet increased from $42.3 million at December 31, 2018 to $54.7 million at December 31, 2019 primarily due to a $15.8 million increase in swap assets.


-37-


Deposits
Total deposits increased from $4.62 billion at December 31, 2018 to $5.29 billion at December 31, 2019, an increase of $673.1 million, or 15%, including $409.6 million acquired in the Highlands merger. Noninterest-bearing deposits increased $173.9 million, or 18%, to $1.12 billion, while savings and interest-bearing transaction accounts and time deposits increased $385.4 million and $113.8 million, respectively. The Highlands acquisition included $81.1 million, $196.2 million and $132.3 million in noninterest-bearing transaction accounts, savings and interest-bearing transaction accounts and time deposits, respectively.
Total deposits increased from $4.37 billion at December 31, 2017 to $4.62 billion at December 31, 2018, an increase of $251.9 million, or 6%.
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,
 
 
2019
 
2018
 
2017
(dollars in thousands)
 
Average
Balance
 
Average
Rate
 
Average
Balance
 
Average
Rate
 
Average
Balance
 
Average
Rate
 
 
 
Noninterest-bearing demand deposits
 
$
1,092,827

 
—
%
 
$
984,445

 
—
%
 
$
959,298

 
—
%
Interest-bearing transaction accounts
 
2,653,404

 
1.17
%
 
2,301,065

 
0.81
%
 
2,241,259

 
0.45
%
Savings
 
500,650

 
0.07
%
 
489,742

 
0.06
%
 
486,821

 
0.06
%
Time deposits
 
922,412

 
1.92
%
 
778,180

 
1.49
%
 
623,257

 
0.98
%
Total
 
$
5,169,293

 
0.95
%
 
$
4,553,432

 
0.67
%
 
$
4,310,635

 
0.38
%
As of December 31, 2019, 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)
 
Within 3 months
$
81,861

Over 3 through 6 months
60,350

Over 6 through 12 months
54,577

Over 12 months
21,872

Total
$
218,660

Federal Home Loan Bank Advances and Other Borrowings
Lakeland may borrow from time to time from the Federal Home Loan Bank ("FHLB") and other correspondent banks as part of its overall funding and liquidity management program. The following tables provide a summary of the borrowings as of and for the years ended December 31, 2019, 2018 and 2017.
(dollars in thousands)
2019
 
2018
 
2017
Federal Funds Purchased
 
 
 
 
 
Balance at December 31,
$
284,983

 
$
192,064

 
$
80,000

Weighted average interest rate at December 31,
1.85
%
 
2.88
%
 
1.71
%
Average daily balance during the year
$
52,421

 
$
21,338

 
$
13,264

Weighted average interest rate during the year
2.56
%
 
2.03
%
 
1.42
%
Maximum amount outstanding at any month-end during the year
$
385,000

 
$
214,165

 
$
168,784


-38-


(dollars in thousands)
2019
 
2018
 
2017
Securities Sold Under Agreements to Repurchase
 
 
 
 
 
Balance at December 31,
$
43,675

 
$
41,841

 
$
44,936

Weighted average interest rate at December 31,
0.33
%
 
0.26
%
 
0.02
%
Average daily balance during the year
$
42,615

 
$
32,435

 
$
28,480

Weighted average interest rate during the year
0.30
%
 
0.12
%
 
0.03
%
Maximum amount outstanding at any month-end during the year
$
49,669

 
$
50,526

 
$
44,936

At December 31, 2019, 2018 and 2017, FHLB advances totaled $165.8 million with a weighted average interest rate of 2.24%, $181.1 million with a weighted average interest rate of 2.10% and $172.0 million with a weighted average interest rate of 1.69%, respectively. All advances mature within four years of December 31, 2019 and are secured by certain first mortgage loans.
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 2019, the Company did not record any hedge ineffectiveness.
Further discussion of Lakeland’s financial derivatives is set forth in Note 19 to the Consolidated Financial Statements.
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 $87.1 million in 2019 compared to $79.4 million and $67.5 million in 2018 and 2017, respectively.
•
Deposits. Lakeland can offer new products or change its rate structure in order to increase deposits. In 2019, Lakeland generated $263.4 million in deposit growth, excluding the impact of the Highlands acquisition, compared to $251.9 million in 2018.
•
Sales of securities and overnight funds. At year-end 2019, the Company had $755.9 million in securities designated “available for sale.” Of these securities, $520.3 million was pledged to secure public deposits and for other purposes required by applicable laws and regulations.
•
Repayments on loans can also be a source of liquidity 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 and short term based on the market value of collateral pledged. Lakeland had $200.0 million in overnight and short term borrowings from the FHLB on December 31, 2019. Lakeland also has overnight federal funds lines available for it to borrow up to $230.0 million from correspondent banks. Lakeland had borrowings against these lines of $85.0 million at December 31, 2019. 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, 2019.

-39-


•
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 9 to the Consolidated Financial Statements.
Management and the Board of Directors 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 $282.4 million on December 31, 2019, increased $73.8 million from December 31, 2018. Operating activities provided $87.1 million in net cash. Investing activities used $304.0 million in net cash, primarily reflecting an increase in loans. Financing activities provided $290.6 million in net cash primarily reflecting a net increase in deposits of $264.3 million, and an increase in federal funds purchased and securities sold under agreements to repurchase of $94.8 million, partially offset by dividends paid and net repayments of other borrowings of $24.9 million and $43.1 million, respectively.
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, 2019. Interest on subordinated debentures and other borrowings is calculated based on current contractual interest rates.
 
 
Payment Due Period
(in thousands)
 
Total
 
Within
One Year
 
After
One but
Within Three
Years
 
After Three
but Within
Five Years
 
After
Five Years
 
 
 
Minimum annual rentals or noncancellable operating leases
 
$
24,010

 
$
3,300

 
$
5,683

 
$
4,465

 
$
10,562

Benefit plan commitments
 
5,314

 
397

 
793

 
798

 
3,326

Remaining contractual maturities of time deposits
 
870,804

 
715,060

 
146,178

 
9,478

 
88

Subordinated debentures
 
118,220

 
—

 
—

 
5,335

 
112,885

Loan commitments and lines of credit
 
1,086,522

 
753,101

 
150,143

 
81,705

 
101,573

Other borrowings
 
165,816

 
55,881

 
85,498

 
24,437

 
—

Interest on other borrowings (1)
 
58,529

 
9,436

 
15,816

 
12,451

 
20,826

Standby letters of credit
 
17,204

 
16,909

 
215

 
80

 
—

Total
 
$
2,346,419

 
$
1,554,084

 
$
404,326

 
$
138,749

 
$
249,260

(1)
Includes interest on other borrowings and subordinated debentures at a weighted rate of 3.49%.
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.

-40-


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 Risk Committee. 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, Chief Operating Officer, Chief Lending Officer, Chief Banking Officer, Chief Credit Officer, Chief Risk Officer and certain other senior officers. 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. 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 2019 (the base case) is $201.8 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, 2019
 
(0.6
)%
 
(0.7
)%
December 31, 2018
 
(1.5
)%
 
(0.7
)%

-41-


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
 
-200 bp
Asset/Liability Policy limit
 
(15.0
)%
 
(10.0
)%
 
(5.0
)%
 
(5.0
)%
 
(10.0
)%
December 31, 2019
 
2.4
 %
 
1.7
 %
 
1.1
 %
 
(3.3
)%
 
(4.6
)%
December 31, 2018
 
0.6
 %
 
0.4
 %
 
0.3
 %
 
(2.5
)%
 
(8.0
)%
The base case for the following table is an estimate of the Company’s net portfolio value for the periods presented using current discount rates, and assuming the Company’s interest-sensitive assets and liabilities remain at year-end levels. The net portfolio value at December 31, 2019 (the base case) was $873.0 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
 
-200 bp
Asset/Liability Policy limit
 
(25.0
)%
 
(20.0
)%
 
(10.0
)%
 
(10.0
)%
 
(20.0
)%
December 31, 2019
 
(4.8
)%
 
(2.8
)%
 
(0.9
)%
 
(1.2
)%
 
(5.2
)%
December 31, 2018
 
(5.2
)%
 
(3.3
)%
 
(1.4
)%
 
(0.2
)%
 
(1.5
)%
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 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 $623.7 million on December 31, 2018 to $725.3 million on December 31, 2019. The increase in stockholders’ equity from December 31, 2018 to December 31, 2019 was primarily due to $70.7 million of net income and $43.4 million in equity acquired in the Highlands merger, partially offset by the payment of cash dividends on common stock of $24.9 million.
Book value per common share (total common stockholders’ equity divided by the number of shares outstanding) increased from $13.14 on December 31, 2018 to $14.36 on December 31, 2019, primarily as a result of net income. Book value per common share was $12.31 on December 31, 2017. Tangible book value per share increased from $10.22 on December 31, 2018 to $11.18 on December 31, 2019. For more information see “Non-GAAP Financial Measures.”

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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, 2019, the Company and Lakeland met all capital adequacy requirements to which they are subject.
The final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks became effective for the Company on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule, with full phase-in completed on January 1, 2019. As of December 31, 2019, the Company’s capital levels remained characterized as “well-capitalized” under the new rules.
The following table reflects capital ratios of the Company and Lakeland as of December 31, 2019 and 2018:
 
 
Tier 1 Capital
to Total Average
Assets Ratio
December 31,
 
Common Equity Tier 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
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Company
 
9.41
%
 
9.39
%
 
10.46
%
 
10.62
%
 
11.02
%
 
11.27
%
 
13.40
%
 
13.71
%
Lakeland
 
10.16
%
 
10.17
%
 
11.89
%
 
12.20
%
 
11.89
%
 
12.20
%
 
12.67
%
 
13.06
%
Required capital ratios including conservation buffer
 
4.00
%
 
4.00
%
 
7.00
%
 
6.38
%
 
8.50
%
 
7.88
%
 
10.50
%
 
9.88
%
“Well capitalized” institution under FDIC regulations
 
5.00
%
 
5.00
%
 
6.50
%
 
6.50
%
 
8.00
%
 
8.00
%
 
10.00
%
 
10.00
%
The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”) was signed into law during the second quarter of 2018. The Act, among other matters, amends the Federal Deposit Insurance Act to require federal banking agencies to develop a specified Community Bank Leverage Ratio (the ratio of a bank's equity capital to its average total consolidated assets) for banks with assets of less than $10 billion. Qualifying participating banks that exceed this ratio shall be deemed to comply with all other capital and leverage requirements. In September 2019, the FDIC approved a final rule allowing community banks with a leverage capital ratio of at least 9% to be considered in compliance with Basel III capital requirements and exempt from the Basel Calculation. Under the final rule, banks with less than $10 billion in assets may elect the community bank leverage ratio framework if they meet the 9% ratio and if they hold 25% or less of assets in off-balance sheet exposures, and 5% or less of assets in trading assets and liabilities. For institutions that fall below the 9% capital requirement but remain above 8%, the final rule establishes a two-quarter grace period to either meet the qualifying criteria again or comply with the generally applicable capital rule. Management is still reviewing the Community Bank Leverage Ratio framework, but does not expect that Lakeland Bancorp or Lakeland Bank will elect to use the Community Bank Leverage Ratio framework.
Non-GAAP Financial Measures
Calculation of Tangible Book Value Per Common Share
 
 
December 31,
(dollars in thousands)
 
2019
 
2018
 
2017
 
2016
 
2015
 
 
 
Total common stockholders’ equity at end of period - GAAP
 
$
725,263

 
$
623,739

 
$
583,122

 
$
550,044

 
$
400,516

Less:
 
 
 
 
 
 
 
 
 
 
Goodwill
 
156,277

 
136,433

 
136,433

 
135,747

 
109,974

Other identifiable intangible assets, net
 
4,314

 
1,768

 
2,362

 
3,344

 
1,545

Total tangible common stockholders’ equity at end of period - Non-GAAP
 
$
564,672

 
$
485,538

 
$
444,327

 
$
410,953

 
$
288,997

Shares outstanding at end of period
 
50,498

 
47,486

 
47,354

 
47,223

 
37,906

Book value per share - GAAP
 
$
14.36

 
$
13.14

 
$
12.31

 
$
11.65

 
$
10.57

Tangible book value per share - Non-GAAP
 
$
11.18

 
$
10.22

 
$
9.38

 
$
8.70

 
$
7.62



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Calculation of Tangible Common Equity to Tangible Assets
 
 
December 31,
(dollars in thousands)
2019
 
2018
 
2017
 
2016
 
2015
 
 
 
Total tangible common stockholders’ equity at end of period - Non-GAAP
 
$
564,672

 
$
485,538

 
$
444,327

 
$
410,953

 
$
288,997

Total assets at end of period - GAAP
 
$
6,711,236

 
$
5,806,093

 
$
5,405,639

 
$
5,093,131

 
$
3,869,550

Less:
 
 
 
 
 
 
 
 
 
 
Goodwill
 
156,277

 
136,433

 
136,433

 
135,747

 
109,974

Other identifiable intangible assets, net
 
4,314

 
1,768

 
2,362

 
3,344

 
1,545

Total tangible assets at end of period - Non-GAAP
 
$
6,550,645

 
$
5,667,892

 
$
5,266,844

 
$
4,954,040

 
$
3,758,031

Common equity to assets - GAAP
 
10.81
%
 
10.74
%
 
10.79
%
 
10.80
%
 
10.35
%
Tangible common equity to tangible assets - Non-GAAP
 
8.62
%
 
8.57
%
 
8.44
%
 
8.30
%
 
7.69
%
 
 
 
 
 
 
 
 
 
 
 
Calculation of Return on Average Tangible Common Equity
 
 
 
 
 
 
 
For the Years Ended December 31,
(dollars in thousands)
2019
 
2018
 
2017
 
2016
 
2015
 
 
 
Net income - GAAP
 
$
70,672

 
$
63,401

 
$
52,580

 
$
41,518

 
$
32,481

Total average common stockholders’ equity - GAAP
 
$
697,037

 
$
598,527

 
$
568,680

 
$
474,540

 
$
392,221

Less:
 
 
 
 
 
 
 
 
 
 
Average goodwill
 
154,971

 
136,433

 
136,095

 
130,689

 
109,974

Average other identifiable intangible assets, net
 
4,883

 
2,064

 
2,847

 
3,225

 
1,759

Total average tangible common stockholders’ equity - Non-GAAP
 
$
537,183

 
$
460,030

 
$
429,738

 
$
340,626

 
$
280,488

Return on average common stockholders’ equity - GAAP
 
10.14
%
 
10.59
%
 
9.25
%
 
8.75
%
 
8.28
%
Return on average tangible common stockholders’ equity - Non-GAAP
 
13.16
%
 
13.78
%
 
12.24
%
 
12.19
%
 
11.58
%


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Reconciliation of Net Income
 
 
 
 
 
 
For the Year Ended December 31,
(in thousands, except per share data)
 
2019
 
2018
 
 
 
 
 
Net income - GAAP
 
$
70,672

 
$
63,401

 
 
 
 
 
NON-ROUTINE TRANSACTIONS, NET OF TAX
 
 
 
 
Tax deductible merger-related expenses
 
1,878

 
84

Non-tax deductible merger-related expenses
 
491

 
345

  Net effect of non-routine transactions
 
2,369

 
429

 
 
 
 
 
Net income available to common shareholders excluding non-routine transactions
 
73,041

 
63,830

Less: Earnings allocated to participating securities
 
(596
)
 
(582
)
Net Income, excluding non-routine transactions
 
$
72,445

 
$
63,248

 
 
 
 
 
Weighted average shares - Basic
 
50,477

 
47,578

Weighted average shares - Diluted
 
50,642

 
47,766

 
 
 
 
 
Basic earnings per share - GAAP
 
$
1.39

 
$
1.32

Diluted earnings per share - GAAP
 
$
1.38

 
$
1.32

 
 
 
 
 
Basic earnings per share, adjusted for non-routine transactions
 
$
1.44

 
$
1.33

Diluted earnings per share, adjusted for non-routine transactions (Core EPS)
 
$
1.43

 
$
1.32

 
 
 
 
 
Return on average assets - GAAP
 
1.12
%
 
1.15
%
Return on average assets, adjusted for non-routine transactions
 
1.16
%
 
1.15
%
 
 
 
 
 
