A N N U A L R E P O R T
T R U S T
At Lakeland Bank
the relationships we develop with our customers
are governed by the
principles of trustworthiness.
It’s what our customers expect...
and it’s what we deliver every day.
R E P O R T T O S H A R E H O L D E R S
Dear Fellow Shareholders:
We are pleased to report that Lakeland Bancorp reached
new heights of perfoff rmance and progress in 2017. Your
Company reported its sixth straight year of record earnings,
with an increase in GAAP net income of 27% and a strong
return on average assets of 1.00%. In particular, we want to
highlight our achievement of $5.4 billion in assets as of
year-end — a record foff r Lakeland and a dramatic increase
from $3.3 billion just foff ur years ago. This dynamic growth
has reinfoff rced our position as one of the largest banking
institutions in the State of New Jersey.
Lakeland’s impressive results foff r 2017 reflect the strategic
path that we have foff llowed diligently. We have consistently
foff cused on growing our business organically, while also
taking advantage of opportunities to expand our market
presence through successful mergers and our entry into
New York State. We have added talented members to our
team to help guide the Company foff rward — while at all
times maintaining our unwavering commitment to serve
our customers and communities with excellence and
integrity, enhance value foff r our shareholders, and provide
a rewarding workplace environment foff r our colleagues.
Recognition for Performance
We are extremely proud that several independent
organizations have recognized Lakeland’s exceptional
perfoff rmance. Among the honors and commendations we
have received in the past year:
• Standard & Poor’s ranked Lakeland 73rd among the
top-perfoff rming banks in the U.S. with assets between
$1 billion and $10 billion, and we were the highest-rated
bank in New Jersey.
• Lakeland was named to the 2017 Sandler O’Neill
Sm-All Stars, a list of companies compiled by a leading
financial industry investment firm, distinguished
by faff ctors such as growth, profitability, credit quality
and capital strength.
• We were recognized as one of New Jersey’s 50 Fastest
Growing Companies in 2017 by NJNN BIZII
premiere business news publication.
,ZZ New Jersey’s
• In early 2018, Lakeland Bank received Prefeff rred Lender
status from the U.S. Small Business Administration (SBA),
the highest bank designation foff r top-tier lenders. This
designation reflects our commitment to being a premier
Mary Ann Deacon and Thomas J. Shara
provider of SBA financing and recognizes the best-in-
class service we provide to the small businesses we serve.
• Lakeland received a 5-Star rating (the highest possible
rating) by Bauer Financial, an independent bank rating
agency,yy based on the fiff nancial condition of our Company.
• Our support of higher education, local community
organizations and national charities was honored by
the Commerce and Industry Association of New Jersey
(CIANJ), which cited Lakeland as a 2017 Champion of
Good Works.
2017 Financial Highlights
Lakeland’s effff off rts to deliver best-in-class customer service
while driving profitable growth were reflected in our 2017
financial and operating results. Net income was $52.6
million, or $1.09 per diluted share. Excluding a non-cash
charge in 2017 related to the enactment of tax refoff rm and
merger-related expenses in 2016, our net income rose 20%
year-over-year. Our strong earnings growth was driven
mainly by higher net interest income due to the increase
in earning assets.
Return on average assets was 1.00% and the return on
average tangible common equity was 12.24%. Reflecting
our continued progress in becoming a more cost-effff icient
organization, the effff iciency ratio improved to 53.40% foff r
2017, from 56.48% a year earlier.
Total loans reached $4.2 billion at year-end 2017, up 7%
over the prior year, reflecting a strong loan generation
effff off rt by our teams. Total deposits were $4.4 billion at
December 31, 2017, up 7% from a year ago.
R E P O R T T O S H A R E H O L D E R S
Continued
We continue to develop our stable and cost-effff eff ctive
funding base of noninterest bearing demand deposits,
which reached a record level of $967 million at year-end
2017. Asset quality remained strong. At year-end 2017,
non-perfoff rming assets amounted to 0.27% of total assets,
declining from 0.42% at December 31, 2016.
Reflecting Lakeland’s commitment to deliver value foff r
shareholders, the Board of Directors increased the cash
dividend 11% in 2017, and the total dividend payout foff r
the year was $0.395 per share.
Expanding Branch Footprint
Early in 2017, Lakeland opened a new state-of-ff the-art
retail branch in Highland Mills, New York,k representing our
first full-service branch outside New Jersey. The Highland
Mills branch incorporates innovative design elements that
have proven successful in our other new and remodeled
branches. The result is an environment that offff eff rs a
modern banking experience foff r our customers and
enables us to deliver products and services in the manner
that people want to bank today. Supporting the personal
interaction that is the essence of community banking, the
branch feff atures the latest banking technologies including
a modern teller pod station, an ATM with automated
deposit capacity, and up-to-the-minute communications
through digital signage. The new branch is well positioned
to serve the banking needs of the Highland Mills and
Woodbury communities and is housed in the same
building as our New York Regional Loan Offff ice.
New Talent for a Changing Banking Landscape
Today we operate in a business environment that is
being dramatically reshaped by foff rces such as disruptive
technologies, increasing cybersecurity challenges,
shiftff ing regulatory requirements, and the changing
needs and demands of a new generation of customers.
We have responded to these foff rces by strengthening
our team, adding talented individuals with the skills
and experience to help Lakeland meet the needs of our
customers — and deliver profitable growth — in the
faff ce of unprecedented change.
Reflecting our commitment to stay ahead of technological
developments and enhance our processes, we named a
new Executive Vice President and Chief Infoff rmation
Offff icer, as well as several significant hires in the systems,
operations and infoff rmation security areas. To ensure that
we can continue to attract, retain and cultivate a highly
qualified and motivated team, we have added staffff
with expertise in talent acquisition and learning and
development. Several executives were also added in
commercial lending, online banking and key marketing
and sales positions to support our growth. We also
acquired a new Vice President of Community
Development to further enhance our investments in
our local communities.
Committed to Corporate Social Responsibility and
Our Communities
As a community bank,k we believe Lakeland has an
obligation not only to invest in and provide financial
services to individuals and businesses in our communities,
but also to support activities that enhance the places
where we, our team members and our customers live and
work. To that end, we were active in many community
organizations and initiatives last year, of which the
foff llowing were among the most noteworthy:
• Lakeland participated in the Neighborhood
Revitalization Tax Credit Program offff eff red through
the New Jersey Department of Community Affff aff irs.
We also donated $100,000 to help improve a Paterson,
New Jersey neighborhood. The funds will help transfoff rm
a once abandoned property into a neighborhood
center that will offff eff r educational programs, job
training and microenterprise development services
to Paterson residents.
• For nearly a decade, we have supported Pass It Along, a
non-profit organization committed to helping teenagers
become confident, resilient and compassionate citizens
through self-ff discovery, volunteerism and leadership.
• We provided funding foff r the Senior Crimestoppers
program serving residents at Middletown Park Rehab
and Health Care Center in Middletown, New York. The
Senior Crimestoppers program aims to reduce crimes
against the elderly in nursing homes and assisted living
faff cilities and to foff ster a greater sense of security.
• Lakeland again hosted an Annual Scholarship Golf
Outing, which provides scholarships to students from
50 local high schools. We have hosted this event foff r 44
years, helping to raise a total of more than $1 million
to support local students who have demonstrated
academic success and need financial assistance to
attend college.
R E P O R T T O S H A R E H O L D E R S
Continued
Building on Our Strategic Strengths
Lakeland has the strategic strengths to carry the company
foff rward to a bright future. We have built a valuable
community banking franchise with a solid platfoff rm of
53 branches in New Jersey, and a new presence in the
attractive Hudson Valley region of New York State. We have
a proven commitment to outstanding service that has
enabled us to grow along with our customers. Lakeland
continually has demonstrated the ability to deliver
profitable growth while operating in an effff icient and
responsible manner. Most of all, we have a team of highly
talented individuals who bring a spirit of integrity,
excellence and enthusiasm to everything they do.
Going foff rward, we will continue to drive Lakeland’s future
success by:
We are confident that Lakeland can successfully
execute on our strategic plans, enabling us to continue
to grow profitably, serve our customers and enhance
shareholder value.
As we close another successful year, we want to
acknowledge three of our Directors who are retiring from
our Board. Joseph O’Dowd, Stephen Tilton and Edward
Deutsch have provided wisdom and leadership to our
Board, and we sincerely thank them foff r their invaluable
service to our Company.
We also thank our clients and shareholders foff r placing
their confidence in us, our Board of Directors foff r sharing
their sound guidance and experience, and our entire
Lakeland team foff r their profeff ssionalism, hard work and
passion foff r excellence.
• Improving effff iciency
• Enhancing employee engagement
• Investing in technology
Sincerelyy,,yyy
Thomas J. Shara
President & CEO
MMaarryy AAnnnn DDeeaaccoonn
Chairman of the Board
F I N A N C I A L H I G H L I G H T S
Lakeland Bancorp, Inc. and Subsidiaries
FOR THE YEAR 2017 2016 2015
(dollars and shares in thousands, except per-share data)
Net Income
Return on Average Assets
Return on Average Stockholders’ Equity
Net Interest Margin
Effff iciency Ratio
Tangible Common Equity Ratio
Dividends Paid on Common Stock
PER-SHARE DATA
Earnings Per Share:
Basic
Diluted
Cash Dividends Per Common Share
Book Value Per Common Share
Tangible Book Value Per Common Share
Weighted Average Shares Outstanding:
Basic
Diluted
AT YEAR END
$ 52,580
$ 41,518 $ 32,481
1.00%
0.90% 0.89%
9.25%
8.75% 8.28%
3.38%
3.41% 3.47%
53.40%
56.41% 60.18%
8.44%
8.30% 7.69%
$ 18,853
$ 16,007 $ 12,586
$ 1.10
$ 1.09
$ 0.40
$ 12.31
$ 9.38
$ 0.96 $ 0.85
$ 0.95 $ 0.85
$ 0.37 $ 0.33
$ 11.65 $ 10.57
$ 8.70 $ 7.62
47,438
47,674
42,912 37,844
43,114 37,993
Loans and Leases, Net of Defeff rred Costs (Fees)
$ 4,152,720
$3,870,598
$2,965,200
Total Deposits 4,368,748 4,092,835 2,995,572
Total Assets 5,405,639 5,093,131 3,869,550
Stockholders’ Equity 583,122 550,044 400,516
Loans to Deposits 95.06% 94.57% 98.99%
Ratio of Net Charge-Offff sf to Average Loans Outstanding 0.05% 0.11% 0.06%
Ratio of Non-Perfoff rming Assets to Total Assets 0.27% 0.42% 0.61%
Tier 1 Leverage Ratio 9.12% 9.07% 8.70%
Tier 1 Risk-Based Capital Ratio 10.87% 10.85% 10.53%
Total Risk-Based Capital Ratio 13.40% 13.48% 11.61%
CET1 Ratio 10.18% 10.11% 9.54%
Total Assets
(in millions)
$5,406
$5,093
Net Income
(in millions)
$41.5
$52.6
$3,870
$32.5
Diluted Earnings Per Share
$1.09
$0.95
$0.85
2015
2016
2017
2015
2016
2017
2015
2016
2017
L A K E L A N D B A N C O R P A N D L A K E L A N D B A N K
B O A R D O F D I R E C T O R S
Mary Ann Deacon
Secretary and Treasurer,
Deacon Homes, Inc.
Thomas J. Shara
President and
Chief Executive Offff icer,
Lakeland Bancorp, Inc.