Return on average common stockholders' equity - GAAP
 
10.14
%
 
10.59
%
Return on average common stockholders' equity, adjusted for non-routine transactions
 
10.48
%
 
10.66
%
 
 
 
 
 
Return on average tangible common stockholders' equity - Non-GAAP
 
13.16
%
 
13.78
%
Return on average tangible common stockholders' equity - Non-GAAP, adjusted for non-routine transactions
 
13.60
%
 
13.88
%
Recent Accounting Pronouncements
In January 2020, the Financial Accounting Standards Board ("FASB") issued Update 2020-01, an update to Topic 321, Investments, Topic 323, Joint Ventures and Topic 815, Derivatives and Hedging. The update clarifies the accounting for certain equity securities upon the application or discontinuation of the equity method of accounting in accordance with Topic 321. In addition, the update clarifies scope considerations for forward contracts and purchased options on certain securities. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2020. The Company does not expect the update to have a material impact on the Company's financial statements.
In December 2019, FASB issued Update 2019-12, an update to Topic 740, Income Taxes, as part of an initiative to reduce complexity in accounting standards for income taxes. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2021 with early adoption permitted. The Company does not expect the update to have a material impact on the Company's financial statements.
In August 2018, the FASB issued Update 2018-13, an update to Topic 820, Fair Value Measurement, to improve the effectiveness of fair value measurement disclosures. Among other provisions, the update removes requirements to disclose amounts of and reasons for transfers between Level 1 and Level 2 in the fair value hierarchy, and it modifies the disclosures regarding transfers in and out of Level 3 of the fair value hierarchy. The update requires a discussion regarding the change in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value

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measurements. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2019. Because the Company does not typically have Level 3 fair value measurements, the update is not expected to have a material impact on the Company's financial statements.
In August 2018, the FASB issued Update 2018-15, an update to Subtopic 350-40, Intangibles - Goodwill and Other - Internal-Use Software, which aligns the requirements for capitalizing implementation costs in a cloud-computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. Implementation costs incurred by customers in a cloud computing arrangement are to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance. This update will be effective for financial statements issued for fiscal years and interim periods 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 August 2018, the FASB issued Update 2018-14, an update to Subtopic 715-20, Compensation - Retirement Benefits - Defined Benefit Plans - General, which changes the disclosure of accounting and reporting requirements related to single-employer defined benefit pension or other postretirement benefit plans. The amendments in the update remove disclosures that are no longer considered cost-beneficial, clarify the specific requirements of disclosures and add disclosure requirements identified as relevant. For calendar-year public companies, the changes will be effective for annual periods, including interim periods within those annual periods, in 2020. Because the Company has minimal pension plans that require calculation of projected benefit obligations or accumulated benefit obligations, the update will not have a material impact on the Company's financial statements.
In June 2018, the FASB issued Update 2018-07, an update to Topic 718, Compensation - Stock Compensation, expanding earlier guidance on stock compensation to include share-based payments issued to nonemployees for goods and services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially the same. This update is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2018. Earlier adoption was permitted. The adoption of this update did not have a significant impact on the Company's financial statements.
In August 2017, the FASB issued Update 2017-05, an update to Subtopic 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets, intended to improve and simplify accounting rules around hedge accounting. Amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this update also make certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. This update will be effective for financial statements issued for fiscal years and interim periods 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 July 2017, the FASB issued Update 2017-11, guidance which simplifies the accounting for certain financial instruments with down round features, a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings. The provisions of the new guidance related to down rounds are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this update did not have a material impact on the Company’s financial statements because the Company does not have any equity-linked financial instruments that have such down round features.
In March 2017, the FASB issued Update 2017-08, an update to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs, which shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. Under current GAAP, entities amortize the premium as an adjustment of yield over the contractual life of the instrument even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. The update shortens the amortization period for certain callable debt securities held at a premium and requires the premium be amortized to the earliest call date. This update will be effective for annual and interim periods beginning after December 15, 2018. Entities are required to apply the amendments on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of this update did not have a material impact on the Company’s financial statements.
In January 2017, the FASB issued Update 2017-04, an update to Topic 350, Intangibles - Goodwill and Other, to simplify the test for goodwill impairment. This amendment eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. This update 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.

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In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL"), further amended by ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. Topic 326 pertains to the measurement of credit losses on financial instruments. This update requires the measurement of all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. This update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2019.
Subsequent to year-end, we adopted Topic 326 as of January 1, 2020, using a modified retrospective approach. Our CECL methodology includes the following key factors and assumptions for all loan portfolio segments: a) the calculation of a baseline lifetime loss by applying a segment-specific historical average annual loss rate, calculated using an open pool method, applied over the remaining life of each instrument; b) a single set of economic forecast inputs for the reasonable and supportable period; c) an initial reasonable and supportable forecast period, which reflects management's expectations of losses based on forward-looking economic scenarios over that time; d) baseline lifetime loss rates adjusted for changes in macroeconomic conditions over the reasonable and supportable forecast period via a series of adjustment factors developed using a third-party developed and supported top-down statistical model suite that uses a set of relevant economic forecast inputs sourced from a leading global forecasting firm; e) a reversion period (after the reasonable and supportable forecast period) using a straight-line approach; f) a historical loss period which represents a full economic credit cycle (with the exception of equipment finance loans which will use a shorter time period due to circumstances unique to that segment); and g) expected prepayment rates estimated on more recent historical experience adjusted for refinance incentive, seasoning and burnout, as applicable. Based on several analyses performed in the third and fourth quarters of 2019, as well as an implementation analysis utilizing existing exposures and forecasts of macroeconomic conditions as of year-end, we currently expect the adoption of ASU 2016-13 will result in a combined 10% to 25% increase in our allowance for loan losses and our reserves for unfunded commitments. As we are currently finalizing the execution of our implementation controls and processes, the review of our most recent model run and assumptions including qualitative adjustments and purchased credit-deteriorated loans, the ultimate impact of the adoption of ASU 2016-13 as of January 1, 2020 could differ from our current expectation. The expected increase in the allowance for loan losses and reserve for unfunded commitments is a result of changing from an incurred loss model, which encompasses allowances for current known and inherent losses within the portfolio, to an expected loss model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses for certain debt securities and other financial assets; however, we do not expect these allowances to be significant. The adoption of ASU 2016-13 is not expected to have a significant impact on our regulatory capital ratios.

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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.
 
 
Quarter Ended
(in thousands, except per share amounts
 
March 31,
2019
 
June 30,
2019
 
September 30,
2019
 
December 31,
2019
 
 
 
Total interest income
 
$
63,177

 
$
64,848

 
$
64,626

 
$
63,836

Total interest expense
 
14,571

 
15,650

 
15,944

 
14,288

Net interest income
 
48,606

 
49,198

 
48,682

 
49,548

Provision for loan losses
 
508

 
—

 
536

 
1,086

Noninterest income
 
5,723

 
6,389

 
6,700

 
7,984

Merger related expenses
 
2,860

 
318

 
—

 
—

Core deposit intangible amortization
 
304

 
301

 
288

 
289

Noninterest expense
 
30,820

 
31,067

 
29,275

 
31,234

Income before taxes
 
19,837

 
23,901


25,283


24,923

Income taxes
 
4,211

 
6,444

 
6,409

 
6,208

Net income
 
$
15,626

 
$
17,457

 
$
18,874

 
$
18,715

Earnings per share of common stock
 
 
 
 
 
 
 
 
Basic
 
$
0.31

 
$
0.34

 
$
0.37

 
$
0.37

Diluted
 
0.31

 
$
0.34

 
0.37

 
0.37

 
 
Quarter Ended
(in thousands, except per share amounts
 
March 31,
2018
 
June 30,
2018
 
September 30,
2018
 
December 31,
2018
 
 
 
Total interest income
 
$
50,145

 
$
52,260

 
$
54,282

 
$
56,434

Total interest expense
 
7,909

 
8,767

 
10,658

 
12,228

Net interest income
 
42,236

 
43,493

 
43,624

 
44,206

Provision for loan losses
 
1,284

 
1,492

 
1,046

 
591

Noninterest income
 
5,334

 
5,709

 
5,639

 
5,628

Merger related expenses
 
—

 
—

 
—

 
464

Core deposit intangible amortization
 
157

 
153

 
142

 
142

Noninterest expense
 
26,980

 
27,421

 
27,651

 
28,057

Income before taxes
 
19,149

 
20,136

 
20,424

 
20,580

Income taxes
 
3,894

 
4,298

 
3,666

 
5,030

Net income
 
$
15,255

 
$
15,838

 
$
16,758

 
$
15,550

Earnings per share of common stock
 
 
 
 
 
 
 
 
Basic
 
$
0.32

 
$
0.33

 
$
0.35

 
$
0.32

Diluted
 
0.32

 
$
0.33

 
0.35

 
0.32

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

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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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2019, 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, 2019, 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 March 2, 2020 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of the allowance for loan and lease losses related to loans collectively evaluated for impairment
As discussed in Notes 1 and 5 to the consolidated financial statements, the Company’s allowance for loan and lease losses related to loans collectively evaluated for impairment (”collective reserve”) was $39.7 million of a total ALLL of $40.0 million as of December 31, 2019. The Company estimated the collective reserve using a historical loss migration methodology that estimates the historical loss rates. Such loss rates are adjusted to reflect current conditions through the use of qualitative adjustments.
We identified the assessment of the collective reserve as a critical audit matter because it involved complex and subjective auditor judgment. Specifically, complex and subjective auditor judgment is required to assess the (1) methodologies used to derive the historical loss rates, (2) key assumptions including the loss migration periods and loss emergence periods, (3) development and evaluation of qualitative adjustments, and (4) internal risk ratings assigned to commercial loans.
The primary procedures we performed to address the critical audit matter included the following. We tested certain internal controls over the Company’s collective reserve process, including controls related to the (1) development and approval of the

-49-

collective reserve methodology and key assumptions, (2) periodic testing of internal risk ratings for commercial loans, and (3) determination of the qualitative adjustments. We tested the relevance of sources of internal and external data and key assumptions, including (1) the loss migration period, by evaluating if the loss data in the loss migration period is representative of the credit characteristics of the current portfolio and the sufficiency of loss data within the loss migration period, and (2) the loss emergence period, by evaluating the methodology used to develop the loss emergence period assumptions and testing observable loss data. We tested the qualitative framework and related adjustments by:
–
assessing the maximum qualitative factor adjustment based on the highest losses during the loss migration period,
–
evaluating the metrics, including the relevance of sources of data and assumptions, used to allocate the qualitative factor adjustments, and
–
analyzing the determination of each qualitative factor adjustment.

We involved credit risk professionals with specialized industry knowledge and experience who assisted in evaluating the:
–
Company’s collective reserve methodology for compliance with U.S. generally accepted accounting principles,
–
loss migration period, by evaluating the methodology used to determine the historical loss rates in the loss migration period, and the loss emergence period, by evaluating the methodology used to develop the loss emergence period assumptions,
–
framework used to develop the resulting qualitative adjustments and the effect on the collective reserve compared with relevant credit risk factors and consistency with credit trends, and
–
internal risk ratings for commercial loans, by evaluating the financial performance of the borrower and the underlying collateral.

We evaluated trends in the collective reserve, including the qualitative factor adjustments, for consistency with trends in loan portfolio and credit performance.

/s/ KPMG LLP

Short Hills, New Jersey
March 2, 2020


-50-

Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
 
 
December 31,
(dollars in thousands)
 
2019
 
2018
ASSETS
 
 
 
 
Cash
 
$
275,794

 
$
205,199

Interest-bearing deposits due from banks
 
6,577

 
3,400

Total cash and cash equivalents
 
282,371

 
208,599

Investment securities, available for sale, at fair value
 
755,900

 
638,618

Equity securities, at fair value
 
16,473

 
15,921

Investment securities, held to maturity, at amortized cost with fair value of
$124,904 at December 31, 2019 and $150,932 at December 31, 2018
 
123,975

 
153,646

Federal Home Loan Bank and other membership stock, at cost
 
22,505

 
13,301

Loans held for sale
 
1,743

 
1,113

Loans, net of deferred fees
 
5,137,823

 
4,456,733

Allowance for loan losses
 
(40,003
)
 
(37,688
)
Net loans
 
5,097,820

 
4,419,045

Premises and equipment, net
 
47,608

 
49,175

Operating lease right-of-use assets
 
18,282

 
—

Accrued interest receivable
 
16,832

 
16,114

Goodwill
 
156,277

 
136,433

Other identifiable intangible assets
 
4,314

 
1,768

Bank owned life insurance
 
112,392

 
110,052

Other assets
 
54,744

 
42,308

TOTAL ASSETS
 
$
6,711,236

 
$
5,806,093

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
LIABILITIES:
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing
 
$
1,124,121

 
$
950,218

Savings and interest-bearing transaction accounts
 
3,298,854

 
2,913,414

Time deposits $250 thousand and under
 
652,144

 
589,737

Time deposits over $250 thousand
 
218,660

 
167,301

Total deposits
 
5,293,779

 
4,620,670

Federal funds purchased and securities sold under agreements to repurchase
 
328,658

 
233,905

Other borrowings
 
165,816

 
181,118

Subordinated debentures
 
118,220

 
105,027

Operating lease liabilities
 
19,814

 
—

Other liabilities
 
59,686

 
41,634

TOTAL LIABILITIES
 
5,985,973

 
5,182,354

STOCKHOLDERS’ EQUITY:
 
 
 
 
Common stock, no par value; authorized 100,000,000 shares; issued shares, 50,498,410 at December 31, 2019 and 47,486,250 at December 31, 2018
 
560,263

 
514,703

Retained earnings
 
162,752

 
116,874

Accumulated other comprehensive gain (loss)
 
2,248

 
(7,838
)
TOTAL STOCKHOLDERS’ EQUITY
 
725,263

 
623,739

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
6,711,236

 
$
5,806,093

The accompanying notes are an integral part of these statements.


-51-


Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
 
 
Years Ended December 31,
(in thousands, except per share data)
 
2019
 
2018
 
2017
INTEREST INCOME
 
 
 
 
 
 
Loans and fees
 
$
233,535

 
$
193,143

 
$
172,342

Federal funds sold and interest-bearing deposits with banks
 
1,720

 
1,559

 
880

Taxable investment securities and other
 
19,722

 
16,710

 
14,987

Tax-exempt investment securities
 
1,510

 
1,709

 
1,995

TOTAL INTEREST INCOME
 
256,487

 
213,121

 
190,204

INTEREST EXPENSE
 
 
 
 
 
 
Deposits
 
49,248

 
30,620

 
16,600

Federal funds purchased and securities sold under agreements to repurchase
 
1,471

 
471

 
198

Other borrowings
 
9,734

 
8,471

 
8,168

TOTAL INTEREST EXPENSE
 
60,453

 
39,562

 
24,966

NET INTEREST INCOME
 
196,034

 
173,559

 
165,238

Provision for loan losses
 
2,130

 
4,413

 
6,090

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
193,904

 
169,146

 
159,148

NONINTEREST INCOME
 
 
 
 
 
 
Service charges on deposit accounts
 
11,205

 
10,584

 
10,740

Commissions and fees
 
6,230

 
5,542

 
4,858

Income on bank owned life insurance
 
2,740

 
3,256

 
2,354

Gain (loss) on equity securities
 
496

 
(583
)
 
—

Gains on sales of loans
 
1,660

 
1,329

 
1,836

Gain on sales and calls of investment securities, net
 
—

 
—

 
2,524

Swap income
 
3,231

 
1,992

 
982

Other income
 
1,234

 
190

 
2,141

TOTAL NONINTEREST INCOME
 
26,796

 
22,310

 
25,435

NONINTEREST EXPENSE
 
 
 
 
 
 
Salaries and employee benefits
 
77,287

 
68,595

 
61,166

Net occupancy expense
 
11,029

 
10,155

 
10,243

Furniture and equipment
 
8,681

 
8,297

 
8,269

FDIC insurance expense
 
431

 
1,608

 
1,577

Stationery, supplies and postage
 
1,599

 
1,625

 
1,797

Marketing expense
 
1,945

 
1,437

 
1,675

Data processing expense
 
4,913

 
3,609

 
1,993

Telecommunications expense
 
1,943

 
1,769

 
1,607

ATM and debit card expense
 
2,377

 
2,195

 
2,051

Core deposit intangible amortization
 
1,182

 
594

 
654

Other real estate and repossessed asset expense
 
256

 
158

 
181

Long-term debt prepayment fee
 
—

 
—

 
2,828

Merger related expenses
 
3,178

 
464

 
—

Other expenses
 
11,935

 
10,661

 
10,493

TOTAL NONINTEREST EXPENSE
 
126,756

 
111,167

 
104,534

Income before provision for income taxes
 
93,944

 
80,289

 
80,049

Provision for income taxes
 
23,272

 
16,888

 
27,469

NET INCOME
 
$
70,672

 
$
63,401

 
$
52,580

PER SHARE OF COMMON STOCK:
 
 
 
 
 
 
Basic earnings
 
$
1.39

 
$
1.32

 
$
1.10

Diluted earnings
 
$
1.38

 
$
1.32

 
$
1.09

Cash dividends paid
 
$
0.49

 
$
0.45

 
$
0.40

The accompanying notes are an integral part of these statements.

-52-


Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
For the Years Ended December 31,
(in thousands)
 
2019
 
2018
 
2017
 
 
 
NET INCOME
 
$
70,672

 
$
63,401

 
$
52,580

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
 
 
 
 
 
 
Unrealized gains (losses) on securities available for sale
 
10,718

 
(3,507
)
 
(903
)
Reclassification for securities gains included in net income
 
—

 
—

 
(1,640
)
Unrealized (losses) gains on derivatives
 
(586
)
 
41

 
37

Change in pension liability, net
 
(46
)
 
20

 
(16
)
Other comprehensive income (loss)
 
10,086

 
(3,446
)
 
(2,522
)
TOTAL COMPREHENSIVE INCOME
 
$
80,758

 
$
59,955

 
$
50,058

The accompanying notes are an integral part of these statements.


-53-


Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2019, 2018 and 2017
(in thousands)
 
Common  Stock
 
Retained
Earnings
(Accumulated
Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
At January 1, 2017
 
$
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

Cumulative adjustment for adoption of ASU 2016-01
 
—

 
2,043

 
(2,043
)
 
—

January 1, 2018, as adjusted
 
512,734

 
74,780

 
(4,392
)
 
583,122

Net income
 
—

 
63,401

 
—

 
63,401

Other comprehensive loss, net of tax
 
—

 
—

 
(3,446
)
 
(3,446
)
Stock based compensation
 
2,425

 
—

 
—

 
2,425

Retirement of restricted stock
 
(763
)
 
—

 
—

 
(763
)
Exercise of stock options
 
307

 
—

 
—

 
307

Cash dividends, common stock
 
—

 
(21,307
)
 
—

 
(21,307
)
At December 31, 2018
 
$
514,703

 
$
116,874

 
$
(7,838
)
 
$
623,739

Cumulative adjustment for adoption of ASU 842
 
—

 
125

 
—

 
125

January 1, 2019 as adjusted
 
$
514,703

 
$
116,999

 
$
(7,838
)
 
$
623,864

Net income
 
—

 
70,672

 
—

 
70,672

Other comprehensive income, net of tax
 
—

 
—

 
10,086

 
10,086

Stock based compensation
 
2,545

 
—

 
—

 
2,545

Issuance of stock for Highlands acquisition
 
43,417

 
—

 
—

 
43,417

Retirement of restricted stock
 
(715
)
 
—

 
—

 
(715
)
Exercise of stock options
 
313

 
—

 
—

 
313

Cash dividends, common stock
 
—

 
(24,919
)
 
—

 
(24,919
)
At December 31, 2019
 
$
560,263

 
$
162,752

 
$
2,248

 
$
725,263

The accompanying notes are an integral part of these statements.


-54-


Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Years Ended December 31,
(in thousands)
 
2019
 
2018
 
2017
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net income
 
$
70,672

 
$
63,401

 
$
52,580

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Net amortization of premiums, discounts and deferred loan fees and costs
 
3,660

 
4,153

 
5,153

Depreciation and amortization
 
1,645

 
5,555

 
4,536

Amortization of intangible assets
 
1,182

 
594

 
654

Amortization of operating lease right-of-use assets
 
2,592

 
—

 
—

Provision for loan losses
 
2,130

 
4,413

 
6,090

Stock based compensation
 
2,545

 
2,425

 
2,325

Loans originated for sale
 
(57,605
)
 
(49,748
)
 
(60,783
)
Proceeds from sales of loans held for sale
 
59,748

 
50,420

 
63,905

Gains on sales of securities
 
—

 
—

 
(2,524
)
Gains on sales of loans held for sale
 
(1,660
)
 
(1,329
)
 
(1,836
)
Gains on proceeds from bank owned life insurance policies
 
—

 
(421
)
 
(109
)
Change in market value of equity securities
 
(496
)
 
583

 
—

Losses (gains) on other real estate and other repossessed assets
 
72

 
(338
)
 
(646
)
Loss (gain) on sale of premises and equipment
 
497

 
561

 
(838
)
Long-term debt prepayment penalty
 
—

 
—

 
2,828

Deferred tax expense (benefit)
 
2,854

 
(13,571
)
 
16,904

Excess tax benefits
 
189

 
318

 
587

(Increase) decrease in other assets
 
(15,986
)
 
2,679

 
(25,065
)
Increase in other liabilities
 
15,092

 
9,743

 
3,705

NET CASH PROVIDED BY OPERATING ACTIVITIES
 
87,131

 
79,438

 
67,466

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

 
—

 
—

Proceeds from repayments and maturities of available for sale securities
 
147,130

 
91,833

 
91,314

Proceeds from repayments and maturities of held to maturity securities
 
31,457

 
26,083

 
43,218

Proceeds from sales of equity securities
 
1,287

 
2,155

 
—

Proceeds from sales of available for sale securities
 
—

 
—

 
4,500

Purchase of available for sale securities
 
(211,503
)
 
(110,370
)
 
(140,258
)
Purchase of held to maturity securities
 
(21,453
)
 
(40,753
)
 
(35,841
)
Purchase of equity securities
 
(1,343
)
 
(570
)
 
(307
)
Proceeds from redemptions of Federal Home Loan Bank stock
 
95,643

 
6,799

 
13,497

Purchases of Federal Home Loan Bank stock
 
(103,080
)
 
(7,524
)
 
(10,974
)
Purchase of bank owned life insurance
 
—

 
—

 
(33,000
)
Death benefit proceeds from bank owned life insurance policy
 
121

 
755

 
312

Net increase in loans
 
(252,441
)
 
(310,256
)
 
(289,914
)
Proceeds from dispositions and sales of bank premises and equipment
 
1,827

 
697

 
1,638

Purchases of premises and equipment
 
(5,936
)
 
(5,523
)
 
(3,972
)
Proceeds from sales of other real estate and other repossessed assets
 
860

 
4,116

 
4,638

NET CASH USED IN INVESTING ACTIVITIES
 
(303,977
)
 
(342,558
)
 
(355,149
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
Net increase in deposits
 
264,279

 
252,329

 
276,537

Increase in federal funds purchased and securities sold under agreements to repurchase
 
94,753

 
108,969

 
68,582

Proceeds from other borrowings
 
46,260

 
60,003

 
306,184

Repayments of other borrowings
 
(89,353
)
 
(70,752
)
 
(377,183
)
Exercise of stock options
 
313

 
307

 
321

Retirement of restricted stock
 
(715
)
 
(763
)
 
(773
)
Dividends paid
 
(24,919
)
 
(21,307
)
 
(18,853
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
 
290,618

 
328,786

 
254,815

Net increase (decrease) in cash and cash equivalents
 
73,772

 
65,666

 
(32,868
)
Cash and cash equivalents, beginning of year
 
208,599

 
142,933

 
175,801

CASH AND CASH EQUIVALENTS, END OF YEAR
 
$
282,371

 
$
208,599

 
$
142,933



-55-


Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
 
 
Years Ended December 31,
(in thousands)
 
2019
 
2018
 
2017
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 
 
 
 
 
 
Cash paid during the period for income taxes
 
$
15,944

 
$
18,614

 
$
27,423

Cash paid during the period for interest
 
59,949

 
38,679

 
24,571

Transfer of loans into other repossessed assets and other real estate owned
 
665

 
3,765

 
3,763

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

 
 
 
 
Initial recognition of operating lease liabilities
 
20,203

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

 
—

 
—

Investment securities
 
22,734

 
—

 
—

Loans, including loans held for sale
 
426,118

 
—

 
—

Goodwill and other intangible assets, net
 
23,125

 
—

 
—

Other assets
 
9,304

 
—

 
—

Total non-cash assets acquired
 
483,048

 
—

 
—

Liabilities assumed:
 
 
 
 
 
 
Deposits
 
409,638

 
—

 
—

Other borrowings
 
40,957

 
—

 
—

Other liabilities
 
2,490

 
—

 
—

Total liabilities assumed
 
453,085

 
—

 
—

Common stock issued for acquisitions
 
$
43,417

 
—

 
—

The accompanying notes are an integral part of these statements.


-56-


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 and the Federal Deposit Insurance Corporation. Lakeland generates commercial, mortgage and consumer loans and receives deposits from customers located primarily in Northern and Central New Jersey and the metropolitan New York area. 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, 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 commercial enterprises, individuals and municipalities in the communities we serve. 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 loans to finance equipment 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 losses and the valuation of the Company’s investment securities portfolio. The policies regarding these estimates are discussed below.
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, metropolitan New York 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 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 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

-57-

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.
The Company has an equity securities portfolio, which consists of investments in other financial institutions for market appreciation purposes, and recognizes net unrealized gains and losses through net income.
Loans and Allowance for Loan Losses
Loans 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 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 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 is placed on such non-accrual status, all accumulated accrued interest receivable is reversed out of current period income.
Commercial loans are placed on 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 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 Company's Board of Directors.
Lakeland groups impaired commercial loans under $500,000 into homogeneous pools and collectively evaluates them. Interest received on impaired loans may be recorded as interest income. However, if management is not reasonably certain that an impaired loan 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 losses). The difference between the undiscounted cash flows expected at acquisition and the initial carrying amount (fair value)

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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 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 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 losses charged against income. Loan principal considered to be uncollectible by management is charged against the allowance.
The allowance for loan 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 losses and the periodic provisioning for estimated losses included in the consolidated financial statements is the responsibility of management and the Board of Directors. Management performs a formal quarterly evaluation of the allowance for loan losses. This quarterly process is performed by the credit administration department and approved by the Chief Credit Officer. All supporting documentation with regard to the evaluation process is maintained by the credit administration department. Each quarter, the evaluation along with the supporting documentation is reviewed by the finance department before approval by the Chief Credit Officer. The allowance evaluation is then presented to an Allowance for Loan Losses committee, which gives final approval to the allowance evaluation before being presented to the Board of Directors for their approval.
The methodology employed for assessing the adequacy of the allowance consists of the following criteria:
•
The establishment of specific reserve amounts for impaired loans, including PCI loans.
•
The establishment of reserves for pools of homogeneous loans not subject to specific review, including impaired loans under $500,000, equipment finance loans, 1 - 4 family residential mortgages, and consumer loans.
The establishment of reserve amounts for pools of homogeneous loans is 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 losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods.
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 of Directors.

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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, 2019 and 2018, Lakeland was servicing approximately $18.6 million and $19.9 million, respectively, of loans for others.
Lakeland originates certain mortgages under a definitive plan to sell those loans and service the loans owned by the investor. Upon the transfer of the mortgage loans in a sale, 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, 2019 and 2018, Lakeland had originated mortgage servicing rights of $43,000 and $68,000, 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 (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 swap income.

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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 swap 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 19 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 as unrealized gains (losses) recorded on derivatives and benefit plans.
Goodwill and Other Identifiable Intangible Assets
Intangible assets resulting from acquisitions under the purchase method of accounting consist of goodwill and other intangible assets. Goodwill is not amortized and is subject to an annual assessment for impairment. The goodwill impairment analysis is generally a two-step test. However, under current accounting guidance, first we may assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under current accounting guidance, we are not required to calculate the fair value of a reporting unit if, based on a qualitative assessment, we determine that it was more likely than not that the unit’s fair value was not less than its carrying amount. For the year ended December 31, 2019, we elected to perform step one of the two-step goodwill impairment test for our reporting unit.
Goodwill is allocated to Lakeland's reporting unit at the date goodwill is actually recorded. If the carrying value of a reporting unit exceeds its estimated fair value, a second step in the analysis is performed to determine the amount of impairment, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying value of a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded equal to the excess amount in the current period earnings.
As of December 31, 2019, the carrying value of goodwill totaled $156.3 million. The Company performed its annual goodwill impairment test, as of November 30, 2019, and determined that the fair value of the Company’s single reporting unit to be in excess of its carrying value. The Company will test goodwill for impairment between annual test dates if an event occurs or circumstances change that would indicate the fair value of the reporting unit is below its carrying amount. No events have occurred and no circumstances have changed since the annual impairment test date that would indicate the fair value of the reporting unit is below its carrying amount.
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, 2019 and 2018, Lakeland had $112.4 million and $110.1 million, respectively, in BOLI. Income earned on BOLI was $2.7 million, $3.3 million and $2.4 million for the years ended December 31, 2019, 2018 and 2017, respectively. BOLI is accounted for using the cash surrender value method and is recorded at its net realizable value.

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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 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, 2019, 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.
NOTE 2 - ACQUISITIONS
On January 4, 2019, the Company completed its acquisition of Highlands Bancorp, Inc. ("Highlands"), a bank holding company headquartered in Vernon, New Jersey. Highlands was the parent of Highlands State Bank, which operated four branches in Sussex, Passaic and Morris Counties in New Jersey. This acquisition enabled the Company to broaden its presence in those counties. Effective as of the close of business on January 4, 2019, Highlands merged into the Company and Highlands State Bank merged into Lakeland. Pursuant to the merger agreement, the shareholders of Highlands received for each outstanding share of Highlands common stock that they owned at the effective time of the merger, 1.015 shares of Lakeland Bancorp, Inc. common stock. The Company issued 2,837,524 shares of its common stock in the merger. Outstanding Highlands options were paid out in cash at the difference between $14.71 and an average strike price of $8.09 for a total cash payment of $797,000.
The acquisition was accounted for under the acquisition method of accounting and accordingly, the assets acquired and liabilities assumed in the acquisition were recorded at their estimated fair values as of the acquisition date. Highlands' assets were recorded at their preliminary estimated fair values as of January 4, 2019 and Highlands' results of operations are included in the Company's Consolidated Statements of Income from that date forward.
The assets acquired and liabilities assumed in the acquisition were recorded at their estimated fair values based on management's best estimates using information available at the date of the acquisition, including the use of third-party valuation specialists.
During the second quarter of 2019, the Company revised the estimated fair value of the acquired assets as of the acquisition date as the result of additional information obtained. The adjustment related to credit-impaired loans acquired in the acquisition that were recorded at fair value and subsequently accounted for in accordance with Accounting Standards Codification ("ASC") Subtopic 310-30 and resulted in a $1.7 million increase in goodwill.

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


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

Investment securities, available for sale
21,234

Investment securities, held to maturity
1,500

Federal Home Loan Bank stock
1,767

Loans held for sale
1,113

Loans
425,005

Premises and equipment
2,613

Goodwill
19,844

Identifiable intangible assets
3,728

Accrued interest receivable and other assets
6,244

Total assets acquired
496,502

Liabilities assumed
 
Deposits
(409,638
)
Other borrowings
(27,800
)
Subordinated debt
(13,157
)
Other liabilities
(2,490
)
Total liabilities assumed
(453,085
)
Net assets acquired
$
43,417


Loans acquired in the Highlands acquisition were recorded at fair value and subsequently accounted for in accordance with ASC Topic 310. There was no carryover related allowance for loan losses. The fair values of loans acquired from Highlands were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted for estimated future credit losses and the rate of prepayments. Projected cash flows were then discounted to present value using a risk-adjusted market rate for similar loans.
The following is a summary of the credit impaired loans acquired in the Highlands acquisition as of the closing date.
(in thousands)
 
 
Contractually required principal and interest at acquisition
 
$
22,363

Contractual cash flows not expected to be collected (non-accretable difference)
 
7,129

Expected cash flows at acquisition
 
15,234

Interest component of expected cash flows (accretable difference)
 
1,431

Fair value of acquired loans
 
$
13,803


The core deposit intangible totaled $3.7 million and is being amortized over its estimated useful life of approximately ten years using an accelerated method. Goodwill totaled $19.8 million and will be evaluated annually for impairment. The goodwill is not deductible for tax purposes.
The fair values of deposit liabilities with no stated maturities such as checking, money market and savings accounts, were assumed to equal the carrying amounts since these deposits are payable on demand. The fair values of certificates of deposits and IRAs represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit.
Direct costs related to the Highlands acquisition were expensed as incurred. During the years ended December 31, 2019 and 2018, the Company incurred $3.2 million and $464,000, respectively, of merger and acquisition integration-related expenses, which have been separately stated in the Company’s Consolidated Statements of Income. There were no merger or acquisition integration-related expenses in 2017.