Bruce D. Bohuny
President,
Brooks Builders
Edward B. Deutsch
anaging Partner, McElroy,
Deutsch, Mulvaney &
Carpenter, LLP
Brian M. Flynn
CPA and Partner,
O’Connor Davies, LLP
Mark J. Fredericks
President, Keil Oil, Inc.,
and Fredericks Fuel
and Heating Service
Janeth C. Hendershot
Former Senior Vice President,
Munich-American
Risk Partners
Lawrence R. Inserra, Jr.
Chairman of the Board
and CEO,
Inserra Supermarkets, Inc.
Thomas J. Marino
CPA, Retired Partner,
CohnReznick, LLP
Robert E. McCracken
uneral Director/Owner,
Smith-McCracken
Funeral Home
Robert Nicholson III
President and CEO,
Northern Resources Corporation
Joseph O’Dowd
President,
O’Dowd Advertising
Stephen R. Tilton, Sr.
Chairman and
Chief Executive Offff icer,
Tilton Securities, LLC
R E T I R E D B O A R D M E M B E R S
Chairmen Emeritus
John W. Fredericks
Robert B. Nicholson
Vice Chairman Emeritus
Arthur L. Zande
Directors Emeritus
eorge H. Guptill, Jr.
Albert S. Riggs
Charles L. Tice
Roger Bosma
L A K E L A N D B A N C O R P O F F I C E R S
Mary Ann Deacon
ChCC airman of the Board
Thomas J. Shara
President and ChCC ief ExEE ecutive Offff iff cer
Ronald E. Schwarz
Sr.rr ExEE ecutive ViVV ce President
and ChCC ief OpO erating Offff iff cer
Robert A. Vandenbergh
Sr.rr ExEE ecutive ViVV ce President and
Regional President
Timothy Matteson
ExEE ecutive ViVV ce President/tt
ChCC ief Adminisii trative Offff iff cer/rr
General CoCC unsel and
CoCC rprr orate Secretaryr
James M. Nigro
ExEE ecutive ViVV ce President
and ChCC ief Risii k Offff iff cer
Thomas F. Splaine, Jr.
ExEE ecutive ViVV ce President
and ChCC ief FiFF nancial Offff iff cer
David S. Yanagisawa
ExEE ecutive ViVV ce President
and ChCC ief Lending Offff iff cer
L A K E L A N D B A N K O F F I C E R S
PRESIDENT/CEO
Thomas J. Shara
EXECUTIVE VICE PRESIDENTS
Ronald E. Schwarz
Sr.rr ExEE ecutive ViVV ce President
and ChCC ief OpO erating Offff iff cer
Robert A. Vandenbergh
Sr.rr ExEE ecutive ViVV ce President and
Regional President
Jeffff Buonfoff rte
ExEE ecutive ViVV ce President/tt S// enior
Government Banking and
FiFF nancial Servivv ces Offff iff cer
Paul Ho-Sing-Loy
ExEE ecutive ViVV ce President
and ChCC ief Infoff rmation Offff iff cer
Ellen Lalwani
ExEE ecutive ViVV ce President and
ChCC ief Retail Offff iff cer
Timothy Matteson
ExEE ecutive ViVV ce President/tt
ChCC ief Adminisii trative Offff iff cer/rr
General CoCC unsel and
CoCC rprr orate Secretaryr
FIRST SENIOR VICE PRESIDENTS
Karen Garrera
FiFF rsrr t SVPVV /PP S// enior Regional
Adminisii trator
Mary Kaye Nardone
FiFF rsrr t SVPVV /PP C// hCC ief Infoff rmation
Securityt Offff iff cer
Stephen C. Novak
FiFF rsrr t SVPVV /PP G// roup Leader:rr Bernardsdd vivv lle,e
Montvivv lle,e and WaWW ldwick CoCC mmercial
Lending TeTT ams
Elaine C. Petit
FiFF rsrr t SVPVV /PP D// irector of EnEE terprr risii e Solutions
SENIOR VICE PRESIDENTS
James M. Nigro
ExEE ecutive ViVV ce President
and ChCC ief Risii k Offff iff cer
James R. Noonan
ExEE ecutive ViVV ce President and
ChCC ief CrCC edit Offff iff cer
Michael A. Schutzer
ExEE ecutive ViVV ce President and
Regional President
Thomas F. Splaine, Jr.
ExEE ecutive ViVV ce President
and ChCC ief FiFF nancial Offff iff cer
David S. Yanagisawa
ExEE ecutive ViVV ce President and
ChCC ief Lending Offff iff cer
John F. Rath, III
FiFF rsrr t SVPVV /PP G// roup Leader:rr Hudsdd on VaVV lleye
and TeTT aneck CoCC mmercial Lending TeTT ams,s
Asset-Based Lending and EqEE uipi ment
FiFF nancing TeTT ams
Jenifeff r Thoma
FiFF rsrr t SVPVV /PP D// irector of
Human Resources
Robert Abraham
SVPVV /PP A// sset-Based Lending TeTT am Leader
Robert Ingram
SVPVV /PP E// qEE uipi ment FiFF nance Director
Nancy Minette
SVPVV /PP P// rofeff ssional Servivv ces
Vickie Tomasello
SVPVV /PP C// hCC ief Audit Offff iff cer
Bradley Bloss
SVPVV /PP C// oCC mmercial Loan Offff iff cer
(WaWW ldwick)k
Kenneth Bostwick,k Jr.
SVPVV /PP D// irector of Retail Sales
Mary T. Karakos
SVPVV /PP C// oCC mmercial Loan/n C// hCC ief Loan
Adminisii trative Offff iff cer
Karen Kennedy
SVPVV /PP B// ranch Adminisii trator
Bruce Bready
SVPVV /PP S// mall Business Lending Manager
Rasiel Kleiner
SVPVV /PP B// SASS /F// rFF aud Offff iff cer
Leonard Carlucci
SVPVV /PP C// oCC mmercial Loan TeTT am Leader
(WaWW ldwick)k
Raymond Cordts
SVPVV /PP B// usiness Development Offff iff cer
Brendan Eccleston
SVPVV /PP A// ssisii tant General CoCC unsel
Laura A. Ferraro
SVPVV /PP R// etail Lending
Angelo Frangella
SVPVV /PP C// oCC mmercial Loan TeTT am Leader
(T(( eTT aneck)k
Carl Grau
SVPVV /PP B// usiness Intelligi ence and eBanking
Michael Kurzawski
SVPVV /PP C// oCC mmercial Loan Offff iff cer
(WeWW stwood)d
Richard Machtinger
SVPVV /PP C// oCC mmercial Loan TeTT am Leader
(O(( cean CoCC untyt )yy
Maureen G. Martin
SVPVV /PP D// irector of Marketing
Mark McCoy
SVPVV /PP M// arket and Business Banking
Manager
Connie A. Meehan
SVPVV /PP H// uman Resources
Rita A. Myers
SVPVV /PP C// oCC ntroller
Harry W. Neinstedt
SVPVV /PP C// oCC mmercial Loan TeTT am Leader
(M(( ontvivv lle,e Newton)
M. Keith Niedergall
SVPVV /PP R// egional Adminisii trator
(N(( orthern Region)
Anthony Penta
SVPVV /PP C// oCC mmercial Loan TeTT am Leader
(M((
iddlesexee /xx M// onmouth)
Neill Schreyer
SVPVV /PP A// sset Recoveryr Manager
Susan Scimone-Bellini
SVPVV /PP R// egional Adminisii trator
(E(( aEE stern Region)
Patrick M. Trask
SVPVV /PP C// oCC mmercial Loan TeTT am Leader
(H(( udsdd on VaVV lleye )yy
Henrik Tvedt, Jr.
SVPVV /PP P// roduct & Deliveryr
ChCC annel Manager
Timothy VanSlooten
SVPVV /PP F// iFF nancial Servivv ces
Program Manager
Laurie A. Veith
SVPVV /PP D// epe osit OpO erations
David Ver Hage
SVPVV /PP L// oan OpO erations Manager
Michael J. Vessa
SVPVV /PP C// oCC mmercial Loan Offff iff cer
(B(( ernardsdd vivv lle)e
Susan Smith
SVPVV /PP C// rCC edit Adminisii tration Manager
Jeffff rey Wichman
SVPVV /PP C// rCC edit Manager
Jody Michael Tobia
SVPVV /PP L// akeland Mortgt age
Samuel R. Wilson
SVPVV /PP C// oCC mmercial Loan TeTT am Leader
(B(( ernardsdd vivv lle)e
C O R P O R A T E A D V I S O R Y C O U N C I L
Jon F. Hanson II, Council Chairman
Chairman, The Hampshire
Companies, LLC
Daniel J. Geltrude, CPA
Managing Member, Geltrude &
Company, LLC
Jerrold Grossman, PhD
President, Genesis BPS
Jerome Lombardo
President, CJ Lombardo
Company
Bruce M. Meisel
CEO, First Westwood
Realty, LLC
B U I L D I N G A S T R O N G E R T E A M C U L T U R E
Seated: Ellen Lalwani, EVP, Chief Retail Officer; Rita Myers, First SVP, Controller;
Paul Ho-Sing-Loy, EVP, Chief Information Officer; Elaine Petit, First SVP, Business Application Support
Middle Row: Laurie Veith, First SVP, Deposit Operations; Michael Schutzer, EVP, Regional President;
Mary Kaye Nardone, First SVP, Chief Technology Officer/ISO
Back Row: Stephen Novak, EVP, Sr. Commercial Real Estate Officer & Group Leader;
Karen Garrera, First SVP, Senior Regional Administrator; Jenifer Thoma, First SVP, Director of Human Resources;
John F. Rath, EVP, Chief Lending Officer
Lakeland achieved a milestone in 2017, as our assets
reached a record $5.4 billion. But we never foff rget that our
most important assets are our colleagues – who together
make Lakeland a successful banking enterprise and enable
us to make good on our commitments to our customers,
shareholders and communities, every day.
We have continued to strengthen our team with talented
profeff ssionals in vital areas such as technology, infoff rmation
security, finance, human resources, operations, learning and
development, as well as our lending and retail businesses.
Pictured here are several members of our management
team, who are representative of the depth of talent,
experience and profeff ssionalism that can be foff und across
the entire Lakeland organization.
At a time when the entire financial industry is faff cing dramatic
changes in technology, regulation and customer demands,
one thing that will not change is our team’s unwavering foff cus
on serving our customers and communities, promoting
operational excellence, delivering strong financial
perfoff rmance, growing shareholder value, and foff stering a
supportive workplace. We remain committed to doing so
with integrity, responsibility and pride in a job well done.
L A K E L A N D B A N K O F F I C E S
NEW JERSEY
BERGEN
arlstadt
325 Garden Street
Englewood
42 North Dean Street
Hackensack-Polifly Road
9 Polifly Road
Hillsdale
210 Broadway
Hackensack-Main Street
25 Main Street
Park Ridge
165 Kinderkamack Road
Rochelle Park
1 East Passaic Street
Teaneck
417 Cedar Lane
Waldwick
64 Crescent Avenue
Westwood
21 Jeffff eff rson Avenue
Wyckoffff
652 Wyckoffff Avenue
ESSEX
Caldwell
49-53 Bloomfield Avenue
Nutley
356 Franklin Avenue
West Caldwell
995 Bloomfield Avenue
MORRIS
Boonton
321 West Main Street
Butler
1410 Route 23 North
Butler-Carey Avenue
6 Carey Avenue
Madison
265 Main Street
Mendham
106 East Main Street, Suite A
Milton
5729 Berkshire Valley Road
Montville
166 Changebridge Road
Morristown
151 South Street
Pompton Plains
901 Route 23 South
Pompton Plains-
Cedar Crest Village
1 Cedar Crest Drive
Pompton Plains-
Woodland Commons
1 Woodland Commons
Wharton
350 North Main Street
OCEAN
Jackson
2120 West County Line Road
Lakewood
500 River Avenue
Toms River
104 Route 37 East
PASSAIC
Bloomingdale
28 Main Street
Little Falls
86-88 Main Street
SOMERSET
Bernardsville
155 Morristown Road
SUSSEX
Andover
615 Route 206 North
Branchville
362 Route 206 North
Branchville Downtown
3 Broad Street
Franklin
25 Route 23 South
UNION
Summit
510 Morris Avenue
NEW YORK
ORANGE
Highland Mills
556 State Route 32 North
REGIONAL LOAN OFFICES
Bernardsville
155 Morristown Road
Highland Mills, NY
556 State Route 32 North
Newfoff undland
2717 Route 23 South
North Haledon
892 Belmont Avenue
Ringwood
45 Skykk line Drive
Wanaque
103 Ringwood Avenue
Wayne
231 Black Oak Ridge Road
West Milfoff rd
1527 Union Valley Road
Fredon
395 Route 94 North
Lafaff yette
37 Route 15 South
Newtww on-Hampton
11 Hampton House Road
Newton-Park Place
30 Park Place
Sparta
7 Town Center Drive
Stanhope
143 Route 183 North
Stillwater
902 Main Street
Wantage
455 Route 23 North
Vernon
529 Route 515 South,
Suite 101
Montville
166 Changebridge Road
Jackson
2120 West County Line Road
Teaneck
417 Cedar Lane
Newton
30 Park Place
Administrative Center
250 Oak Ridge Road
Oak Ridge, NJ 07438
Commercial Real Estate Office
64 Crescent Avenue
Waldwick,k NJ 07463
Loan Production Office
485 Route 1 South
Iselin, NJ 08830
Milton Operations &
Training Center
5716 Berkshire Valley Road
P.O. Box 326
Oak Ridge, NJ 07438
Branch Hours Available at LakelandBank.com
I N V E S T O R I N F O R M A T I O N
STOCK LISTING
Common shares of Lakeland Bancorp, Inc., trade on
the Nasdaq National Market under the symbol “LBAI.”
DIVIDEND CALENDAR
Dividends on Lakeland Bancorp, Inc. common stock
are customarily payable on or about the 15th of February,
May, August and November.
REGISTRAR AND TRANSFER AGENT
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
1-800-937-5449
www.amstock.com
CORPORATE HEADQUARTERS
Lakeland Bancorp, Inc.
250 Oak Ridge Road
Oak Ridge, NJ 07438
973-697-2000
Information on Lakeland Bancorp, Inc., can also
be found on the Internet at LakelandBank.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017.
OR
‘ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
TO
.
Commission file number: 000-17820
LAKELAND BANCORP, INC.
(Exact name of registrant as specified in its charter)
New Jersey
(State or other jurisdiction of
incorporation or organization)
22-2953275
(I.R.S. Employer
Identification No.)
250 Oak Ridge Road,
Oak Ridge, New Jersey 07438
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: (973) 697-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, no par value
Name of each exchange on which registered
NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È 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 È
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 È No ‘
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act:
È
Large accelerated filer
‘
Non-accelerated filer
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 È
As of June 30, 2017, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately
$840,000,000, based on the closing sale price as reported on the NASDAQ Global Select Market.
The number of shares outstanding of the registrant’s common stock, as of February 23, 2018, was 47,363,146.
‘
Accelerated filer
Smaller Reporting Company ‘
Lakeland Bancorp, Inc’s. Proxy Statement for its 2018 Annual Meeting of Shareholders (Part III).
DOCUMENTS INCORPORATED BY REFERENCE:
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LAKELAND BANCORP, INC.
Form 10-K Index
PART I
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 3A. Executive Officers of the Registrant
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
PART II
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Item 15. Exhibits and Financial Statement Schedules
Item 16.
Signatures
Form 10-K Summary
PART IV
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ITEM 1 - Business.
PART I
GENERAL
Lakeland Bancorp, Inc. (the “Company” or “Lakeland Bancorp”) is a bank holding company headquartered
in Oak Ridge, New Jersey. The Company was organized in March of 1989 and commenced operations on
May 19, 1989, upon the consummation of the acquisition of all of the outstanding stock of Lakeland Bank,
formerly named Lakeland State Bank (“Lakeland” or the “Bank” or “Lakeland Bank”). The Bank operates
53 branch offices throughout Bergen, Essex, Morris, Ocean, Passaic, Somerset, Sussex, and Union counties in
New Jersey and also including one branch in Highland Mills, New York; six New Jersey regional commercial
lending centers in Bernardsville, Jackson, Montville, Newton, Teaneck and Waldwick; and one in New York to
serve the Hudson Valley region. Lakeland also has a commercial loan production office serving Middlesex and
Monmouth counties in New Jersey. Lakeland offers an extensive suite of financial products and services for
businesses and consumers.
The Company has shown substantial growth through a combination of organic growth and acquisitions.
Since 1998, the Company has acquired seven community banks with an aggregate asset total of approximately
$1.8 billion. All of the acquired banks have been merged into Lakeland and the acquired holding companies, if
applicable, have been merged into the Company.
At December 31, 2017, Lakeland Bancorp had total consolidated assets of $5.4 billion, total consolidated
deposits of $4.4 billion, total consolidated loans, net of the allowance for loan and lease losses, of
$4.1 billion and total consolidated stockholders’ equity of $583.1 million.
This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 (“Forward-Looking Statements”). Such statements are subject
to risks and uncertainties that could cause actual results to differ materially from those projected in such
Forward-Looking Statements. Certain factors which could materially affect such results and the future
performance of the Company are described in Item 1A - Risk Factors of this Annual Report on Form 10-K.
Unless otherwise indicated, all weighted average, actual shares and per share information contained in this
Annual Report on Form 10-K have been adjusted retroactively for the effect of stock dividends, including the
Company’s 5% stock dividend which was distributed on June 17, 2014.
Commercial Bank Services
Through Lakeland, the Company offers a broad range of lending, depository, and related financial services
to individuals and small to medium sized businesses located primarily in northern and central New Jersey, the
Hudson Valley region in New York, and surrounding areas. In the lending area, these services include short and
medium term loans, lines of credit, letters of credit, inventory and accounts receivable financing, real estate
construction loans, mortgage loans, small business administration (“SBA”) loans, and merchant credit card
services. In addition to commercial real estate loans, Lakeland makes commercial and industrial loans. These
types of loans can diversify the Company’s exposure in a depressed real estate market. Lakeland’s equipment
financing division provides a solution to small and medium sized companies who prefer to lease equipment over
other financial alternatives. Lakeland’s asset based loan department provides commercial borrowers with another
lending alternative.
Depository products include demand deposits, as well as savings, money market and time accounts. The
Company also offers internet banking, mobile banking, wire transfer and night depository services to the
business community and municipal relationships. In addition, Lakeland offers cash management services, such as
remote capture of deposits and overnight sweep repurchase agreements.
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Consumer Banking
Lakeland also offers a broad range of consumer banking services, including checking accounts, savings
accounts, NOW accounts, money market accounts, certificates of deposit, internet banking, secured and
unsecured loans, consumer installment loans, mortgage loans, and safe deposit services.
Other Services
Investment and advisory services for individuals and businesses are also available. Additionally, as a result
of the merger with Somerset Hills Bancorp in 2013, Lakeland acquired a 50% interest in a New Jersey title
company, Lakeland Title Group LLC, which provides commercial title insurance services.
Competition
Lakeland faces considerable competition in its market areas for deposits and loans from other depository
institutions. Many of Lakeland’s depository institution competitors have substantially greater resources, broader
geographic markets, and higher lending limits than Lakeland and are also able to provide more services and make
greater use of media advertising. In recent years, intense market demands, economic pressures, increased
customer awareness of products and services, and the availability of electronic services have forced banking
institutions to diversify their services and become more cost-effective.
Lakeland also competes with credit unions, brokerage firms, insurance companies, money market mutual
funds, consumer finance companies, mortgage companies and other financial companies, some of which are not
subject to the same degree of regulation and restrictions as Lakeland in attracting deposits and making loans.
Interest rates on deposit accounts, convenience of facilities, products and services, and marketing are all
significant factors in the competition for deposits. Competition for loans comes from other commercial banks,
savings institutions, insurance companies, consumer finance companies, credit unions, mortgage banking firms
and other institutional lenders. Lakeland primarily competes for loan originations through its structuring of loan
transactions and the overall quality of service it provides. Competition is affected by the availability of lendable
funds, general and local economic conditions, interest rates, and other factors that are not readily predictable.
The Company expects that competition will continue in the future.
Concentration
The Company is not dependent on deposits or exposed by loan concentrations to a single customer or a few
customers, the loss of any one or more of which would have a material adverse effect upon the financial
condition of the Company.
Employees
At December 31, 2017, the Company had 621 full-time equivalent employees. None of these employees are
covered by a collective bargaining agreement. The Company considers relations with its employees to be good.
SUPERVISION AND REGULATION
General
The Company is a registered bank holding company under the Federal Bank Holding Company Act of 1956,
as amended (the “Holding Company Act”), and is required to file with the Federal Reserve Board an annual
report and such additional information as the Federal Reserve Board may require pursuant to the Holding
Company Act. The Company is subject to examination by the Federal Reserve Board.
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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.
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
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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:
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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.
• 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.
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•
Financial institutions are prohibited from establishing, maintaining, administering or managing
correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in
any country), and will be subject to certain record keeping obligations with respect to correspondent
accounts of foreign banks.
• Bank regulators are directed to consider a holding company’s effectiveness in combating money
laundering when ruling on Federal Reserve Act and Bank Merger Act applications.
The United States Treasury Department has issued a number of implementing regulations which address
various requirements of the USA PATRIOT Act and are applicable to financial institutions such as Lakeland.
These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and
controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their
customers. Banking agencies have strictly enforced various anti-money laundering and suspicious activity
reporting requirements using formal and informal enforcement tools to cause banks to comply with these
provisions.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (the “SOA”) added new legal requirements for public companies affecting
corporate governance, accounting and corporate reporting, to increase corporate responsibility and to protect
investors.
The SOA addresses, among other matters:
•
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•
•
•
•
•
•
•
•
•
•
audit committees for all reporting companies;
certification of financial statements by the chief executive officer and the chief financial officer;
the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s
securities by directors and senior officers in the twelve month period following initial publication of
any financial statements that later require restatement;
a prohibition on insider trading during pension plan black out periods;
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.
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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:
•
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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:
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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
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the FDIC, in connection with its examination of a state non-member bank, to assess the bank’s record of meeting
the credit needs of its community and to take that record into account in its evaluation of certain applications by
the bank. Under the FDIC’s CRA evaluation system, the FDIC focuses on three tests: (i) a lending test, to
evaluate the institution’s record of making loans in its service areas; (ii) an investment test, to evaluate the
institution’s record of investing in community development projects, affordable housing and programs benefiting
low or moderate income individuals and businesses; and (iii) a service test, to evaluate the institution’s delivery
of services through its branches, ATMs and other offices. The CRA also requires all institutions to make public
disclosure of their CRA ratings. Lakeland Bank received an “outstanding” CRA rating in its most recent
examination.
Securities and Exchange Commission
The common stock of the Company is registered with the SEC under the Exchange Act. As a result, the
Company and its officers, directors, and major stockholders are obligated to file certain reports with the SEC.