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.

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Year Ended December 31, 2019
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
(in thousands, except per share amounts)
 
 
Basic earnings per share
 
 
 
 
 
 
Net income available to common shareholders
 
$
70,672

 
50,477

 
$
1.40

Less: earnings allocated to participating securities
 
(596
)
 
—

 
(0.01
)
Net income available to common shareholders
 
70,076

 
50,477

 
1.39

Effect of dilutive securities
 
 
 
 
 
 
Stock options and restricted stock
 
—

 
165

 
(0.01
)
Diluted earnings per share
 
 
 
 
 
 
Net income available to common shareholders plus assumed conversions
 
$
70,076

 
50,642

 
$
1.38


Year Ended December 31, 2018
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
(in thousands, except per share amounts)
 
 
Basic earnings per share
 
 
 
 
 
 
Net income available to common shareholders
 
$
63,401

 
47,578

 
$
1.33

Less: earnings allocated to participating securities
 
(582
)
 
—

 
(0.01
)
Net income available to common shareholders
 
62,819

 
47,578

 
1.32

Effect of dilutive securities
 
 
 
 
 
 
Stock options and restricted stock
 
—

 
188

 
—

Diluted earnings per share
 
 
 
 
 
 
Net income available to common shareholders plus assumed conversions
 
$
62,819

 
47,766

 
$
1.32


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


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

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December 31, 2019
 
December 31, 2018
(in thousands)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and U.S. government agencies
 
$
135,361

 
$
722

 
$
(436
)
 
$
135,647

 
$
143,495

 
$
—

 
$
(2,568
)
 
$
140,927

Mortgage-backed securities, residential
 
500,245

 
3,185

 
(1,551
)
 
501,879

 
434,208

 
779

 
(8,843
)
 
426,144

Mortgage-backed securities, multifamily
 
48,675

 
633

 
(123
)
 
49,185

 
21,087

 
67

 
(204
)
 
20,950

Obligations of states and political subdivisions
 
58,979

 
1,077

 
(35
)
 
60,021

 
45,951

 
140

 
(586
)
 
45,505

Debt securities
 
9,000

 
168

 
—

 
9,168

 
5,000

 
92

 
—

 
5,092

Total
 
$
752,260

 
$
5,785

 
$
(2,145
)
 
$
755,900

 
$
649,741

 
$
1,078

 
$
(12,201
)
 
$
638,618


 
 
December 31, 2019
 
December 31, 2018
(in thousands)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
 
$
31,335

 
$
182

 
$
(8
)
 
$
31,509

 
$
33,025

 
$
—

 
$
(677
)
 
$
32,348

Mortgage-backed securities, residential
 
76,229

 
734

 
(176
)
 
76,787

 
75,859

 
169

 
(1,838
)
 
74,190

Mortgage-backed securities, multifamily
 
1,750

 
4

 
(2
)
 
1,752

 
1,853

 
—

 
(35
)
 
1,818

Obligations of states and political subdivisions
 
12,161

 
195

 
—

 
12,356

 
37,909

 
113

 
(328
)
 
37,694

Debt securities
 
2,500

 
—

 
—

 
2,500

 
5,000

 
—

 
(118
)
 
4,882

Total
 
$
123,975

 
$
1,115

 
$
(186
)
 
$
124,904

 
$
153,646

 
$
282

 
$
(2,996
)
 
$
150,932


During the fourth quarter of 2019, the Company early adopted ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging and Topic 825, Financial Instruments, and reclassified securities with a book value of $20.8 million and an unrealized gain of $291,000 from held to maturity to securities available for sale. ASU 2019-04 makes clarifications and corrections to the application of the guidance contained in each of the amended topics.
The following table lists contractual maturities of investment securities classified as available for sale and held to maturity at December 31, 2019. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
Available for Sale
 
Held to Maturity
(in thousands)
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
29,733

 
$
29,786

 
$
7,321

 
$
7,328

Due after one year through five years
 
105,745

 
106,611

 
31,102

 
31,425

Due after five years through ten years
 
52,534

 
53,385

 
6,815

 
6,852

Due after ten years
 
15,328

 
15,054

 
758

 
760

 
 
203,340

 
204,836

 
45,996

 
46,365

Mortgage-backed securities
 
548,920

 
551,064

 
77,979

 
78,539

Total securities
 
$
752,260

 
$
755,900

 
$
123,975

 
$
124,904



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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,
(in thousands)
 
2019
 
2018
 
2017
Sale proceeds
 
$
—

 
$
—

 
$
4,500

Gross gains
 
—

 
—

 
2,539

Gross losses
 
—

 
—

 
(15
)

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 $581.1 million and $476.3 million at December 31, 2019 and 2018, respectively, were pledged to secure public deposits and for other purposes required by applicable laws and regulations.
The following tables indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2019 and 2018:
December 31, 2019
 
Less than 12 Months
 
12 Months or Longer
 
Total
(dollars in thousands)
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Number of
Securities
 
Fair Value
 
Unrealized
Losses
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and U.S. government agencies
 
$
11,625

 
$
39

 
$
41,617

 
$
397

 
11

 
$
53,242

 
$
436

Mortgage-backed securities, residential
 
125,782

 
561

 
99,489

 
990

 
86

 
225,271

 
1,551

Mortgage-backed securities, multifamily
 
7,651

 
118

 
4,878

 
5

 
3

 
12,529

 
123

Obligations of states and political subdivisions
 
373

 
2

 
6,559

 
33

 
5

 
6,932

 
35

Total
 
$
145,431

 
$
720

 
$
152,543

 
$
1,425

 
105

 
$
297,974

 
$
2,145

HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
 
$
3,195

 
$
6

 
$
5,102

 
$
2

 
2

 
$
8,297

 
$
8

Mortgage-backed securities, residential
 
12,462

 
46

 
10,592

 
130

 
16

 
23,054

 
176

Mortgage-backed securities, multifamily
 
—

 
—

 
998

 
2

 
1

 
998

 
2

Total
 
$
15,657

 
$
52

 
$
16,692

 
$
134

 
19

 
$
32,349

 
$
186

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

 
$
216

 
$
120,338

 
$
2,352

 
27

 
$
140,926

 
$
2,568

Mortgage-backed securities, residential
 
10,119

 
58

 
316,851

 
8,785

 
139

 
326,970

 
8,843

Mortgage-backed securities, multifamily
 
1,977

 
2

 
12,911

 
202

 
4

 
14,888

 
204

Obligations of states and political subdivisions
 
1,289

 
2

 
26,522

 
584

 
50

 
27,811

 
586

Total
 
$
33,973

 
$
278

 
$
476,622

 
$
11,923

 
220

 
$
510,595

 
$
12,201

HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
 
$
—

 
$
—

 
$
32,348

 
$
677

 
6

 
$
32,348

 
$
677

Mortgage-backed securities, residential
 
8,325

 
59

 
53,761

 
1,779

 
36

 
62,086

 
1,838

Mortgage-backed securities, multifamily
 
—

 
—

 
1,818

 
35

 
2

 
1,818

 
35

Obligations of states and political subdivisions
 
1,764

 
8

 
15,580

 
320

 
27

 
17,344

 
328

Debt securities
 
3,882

 
118

 
—

 
—

 
1

 
3,882

 
118

Total
 
$
13,971

 
$
185

 
$
103,507

 
$
2,811

 
72

 
$
117,478

 
$
2,996


Management has evaluated the securities in the above table and has concluded that none of the securities with unrealized losses has impairments that are other-than-temporary. Fair value below cost is solely due to interest rate movements and is deemed temporary.

-66-

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.
Equity securities at fair value
The Company has an equity securities portfolio, which consists of investments in other financial institutions for market appreciation purposes and investments in Community Reinvestment funds. The market value of these investments was $16.5 million and $15.9 million as of December 31, 2019 and 2018, respectively. Upon implementation of Accounting Standards Update 2016-01 - Financial Instruments ("ASU 2016-01"), the Company made a cumulative adjustment of $2.0 million from other comprehensive income to retained earnings as of January 1, 2018. For the year ended December 31, 2019, the Company recorded proceeds from sales of equity securities of $1.3 million. In the twelve months ended December 31, 2019, the Company recorded $496,000 in market value gains on equity securities in noninterest income as compared to market value losses on equity securities of $583,000 during 2018.
As of December 31, 2019, the equity investments in other financial institutions and Community Reinvestment funds had a market value of $1.7 million and $14.8 million, respectively. The Community Reinvestment funds include $3.5 million that are primarily invested in community development loans that are guaranteed by the Small Business Administration ("SBA"). Because the funds are primarily guaranteed by the federal government there are minimal changes in market value between accounting periods. These funds can be redeemed within 60 days notice at the net asset value less unpaid management fees with the approval of the fund manager. As of December 31, 2019, the net amortized cost equaled the market value of the investment. There are no unfunded commitments related to these investments.
The Community Reinvestment funds include $11.3 million as of December 31, 2019, that are primarily invested in government guaranteed loans, mortgage-backed securities, small business loans and other instruments supporting affordable housing and economic development. The Company may redeem these funds at the net asset value calculated at the end of the current business day less any unpaid management fees. There are no restrictions on redemptions for the holdings in these investments other than the notice required by the fund manager. There are no unfunded commitments related to this investment.
NOTE 5 - LOANS AND OTHER REAL ESTATE
The following sets forth the composition of Lakeland’s loan portfolio:
 
 
December 31,
(in thousands)
 
2019
 
2018
Commercial, secured by real estate
 
$
3,589,593

 
$
3,057,779

Commercial, industrial and other
 
431,934

 
336,735

Equipment finance
 
111,076

 
87,925

Real estate - residential mortgage
 
335,191

 
329,854

Real estate - construction
 
335,169

 
319,545

Home equity and consumer
 
337,977

 
328,609

Total loans
 
5,140,940

 
4,460,447

Less deferred fees
 
(3,117
)
 
(3,714
)
Loans, net of deferred fees
 
$
5,137,823

 
$
4,456,733


At December 31, 2019 and December 31, 2018, Lakeland had $1.3 billion and $1.2 billion in loans pledged for potential borrowings at the Federal Home Loan Bank of New York (“FHLB”). As of December 31, 2019 and 2018, home equity and consumer loans included overdraft deposit balances of $789,000 and $452,000, respectively.

-67-

Purchased Credit Impaired Loans
The following sets forth the carrying value of the purchased credit impaired loans ("PCI") loans acquired in mergers:
 
December 31,
(in thousands)
2019
 
2018
Acquisition
 
 
 
  Highlands
$
8,194

 
$
—

  Pascack Community Bank
113

 
157

  Harmony Bank
441

 
495

     Total
$
8,748

 
$
652


The following table presents changes in the accretable yield for PCI loans:
 
 
Years Ended December 31,
(in thousands)
 
2019
 
2018
Balance, beginning of period
 
$
81

 
$
129

Acquisitions
 
1,431

 
—

Accretion
 
(1,236
)
 
(182
)
Net reclassification non-accretable difference
 
87

 
134

Balance, end of period
 
$
363

 
$
81


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 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 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.
•
Equipment finance - 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.

-68-

•
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, its other real estate owned and other repossessed assets, and accruing troubled debt restructurings (“TDRs”):
 
 
At December 31,
(in thousands)
 
2019
 
2018
Commercial, secured by real estate
 
$
12,314

 
$
7,192

Commercial, industrial and other
 
1,539

 
1,019

Equipment finance
 
284

 
501

Real estate - residential mortgage
 
3,428

 
1,986

Real estate - construction
 
967

 
—

Home equity and consumer
 
2,606

 
1,432

Total non-accrual loans
 
21,138

 
12,130

Other real estate and other repossessed assets
 
563

 
830

Total non-performing assets
 
$
21,701

 
$
12,960

Troubled debt restructurings, still accruing
 
$
5,650

 
$
9,293


Non-accrual loans included $1.6 million and $3.6 million of TDRs for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019 and 2018, the Company had $2.0 million and $1.5 million, respectively, in residential mortgages and consumer home equity loans included in total non-accrual loans that were in the process of foreclosure.
An age analysis of past due loans, excluding PCI loans which are accounted for on a pool basis, segregated by class of loans as of December 31, 2019 and 2018, is as follows:
December 31, 2019
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater
Than
89 Days
 
Total
Past Due
 
Current
 
Total Loans

 
Recorded
Investment  Greater
than 89 Days and
Still  Accruing
(in thousands)
 
 
Commercial, secured by real estate
 
$
3,578

 
$
1,200

 
$
9,702

 
$
14,480

 
$
3,569,008

 
$
3,583,488

 
$
—

Commercial, industrial and other
 
353

 
71

 
1,064

 
1,488

 
429,502

 
430,990

 
—

Equipment finance
 
166

 
80

 
284

 
530

 
110,546

 
111,076

 
—

Real estate - residential mortgage
 
1,138

 
251

 
2,075

 
3,464

 
331,337

 
334,801

 
—

Real estate - construction
 
—

 
—

 
967

 
967

 
333,418

 
334,385

 
—

Home equity and consumer
 
1,573

 
287

 
1,533

 
3,393

 
334,059

 
337,452

 
—

 
 
$
6,808

 
$
1,889

 
$
15,625

 
$
24,322

 
$
5,107,870

 
$
5,132,192

 
$
—


-69-

December 31, 2018
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater
Than
89 Days
 
Total
Past Due
 
Current
 
Total Loans
 
Recorded
Investment  Greater
than 89 Days and
Still  Accruing
(in thousands)
 
 
Commercial, secured by real estate
 
$
1,477

 
$
639

 
$
2,080

 
$
4,196

 
$
3,052,931

 
$
3,057,127

 
$
—

Commercial, industrial and other
 
173

 
243

 
750

 
1,166

 
335,569

 
336,735

 
—

Equipment finance
 
533

 
13

 
501

 
1,047

 
86,878

 
87,925

 
—

Real estate - residential mortgage
 
743

 
111

 
1,776

 
2,630

 
327,224

 
329,854

 
—

Real estate - construction
 
—

 
—

 
—

 
—

 
319,545

 
319,545

 
—

Home equity and consumer
 
1,917

 
216

 
850

 
2,983

 
325,626

 
328,609

 
—

 
 
$
4,843

 
$
1,222

 
$
5,957

 
$
12,022

 
$
4,447,773

 
$
4,459,795

 
$
—



Impaired Loans
Lakeland’s policy regarding impaired loans is discussed in Note 1 – Summary of Accounting Policies – Loans and Allowance for Loan 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, but excludes PCI loans. The following tables represent the Company's impaired loans at December 31, 2019, 2018 and 2017.
December 31, 2019
 
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
 
$
12,478

 
$
12,630

 
$
—

 
$
164

 
$
10,386

Commercial, industrial and other
 
1,391

 
1,381

 
—

 
16

 
1,334

Equipment finance
 
—

 
—

 
—

 
—

 
—

Real estate - residential mortgage
 
803

 
815

 
—

 
—

 
233

Real estate - construction
 
1,663

 
1,661

 
—

 
2

 
82

Home equity and consumer
 
—

 
—

 
—

 
—

 
—

Loans with related allowance:
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
 