The Company is subject to proxy and tender offer rules promulgated pursuant to the Exchange Act. You may
read and copy any document the Company files with the SEC at the SEC’s Public Reference Room at 100 F
Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the
Public Reference Room. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and
information statements, and other information regarding issuers that file electronically with the SEC, such as the
Company.
The Company maintains a website at http://www.lakelandbank.com. The Company makes available on its
website the proxy statements and reports on Forms 8-K, 10-K and 10-Q that it files with the SEC as soon as
reasonably practicable after such material is electronically filed with or furnished to the SEC. Additionally, the
Company has adopted and posted on its website a Code of Ethics that applies to its principal executive officer,
principal financial officer and principal accounting officer. The Company intends to disclose any amendments to
or waivers of the Code of Ethics on its website.
Effect of Government Monetary Policies
The earnings of the Company are and will be affected by domestic economic conditions and the monetary
and fiscal policies of the United States government and its agencies. The monetary policies of the Federal
Reserve Board have had, and will likely continue to have, an important impact on the operating results of
commercial banks through the Board’s power to implement national monetary policy in order to, among other
things, curb inflation or combat a recession. The Federal Reserve Board has a major effect upon the levels of
bank loans, investments and deposits through its open market operations in United States government securities
and through its regulation of, among other things, the discount rate of borrowings of banks and the reserve
requirements against bank deposits. It is not possible to predict the nature and impact of future changes in
monetary fiscal policies.
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
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hearing, that such bank cease and desist from such practice or, as a result of an unrelated practice, require the
bank to limit dividends in the future. The Federal Reserve Board has similar authority with respect to bank
holding companies. In addition, the Federal Reserve Board and the FDIC have issued policy statements which
provide that insured banks and bank holding companies should generally only pay dividends out of current
operating earnings. Regulatory pressures to reclassify and charge off loans and to establish additional loan loss
reserves can have the effect of reducing current operating earnings and thus impacting an institution’s ability to
pay dividends. Further, as described herein, the regulatory authorities have established guidelines with respect to
the maintenance of appropriate levels of capital by a bank or bank holding company under their jurisdiction.
Compliance with the standards set forth in these policy statements and guidelines could limit the amount of
dividends which the Company and Lakeland may pay. Banking institutions that fail to maintain the minimum
capital ratios, or that maintain the requisite minimum capital ratios but do so at a level below the minimum
capital ratios plus the new capital conservation buffer, will face constraints on their ability to pay dividends. See
“Capital Requirements” below.
Capital Requirements
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), each federal
banking agency has promulgated regulations, specifying the levels at which a financial institution would be
considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or
“critically undercapitalized,” and to take certain mandatory and discretionary supervisory actions based on the
capital level of the institution. To qualify to engage in financial activities under the Gramm-Leach-Bliley Act, all
depository institutions must be “well capitalized.” The financial holding company of a bank will be put under
directives to raise its capital levels or divest its activities if the depository institution falls from that level.
In July 2013, the Federal Reserve Board, the FDIC and the Comptroller of the Currency adopted final rules
establishing a new comprehensive capital framework for U.S. banking organizations (the “Basel Rules”). The
Basel Rules implement the Basel Committee’s December 2010 framework, commonly referred to as Basel III,
for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act, as discussed
below. The Basel Rules substantially revise the risk-based capital requirements applicable to bank holding
companies and depository institutions, including Lakeland Bancorp and Lakeland Bank, compared to prior U.S.
risk-based capital rules. The Basel Rules define the components of capital and address other issues affecting the
numerator in banking institutions’ regulatory capital ratios. The Basel Rules also address risk weights and other
issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing risk-
weighting approach, which was derived from Basel I capital accords of the Basel Committee, with a more risk-
sensitive approach based, in part, on the standardized approach in the Basel Committee’s 2004 Basel II capital
accords. The Basel Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove
references to credit ratings from the federal banking agencies’ rules.
The Basel Rules became effective for us on January 1, 2015 (subject to phase-in periods for certain
components).
For bank holding companies and banks like Lakeland Bancorp and Lakeland Bank, January 1, 2015 was the
start date for compliance with the revised minimum regulatory capital ratios and for determining risk-weighted
assets under what the Basel Rules call a “standardized approach.” As of January 1, 2015, Lakeland Bancorp and
Lakeland Bank were required to maintain the following minimum capital ratios, expressed as a percentage of
risk-weighted assets:
• Common Equity Tier 1 Capital Ratio of 4.5% (this is referred to as the “CET1”);
• Tier 1 Capital Ratio (CET1 capital plus “Additional Tier 1 capital”) of 6.0%; and
• Total Capital Ratio (Tier 1 capital plus Tier 2 capital) of 8.0%.
In addition, Lakeland Bancorp and Lakeland Bank are subject to a leverage ratio of 4.0% (calculated as
Tier 1 capital to average consolidated assets as reported on the consolidated financial statements).
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The Basel Rules also require a “capital conservation buffer.” When fully phased in on January 1, 2019,
Lakeland Bancorp and Lakeland Bank will be required to maintain a 2.5% capital conservation buffer, in
addition to the minimum capital ratios described above, effectively resulting in the following minimum capital
ratios on January 1, 2019:
• CET1 of 7.0%;
• Tier 1 Capital Ratio of 8.5%; and
• Total Capital Ratio of 10.5%.
The purpose of the capital conservation buffer is to ensure that banking organizations conserve capital when
it is needed most, allowing them to weather periods of economic stress. Banking institutions with a CET1, Tier 1
Capital Ratio and Total Capital Ratio above the minimum capital ratios but below the minimum capital ratios
plus the capital conservation buffer will face constraints on their ability to pay dividends, repurchase equity and
pay discretionary bonuses to executive officers, based on the amount of the shortfall. The implementation of the
capital conservation buffer began on January 1, 2016 at the 0.625% level, and increases by 0.625% on each
subsequent January 1 until it reaches 2.5% on January 1, 2019. Accordingly, as of January 1, 2018, the minimum
capital ratios applicable to Lakeland Bancorp and Lakeland Bank are 6.375% for CET1, 7.875% for Tier 1
Capital and 9.875% for Total Capital.
The Basel Rules also adopted a “countercyclical capital buffer,” which is not applicable to Lakeland
Bancorp or Lakeland Bank. That buffer is applicable only to “advanced approaches banking organizations,”
which generally are those with consolidated total assets of at least $250 billion.
The Basel Rules provide for several deductions from and adjustments to CET1, which were phased in as of
January 1, 2018. For example, mortgage servicing rights, deferred tax assets dependent upon future taxable
income and significant investments in common equity issued by nonconsolidated financial entities must be
deducted from CET1 to the extent that any one of those categories exceeds 10% of CET1 or all such categories in
the aggregate exceed 15% of CET1.
Under prior capital standards, the effects of accumulated other comprehensive income items included in
capital were excluded for the purposes of determining regulatory capital ratios. Under the Basel Rules, the effects
of certain accumulated other comprehensive income items are not excluded; however, banking organizations
such as Lakeland Bancorp and Lakeland Bank were permitted to make a one-time permanent election to continue
to exclude these items effective as of January 1, 2015. Lakeland Bancorp and Lakeland Bank made such an
election to continue to exclude these items.
While the Basel Rules generally require the phase-out of non-qualifying capital instruments such as trust
preferred securities and cumulative perpetual preferred stock, holding companies with less than $15 billion in
total consolidated assets as of December 31, 2009, such as Lakeland Bancorp, may permanently include non-
qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in
Additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.
The Basel Rules prescribe a standardized approach for calculating risk-weighted assets that expands the
risk-weighting categories from the previous four categories (0%, 20%, 50% and 100%) to a much larger and
more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for
U.S. Government and agency securities, to 600% for certain equity exposures, and resulting in higher risk
weights for a variety of asset categories. In addition, the Basel Rules provide more advantageous risk weights for
derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increase the
scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.
Consistent with the Dodd-Frank Act, the Basel Rules adopt alternatives to credit ratings for calculating the
risk-weighting for certain assets.
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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. When the capital conservation buffer is fully phased in, the capital
ratios applicable to depository institutions under the Basel Rules will exceed the ratios to be considered well-
capitalized under the prompt corrective action regulations.
As of December 31, 2017, Lakeland Bancorp and Lakeland Bank met all capital requirements under the
Basel Rules as then in effect, and the Company believes that as of such date, it would meet all capital
requirements under the Basel Rules on a fully phased-in basis, if the full phase-in of such requirements were
currently in effect.
Volcker Rule
In December 2013, the Federal Reserve Board, the FDIC and several other governmental regulatory
agencies issued final rules to implement the Volcker Rule contained in section 619 of the Dodd-Frank Act,
generally to become effective on July 21, 2015. The Federal Reserve extended the Volcker Rule’s conformance
period until July 21, 2017. In August 2017, the U.S. Comptroller of the Currency, one of the federal bank
regulators, announced he was soliciting public comment on how the Volcker Rule should be revised to better
accomplish its purposes. The Volcker Rule prohibits an insured depository institution and its affiliates from
(i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain types of funds (defined as
“Covered Funds”) subject to certain limited exceptions. The Company does not own any interests in any hedge
funds or private equity funds that are designated “Covered Funds” under the Volcker Rule.
Federal Deposit Insurance and Premiums
Lakeland’s deposits are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC
and are subject to deposit insurance assessments to maintain the DIF. As a result of the Dodd-Frank Act, the
basic federal deposit insurance limit was permanently increased to at least $250,000.
In November 2010, the FDIC approved a rule to change the assessment base from adjusted domestic
deposits to average consolidated total assets minus average tangible equity, as required by the Dodd-Frank Act.
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Since the new base is larger than the current base, the FDIC’s rule lowered the total base assessment rates to
between 2.5 and 9 basis points for banks in the lowest risk category, and 30 to 45 basis points for banks in the
highest risk category. The Company paid $1.6 million in total FDIC assessments in 2017 and $2.2 million in
2016.
Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio (“DRR”),
that is, the ratio of the DIF to insured deposits. The FDIC has adopted a plan under which it will meet the
statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act. The
Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the
increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%. In March 2016,
the FDIC adopted a rule that imposes a surcharge on the quarterly assessments of insured depository institutions
with total consolidated assets of $10 billion or more. The surcharge equals an annual rate of 4.5 basis points
applied to the institution’s assessment base, with certain adjustments.
In addition to deposit insurance assessments, the FDIC is required to continue to collect from institutions
payments for the servicing of obligations of the Financing Corporation (“FICO”) that were issued in connection
with the resolution of savings and loan associations, so long as such obligations remain outstanding. Lakeland
paid a FICO premium of approximately $243,000 in 2017 and expects to pay a similar amount in 2018.
The Dodd-Frank Act
The Dodd-Frank Act, which was signed into law on July 21, 2010, significantly changed the bank regulatory
landscape and has impacted and will continue to have a broad impact on the financial services industry as a result
of significant regulatory and compliance changes, including, among other things, (i) enhanced resolution
authority over troubled and failing banks and their holding companies; (ii) increased capital and liquidity
requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for
federal deposit insurance; and (v) numerous other provisions designed to improve supervision and oversight of,
and strengthening safety and soundness for, the financial services sector. Generally, the Dodd-Frank Act became
effective the day after it was signed into law, but different effective dates apply to specific sections of the law.
The following is a summary of certain provisions of the Dodd-Frank Act:
• 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.”
• 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.”
•
•
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.
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.
• Enhanced Lending Limits. The Dodd-Frank Act strengthened the previous limits on a depository
institution’s credit exposure to one borrower which limited a depository institution’s ability to extend
credit to one person (or group of related persons) in an amount exceeding certain thresholds. The
Dodd-Frank Act expanded the scope of these restrictions to include credit exposure arising from
derivative transactions, repurchase agreements, and securities lending and borrowing transactions.