3,470

 
3,706

 
228

 
190

 
4,554

Commercial, industrial and other
 
113

 
113

 
5

 
6

 
113

Equipment finance
 
23

 
23

 
10

 
—

 
21

Real estate - residential mortgage
 
1,512

 
1,682

 
104

 
19

 
926

Real estate - construction
 
—

 
—

 
—

 
—

 
—

Home equity and consumer
 
671

 
765

 
5

 
29

 
693

Total:
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
 
$
15,948

 
$
16,336

 
$
228

 
$
354

 
$
14,940

Commercial, industrial and other
 
1,504

 
1,494

 
5

 
22

 
1,447

Equipment finance
 
23

 
23

 
10

 
—

 
21

Real estate - residential mortgage
 
2,315

 
2,497

 
104

 
19

 
1,159

Real estate - construction
 
1,663

 
1,661

 
—

 
2

 
82

Home equity and consumer
 
671

 
765

 
5

 
29

 
693

 
 
$
22,124

 
$
22,776

 
$
352

 
$
426

 
$
18,342


-70-

December 31, 2018
 
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
 
$
9,284

 
$
9,829

 
$
—

 
$
188

 
$
7,369

Commercial, industrial and other
 
1,151

 
1,449

 
—

 
19

 
1,834

Equipment finance
 
301

 
597

 
—

 
—

 
376

Real estate - residential mortgage
 
—

 
—

 
—

 
4

 
242

Real estate - construction
 
—

 
—

 
—

 
—

 
726

Home equity and consumer
 
—

 
—

 
—

 
—

 
—

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

 
7,597

 
307

 
317

 
7,594

Commercial, industrial and other
 
209

 
209

 
7

 
12

 
209

Equipment finance
 
30

 
30

 
14

 
—

 
19

Real estate - residential mortgage
 
730

 
884

 
4

 
20

 
745

Real estate - construction
 
—

 
—

 
—

 
—

 
—

Home equity and consumer
 
727

 
765

 
6

 
32

 
898

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

 
$
17,426

 
$
307

 
$
505

 
$
14,963

Commercial, industrial and other
 
1,360

 
1,658

 
7

 
31

 
2,043

Equipment finance
 
331

 
627

 
14

 
—

 
395

Real estate - residential mortgage
 
730

 
884

 
4

 
24

 
987

Real estate - construction
 
—

 
—

 
—

 
—

 
726

Home equity and consumer
 
727

 
765

 
6

 
32

 
898

 
 
$
19,702

 
$
21,360

 
$
338

 
$
592

 
$
20,012

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

Equipment finance
 
—

 
—

 
—

 
—

 
—

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

Equipment finance
 
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

Equipment finance
 
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



-71-

Interest which would have been accrued on impaired loans during 2019, 2018 and 2017 was $1.0 million, $1.1 million and $1.5 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 assesses the quantitative and qualitative risks arising from the credit quality of its loans. 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 Company's Board of Directors. 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, 2019 and 2018, by the risk ratings discussed above:
December 31, 2019
 
Commercial,
Secured by
Real Estate
 
Commercial,
Industrial
and  Other
 
 
 
 
(in thousands)
 
Real Estate -
Construction
 
Total Commercial Loans
RISK RATING
 
 
 
 
 
 
 
 
1
 
$
—

 
$
898

 
$
—

 
$
898

2
 
—

 
17,988

 
—

 
17,988

3
 
74,072

 
39,112

 
—

 
113,184

4
 
965,825

 
107,376

 
17,941

 
1,091,142

5
 
2,332,863

 
215,975

 
307,824

 
2,856,662

5W - Watch
 
100,347

 
30,192

 
6,959

 
137,498

6 - Other assets especially mentioned
 
55,438

 
11,328

 
—

 
66,766

7 - Substandard
 
61,048

 
9,065

 
2,445

 
72,558

8 - Doubtful
 
—

 
—

 
—

 
—

9 - Loss
 
—

 
—

 
—

 
—

Total
 
$
3,589,593

 
$
431,934

 
$
335,169

 
$
4,356,696



-72-

December 31, 2018
 
Commercial,
Secured by
Real Estate
 
Commercial,
Industrial
and  Other
 
 
 
Total Commercial Loans
(in thousands)
 
Real Estate -
Construction
 
RISK RATING
 
 
 
 
 
 
 
 
1
 
$
—

 
$
1,119

 
$
—

 
$
1,119

2
 
—

 
18,462

 
—

 
18,462

3
 
69,995

 
36,367

 
—

 
106,362

4
 
933,577

 
91,145

 
17,375

 
1,042,097

5
 
1,910,423

 
168,474

 
297,625

 
2,376,522

5W - Watch
 
61,626

 
7,798

 
3,493

 
72,917

6 - Other assets especially mentioned
 
38,844

 
2,033

 
—

 
40,877

7 - Substandard
 
43,314

 
11,337

 
1,052

 
55,703

8 - Doubtful
 
—

 
—

 
—

 
—

9 - Loss
 
—

 
—

 
—

 
—

Total
 
$
3,057,779

 
$
336,735

 
$
319,545

 
$
3,714,059


This table does not include residential mortgage loans, consumer loans, or equipment finance loans 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 Losses
The following table details activity in the allowance for loan losses by portfolio segment and the related recorded investment in loans for the years ended December 31, 2019 and 2018:
December 31, 2019
 
Commercial,
Secured by
Real Estate
 
Commercial,
Industrial
and  Other
 
Equipment Finance
 
Real Estate -
Residential
Mortgage
 
Real Estate -
Construction
 
Home
Equity and
Consumer
 
Total
(in thousands)
 
 
Beginning balance
 
$
27,881

 
$
1,742

 
$
987

 
$
1,566

 
$
3,015

 
$
2,497

 
$
37,688

Charge-offs
 
(544
)
 
(645
)
 
(414
)
 
(50
)
 
—

 
(283
)
 
(1,936
)
Recoveries
 
251

 
1,100

 
332

 
66

 
126

 
246

 
2,121

Provision
 
1,362

 
1,092

 
52

 
143

 
(469
)
 
(50
)
 
2,130

Ending balance
 
$
28,950

 
$
3,289

 
$
957

 
$
1,725

 
$
2,672

 
$
2,410

 
$
40,003

Allowance for Loan Losses
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: Individually evaluated for impairment
 
$
228

 
$
5

 
$
10

 
$
104

 
$
—

 
$
5

 
$
352

Ending balance: Collectively evaluated for impairment
 
28,722

 
3,284

 
947

 
1,621

 
2,672

 
2,405

 
39,651

Ending balance
 
$
28,950

 
$
3,289

 
$
957

 
$
1,725

 
$
2,672

 
$
2,410

 
$
40,003

Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: Individually evaluated for impairment
 
$
15,948

 
$
1,504

 
$
23

 
$
2,315

 
$
1,663

 
$
671

 
$
22,124

Ending balance: Collectively evaluated for impairment
 
3,567,540

 
429,486

 
111,053

 
332,486

 
332,722

 
336,781

 
5,110,068

Ending balance: Loans acquired with deteriorated credit quality
 
6,105

 
944

 
—

 
390

 
784

 
525

 
8,748

Ending balance (1)
 
$
3,589,593

 
$
431,934

 
$
111,076

 
$
335,191

 
$
335,169

 
$
337,977

 
$
5,140,940

(1)
Excludes deferred fees

-73-

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

 
$
2,313

 
$
630

 
$
1,557

 
$
2,731

 
$
2,520

 
$
35,455

Charge-offs
 
(421
)
 
(1,452
)
 
(507
)
 
(131
)
 
(248
)
 
(588
)
 
(3,347
)
Recoveries
 
468

 
317

 
23

 
10

 
17

 
332

 
1,167

Provision
 
2,130

 
564

 
841

 
130

 
515

 
233

 
4,413

Ending balance
 
$
27,881

 
$
1,742

 
$
987

 
$
1,566

 
$
3,015

 
$
2,497

 
$
37,688

Allowance for Loan Losses
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: Individually evaluated for impairment
 
$
307

 
$
7

 
$
14

 
$
4

 
$
—

 
$
6

 
$
338

Ending balance: Collectively evaluated for impairment
 
27,574

 
1,735

 
973

 
1,562

 
3,015

 
2,491

 
37,350

Ending balance
 
$
27,881

 
$
1,742

 
$
987

 
$
1,566

 
$
3,015

 
$
2,497

 
$
37,688

Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: Individually evaluated for impairment
 
$
16,554

 
$
1,360

 
$
331

 
$
730

 
$
—

 
$
727

 
$
19,702

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

 
335,375

 
87,594

 
329,124

 
319,545

 
327,882

 
4,440,093

Ending balance: Loans acquired with deteriorated credit quality
 
652

 
—

 
—

 
—

 
—

 
—

 
652

Ending balance (1)
 
$
3,057,779

 
$
336,735

 
$
87,925

 
$
329,854

 
$
319,545

 
$
328,609

 
$
4,460,447

(1)
Excludes deferred fees
Lakeland also maintains a reserve for unfunded lending commitments which is included in other liabilities. This reserve was $1.8 million and $2.3 million as of December 31, 2019 and December 31, 2018, respectively. Lakeland analyzes the adequacy of the reserve for unfunded lending commitments in conjunction with its analysis of the adequacy of the allowance for loan losses. For more information on this analysis, see “Risk Elements” in Management’s Discussion and Analysis.
Troubled Debt Restructurings
Troubled Debt Restructurings ("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.
The following table summarizes loans that have been restructured during the periods presented:
  
 
For the Year Ended December 31, 2019
 
For the Year Ended December 31, 2018
(dollars in thousands)
 
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
 
 
Commercial, secured by real estate
 
—

 
$
—

 
$
—

 
5

 
$
3,348

 
$
3,348

Commercial, industrial and other
 
—

 
—

 
—

 
1

 
950

 
950

Equipment finance
 
—

 
—

 
—

 
1

 
15

 
15

Real estate - construction
 
1

 
694

 
694

 
—

 
—

 
—

Home equity and consumer
 
2

 
83

 
83

 
—

 
—

 
—

 
 
3

 
$
777

 
$
777

 
7

 
$
4,313

 
$
4,313



-74-

The following table presents loans modified as TDRs within the previous twelve months from December 31, 2019 and 2018 that have defaulted during the subsequent twelve months:
  
 
For the Year Ended December 31, 2019
 
For the Year Ended December 31, 2018
(dollars in thousands)
 
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
 
 
 
Commercial, secured by real estate
 
—

 
$
—

 
1

 
$
171

Home equity and consumer
 
2

 
83

 
—

 
—

 
 
2

 
$
83

 
1

 
$
171


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, 2019 and 2018, loans to these related parties amounted to $55.4 million and $53.1 million, respectively. There were new loans of $21.4 million to related parties and repayments of $19.1 million from related parties in 2019.
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, 2019, Lakeland had $1.7 million in mortgages held for sale compared to $1.1 million as of December 31, 2018.
Equipment Finance Receivables
Future minimum payments of equipment finance receivables at December 31, 2019 are expected as follows:
(in thousands)
 
2020
$
36,290

2021
30,448

2022
23,029

2023
14,767

2024
5,616

Thereafter
926

 
$
111,076


Other Real Estate and Other Repossessed Assets
At December 31, 2019, Lakeland had other real estate of $563,000, consisting of residential property acquired as a result of foreclosure proceedings or through a deed in lieu of foreclosure. Lakeland held no other repossessed assets at December 31, 2019. At December 31, 2018, Lakeland had other real estate of $830,000 and no other repossessed assets. The other real estate that Lakeland held at December 31, 2018 consisted of $702,000 in residential property acquired as a result of foreclosure proceedings or through a deed in lieu of foreclosure. For the years ended December 31, 2019, 2018 and 2017, Lakeland had writedowns of $153,000, $70,000 and $98,000, 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.

-75-

NOTE 6 - PREMISES AND EQUIPMENT
 
 
Estimated
 
December 31,
 
 
Useful Lives
 
2019
 
2018
 
 
 
 
(in thousands)
Land
 
Indefinite
 
$
10,356

 
$
10,471

Buildings and building improvements
 
10 to 50 years
 
42,481

 
47,006

Leasehold improvements
 
10 to 25 years
 
14,260

 
12,880

Furniture, fixtures and equipment
 
2 to 30 years
 
31,728

 
27,858

 
 
 
 
98,825

 
98,215

Less accumulated depreciation and amortization
 
 
 
51,217

 
49,040

 
 
 
 
$
47,608

 
$
49,175


Depreciation expense was $5.9 million, $5.3 million and $5.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.
NOTE 7 – LEASES
The Company leases certain premises and equipment under operating leases. Portions of certain properties are subleased for terms extending through 2024. In February 2016, FASB issued Update 2016-02, Topic 842, Leases, accounting guidance that requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period, with early adoption permitted. A modified retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company retained the services of a software provider to aid in its implementation. In the third quarter of 2018, the FASB issued updates which included targeted improvements to the leasing guidance that were intended to reduce costs and ease implementation of the leases standard. The improvements include an optional transition method to adopt the new leases standard where the entity could initially apply the new leases standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity's reporting for comparative periods presented in the financial statements in which it adopts the new leases standard, will continue to be in accordance with Accounting Standards Codification ("ASC") Topic 840, Leases. An entity that adopts this additional transition method must provide the required disclosures for all periods that continue to be in accordance with the current ASC 840. The lease update also includes a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead, to account for these components as a single component if the nonlease components otherwise would be accounted for under the new revenue guidance and both of the following conditions are met: 1) the timing and pattern of transfer of the nonlease component(s) and associated lease component are the same, and 2) the lease component, if accounted for separately, would be classified as an operating lease. Management used the optional transition method discussed above and also used the practical expedient to account for non-lease components with the associated lease component as a single component assuming the appropriate conditions were met. The FASB issued further clarification of the standard and addressed implementation and disclosure requirements.
With the adoption of this update on January 1, 2019, the Company recorded an operating lease right-of-use asset of $18.7 million, a corresponding liability of $20.2 million and a cumulative adjustment to retained earnings of $125,000.
At December 31, 2019, the Company had lease liabilities totaling $19.8 million and right-of-use assets totaling $18.3 million related to these leases. The calculated amount of the right-of-use asset and lease liabilities are impacted by the length of the lease term and the discount rate used to calculate the present value of the minimum lease payments. The Company's lease agreements often include one or more options to renew at the Company's discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the right-of-use asset and lease liability. The Company uses its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used.
For the year ended December 31, 2019, the weighted average remaining lease term for operating leases was 10.32 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.51%.
As the Company elected not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities. Lease costs were as follows:

-76-

(in thousands)
 
Year Ended December 31, 2019
Operating lease cost
 
$
3,293

Short-term lease cost
 
—

Variable lease cost
 
133

Sublease income
 
(122
)
Net lease cost
 
$
3,304


Rent expense for years ended December 31, 2018 and 2017, prior to the adoption of ASU 2016-02, was $3.0 million and $3.1 million, respectively.
The table below presents other information on the Company's operating leases for the year ended December 31, 2019:
(in thousands)
 
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
2,654

Right-of-use asset obtained in exchange for new operating lease liabilities
1,748


There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the year ended December 31, 2019. At December 31, 2019, the Company had no leases that had not yet commenced.
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability at December 31, 2019 is as follows:
(in thousands)
 
 
Within one year
 
$
3,300

After one year but within two years
 
3,057

After two years but within three years
 
2,626

After three years but within four years
 
2,291

After four years but within five years
 
2,174

After 5 years
 
10,562

Total undiscounted cash flows
 
24,010

Discount on cash flows
 
(4,196
)
Total lease liability
 
$
19,814


NOTE 8 - DEPOSITS
The following table sets forth the details of total deposits:
(dollars in thousands)
 
December 31, 2019
 
December 31, 2018
 
 
 
 
 
 
 
 
 
Noninterest-bearing demand
 
$
1,124,121

 
21.23
%
 
$
950,218

 
20.56
%
Interest-bearing checking
 
1,797,504

 
33.96
%
 
1,711,507

 
37.04
%
Money market
 
1,003,149

 
18.95
%
 
715,620

 
15.49
%
Savings
 
498,201

 
9.41
%
 
486,287

 
10.52
%
Certificates of deposit
 
870,804

 
16.45
%
 
757,038

 
16.39
%
Total Deposits
 
$
5,293,779

 
100.00
%
 
$
4,620,670

 
100.00
%


-77-

At December 31, 2019, certificates of deposit totaling $63.8 million were obtained through brokers, while no certificates of deposit at December 31, 2018 were obtained through brokers.
At December 31, 2019, the schedule of maturities of certificates of deposit is as follows:
(in thousands)
 
2020
$
715,061

2021
103,285

2022
42,891

2023
8,215

2024
1,264

2025
88

 
$
870,804


NOTE 9 - DEBT
Overnight and Short-Term Borrowings
At December 31, 2019, overnight and short-term borrowings from FHLB totaled $200.0 million, while at December 31, 2018 there were no overnight or short-term borrowings from FHLB.
In addition, Lakeland had overnight and short-term borrowings from correspondent banks totaling $85.0 million and $192.1 million at December 31, 2019 and 2018, respectively. At December 31, 2019, Lakeland had overnight and short-term federal funds lines available to borrow up to $230.0 million from correspondent banks. 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, 2019 or 2018.
Other short-term borrowings at December 31, 2019 and 2018 consisted of short-term securities sold under agreements to repurchase totaling $43.7 million and $41.8 million, respectively. Securities underlying the agreements were under Lakeland’s control. At December 31, 2019, the Company had $44.0 million in mortgage-backed securities pledged for its short-term securities sold under agreements to repurchase.
FHLB Advances
Advances from the Federal Home Loan Bank ("FHLB") totaled $165.8 million at December 31, 2019, with a weighted average interest rate of 2.24%, with fixed maturity dates. At December 31, 2018, advances from the FHLB totaled $181.1 million, with a weighted average interest rate of 2.10%, with fixed maturity dates. These advances were collateralized by first mortgage loans. The advances have prepayment penalties. In 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.
The schedule of maturities of advances is as follows:
(in thousands)
 
2020
$
55,881

2021
44,972

2022
40,526

2023
24,437

 
$
165,816


Long-term Securities Sold Under Agreements to Repurchase
At both December 31, 2019 and 2018, Lakeland had no long-term securities sold under agreements to repurchase. In the second quarter of 2018, the Company repaid all of its $20.0 million in matured long-term securities sold under agreements to repurchase. 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.
Subordinated Debentures
On January 4, 2019, the Company acquired subordinated notes from Highlands. Highlands issued $5.0 million of fixed rate notes in May 2014. The notes bear interest at a rate of 8.00% per annum until maturity on May 16, 2024. In October 2015, Highlands issued $7.5 million of fixed rate notes bearing an interest rate of 6.94% until maturity on October 1, 2025.