• Compensation Practices. The Dodd-Frank Act provides that the appropriate federal regulators must
establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank
holding company or other “covered financial institution” that provides an insider or other employee
with “excessive compensation” or compensation that gives rise to excessive risk or could lead to a
material financial loss to such firm. In June 2010, prior to the Dodd-Frank Act, the bank regulatory
agencies promulgated the Interagency Guidance on Sound Incentive Compensation Policies, which sets
forth three key principles concerning incentive compensation arrangements:
•
•
•
such arrangements should provide employees incentives that balance risk and financial results in a
manner that does not encourage employees to expose the financial institution to imprudent risks;
such arrangements should be compatible with effective controls and risk management; and
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.
•
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.
• De Novo Banking. The Dodd-Frank Act allows de novo interstate branching by banks.
Final rules have been issued which implement the ability-to-repay and qualified mortgage (QM) provisions
of the Truth in Lending Act, as amended by the Dodd-Frank Act (the “QM Rule”). The QM Rule impacted our
mortgage originations when it became effective in January 2014. The ability-to-repay provision requires creditors
to make reasonable, good faith determinations that borrowers are able to repay their mortgages before extending
the credit based on a number of factors and consideration of financial information about the borrower from
reasonably reliable third-party documents. Under the Dodd-Frank Act and the QM Rule, loans meeting the
definition of “qualified mortgage” are entitled to a presumption that the lender satisfied the ability-to-repay
requirements. The presumption is a conclusive presumption/safe harbor for prime loans meeting the
QM requirements, and a rebuttable presumption for higher-priced/subprime loans meeting the QM requirements.
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The definition of a “qualified mortgage” incorporates the statutory requirements, such as not allowing negative
amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43 percent debt-to-
income ratio for borrowers if the loan is to meet the QM definition, though some mortgages that meet GSE, FHA
and VA underwriting and eligibility guidelines may, for a period not to exceed seven years, meet the QM
definition without being subject to the 43 percent debt-to-income limits. We cannot assure you that existing or
future regulations will not have a material adverse impact on our residential mortgage loan business or the
housing markets in which we participate.
In addition, provisions in the Dodd-Frank Act which have revised the capital requirements of the Company
and the Bank could require the Company and the Bank to seek additional sources of capital in the future. See
“Capital Requirements.”
The Dodd-Frank Act contains numerous other provisions affecting financial institutions of all types, many
of which may have an impact on our operating environment in substantial and unpredictable ways. Consequently,
the Dodd-Frank Act is likely to continue to increase our cost of doing business, it may limit or expand our
permissible activities, and it may affect the competitive balance within our industry and market areas.
Proposed Legislation
From time to time proposals are made in the United States Congress, the New Jersey Legislature, and before
various bank regulatory authorities, which would alter the powers of, and place restrictions on, different types of
banking organizations. It is impossible to predict the impact, if any, of potential legislative trends on the business
of the Company and its subsidiaries.
In accordance with federal law providing for deregulation of interest on all deposits, banks and thrift
organizations are now unrestricted by law or regulation from paying interest at any rate on most time deposits. It
is not clear whether deregulation and other pending changes in certain aspects of the banking industry will result
in further increases in the cost of funds in relation to prevailing lending rates.
ITEM 1A - Risk Factors.
Our business, financial condition, operating results and cash flows can be affected by a number of factors,
including, but not limited to, those set forth below, any one of which could cause our actual results to vary
materially from recent results or from our anticipated future results.
Credit Risks
Our allowance for loan and lease losses may not be adequate to cover actual losses.
Like all commercial banks, Lakeland Bank maintains an allowance for loan and lease losses to provide for
loan and lease defaults and non-performance. If our allowance for loan and lease losses is not adequate to cover
actual loan and lease losses, we may be required to significantly increase future provisions for loan and lease
losses, which could materially and adversely affect our operating results. Our allowance for loan and lease losses
is determined by analyzing historical loan and lease losses, current trends in delinquencies and charge-offs, plans
for problem loan and lease resolution, the opinions of our regulators, changes in the size and composition of the
loan and lease portfolio and industry information. We also consider the possible effects of economic events,
which are difficult to predict. The amount of future losses is affected by changes in economic, operating and
other conditions, including changes in interest rates, many of which are beyond our control. These losses may
exceed our current estimates. Federal regulatory agencies, as an integral part of their examination process, review
our loans and the allowance for loan and lease losses. While we believe that our allowance for loan and lease
losses in relation to our current loan portfolio is adequate to cover current losses, we cannot assure you that we
will not need to increase our allowance for loan and lease losses or that the regulators will not require us to
increase this allowance. Future increases in our allowance for loan and lease losses could materially and
adversely affect our earnings and profitability.
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A change in accounting standards could also cause an increase in Lakeland’s allowance for loan and lease
losses. In June 2016, the FASB issued an accounting standards update pertaining to the measurement of credit
losses on financial instruments. This update requires the measurement of all expected credit losses for financial
instruments held at the reporting date based on historical experience, current conditions, and reasonable and
supportable forecasts. Financial institutions, such as Lakeland, and other organizations will now use forward-
looking information to better inform their credit loss estimates. This update will be effective for fiscal years and
interim periods beginning after December 15, 2019. While Lakeland is currently evaluating the impact that this
standard could have on its financial statements, the adoption of this update is likely to cause an increase in
Lakeland’s allowance for loan and lease losses and a reduction in capital.
The concentration of our commercial real estate loan portfolio may subject us to increased regulatory
analysis, or otherwise adversely affect our business and operating results.
The FDIC, the Federal Reserve and the OCC have promulgated joint guidance on sound risk management
practices for financial institutions with concentrations in commercial real estate (CRE) lending. The 2006
interagency guidance did not establish specific CRE lending limits or caps; rather, the guidance set forth
supervisory criteria to serve as levels of bank CRE concentration above which certain financial institutions may
be identified for further supervisory analysis. According to the guidelines, institutions could be subject to further
analysis if (i) their loans for construction, land, and land development (CLD) represent 100% or more of the
institution’s total risk-based capital, or (ii) their total non-owner-occupied CRE loans (including CLD loans), as
defined, represent 300% or more of the institution’s total risk-based capital, and further, that the institution’s
non-owner-occupied CRE loan portfolio has increased by 50% or more during the previous 36 months.
The Bank’s total reported CLD loans represented 47% of total risk-based capital at December 31, 2017. The
Bank’s total reported CRE loans to total capital was 404% at December 31, 2017, while the Bank’s CRE
portfolio has increased by 127% over the preceding 36 months. The growth rate of the preceding 36 months
included the acquisitions of Pascack Community Bank and Harmony Bank.
The Bank’s CRE portfolio is segmented and spread among various property types including retail, office,
multi-family, mixed use, industrial, hospitality, healthcare, special use and residential and commercial
construction. Management regularly reviews and evaluates its CRE portfolio, including concentrations within the
various property types based on current market conditions and risk appetite as well as by utilizing stress testing
on material exposures and believes its underwriting practices are sound.
There is no assurance that in the future we will not continue to exceed the levels set forth in the guidelines.
Furthermore, the concentration of our commercial real estate portfolio could materially and adversely affect our
business and operating results, including our overall profitability, and/or adversely impact the growth of our
business, including the growth and composition of our overall loan portfolio.
Our mortgage banking operations expose us to risks that are different than the risks associated with our
retail banking operations.
The Bank’s mortgage banking operations expose us to risks that are different than our retail banking
operations. Our mortgage banking operations are dependent upon the level of demand for residential mortgages.
During higher and rising interest rate environments, the level of refinancing activity tends to decline, which can
lead to reduced volumes of business and lower revenues that may not exceed our fixed costs to run the business.
In addition, mortgages sold to third-party investors are typically subject to certain repurchase provisions related
to borrower refinancing, defaults, fraud or other reasons stipulated in the applicable third-party investor
agreements. If the fair value of a loan when repurchased is less than the fair value when sold, a bank may be
required to charge such shortfall to earnings.
In addition, the “ability to repay” and “Qualified Mortgage” rules promulgated as required by the Dodd-
Frank Act, may expose the Company to greater losses, reduced volume and litigation related expenses and delays
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in taking title to collateral real estate, if these loans do not perform and borrowers challenge whether the rules
were satisfied when originating the loans.
We are subject to various lending and other economic risks that could adversely affect our results of
operations and financial condition.
Economic, political and market conditions, trends in industry and finance, legislative and regulatory
changes, changes in governmental monetary and fiscal policies and inflation affect our business. These factors
are beyond our control. A deterioration in economic conditions, particularly in the markets we lend in, could
have the following consequences, any of which could materially adversely affect our business:
•
•
•
•
loan and lease 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, could adversely affect our business. A
decline in real estate values in New Jersey would reduce our ability to recover on defaulted loans by selling the
underlying real estate, which would increase the possibility that we may suffer losses on defaulted loans.
We may suffer losses in our loan portfolio despite our underwriting practices.
We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices.
Although we believe that our underwriting criteria are appropriate for the various kinds of loans that we make,
we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set
aside as reserves in our allowance for loan and lease losses.
Liquidity and Interest Rate Risks
A decrease in our ability to borrow funds could adversely affect our liquidity.
Our ability to obtain funding from the Federal Home Loan Bank (“FHLB”) or through our overnight federal
funds lines with other banks could be negatively affected if we experienced a substantial deterioration in our
financial condition or if such funding became restricted due to deterioration in the financial markets. While we
have a contingency funds management plan to address such a situation if it were to occur (such plan includes
deposit promotions, the sale of securities and the curtailment of loan growth, if necessary), a significant decrease
in our ability to borrow funds could adversely affect our liquidity.
Public funds deposits are an important source of funds for us and a reduced level of those deposits may
hurt our profits.
Public funds deposits are a significant source of funds for our lending and investment activities. The
Company’s public funds deposits consist of deposits from local government entities, domiciled in the state of
New Jersey, such as school districts, counties and other municipalities, and are collateralized by letters of credit
from the FHLB and investment securities. Given our use of these high-average balance public funds deposits as a
source of funds, our inability to retain such funds could adversely affect our liquidity. In addition, Governor Phil
Murphy of New Jersey has proposed the creation of a state-owned bank which would accept public revenues to
be invested in New Jersey. A bill was introduced in the New Jersey legislature in January 2018 that calls for the
establishment of such a state-run bank. While no assurance can be provided that such a bank will be created, to
the extent that a state-run bank is established and accepts public revenues, the amount of the Company’s public
funds deposits could be reduced, which could adversely affect our liquidity.
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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
actions taken or statements made by the Federal Reserve Board.
Both increases and decreases in the interest rate environment may reduce our profits. We expect that we will
continue to realize income from the difference or “spread” between the interest we earn on loans, securities and
other interest-earning assets, and the interest we pay on deposits, borrowings and other interest-bearing liabilities.
Our net interest spreads are affected by the differences between the maturities and repricing characteristics of our
interest-earning assets and interest-bearing liabilities. Our interest-earning assets may not reprice as slowly or
rapidly as our interest-bearing liabilities. Changes in market interest rates could materially and adversely affect
our net interest spread, asset quality, levels of prepayments, cash flows, market value of our securities portfolio,
loan and deposit growth, costs and yields on loans and deposits and our overall profitability. Competition for our
deposits has increased significantly as a result of the continuing low interest rate environment.
Declines in value may adversely impact our investment portfolio.
As of December 31, 2017, the Company had approximately $646.1 million and $139.7 million in available
for sale and held to maturity investment securities, respectively. We may be required to record impairment
charges on our investment securities if they suffer a decline in value that is considered other-than-temporary.