-78-

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 19 – Derivatives.
NOTE 10 - STOCKHOLDERS’ EQUITY
On October 22, 2019, the Board of Directors of Lakeland approved a new share repurchase program whereby the Company may repurchase up to 2,524,458 shares of its common stock, or approximately 5% of its outstanding shares of common stock at September 30, 2019. The Company had 50,489,161 shares outstanding as of September 30, 2019. Repurchases may be made from time to time through a combination of open market and privately negotiated repurchases. The specific timing, price and quantity of repurchases will be at the discretion of the Company and will depend on a variety of factors, including general market conditions, the trading price of the common stock, legal and contractual requirements and the Company's financial performance. Open market purchases may be conducted in accordance with the limitations of Rule 10b-18 of the Securities and Exchange Commission (the SEC). Repurchases may be made pursuant to trading plans adopted in accordance with SEC Rule 10b5-1, which would permit common stock to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The repurchase program does not obligate the Company to repurchase any particular number of shares and may be terminated at any time without notice, in the Company’s discretion. As of December 31, 2019, the Company had repurchased no shares.
NOTE 11 - INCOME TAXES
The components of income taxes are as follows:
 
 
Years Ended December 31,
(in thousands)
 
2019
 
2018
 
2017
 
 
 
Current tax provision
 
$
20,418

 
$
30,459

 
$
10,565

Deferred tax expense (benefit)
 
2,854

 
(13,571
)
 
16,904

Total provision for income taxes
 
$
23,272

 
$
16,888

 
$
27,469



-79-

In July 2018, the State of New Jersey enacted changes to the tax law that were retroactive to the beginning of 2018. Included in these changes was a surcharge in addition to the corporate tax. The surcharge will be 2.5% for 2018 and 2019, 1.5% for 2020 and 2021, and will revert to no surcharge in 2022. In addition to the surcharge, New Jersey adopted the concept of combined (consolidated) tax filings under a unitary concept for corporations that are part of an affiliated group beginning in 2019. As of July 1, 2018, the Company revalued its deferred tax assets based on the additional surcharge and the combined tax filings. Based on this revaluation, the Company recorded an increase in its net deferred tax asset of $943,000 to reflect the change in the state tax rates among its subsidiaries.
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 a $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 21% for 2019 and 2018 and 35% for 2017 is as follows: 
 
 
Years Ended December 31,
(in thousands)
 
2019
 
2018
 
2017
 
 
 
Federal income tax, at statutory rates
 
$
19,728

 
$
16,861

 
$
28,017

Increase (deduction) in taxes resulting from:
 
 
 
 
 
 
Tax-exempt income
 
(952
)
 
(1,096
)
 
(1,652
)
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
 
4,322

 
1,880

 
931

Adjustment to net deferred tax asset for change in NJ tax law
 
—

 
(943
)
 
—

Excess tax benefits from employee share-based payments
 
(189
)
 
(318
)
 
(587
)
Other, net
 
363

 
504

 
158

Provision for income taxes
 
$
23,272

 
$
16,888

 
$
27,469



-80-

The net deferred tax asset consisted of the following:
 
 
December 31,
(in thousands)
 
2019
 
2018
Deferred tax assets:
 
 
Allowance for loan losses
 
$
11,937

 
$
11,651

Stock based compensation plans
 
958

 
865

Purchase accounting fair market value adjustments
 
3,632

 
1,192

       Non-accrued interest
 
381

 
256

Deferred compensation
 
2,444

 
2,142

Depreciation and amortization
 
—

 
630

Other-than-temporary impairment loss on investment securities
 
41

 
59

Federal net operating loss carryforward
 
875

 
—

Unrealized loss on pension plans
 
2

 
—

Unrealized losses on securities available for sale
 
—

 
3,162

Other, net
 
594

 
585

Gross deferred tax assets
 
20,864

 
20,542

Deferred tax liabilities:
 
 
 
 
Core deposit intangible from acquired companies
 
1,235

 
516

Undistributed income from subsidiary not consolidated for tax return purposes (REIT)
 
678

 
149

Deferred loan costs
 
1,461

 
1,418

Depreciation and amortization
 
750

 
—

Prepaid expenses
 
443

 
459

Deferred gain on securities
 
162

 
166

Unfunded pension benefits
 
—

 
17

Loss on equity securities
 
65

 
36

Unrealized gain on investment securities
 
884

 
—

Unrealized gains on hedging derivative
 
80

 
322

Other
 
301

 
270

Gross deferred tax liabilities
 
6,059

 
3,353

Net deferred tax assets
 
$
14,805

 
$
17,189


The Company recorded net deferred tax assets of $4.3 million as a result of the acquisition of Highlands.
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, 2019 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, 2019 or 2018.
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 2016 or to state and local examinations by tax authorities for the years before 2016.

-81-

NOTE 12 - EMPLOYEE BENEFIT PLANS
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, 2019 and 2018, the Company had a liability of $616,000 and $629,000, respectively, for these SERPs and recognized an expense of $59,000 and $33,000 in 2019 and 2017, respectively, while recognizing income of $1,000 in 2018.
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 2019, 2018 and 2017 totaled $1.3 million, $1.1 million and $1.0 million, respectively.
Supplemental Executive Retirement Plans
In 2003, the Company entered into a SERP agreement with its former CEO that provides annual retirement benefits of $150,000 a year for 15 years 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 15 years when the CEO reaches the age of 65. Also in 2008, the Company entered into a SERP with a Regional President that provides annual retirement benefits of $90,000 a year for ten years upon his reaching the age of 65. In 2016, the Company entered into a SERP with a former Regional President that provides $84,500 a year for 15 years upon his reaching the age of 66. 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 2019, 2018 and 2017, the Company recorded compensation expense of $371,000, $83,000 and $261,000, respectively, for these plans. The accrued liability for these plans was $3.4 million and $3.3 million for the years ended December 31, 2019 and 2018, respectively.
Deferred Compensation Agreement
In 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 2019, 2018 and 2017 was $311,000, $269,000 and $244,000, respectively, and the accrued liability at December 31, 2019 and 2018 was $1.2 million and $923,000, respectively. Following the CEO’s normal retirement date, he shall be paid out in 180 consecutive monthly installments.
Elective Deferral Plan
In 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 $136,000, $73,000 and $55,000 in 2019, 2018 and 2017, respectively, and had a liability recorded of $2.0 million and $1.4 million at December 31, 2019 and 2018, respectively.
NOTE 13 - DIRECTORS RETIREMENT PLAN
The Company provides a retirement plan for directors appointed to the Company's Board of Directors prior to 2009 who after completing 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.
 
 
December 31,
(in thousands)
 
2019
 
2018
Accrued plan cost included in other liabilities
 
$
646

 
$
604

Amount not recognized as component of net postretirement benefit cost
 
 
 
 
Recognized in accumulated other comprehensive income
 
 
 
 
Net actuarial loss (gain)
 
$
64

 
$
(29
)
Unrecognized prior service cost
 
—

 
—

Amounts not recognized as a component of net postretirement benefit
 
$
64

 
$
(29
)


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The net periodic plan cost included the following components:
 
 
Years Ended December 31,
(in thousands)
 
2019
 
2018
 
2017
 
 
 
 
 
 
 
Service cost
 
$
14

 
$
15

 
$
21

Interest cost
 
22

 
20

 
23

Amortization of prior service cost
 
—

 
—

 
3

Amortization of gain
 
(2
)
 
—

 
—

 
 
$
34

 
$
35

 
$
47


A discount rate of 2.89%, 3.97% and 3.30% was assumed in the plan valuation for 2019, 2018 and 2017, 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 directors' 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)
 
2020
$
63

2021
37

2022
38

2023
38

2024
52

2025-2029
210


The Company expects its contribution to the directors' retirement plan to be $63,000 in 2020.
There is no expected amount to be recognized in accumulated other comprehensive income as a component of net periodic benefit cost in 2020.
NOTE 14 - STOCK-BASED COMPENSATION
The Company's shareholders approved the 2018 Omnibus Equity Incentive Plan (the "Plan"), which authorizes the granting of incentive stock options, supplemental stock options, stock appreciation rights, restricted shares, restricted stock units, other stock-based awards and cash-based awards to officers, employees and non-employee directors of, and consultants and advisors to, the Company and its subsidiaries. The Plan authorizes the issuance of up to 2.0 million shares of Company common stock and includes approximately 1.1 million shares of common stock theretofore available under the Company's 2009 Equity Compensation Program but not used. The maximum term of the Company’s stock option grants under the Plan is ten years from the date of grant.
Under the 2009 Equity Compensation Program, 2.3 million shares of common stock of the Company were authorized. The maximum term of the Company’s stock option grants under this plan was ten years from the date of grant. No further awards may be granted from the 2009 program.
In 2014, the Company began issuing restricted stock units ("RSUs"), some of which have performance conditions attached to them.
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 the Company's acquisition of Somerset Hills. As of December 31, 2019 and 2018, respectively, 28,942 and 55,192 options granted to directors were outstanding. As of December 31, 2019 and 2018, there were 2,764 and 12,296 options outstanding, respectively, under the Somerset Hills’ stock option plans.
Excess tax benefits of stock based compensation were $189,000, $318,000 and $587,000 for the years 2019, 2018 and 2017, respectively.

-83-

Employee Stock Options
A summary of the status of the Company’s option plans as of December 31, 2019 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
 
67,488

 
$
8.28

 
2.86
 
$
440,483

Exercised
 
(35,782
)
 
8.75

 
 
 
 
Outstanding, end of year
 
31,706

 
$
7.76

 
0.58
 
$
305,120

Options exercisable at year-end
 
31,706

 
$
7.76

 
0.58
 
$
305,120


There were no non-vested options under the Company’s option plans as of December 31, 2019 and no changes to the non-vested options for the year then ended.
As of December 31, 2019, there was no unrecognized compensation expense related to unvested stock options under the 2018 Omnibus Equity Incentive Plan or the 2009 Equity Compensation Program. There was no compensation expense recognized for stock options for 2019 and 2018 and $14,000 of compensation expense for stock options was recognized for 2017.
The aggregate intrinsic values of options exercised in 2019 and 2018 were $265,000 and $406,000, respectively. Exercise of stock options during 2019 and 2018 resulted in cash receipts of $313,000 and $307,000, respectively. No options vested in 2019 and 2018.
Restricted Stock
Information regarding the Company’s restricted stock for the year ended December 31, 2019 is as follows:
 
 
Number of
Shares
 
Weighted
Average
Price
Outstanding, beginning of year
 
11,701

 
$
20.18

Granted
 
13,052

 
15.96

Vested
 
(11,643
)
 
20.24

Outstanding, end of year
 
13,110

 
$
15.93


In 2019, the Company granted 13,052 shares of restricted stock to non-employee directors at a grant date fair value of $15.96 per share under the Company’s 2018 Omnibus Equity Incentive Plan. These shares will vest over a one year period, totaling $208,000 in compensation expense. In 2018, the Company granted 11,575 shares of restricted stock to non-employee directors at a grant date fair value of $20.30 per share under the Company’s 2018 Omnibus Equity Incentive Plan and 2009 Equity Compensation Program. These shares vested over a one year period, totaling $235,000 in compensation expense. 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 vested over a one year period, totaling $240,000 in compensation expense.
The total fair value of the restricted stock vested during the year ended December 31, 2019 was approximately $236,000. Compensation expense recognized for restricted stock was $212,000, $237,000 and $287,000 in 2019, 2018 and 2017, respectively. There was no unrecognized compensation expense related to restricted stock grants as of December 31, 2019.

-84-

Restricted Stock Units
Information regarding the Company’s RSUs and changes during the year ended December 31, 2019 is as follows:
 
 
Number of
RSUs
 
Weighted
Average
Price
Outstanding, beginning of year
 
299,347

 
$
16.60

Granted
 
149,559

 
16.54

Vested
 
(138,578
)
 
13.12

Forfeited
 
(9,699
)
 
18.02

Outstanding, end of year
 
300,629

 
$
18.13


In 2019, the Company granted 149,559 RSUs at a weighted average grant date fair value of $16.54 per share under the Company’s 2018 Omnibus Equity Incentive Plan. 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 agreements. 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 the RSUs granted in 2019 is expected to average approximately $825,000 per year over a three year period. In 2018, the Company granted 159,233 RSUs at a weighted average grant date fair value of $19.09 per share under the Company’s 2018 Omnibus Equity Incentive Plan and 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 $1.0 million per year over a three year period. 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. Compensation expense on these restricted stock units is expected to average $880,000 per year over a three year period. Compensation expense for restricted stock units totaled $2.3 million, $2.2 million and $2.0 million in 2019, 2018 and 2017, respectively. There was approximately $2.4 million in unrecognized compensation expense related to restricted stock units as of December 31, 2019, which is expected to be recognized over a period of 1.29 years.
NOTE 15 - REVENUE RECOGNITION
The Company’s primary source of revenue is interest income generated from loans and investment securities. Interest income is recognized according to the terms of the financial instrument agreement over the life of the loan or investment security unless it is determined that the counterparty is unable to continue making interest payments. Interest income also includes prepaid interest fees from commercial customers, which approximates the interest foregone on the balance of the loan prepaid.
The Company’s additional source of income, also referred to as noninterest income, is generated from deposit related fees, interchange fees, loan fees, merchant fees, loan sales and other miscellaneous income and is largely based on contracts with customers. In these cases, the Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The Company considers a customer to be any party to which the Company will provide goods or services that are an output of the Company’s ordinary activities in exchange for consideration. There is little seasonality with regards to revenue from contracts with customers and all inter-company revenue is eliminated when the Company’s financial statements are consolidated.
Generally, the Company enters into contracts with customers that are short-term in nature where the performance obligations are fulfilled and payment is processed at the same time. Such examples include revenue related to merchant fees, interchange fees and investment services income. In addition, revenue generated from existing customer relationships such as deposit accounts are also considered short-term in nature, because the relationship may be terminated at any time and payment is processed at the time performance obligations are fulfilled. As a result, the Company does not have contract assets, contract liabilities or related receivable accounts for contracts with customers. In cases where collectability is a concern, the Company does not record revenue.
Generally, the pricing of transactions between the Company and each customer is either (i) established within a legally enforceable contract between the two parties, as is the case with the loan sales, or (ii) disclosed to the customer at a specific point in time, as is the case when a deposit account is opened or before a new loan is underwritten. Fees are usually fixed at a specific amount or as a percentage of a transaction amount. No judgment or estimates by management are required to record revenue related to these transactions and pricing is clearly identified within these contracts.
The Company primarily operates in one geographic region, Northern and Central New Jersey, metropolitan New York and contiguous areas. Therefore, all significant operating decisions are based upon analysis of the Company as one operating segment or unit.

-85-

We disaggregate our revenue from contracts with customers by contract-type and timing of revenue recognition, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Noninterest income not generated from customers during the Company’s ordinary activities primarily relates to mortgage servicing rights, gains/losses on the sale of investment securities, gains/losses on the sale of other real estate owned, gains/losses on the sale of property, plant and equipment, and income from bank owned life insurance.
The following table sets forth the components of noninterest income for the years ended December 31, 2019, 2018 and 2017:
(in thousands)
2019
 
2018
 
2017
Deposit Related Fees and Charges
 
 
 
 
 
  Debit card interchange income
$
5,719

 
$
5,150

 
$
4,474

  Overdraft charges
4,052

 
3,938

 
4,656

  ATM service charges
826

 
830

 
808

  Demand deposit fees and charges
501

 
540

 
679

  Savings service charges
107

 
126

 
123

Total
11,205

 
10,584

 
10,740

Commissions and Fees
 
 
 
 
 
  Loan fees
1,510

 
1,264

 
1,136

  Wire transfer charges
1,223

 
1,093

 
1,005

  Investment services income
1,651

 
1,314

 
1,045

  Merchant fees
813

 
784

 
718

  Commissions from sales of checks
407

 
434

 
457

  Safe deposit income
364

 
371

 
269

  Other income
250

 
264

 
202

Total
6,218

 
5,524

 
4,832

Gains on Sale of Loans
1,660

 
1,329

 
1,836

Other Income
 
 
 
 
 
  Gains on customer swap transactions
3,231

 
1,992

 
982

  Title insurance income
183

 
195

 
200

  Other income
1,463

 
295

 
518

Total
4,877

 
2,482

 
1,700

Revenue not from contracts with customers
2,836

 
2,391

 
6,327

Total Noninterest Income
$
26,796

 
$
22,310

 
$
25,435

Timing of Revenue Recognition
 
 
 
 
 
  Products and services transferred at a point in time
$
23,885

 
$
19,844

 
$
19,040

  Products and services transferred over time
75

 
75

 
68

  Revenue not from contracts with customers
2,836

 
2,391

 
6,327

Total Noninterest Income
$
26,796

 
$
22,310

 
$
25,435


NOTE 16 - COMMITMENTS AND CONTINGENCIES
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.
Financial Instruments with Off-Balance-Sheet Risk and Concentrations of Credit Risk
The Company is a party to transactions with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers and consists of commitments to extend credit. These transactions involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the accompanying consolidated balance sheets. 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 and 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

-86-

collateral obtained, if deemed necessary by Lakeland upon extension of credit, is based on management’s credit evaluation of the borrower. At December 31, 2019 and 2018, Lakeland had $1.1 billion and $973.7 million in commitments to originate loans, including unused lines of credit.
Lakeland issues financial standby letters of credit and performance letters of credit that 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 varies based on management’s credit evaluation. 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. The maximum potential undiscounted amount of future payments of these letters of credit as of December 31, 2019 and 2018 was $17.2 million and $21.6 million, respectively, and they expire through 2024. The fair value of Lakeland's liability for financial standby letters of credit was insignificant at December 31, 2019.
At December 31, 2019 and 2018 there were $100,000 and $808,000, respectively, in commitments to lend additional funds to borrowers whose terms have been modified in troubled debt restructurings.
NOTE 17 - COMPREHENSIVE INCOME (LOSS)
The Company reports comprehensive income or loss in addition to net income 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, 2019
(in thousands)
 
Before
Tax Amount
 
Tax Benefit
(Expense)
 
Net of
Tax Amount
 
 
 
 
 
 
 
Unrealized holding gains on securities available for sale arising during the period
 
$
14,763

 
$
(4,045
)
 
$
10,718

Unrealized losses on derivatives
 
(828
)
 
242

 
(586
)
Change in pension liability, net
 
(64
)
 
18

 
(46
)
Other comprehensive income
 
$
13,871

 
$
(3,785
)
 
$
10,086

 
 
Year Ended December 31, 2018
(in thousands)
 
Before
Tax Amount
 
Tax Benefit
(Expense)
 
Net of
Tax Amount
 
 
 
 
 
 
 
Unrealized holding gains on securities available for sale arising during the period
 
$
(4,241
)
 
$
734

 
$
(3,507
)
Unrealized gains on derivatives
 
9

 
32

 
41

Change in pension liability, net
 
29

 
(9
)
 
20

Other comprehensive loss
 
$
(4,203
)
 
$
757

 
$
(3,446
)
 
 
Year Ended December 31, 2017
(in thousands)
 
Before
Tax Amount
 
Tax Benefit
(Expense)
 
Net of
Tax Amount
Unrealized losses on securities available for sale
 
 
 
 
 
 
Unrealized holding losses arising during period
 
$
(1,406
)
 
$
503

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

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

 
(2,543
)
Unrealized gains on derivatives
 
57

 
(20
)
 
37

Change in pension liability, net
 
(27
)
 
11

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

 
$
(2,522
)


-87-

(in thousands, net of tax)
 
Unrealized
Gains (Losses)  on
Available-
for-Sale
Securities
 
Unrealized
Gains 
(Losses) on  Derivatives
 
Pension
Items
 
Total
 
 
 
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
)
 
 
 
 
 
 
 
 
 
Adjustment for implementation of ASU 2016-01
 
(2,043
)
 
—

 
—

 
(2,043
)
Adjusted balance as of January 1, 2018
 
(5,275
)
 
862

 
21

 
(4,392
)
 
 
 
 
 
 
 
 
 
Net current period other comprehensive income (loss)
 
(3,507
)
 
41

 
20

 
(3,446
)
Balance at December 31, 2018
 
$
(8,782
)
 
$
903

 
$
41

 
$
(7,838
)
 
 
 
 
 
 
 
 
 
Net current period other comprehensive income (loss)
 
10,718

 
(586
)
 
(46
)
 
10,086

Balance at December 31, 2019
 
$
1,936

 
$
317

 
$
(5
)
 
$
2,248


NOTE 18 - 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 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).

-88-

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, 2019 and 2018, 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, 2019
 
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
 
$
12,580

 
$
123,067

 
$
—

 
$
135,647

Mortgage-backed securities
 
—

 
551,064

 
—

 
551,064

Obligations of states and political subdivisions
 
—

 
60,021

 
—

 
60,021

Corporate debt securities
 
—

 
9,168

 
—

 
9,168

Total securities available for sale
 
12,580

 
743,320

 
—

 
755,900

Equity securities, at fair value
 
1,735

 
14,738

 
—

 
16,473

Derivative assets
 
—

 
27,123

 
—

 
27,123

Total Assets
 
$
14,315

 
$
785,181

 
$
—

 
$
799,496

Liabilities:
 
 
 
 
 
 
 
 
Derivative liabilities
 
$
—

 
$
26,852

 
$
—

 
$
26,852

Total Liabilities
 
$
—

 
$
26,852

 
$
—

 
$
26,852

December 31, 2018
 
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
 
$
4,920

 
$
136,007

 
$
—

 
$
140,927

Mortgage-backed securities
 
—

 
447,094

 
—

 
447,094

Obligations of states and political subdivisions
 
—

 
45,505

 
—

 
45,505

Corporate debt securities
 
—

 
5,092

 
—

 
5,092

Total securities available for sale
 
4,920

 
633,698

 
—

 
638,618

Equity securities, at fair value
 
2,731

 
13,190

 
—

 
15,921

Derivative assets
 
—

 
12,135

 
—

 
12,135

Total Assets
 
$
7,651

 
$
659,023

 
$
—

 
$
666,674

Liabilities:
 
 
 
 
 
 
 
 
Derivative liabilities
 
$
—

 
$
11,036

 
$
—

 
$
11,036

Total Liabilities
 
$
—

 
$
11,036

 
$
—

 
$
11,036


-89-

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

 
$
—

 
$
5,789

 
$
5,789

Loans held for sale
 
—

 
1,743

 
—

 
1,743

Other real estate owned and other repossessed assets
 
—

 
—

 
563

 
563

December 31, 2018
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total Fair Value
(in thousands)
 
 
Assets:
 
 
 
 
 
 
 
 
Impaired loans
 
$
—

 
$
—

 
$
8,966

 
$
8,966

Loans held for sale
 
—

 
1,113

 
—

 
1,113

Other real estate owned and other repossessed assets
 
—

 
—

 
830

 
830


Impaired loans are evaluated and valued at the time the loan is identified as impaired at the lower of cost or market value. Because most of Lakeland’s impaired loans are collateral dependent, fair value is generally measured based on the value of the collateral, less estimated costs to sell, securing these loans and is classified at a level 3 in the fair value hierarchy. Collateral may be real estate, accounts receivable, inventory, equipment and/or other business assets. The value of 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 the then market discount rates (with ranges of 5-11%) or capitalization rates (with ranges of 4-9%) to evaluate the property. The value of the equipment may be determined by an appraiser, if significant, inquiry through a recognized valuation resource, or by the value on the borrower’s financial statements. Field examiner reviews on business assets may be conducted based on the loan exposure and reliance on this type of collateral. Appraised and reported values may be 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 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, 2019 and December 31, 2018 are outlined below.
This summary, as well as the table below, excludes financial assets and liabilities for which carrying value approximates fair value. For financial assets, these include cash and cash equivalents. For financial liabilities, these include noninterest-bearing demand deposits, savings and interest-bearing transaction accounts and federal funds 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 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.

-90-

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 $901,000 in short-term municipal bond anticipation notes and $2.5 million in subordinated debt that are non-rated and do not have an active secondary market or information readily available on standard financial systems. As a result, the securities are classified as Level 3 securities. Management performs a credit analysis before investing in these securities.
FHLB stock is an equity interest that can be sold to the issuing FHLB, to other 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 is valued using an exit price approach, which incorporates a build-up discount rate calculation that uses a swap rate adjusted for credit risk, servicing costs, a liquidity premium and a prepayment premium.
For fixed maturity certificates of deposit, fair value 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, 2019 and December 31, 2018:
December 31, 2019
 
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
 
$
123,975

 
$
124,904

 
$
—

 
$
121,503

 
$
3,401

Federal Home Loan and other membership bank stock
 
22,505

 
22,505

 
—

 
22,505

 
—

Loans, net
 
5,097,820

 
5,194,065

 
—

 
—

 
5,194,065

Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
870,804

 
871,418

 
—

 
871,418

 
—

Other borrowings
 
165,816

 
166,505

 
—

 
166,505

 
—

Subordinated debentures
 
118,220

 
117,992

 
—

 
—

 
117,992


-91-

December 31, 2018
 
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
 
$
153,646

 
$
150,932

 
$
—

 
$
143,913

 
$
7,019

Federal Home Loan and other membership bank stock
 
13,301

 
13,301

 
—

 
13,301

 
—

Loans, net
 
4,419,045

 
4,341,477

 
—

 
—

 
4,341,477

Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
757,038

 
750,801

 
—

 
750,801

 
—

Other borrowings
 
181,118

 
176,921

 
—

 
176,921

 
—

Subordinated debentures
 
105,027

 
102,497

 
—

 
—

 
102,497


NOTE 19 - 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, 2019 and 2018, Lakeland had $30.0 million and $498,000, 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 9). 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, 2019, the Company did not record any hedge ineffectiveness. The Company recognized $409,000 of accumulated other comprehensive income that was reclassified into interest expense during 2019. The Company did not enter into any hedges in 2019.
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 $243,000 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):
December 31, 2019
 
Notional  Amount
 
Average
Maturity (Years)
 
Weighted  Average
Rate Fixed
 
Weighted Average
Variable Rate
 
Fair Value
Classified in Other Assets:
 
 
 
 
 
 
 

 
 
  Third party interest rate swaps
 
$
85,796

 
9.0
 
3.51
%
 
1 Mo. LIBOR + 1.95
 
$
947

  Customer interest rate swaps
 
473,273

 
9.9
 
4.32
%
 
1 Mo. LIBOR + 1.93
 
25,905

  Interest rate swap (cash flow hedge)
 
30,000

 
1.5
 
1.10
%
 
3 Mo. LIBOR
 
271

Classified in Other Liabilities:
 
 
 
 
 
 
 

 
 
  Customer interest rate swaps
 
$
85,796

 
9.0
 
3.51
%
 
1 Mo. LIBOR + 1.95
 
$
(947
)
  Third party interest rate swaps
 
473,273

 
9.9
 
4.32
%
 
1 Mo. LIBOR + 1.93
 
(25,905
)


-92-

December 31, 2018
 
Notional  Amount
 
Average
Maturity (Years)
 
Weighted  Average
Rate Fixed
 
Weighted Average
Variable Rate
 
Fair Value
Classified in Other Assets:
 
 
 
 
 
 
 

 
 
  3rd Party interest rate swaps
 
$
153,909

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

  Customer interest rate swaps
 
164,427

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

  Interest rate swap (cash flow hedge)
 
30,000

 
2.5
 
1.10
%
 
3 Mo. LIBOR
 
1,099

Classified in Other Liabilities:
 
 
 
 
 
 
 

 
 
  Customer interest rate swaps
 
$
153,909

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

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


NOTE 20 - 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 $629.1 million was available for payment of dividends from Lakeland to the Company as of December 31, 2019.
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, 2019, that the Company and Lakeland met all capital adequacy requirements to which they are subject.
As of December 31, 2019, 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.

-93-

As of December 31, 2019 and 2018, the Company and Lakeland have the following capital ratios based on the then current regulations:
(dollars in thousands)
 
Actual
 
For Capital
Adequacy Purposes with Capital Conservation Buffer
 
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
December 31, 2019
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
 
 
Total capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
$
721,741

 
13.40
%
 
> 
 
$
565,504

 
> 10.50%

 
 
 
N/A

 
N/A
Lakeland
 
681,689

 
12.67
%
 
 
 
564,981

 
10.50
%
 
> 
 
$
538,077

 
> 10.00%
Tier 1 capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
$
593,539

 
11.02
%
 
> 
 
$
457,789

 
> 8.50%

 
 
 
N/A

 
N/A
Lakeland
 
639,908

 
11.89
%
 
 
 
457,365

 
8.50
%
 
> 
 
$
430,462

 
> 8.00%
Common equity Tier 1 capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
$
563,539

 
10.46
%
 
> 
 
$
377,003

 
> 7.00%

 
 
 
N/A

 
N/A
Lakeland
 
639,908

 
11.89
%
 
 
 
376,654

 
7.00
%
 
> 
 
$
349,750

 
> 6.50%
Tier 1 capital (to average assets)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
$
593,539

 
9.41
%
 
> 
 
$
252,234

 
> 4.00%

 
 
 
N/A

 
N/A
Lakeland
 
639,908

 
10.16
%
 
 
 
252,039

 
4.00
%
 
> 
 
$
315,048

 
> 5.00%
(dollars in thousands)
 
Actual
 
For Capital
Adequacy Purposes with Capital Conservation Buffer
 
To Be Well Capitalized Under
Prompt Corrective Action
Provisions
December 31, 2018
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
 
 
Total capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
$
637,377

 
13.71
%
 
> 
 
$
458,952

 
> 9.875%

 
 
 
N/A

 
N/A
Lakeland
 
605,560

 
13.06
%
 
 
 
457,912

 
9.875
%
 
> 
 
$
463,708

 
> 10.00%
Tier 1 capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
$
523,577

 
11.27
%
 
> 
 
$
366,000

 
> 7.875%

 
 
 
N/A

 
N/A
Lakeland
 
565,549

 
12.20
%
 
 
 
365,170

 
7.875
%
 
> 
 
$
370,967

 
> 8.00%
Common equity Tier 1 capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
$
493,577

 
10.62
%
 
> 
 
$
296,285

 
> 6.375%

 
 
 
N/A

 
N/A
Lakeland
 
565,549

 
12.20
%
 
 
 
295,614

 
6.375
%
 
> 
 
$
301,410

 
> 6.50%
Tier 1 capital (to average assets)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
$
523,577

 
9.39
%
 
> 
 
$
222,982

 
> 4.00%

 
 
 
N/A

 
N/A
Lakeland
 
565,549

 
10.17
%
 
 
 
222,539

 
4.00
%
 
> 
 
$
278,173

 
> 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, and was fully phased in at 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 increased by 0.625% every January 1 until it reached 2.5% on January 1, 2019.