Numerous factors, including lack of liquidity for sales of certain investment securities, absence of reliable pricing
information for investment securities, adverse changes in business climate, adverse actions by regulators, or
unanticipated changes in the competitive environment could have a negative effect on our investment portfolio in
future periods. If an impairment charge is significant enough it could affect the ability of Lakeland to upstream
dividends to the Company, which could have a material adverse effect on our liquidity and our ability to pay
dividends to shareholders and could also negatively impact our regulatory capital ratios.
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Information Technology or Cybersecurity Risks
The occurrence of any failure, breach, or interruption in service involving our systems or those of our
service providers could damage our reputation, cause losses, increase our expenses, and result in a loss of
customers, an increase in regulatory scrutiny, or expose us to civil litigation and possibly financial liability,
any of which could adversely impact our financial condition, results of operations and the market price of
our stock.
In the ordinary course of business, we rely on electronic communications and information systems to
conduct our operations and to store sensitive data. Any failure, interruption or breach in security of these systems
could result in significant disruption to our operations. Information security breaches and cybersecurity-related
incidents may include, but are not limited to, attempts to access information, including customer and company
information, malicious code, computer viruses and denial of service attacks that could result in unauthorized
access, misuse, loss or destruction of data (including confidential customer information), account takeovers,
unavailability of service or other events. These types of threats may derive from human error, fraud or malice on
the part of external or internal parties, or may result from accidental technological failure. Further, to access our
products and services our customers may use computers and mobile devices that are beyond our security control
systems. Our technologies, systems, networks and software, and those of other financial institutions have been,
and are likely to continue to be, the target of cybersecurity threats and attacks, which may range from
uncoordinated individual attempts to sophisticated and targeted measures directed at us. The risk of a security
breach or disruption, particularly through cyber attack or cyber intrusion, has increased as the number, intensity
and sophistication of attempted attacks and intrusions from around the world have increased.
Our business requires the collection and retention of large volumes of customer data, including personally
identifiable information in various information systems that we maintain and in those maintained by third parties
with whom we contract to provide data services. We also maintain important internal company data such as
personally identifiable information about our 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
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breaches may not be covered under our cyber insurance coverage. A security breach or other significant
disruption of our information systems or those related to our customers, merchants and our third party vendors,
including as a result of cyber attacks, could (i) disrupt the proper functioning of our networks and systems and
therefore our operations and/or those of certain of our customers; (ii) result in the unauthorized access to, and
destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of
ours or our customers; (iii) result in a violation of applicable privacy, data breach and other laws, subjecting us to
additional regulatory scrutiny and expose the us to civil litigation, governmental fines and possible financial
liability; (iv) require significant management attention and resources to remedy the damages that result; or
(v) harm our reputation or cause a decrease in the number of customers that choose to do business with us. The
occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and
results of operations.
The inability to stay current with technological change could adversely affect our business model.
Financial institutions continually are required to maintain and upgrade technology in order to provide the
most current products and services to their customers, as well as create operational efficiencies. This technology
requires personnel resources, as well as significant costs to implement. Failure to successfully implement
technological change could adversely affect the Company’s business, results of operations and financial
condition.
Our operations rely on certain third party vendors.
We rely on certain external vendors to provide products and services necessary to maintain our day-to-day
operations. These third party vendors are sources of operational and informational security risk to us, including
risks associated with operational errors, information system interruptions or breaches and unauthorized
disclosures of sensitive or confidential client or customer information. If these vendors encounter any of these
issues, or if we have difficulty communicating with them, we could be exposed to disruption of operations, loss
of service or connectivity to customers, reputational damage, and litigation risk that could have a material
adverse effect on our business and, in turn, our financial condition and results of operations.
In addition, our operations are exposed to risk that these vendors will not perform in accordance with the
contracted arrangements under service level agreements. While we have selected these external vendors
carefully, we do not control their actions. The failure of an external vendor to perform in accordance with the
contracted arrangements under service level agreements, because of changes in the vendor’s organizational
structure, financial condition, support for existing products and services or strategic focus or for any other reason,
could be disruptive to our operations, which could have a material adverse effect on our business and, in turn, our
financial condition and results of operations. Replacing these external vendors could also entail significant delay
and expense.
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
-18-
thereunder are likely to continue to impose additional administrative and regulatory burdens that will obligate us
to continue to incur additional expenses and will continue to adversely affect our margins and profitability. For
example, the elimination of the prohibition on the payment of interest on demand deposits could materially
increase our interest expense, depending on our competitors’ responses. Provisions in the legislation mandating
modification of the capital requirements applicable to the Company and the Bank, and the resulting adoption by
federal regulators of the new capital requirements described under “Business-Supervision and Regulation-Capital
Requirements,” could require the Company and the Bank to seek additional sources of capital in the future. More
stringent consumer protection regulations could materially and adversely affect our profitability.
President Donald Trump has stated that he intends to relax financial regulations, including various
provisions of the Dodd-Frank Act and the rules implementing those provisions. The nature and extent of future
legislative and regulatory changes affecting financial institutions remains very unpredictable at this time.
The Company and the Bank are subject to more stringent capital and liquidity requirements.
The Dodd-Frank Act also imposes more stringent capital requirements on bank holding companies such as
Lakeland Bancorp by, among other things, imposing leverage ratios on bank holding companies and prohibiting
new trust preferred issuances from counting as Tier I capital. These restrictions will limit our future capital
strategies. Under the Dodd-Frank Act, our currently outstanding trust preferred securities will continue to count
as Tier I capital, but we will be unable to issue replacement or additional trust preferred securities which would
count as Tier I capital.
As further described above under “Business-Supervision and Regulation-Capital Requirements,” we were
required to meet new capital requirements beginning on January 1, 2015. In addition, beginning in 2016, banks
and bank holding companies were required to maintain a capital conservation buffer on top of minimum risk-
weighted asset ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the
0.625% level, and increases by 0.625% on each subsequent January 1 until it reaches 2.5% when fully phased in
on January 1, 2019. Banking institutions which do not maintain capital in excess of the capital conservation
buffer face constraints on the payment of dividends, equity repurchases and compensation based on the amount
of the shortfall. Accordingly, if the Bank fails to maintain the applicable minimum capital ratios and the capital
conservation buffer, distributions to Lakeland Bancorp may be prohibited or limited.
Future increases in minimum capital requirements could adversely affect our net income. Furthermore, our
failure to comply with the minimum capital requirements could result in our regulators taking formal or informal
actions against us which could restrict our future growth or operations.
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
-19-
sanctions by regulatory agencies, civil money penalties and/or reputational damage, which could have a material
adverse effect on our business, financial condition and results of operations.
Lakeland’s ability to pay dividends is subject to regulatory limitations which, to the extent that our
holding company requires such dividends in the future, may affect our holding company’s ability to pay its
obligations and pay dividends to shareholders.
As a bank holding company, the Company is a separate legal entity from Lakeland Bank and its
subsidiaries, and we do not have significant operations of our own. We currently depend on Lakeland Bank’s
cash and liquidity to pay our operating expenses and dividends to shareholders. The availability of dividends
from Lakeland Bank is limited by various statutes and regulations. The inability of the Company to receive
dividends from Lakeland Bank could adversely affect our financial condition, results of operations, cash flows
and prospects and the Company’s ability to pay dividends.
In addition, as described under “Business-Supervision and Regulation-Capital Requirements,” banks and
bank holding companies are required to maintain a capital conservation buffer on top of minimum risk-weighted
asset ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level,
and increases by 0.625% on each subsequent January 1 until it reaches 2.5% when fully phased in on January 1,
2019. Banking institutions which do not maintain capital in excess of the capital conservation buffer will face
constraints on the payment of dividends, equity repurchases and compensation based on the amount of the
shortfall. Accordingly, if Lakeland Bank fails to maintain the applicable minimum capital ratios and the capital
conservation buffer, distributions to Lakeland Bancorp may be prohibited or limited.
Strategic and External Risks
The effect of the Tax Cuts and Jobs Act and future tax reform is uncertain and may adversely affect our
business.
The current Presidential administration and U.S. Congress passed significant reform of the Internal Revenue
Code, known as the Tax Cuts and Jobs Act of 2017 (“the Tax Act”). We have completed the process of
determining the accounting under ASC Topic 740, Income Taxes, for the income tax effects of the Tax Cuts and
Jobs Act, as discussed in the related notes to the consolidated financial statements. The Company has therefore
disclosed the impact that the Tax Act will have on its financial position and the results of operations. Technical
corrections or other forthcoming guidance could change how we interpret provisions of the Tax Act, which may
impact our effective tax rate and could affect our deferred tax assets, tax positions and/or our tax liabilities.
While the decline in the federal corporate tax rate from 35% to 21% will lower the Company’s income tax
expense as a percent of its taxable income in 2018, other provisions of the Tax Act or future tax reform could
negatively impact certain balance sheet and tax positions taken by the Company. The Tax Act imposes higher
limitations on the deductibility of interest and property tax expenses which may adversely impact the property
values of real estate used to secure loans and create an additional tax burden for many borrowers, particularly in
high tax jurisdictions such as the State of New Jersey where the Company operates. These and other federal tax
changes could significantly impact the financial health of our customers, potentially resulting, in among other
things, an inability to repay loans or maintain deposits at the Bank. Any negative financial impact to our
customers resulting from tax reform could adversely impact our financial condition and earnings.
The ultimate impact of any tax reform on our business, customers and shareholders is uncertain and could
be adverse.
Severe weather, acts of terrorism and other external events could impact our ability to conduct business.
Weather-related events have adversely impacted our market area in recent years, especially areas located
near coastal waters and flood prone areas. Such events that may cause significant flooding and other storm-
-20-
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 review our goodwill at least annually. Our valuation methodology for assessing impairment requires
management to make judgments and assumptions based on historical experience and to rely on projections of
future operating performance. We operate in a competitive environment and projections of future operating
results and cash flows may vary significantly from actual results. Additionally, if our analysis results in an
impairment to our goodwill, we would be required to record a non-cash charge to earnings in our financial
statements during the period in which such impairment is determined to exist. Any such charge could have a
material adverse effect on our results of operations and our stock price.
-21-
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.
-22-
ITEM 1B - Unresolved Staff Comments.
Not Applicable.
ITEM 2 - Properties.
At December 31, 2017, Lakeland Bank conducted business through 53 branch offices located throughout
Bergen, Essex, Morris, Ocean, Passaic, Somerset, Sussex, and Union counties in New Jersey and also including
one branch in Highland Mills, New York. Lakeland Bank also operates six New Jersey regional commercial
lending centers in Bernardsville, Jackson, Montville, Newton, Teaneck and Waldwick; and one in New York to
serve the Hudson Valley region. Lakeland also has a commercial loan production office serving Middlesex and
Monmouth counties in New Jersey. The Company’s principal office is located at 250 Oak Ridge Road, Oak
Ridge, New Jersey 07438.
The aggregate net book value of premises and equipment was $50.3 million at December 31, 2017. As of
December 31, 2017, 30 of the Company’s facilities were owned and 32 were leased for various terms.
ITEM 3 - Legal Proceedings.
There are no pending legal proceedings involving the Company or Lakeland other than those arising in the
normal course of business. Management does not anticipate that the potential liability, if any, arising out of such
legal proceedings will have a material effect on the financial condition or results of operations of the Company
and Lakeland on a consolidated basis.
ITEM 3A - Executive Officers of the Registrant.
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
Thomas J. Shara
Age 60
Officer of the
Company Since
2008
Position with the Company, its Subsidiary
Banks, and Business Experience
President and CEO of the Company and the Bank
(April 2008 – Present); President and Chief Credit
Officer (May 2007 – April 2008) and Executive Vice
President and Senior Commercial Banking Officer
(February 2006 – May 2007), TD Banknorth, N.A.’s
Mid-Atlantic Division.
Thomas Splaine
Age 52
May 2016
Executive Vice President and Chief Financial Officer of
the Company and the Bank (March 2017 – Present); First
Senior Vice President and Chief Accounting Officer of
the Company and the Bank (May 2016 – March 2017);
Senior Vice President, Financial Planning and Analysis
and Investor Relations of Investors Bancorp, Inc.
(January 2015 – December 2015); Senior Vice President
and Chief Financial Officer of Investors Bancorp, Inc.
(2008 – 2015).
-23-
Name and Age
Ronald E. Schwarz
Age 63
Officer of the
Company Since
2009
Position with the Company, its Subsidiary
Banks, and Business Experience
Senior Executive Vice President and Chief Operating
Officer of the Company and the Bank (January 2017 –
Present); Senior Executive Vice President and Chief
Revenue Officer of the Company and the Bank (January
2016 – January 2017); Executive Vice President and
Chief Retail Officer of the Company and the Bank (June
2009 – December 2015); Executive Vice President and
Market Executive of Sovereign Bank (June 2006 –
June 2009).
Ellen Lalwani
Age 54
January 2018 Executive Vice President and Chief Retail Officer of the
Company and the Bank (January 2018 – Present); Senior
Vice President and Director of Retail Sales of the Bank
(August 2008 – January 2018).
Timothy J. Matteson, Esq.
Age 48
2008
James M. Nigro
Age 50
March 2016
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).
Executive Vice President, Chief Risk Officer of the
Company (March 2016 – Present); Senior Vice President,
Credit Risk Manager of The Provident Bank
(December 2013 – March 2016); Senior Vice-President,
Commercial Lending of Lakeland Bank (May 2013 –
December 2013); Executive Vice President, Chief
Lending Officer of Somerset Hills Bank (July 2001 –
May 2013).
John F. Rath, III
Age 59
January 2018 Executive Vice President and Chief Lending Officer of
the Company and the Bank (January 2018 – Present);
First Senior Vice-President, Lending Group Manager of
the Company (January 2016 – January 2018); Senior
Vice-President, Commercial Lending of the Company
(March 2015- January 2016); Senior Vice-President,
Lending Group Manager of TD Bank (August 1998 –
March 2015).
ITEM 4 - Mine Safety Disclosures.
Not applicable.
-24-
PART II
Item 5 - Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
Shares of the common stock of Lakeland Bancorp, Inc. have been traded under the symbol “LBAI” on the
NASDAQ Global Select Market (or the NASDAQ National Market) since February 22, 2000 and in the over the
counter market prior to that date. As of December 31, 2017, there were approximately 3,185 shareholders of
record of the common stock. The following table sets forth the range of the high and low daily closing prices of
the common stock as provided by NASDAQ and dividends declared for the periods presented.
Year Ended December 31, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$20.75
20.35
20.40
21.65
$18.00
18.40
17.65
19.05
High
Low
Dividends
Declared
$0.095
0.100
0.100
0.100
Dividends
Declared
$11.62
11.76
14.04
19.75
$ 9.81
10.26
11.14
13.20
$0.085
0.095
0.095
0.095
Dividends on the Company’s common stock are within the discretion of the Board of Directors of the
Company and are dependent upon various factors, including the future earnings and financial condition of the
Company and Lakeland and bank regulatory policies.
The Bank Holding Company Act of 1956 restricts the amount of dividends the Company can pay.
Accordingly, dividends should generally only be paid out of current earnings, as defined.
The New Jersey Banking Act of 1948 restricts the amount of dividends paid on the capital stock of New
Jersey chartered banks. Accordingly, no dividends shall be paid by such banks on their capital stock unless,
following the payment of such dividends, the capital stock of the bank will be unimpaired and the bank will have
a surplus of not less than 50% of its capital stock, or, if not, the payment of such dividend will not reduce the
surplus of the bank. Under this limitation, approximately $507.9 million was available for the payment of
dividends from Lakeland Bank to the Company as of December 31, 2017.
Capital guidelines and other regulatory requirements may further limit the Company’s and Lakeland’s
ability to pay dividends. See “Item 1 – Business – Supervision and Regulation – Dividend Restrictions” and
“– Capital Requirements.”
-25-
The following chart compares the Company’s cumulative total shareholder return (on a dividend reinvested
basis) over the past five years commencing December 31, 2012 and ending December 31, 2017 with the
NASDAQ Market Index and the Peer Group Index. The Peer Group Index is the Zacks Regional Northeast Banks
Index, which consists of 95 Regional Northeast Banks.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Assumes Initial Investment of $100
December 2017
300.00
250.00
200.00
150.00
100.00
50.00
0.00
2012
2013
2014
2015
2016
2017
LAKELAND BANCORP, INC.
NASDAQ MARKET INDEX
REGIONAL NORTHEAST BANKS
Company/Market/Peer Group
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
Lakeland Bancorp, Inc.
NASDAQ Market Index
Regional Northeast Banks
100.00
100.00
100.00
124.93
140.12
127.19
127.80
160.78
137.22
132.78
171.97
142.90
227.04
187.22
198.36
228.75
242.71
206.24
-26-
Item 6 - Selected Financial Data.
SELECTED CONSOLIDATED FINANCIAL DATA
The following should be read in conjunction with Management’s Discussion and Analysis of Financial
Condition and Results of Operations and the Company’s consolidated financial statements included in Items 7
and 8 of this report. The selective financial data set forth below has been derived from the Company’s audited
consolidated financial statements.
At or for the Years Ended December 31,
2015
2014
2016
2017
2013
Income Statement
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Noninterest income excluding gains on investment securities and gain on debt
extinguishment
Gains on sales of investment securities
Gain on early debt extinguishment
Merger related expenses
Long-term debt prepayment fee
Noninterest expenses
Income before income taxes
Income tax provision
Net income
Per-Share Data (1)
Weighted average shares outstanding:
Basic
Diluted
Earnings per share:
Basic
Diluted
Cash dividend per common share
Book value per common share
Tangible book value per common share (2)
Balance Sheet
Investment securities available for sale and other (5)
Investment securities held to maturity
Loans and leases, net of deferred fees
Goodwill and other identifiable intangible assets
Total assets
Total deposits
Total core deposits (3)
Term borrowings
Total stockholders’ equity
Performance Ratios
Return on average assets
Return on average tangible common equity (2)
Return on average equity
Efficiency ratio (2)(4)
Net interest margin (tax equivalent basis)
Loans to deposits
Capital Ratios
Common equity to asset ratio
Tangible common equity to tangible assets (2)
Tier 1 leverage ratio (6)
Tier 1 risk-based capital ratio (6)
Total risk-based capital ratio (6)
CET1 ratio (6)
(in thousands, except per share data)
$ 190,204 $ 163,296 $ 127,514 $ 122,503 $ 114,199
9,657
24,966
10,874
17,647
8,937
165,238
6,090
145,649
4,223
116,640
1,942
113,566
5,865
104,542
9,343
22,911
2,524
—
—
2,828
101,706
80,049
27,469
20,960
370
—
4,103
—
95,814
62,839
21,321
19,090
241
1,830
1,152
2,407
83,652
48,648
16,167
17,720
2
—
—
—
79,135
46,288
15,159
18,925
839
1,197
2,834
1,209
74,698
37,419
12,450
$
52,580 $
41,518 $
32,481 $
31,129 $
24,969
47,438
47,674
42,912
43,114
37,844
37,993
37,749
37,869
34,742
34,902
$
$
$
$
$
1.10 $
1.09 $
0.40 $
12.31 $
9.38 $
0.96 $
0.95 $
0.37 $
11.65 $
8.70 $
0.85 $
0.85 $
0.33 $
10.57 $
7.62 $
0.82 $
0.82 $
0.29 $
10.01 $
7.06 $
0.71
0.71
0.27
9.28
6.31
147,614
139,685
138,795
107,976
139,091
$ 658,711 $ 621,803 $ 456,436 $ 467,295 $ 439,044
101,744
116,740
4,152,720 3,870,598 2,965,200 2,653,826 2,469,016
112,398
111,519
5,405,639 5,093,131 3,869,550 3,538,325 3,317,791
4,368,748 4,092,835 2,995,572 2,790,819 2,709,205
3,631,320 3,547,927 2,652,251 2,510,857 2,413,119
160,238
303,143
351,424
400,516
243,736
379,438
365,650
550,044
296,913
583,122
111,934
1.00%
12.24%
9.25%
53.40%
3.38%
95.06%
10.79%
8.44%
9.12%
10.87%
13.40%
10.18%
0.90%
12.19%
8.75%
56.48%
3.41%
94.57%
10.80%
8.30%
9.07%
10.85%
13.48%
10.11%
0.89%
11.58%
8.28%
60.31%
3.47%
98.99%
10.35%
7.69%
8.70%
10.53%
11.61%
9.54%
0.92%
12.21%
8.48%
59.53%
3.64%
95.09%
10.72%
7.81%
9.08%
11.76%
12.98%
NA
0.80%
11.42%
7.78%
59.76%
3.69%
91.13%
10.59%
7.46%
8.90%
11.73%
12.98%
NA
(1) Restated for 5% stock dividend in 2014.
(2) A non-GAAP financial measure. See “Non-GAAP Financial Measures” for a reconciliation of such measures to data calculated in
accordance with generally accepted accounting principles.
(3) Core deposits represent all deposits with the exception of time deposits.
-27-
(4) Ratio represents noninterest expense, excluding long-term debt prepayment fee, merger related expenses, provision for unfunded lending
commitments and core deposit amortization, as a percentage of total revenue (calculated on a tax equivalent basis), excluding gains
(losses) on securities and gain on debt extinguishment. Total revenue represents net interest income (calculated on a tax equivalent basis)
plus noninterest income.
Includes investment in Federal Home Loan Bank and other membership stock, at cost.
(5)
(6) Beginning March 31, 2015, these ratios were calculated according to the Basel III capital rules that took effect on January 1, 2015.
-28-
ITEM 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This section presents a review of Lakeland Bancorp, Inc.’s consolidated results of operations and financial
condition. You should read this section in conjunction with the selected consolidated financial data that is
presented on the preceding page as well as the accompanying consolidated financial statements and notes to
financial statements. As used in the following discussion, the term “Company” refers to Lakeland Bancorp, Inc.
and “Lakeland” refers to the Company’s wholly owned banking subsidiary—Lakeland Bank.
Statements Regarding Forward-Looking Information
The information disclosed in this document includes various forward-looking statements that are made in
reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to
credit quality (including delinquency trends and the allowance for loan and lease losses), corporate objectives,
the expected impact from the Tax Cuts and Jobs Act of 2017, and other financial and business matters. The
words “anticipates,” “projects,” “intends,” “estimates,” “expects,” “believes,” “plans,” “may,” “will,” “should,”
“could,” and other similar expressions are intended to identify such forward-looking statements. The Company
cautions that these forward-looking statements are necessarily speculative and speak only as of the date made,
and are subject to numerous assumptions, risks and uncertainties, all of which may change over time. Actual
results could differ materially from such forward-looking statements.