-94-

NOTE 21 - GOODWILL AND OTHER INTANGIBLE ASSETS
The Company reported goodwill of $156.3 million at December 31, 2019 and $136.4 million at December 31, 2018. The Company recorded $19.8 million in goodwill from the Highlands merger in January 2019.
Core deposit intangible was $4.3 million on December 31, 2019 compared to $1.8 million on December 31, 2018. The Company recorded core deposit intangible of $3.7 million for the Highlands acquisition. In 2019, amortization of core deposit intangible totaled $1.2 million. The estimated future amortization expense for each of the succeeding five years ended December 31 is as follows:
(in thousands)
 
 
2020
 
$
1,025

2021
 
868

2022
 
711

2023
 
554

2024
 
425


NOTE 22 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS
 
 
December 31,
(in thousands)
 
2019
 
2018
ASSETS
 
 
 
 
Cash and due from banks
 
$
29,981

 
$
23,285

Equity securities
 
1,735

 
2,743

Investment securities, held to maturity
 
1,000

 
1,000

Investment in subsidiaries
 
802,079

 
695,571

Other assets
 
9,828

 
7,182

TOTAL ASSETS
 
$
844,623

 
$
729,781

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Other liabilities
 
$
1,140

 
$
1,015

Subordinated debentures
 
118,220

 
105,027

Total stockholders’ equity
 
725,263

 
623,739

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
844,623

 
$
729,781


CONDENSED STATEMENTS OF INCOME
 
 
Years Ended December 31,
(in thousands)
 
2019
 
2018
 
2017
INCOME
 
 
 
 
 
 
Dividends from subsidiaries
 
$
36,905

 
$
30,589

 
$
26,665

Other income (loss)
 
408

 
(125
)
 
2,750

TOTAL INCOME
 
37,313

 
30,464

 
29,415

EXPENSE
 
 
 
 
 
 
Interest on subordinated debentures
 
5,983

 
5,141

 
5,091

Noninterest expenses
 
464

 
506

 
377

TOTAL EXPENSE
 
6,447

 
5,647

 
5,468

Income before benefit for income taxes
 
30,866

 
24,817

 
23,947

Income taxes benefit
 
(1,646
)
 
(1,130
)
 
(2,018
)
Income before equity in undistributed income of subsidiaries
 
32,512

 
25,947

 
25,965

Equity in undistributed income of subsidiaries
 
38,160

 
37,454

 
26,615

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
 
$
70,672

 
$
63,401

 
$
52,580



-95-

CONDENSED STATEMENTS OF CASH FLOWS
 
 
Years Ended December 31,
(in thousands)
 
2019
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
 
Net income
 
$
70,672

 
$
63,401

 
$
52,580

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

 
—

 
(2,539
)
Amortization of subordinated debt costs
 
36

 
125

 
118

Change in market value of equity securities
 
(197
)
 
338

 
—

Excess tax benefits
 
189

 
318

 
587

Increase in other assets
 
(1,873
)
 
(1,446
)
 
(1,927
)
Increase (decrease) in other liabilities
 
121

 
(6
)
 
(17
)
Equity in undistributed income of subsidiaries
 
(38,160
)
 
(37,454
)
 
(26,615
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
 
30,788

 
25,276

 
22,187

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
 
Purchases of available for sale securities
 
—

 
—

 
(79
)
Purchases of equity securities
 
(82
)
 
(78
)
 
—

Proceeds from sale of available for sale securities
 
—

 
—

 
3,217

Proceeds from sale of equity securities
 
1,287

 
2,155

 
—

Net cash received from business acquisition
 
24

 
—

 
—

NET CASH PROVIDED BY INVESTING ACTIVITIES
 
1,229


2,077

 
3,138

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
 
Cash dividends paid on common stock
 
(24,919
)
 
(21,307
)
 
(18,853
)
Retirement of restricted stock
 
(715
)
 
(763
)
 
(773
)
Exercise of stock options
 
313

 
307

 
321

NET CASH USED IN FINANCING ACTIVITIES
 
(25,321
)
 
(21,763
)
 
(19,305
)
Net increase in cash and cash equivalents
 
6,696

 
5,590

 
6,020

Cash and cash equivalents, beginning of year
 
23,285

 
17,695

 
11,675

CASH AND CASH EQUIVALENTS, END OF YEAR
 
$
29,981

 
$
23,285

 
$
17,695



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

-96-


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, 2019, 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, 2019. 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, 2019, 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, 2019. Their report, dated March 2, 2020, expressed an unqualified opinion on our internal control over financial reporting.
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, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

-97-


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, 2019, 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, 2019, 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, 2019 and 2018, 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, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated March 2, 2020 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
March 2, 2020

-98-


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 2020 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 2020 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 2020 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 2018 Omnibus Equity Incentive Plan and the 2009 Equity Compensation Program as of December 31, 2019. These plans were the Company’s only equity compensation plans in existence as of December 31, 2019. The 2018 Omnibus Equity Incentive Plan is the successor to the 2009 Equity Compensation Program and no additional awards will be granted under the 2009 Equity Compensation Program.
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
 
342,681

 
$
7.84

 
1,829,259

Equity Compensation Plans Not Approved by Shareholders
 
—

 
—

 
—

TOTAL
 
342,681

 
$
7.84

 
1,829,259

The number in column (a) does not include a total of 2,764 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 $6.94.
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 2020 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 2020 Annual Meeting of Shareholders.

-99-


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, 2019 and 2018.
(ii)    Consolidated Statements of Operations for each of the three years in the period ended December 31, 2019.
(iii)    Consolidated Statements of Changes in Stockholders’ Equity for each of the three years in the period ended
December 31, 2019.
(iv)    Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2019.
(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
 
 
4.1
 
 
4.2
 
 
4.3
 
 
10.1+
 
 
10.2+
 
 
10.3+
 
 
10.4+
 
 
10.5+
 
 
10.6+
 
 
10.7+
 
 
10.8+

-100-


10.9+
 
 
10.10+
 
 
10.11+
 
 
10.12+
 
 
10.13+
 
 
10.14+
 
 
10.15+
 
 
10.16+
 
 
10.17+
 
 
10.18+
 
 
10.19
 
 
10.20+
 
 
10.21+
 
 
10.22+
 
 
10.23+
 
 
21.1
 
 
23.1
 
 
24.1
 
 
31.1
 
 
31.2
 
 
32.1

-101-


101.INS
Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document)
 
 
101.SCH
Inline XBRL Taxonomy Extension Schema Document
 
 
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101)
+ Denotes management contract or compensatory plan, contract or arrangement.
ITEM 16 – Form 10-K Summary.
Not applicable.

-102-


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:
March 2, 2020
 
 
 
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
 
March 2, 2020
Bruce D. Bohuny
 
 
 
 
 
 
 
/s/ Mary Ann Deacon*
  
Chairman
 
March 2, 2020
Mary Ann Deacon
 
 
 
 
 
 
 
/s/ Brian M. Flynn*
  
Director
 
March 2, 2020
Brian M. Flynn
 
 
 
 
 
 
 
/s/ Mark J. Fredericks*
  
Director
 
March 2, 2020
Mark J. Fredericks
 
 
 
 
 
 
 
/s/ Brian Gragnolati*
 
Director
 
March 2, 2020
Brian Gragnolati
 
 
 
 
 
 
 
/s/ James E. Hanson II*
  
Director
 
March 2, 2020
James E. Hanson II
 
 
 
 
 
 
 
/s/ Janeth C. Hendershot*
  
Director
 
March 2, 2020
Janeth C. Hendershot
 
 
 
 
 
 
 
/s/ Lawrence R. Inserra, Jr.*
  
Director
 
March 2, 2020
Lawrence R. Inserra, Jr.
 
 
 
 
 
 
 
/s/ Robert E. McCracken*
  
Director
 
March 2, 2020
Robert E. McCracken
 
 
 
 
 
 
 
/s/ Robert B. Nicholson, III*
  
Director
 
March 2, 2020
Robert B. Nicholson, III
 
 
 
 

-103-
Table of Contents



Signature
 
Capacity
 
Date
 
 
 
/s/ Thomas J. Shara
  
Director, President and Chief Executive Officer (Principal Executive Officer)
 
March 2, 2020
Thomas J. Shara
 
 
 
 
 
 
 
/s/ Thomas Splaine
  
Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
 
March 2, 2020
Thomas Splaine
 
 
 
 
*By:
 
/s/ Thomas J. Shara
 
 
 
March 2, 2020
 
 
Thomas J. Shara
Attorney-in-Fact
 
 
 
 

-104-

Exhibit 4.3
DESCRIPTION OF COMMON STOCK
The Company’s restated certification of incorporation, as amended, provides that the Company may issue up to 100,000,000 shares of common stock, no par value. As of December 31, 2019, there were 50,498,410 shares of our common stock outstanding. The Company’s common stock is listed on the NASDAQ Global Select Market under the symbol “LBAI.”
Dividend Rights
Holders of the Company’s common stock are entitled to dividends if, as and when determined by the Company’s board of directors in its sole discretion out of funds lawfully available for the payment of dividends, and subject to and qualified by the relative rights and preferences of any shares of preferred stock that the Company’s may issue in the future. The only statutory limitation is that such dividends may not be paid when the Company is insolvent. Funds for the payment of dividends by the Company come primarily from the earnings of Lakeland Bank. Thus, as a practical matter, any restrictions on the ability of Lakeland Bank to pay dividends will act as restrictions on the amount of funds available for payment of dividends by the Company.
As a state bank, Lakeland Bank is subject to limitations on the amount of dividends it may pay to the Company, Lakeland Bank’s only shareholder. Such limitations are 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, 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 Bank may pay.
Voting Rights
Each outstanding share of the Company’s common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s shareholders, except as otherwise required by law. The quorum for shareholders’ meetings is a majority of the outstanding shares. Generally, actions and authorizations to be taken or given by shareholders require the approval of a majority of the votes cast by holders of the Company’s common stock at a meeting at which a quorum is present. There is no cumulative voting.
Liquidation Rights
In the event of the liquidation, dissolution or winding up of the Company, holders of the Company’s common stock are entitled to share equally and ratably in assets available for distribution after payment of debts and liabilities, subject to, and qualified by the rights of holders of any preferred stock that the Company may issue in the future.
Assessment and Redemption
All outstanding shares of the Company’s common stock are fully paid and non-assessable. The Company’s common stock is not redeemable at the option of the issuer or the holders thereof.
Other Matters
Certain provisions in the Company’s restated certificate of incorporation, as amended, and applicable New Jersey corporate and banking law, may have the effect of discouraging a change of control of Lakeland Bancorp, even if such a transaction is favored by some of the Company’s shareholders and could result in shareholders receiving a substantial premium over the current market price of the Company’s shares. The primary purpose of these provisions is to encourage negotiations with the Company’s management by persons interested in acquiring control of the Company. These provisions may also tend to perpetuate present management and make it difficult for shareholders owning less than a majority of the shares to be able to elect even a single director.
Under New Jersey corporate law, unless a greater vote is specified in the certificate of incorporation, the affirmative vote of a majority of the votes cast by shareholders entitled to vote on the matter is required to approve, among other things, the sale or other disposition of all or substantially all of the corporation’s assets outside the ordinary course of business or the merger or consolidation of the corporation with another corporation. The Company’s restated certificate of incorporation, as amended, imposes greater-than-majority voting requirements and other requirements in certain such circumstances; provided, however, that such requirements do not apply if a majority of the entire Board approves the proposed transaction.
The Company’s board has the ability to designate and issue preferred stock with voting or other rights or preferences that could deter hostile takeovers or delay changes in control or management.
The Company’s restated certificate of incorporation, as amended, provides that the Company’s board is divided into three classes, one class of which is elected each year by stockholders. The directors in each class serve for a three-year term. This classified board structure may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of the Company because it generally makes it more difficult for stockholders to replace a majority of the directors.
The New Jersey Shareholders Protection Act limits certain transactions involving an “interested shareholder” and a “resident domestic corporation.” A resident domestic corporation is an issuer of voting stock organized under New Jersey law with its principal executive offices or significant business operations located in New Jersey. An interested shareholder is one that (1) beneficially owns, directly or indirectly, 10% or more of the outstanding voting stock of the resident domestic corporation or (2) is an affiliate or associate of the resident domestic corporation and at any time within the past five years beneficially owned, directly or indirectly, 10% or more of the voting power of the then outstanding stock of the resident domestic corporation. In general, the New Jersey Shareholders Protection Act prohibits certain business combinations between an interested shareholder and a resident domestic corporation for five years following the interested shareholder acquiring its stock, unless the corporation’s board of directors approved the business combination prior to the interested shareholder’s stock acquisition date. After the five-year period expires, the prohibition on certain business combinations continues unless the combination is approved by the affirmative vote of two-thirds (2/3) of the voting stock not beneficially owned by the interested shareholder, the combination is approved by the board prior to the interested shareholder’s stock acquisition date or certain fair price provisions are satisfied. The New Jersey Shareholders Protection Act applies to the Company.





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
 
 
Lakeland Title Group LLC
    
New Jersey
(50% owned by Lakeland Bank)
    
 
 
Sullivan Financial Services Inc.
    
New Jersey
(wholly owned subsidiary of Lakeland Bank)
    
 
 
 
Lakeland Financial Services Agency, Inc.
 
New Jersey
(wholly owned subsidiary of Lakeland Bank)
 
 
 
 
31 Sparta Avenue LLC
 
New Jersey
(wholly owned subsidiary of Lakeland Bank)
 
 
 
 
HSB Investment Co. Inc.
 
New Jersey
(wholly owned subsidiary of Lakeland Bank)
 
 
 
 
HSB Delaware Investment Co.
 
Delaware
(wholly owned subsidiary of HSB Investment Co. Inc.)
)
 
 
 
 
HSB REIT, Inc.
 
Delaware
(wholly owned subsidiary of HSB Delaware Investment Co.)
)
)
 




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 Forms S-8 (No. 333-225754, effective June 20, 2018; No. 333-189059, effective June 3, 2013; No. 333-159664, effective June 2, 2009; No. 333-125616, effective June 8, 2005; and No. 333-34296, effective April 7, 2000) of the Company, of our reports dated March 2, 2020, with respect to the consolidated balance sheets of the Company as of December 31, 2019 and 2018, 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, 2019, and the related notes, and the effectiveness of internal control over financial reporting as of December 31, 2019, which reports appear in the December 31, 2019 annual report on Form 10‑K of the Company.

/s/ KPMG LLP

Short Hills, New Jersey
March 2, 2020







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, 2019, 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, 2019, 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 15, 2020.
Signatures
 
Title
 
 
 
/s/ Bruce D. Bohuny
 
Director
Bruce D. Bohuny
 
 
 
 
 
/s/ Mary Ann Deacon
 
Director
Mary Ann Deacon
 
 
 
 
 
/s/ Brian M. Flynn
 
Director
Brian M. Flynn
 
 
 
 
 
/s/ Mark J. Fredericks
 
Director
Mark J. Fredericks
 
 
 
 
 
/s/ Brian Gragnolati
 
Director
Brian Gragnolati
 
 
 
 
 
/s/ James E. Hanson II
 
Director
James E. Hanson
 
 
 
 
 
/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/ Thomas J. Shara
 
Director, President and Chief Executive Officer (Principal Executive Officer)
Thomas J. Shara
 
 
 
 
 
/s/ Thomas F. Splaine, Jr.
 
Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
Thomas F. Splaine, Jr.
 
 




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: March 2, 2020
/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: March 2, 2020
/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, 2019 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: March 2, 2020

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.