In addition to the risk factors disclosed in Item 1A in this Annual Report on Form 10-K, the following
factors, among others, could cause the Company’s actual results to differ materially and adversely from such
forward-looking statements: changes in the financial services industry and the U.S. and global capital markets,
changes in economic conditions nationally, regionally and in the Company’s markets, the nature and timing of
actions of the Federal Reserve Board and other regulators, the nature and timing of legislation affecting the
financial services industry, government intervention in the U.S. financial system, changes in levels of market
interest rates, pricing pressures on loan and deposit products, credit risks of Lakeland’s lending and leasing
activities, successful implementation, deployment and upgrades of new and existing technology, systems,
services and products, customers’ acceptance of Lakeland’s products and services and competition.
The above-listed risk factors are not necessarily exhaustive, particularly as to possible future events, and
new risk factors may emerge from time to time. Certain events may occur that could cause the Company’s actual
results to be materially different than those described in the Company’s periodic filings with the Securities and
Exchange Commission. Any statements made by the Company that are not historical facts should be considered
to be forward-looking statements. The Company is not obligated to update and does not undertake to update any
of its forward-looking statements made herein.
Strategy
The Company, through its wholly owned subsidiary, Lakeland Bank, currently operates 53 banking offices
located in Northern and Central New Jersey including one branch in Highland Mills, New York. Lakeland offers
a broad range of lending, depository, and related financial services to individuals and small to medium sized
businesses located in its market areas. Lakeland also offers a broad range of consumer banking services,
including lending, depository, safe deposit services and wealth management services.
Lakeland’s growth has come from a combination of organic growth and acquisitions. In addition to organic
growth, through December 31, 2017, the Company has acquired seven community banks with an aggregate asset
total of approximately $1.8 billion at the date of acquisition, including the recent acquisitions of Pascack
Bancorp, Inc. and Harmony Bank. On January 7, 2016, the Company completed its acquisition of Pascack, with
eight branches and an asset total of approximately $405.3 million. Three of the eight Pascack branches have been
merged with Lakeland branches. On July 1, 2016, the Company completed its acquisition of Harmony, with three
branches and an asset total of approximately $326.4 million. All acquired banks have been merged into Lakeland
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and their holding companies, if applicable, have been merged into the Company. In 2015, the Company opened
two new Loan Production Offices (“LPOs”) that allowed Lakeland to expand geographically in New Jersey and
to enter New York state for the first time. In the first quarter of 2017, the Company opened its first full service
branch in New York state with the opening of the Highland Mills branch in the Hudson Valley. The Company’s
strategy is to continue growing both organically and through acquisition should opportunities allow. The
Company continues to evaluate opportunities to increase market share by expanding within existing and
contiguous markets.
The Company’s strategic aim is to provide an adequate return to its shareholders by focusing on profitable
growth through services that meet the needs of its customers in its market areas. This will be accomplished by
continuing to offer commercial and consumer loan, deposit and other financial product services in a changing
economic and technological environment. The Company recognizes that there are more service delivery channels
than the traditional branch office and has offered internet banking, mobile banking and cash management
services to meet the needs of its business and consumer customers.
The Company’s results of operations are primarily dependent upon net interest income, the difference
between interest earned on interest-earning assets and the interest paid on interest-bearing liabilities. For
information on how interest rate change can influence the Company’s net interest income and how the Company
manages its net interest income, see “Interest Rate Risk” below.
The Company generates noninterest income such as income from retail and business account fees, loan
servicing fees, loan origination fees, appreciation in the cash surrender value of bank owned life insurance,
income from securities sales, fees from wealth management services and investment product sales, income from
the origination and sale of residential mortgages and SBA loans and other fees. The Company’s operating
expenses consist primarily of compensation and benefits expense, occupancy and equipment expense, data
processing expense, ATM and debit card expense, marketing and advertising expense and other general and
administrative expenses. The Company’s results of operations are also affected by general economic conditions,
changes in market interest rates, changes in asset quality, changes in asset values, actions of regulatory agencies
and government policies.
The Company continues to control its expenses by continually reviewing its ongoing noninterest expense,
including evaluating its salary expense, ongoing service contract expense, marketing expenses and other
expenses. The Company also controls its expenses by leveraging its technology investments that maximize the
efficient delivery of products and services to its customers, which allows it further to evaluate its
infrastructure. Through this process, Lakeland Bank has consolidated and closed branches in markets where it
may have more branches than necessary, including one branch in 2014, three branches in 2015 and seven
branches in 2016 (including three of the eight acquired Pascack branches) while permitting it to expand and open
a branch in 2017 in an area of opportunity (Highland Mills, New York).
As a result of the Tax Cut and Jobs Act of 2017, management has decided to further invest in Lakeland’s
future. Management intends to utilize 20% of the tax savings by accelerating and expanding its investments in
personnel and technology that will continue to enhance the delivery of banking services and products to Lakeland
Bank’s customers. In addition, Lakeland plans to further increase its financial support of non-profits in the
communities that it serves.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company and Lakeland conform with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) and predominant practices within the banking
industry. The preparation of financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements. These estimates and assumptions also affect reported amounts of revenues and
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expenses during the reporting period. Actual results could differ from these estimates. Significant estimates
implicit in these financial statements are as follows. For additional accounting policies and detail, refer to Note 1
to the consolidated financial statements included in Item 8 of this report.
Allowance for loan and lease losses. The allowance for loan and lease losses is the estimated amount
considered necessary to cover probable and reasonably estimable incurred losses inherent in the loan portfolio at
the balance sheet date. In determining the allowance, we make significant estimates and judgments, and,
therefore, have identified the allowance as a critical accounting policy. The allowance is established through a
provision for loan and lease losses charged against income. Loan principal considered to be uncollectible by
management is charged against the allowance.
The allowance for loan and lease losses has been determined in accordance with U.S. GAAP. We are
responsible for the timely and periodic determination of the amount of the allowance required. We believe that
our allowance is adequate to cover identifiable losses, as well as estimated losses inherent in our portfolio for
which certain losses are probable but not specifically identifiable.
The determination of the adequacy of the allowance for loan and lease losses and the periodic provisioning
for estimated losses included in the consolidated financial statements is the responsibility of management and the
Board of Directors. Management performs a formal quarterly evaluation of the allowance for loan and lease
losses. This quarterly process is performed by the credit administration department and approved by the Chief
Credit Officer. All supporting documentation with regard to the evaluation process is maintained by the credit
administration department. Each quarter, the evaluation along with the supporting documentation is reviewed by
the finance department before approval by the Chief Credit Officer. The allowance evaluation is then presented
to an Allowance for Loan and Lease Losses committee, which gives final approval to the allowance evaluation
before presented to the Board of Directors for their approval.
Additionally, the Company continually evaluates, through its governance process, the development of the
allowance for loan and lease losses methodology. During the 3rd quarter of 2017, the Company refined and
enhanced its quantitative framework by implementing loss migration periods to determine historical loss rates. It
also enhanced its qualitative framework to complement the loss migration historical loss rates. These
enhancements were implemented to increase the level of precision in the allowance for loan and lease losses and
did not result in a material change in the required allowance for loan and lease losses.
The methodology employed for assessing the adequacy of the allowance consists of the following criteria:
• The establishment of specific reserve amounts for impaired loans and leases, including purchase-credit
impaired loans.
• The establishment of reserves for pools of homogeneous loans and leases not subject to specific
review, including impaired loans under $500,000, leases, 1 - 4 family residential mortgages, and
consumer loans.
The Company defines impaired loans as all non-accrual loans with recorded investments of $500,000 or
greater. Impaired loans also include all loans modified as troubled debt restructurings. Loans and leases are
considered impaired when, based on current information and events, it is probable that Lakeland will be unable to
collect all amounts due in accordance with the original contractual terms of the loan agreement, including
scheduled principal and interest payments.
Impairment is measured based on the present value of expected cash flows discounted at the loan’s effective
interest rate, or as a practical expedient, Lakeland may measure impairment based on a loan’s observable market
price, or the fair value of the collateral, less estimated costs to sell, if the loan is collateral-dependent. Regardless
of the measurement method, Lakeland measures impairment based on the fair value of the collateral when it is
determined that foreclosure is probable. Most of Lakeland’s impaired loans are collateral-dependent. Shortfalls in
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collateral or cash flows are charged-off or specifically reserved for in the period the shortfall is identified.
Charge-offs are recommended by the Chief Credit Officer and approved by the Board.
Lakeland groups impaired commercial loans under $500,000 into homogeneous pools and collectively
evaluates them. Interest received on impaired loans and leases may be recorded as interest income. However, if
management is not reasonably certain that an impaired loan and lease will be repaid in full, or if a specific time
frame to resolve full collection cannot yet be reasonably determined, all payments received are recorded as
reductions of principal.
The establishment of reserve amounts for pools of homogeneous loans and leases are based upon the
determination of historical loss rates, which are adjusted to reflect current conditions through the use of
qualitative factors. The qualitative factors considered by the Company include an evaluation of the results of the
Company’s independent loan review function, the Company’s reporting capabilities, the adequacy and expertise
of Lakeland’s lending staff, underwriting policies, loss histories, trends in the portfolio, delinquency trends,
economic and business conditions and capitalization rates. Since many of Lakeland’s loans depend on the
sufficiency of collateral as a secondary source of repayment, any adverse trends in the real estate market could
affect the underlying values available to protect Lakeland from losses.
Additionally, management determines the loss emergence periods for each loan segment, which are used to
define loss migration periods and establish appropriate ranges for qualitative adjustments for each loan segment.
The loss emergence period is the estimated time from the date of a loss event (such as a personal bankruptcy) to
the actual recognition of the loss (typically via the first partial or full loan charge-off), and is determined based
upon a study of our past loss experience by loan segment. All of the factors considered in the analysis of the
adequacy of the allowance for loan and lease losses may be subject to change. To the extent actual outcomes
differ from management estimates, additional provisions for loan and lease losses may be required that would
adversely impact earnings in future periods.
Fair value measurements of investment securities. Fair values of financial instruments are volatile and may
be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates, credit
ratings and yield curves. Fair values for investment securities are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on the quoted prices of similar instruments or an
estimate of fair value by using a range of fair value estimates in the market place as a result of the illiquid market
specific to the type of security.
When the fair value of a security is below its amortized cost, and depending on the length of time the
condition exists and the extent the fair value is below amortized cost, additional analysis is performed to
determine whether an other-than-temporary impairment condition exists. Available for sale and held to maturity
securities are analyzed quarterly for possible other-than-temporary impairment. The analysis considers (i) the
length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-
term prospects of the issuer which may include projections of cash flows, and (iii) the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery
in fair value. Often, the information available to conduct these assessments is limited and rapidly changing,
making estimates of fair value subject to judgment. If actual information or conditions are different than
estimated, the extent of the impairment of the security may be different than previously estimated, which could
have a material effect on the Company’s results of operations and financial condition.
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,
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such information is useful to investors. These disclosures should not be viewed as a substitute for financial
results determined in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP
performance measures which may be presented by other companies.
Financial Overview
The year ended December 31, 2017 represented a year of continued growth for the Company. As discussed
in this management’s discussion and analysis:
• Net income was $52.6 million, or $1.09 per diluted share, for the year ended December 31, 2017
compared to net income of $41.5 million, or $0.95 per diluted share, for 2016. Excluding the impact of
the net charge of $602,000 taken in 2017 related to the Tax Cuts and Jobs Act of 2017, net income
would have been $53.2 million and diluted EPS would have been $1.11 in 2017. For more information,
please see Note 10 to the audited Consolidated Financial Statements. Excluding merger related
expenses and other items, net income for 2016 would have been $44.3 million, or $1.02 per diluted
share.
•
In 2017, return on average assets was 1.00%, return on average common equity was 9.25% and return
on average tangible common equity was 12.24%.
• Total loans and leases increased by $282.1 million, or 7%, in 2017, with the majority of the increase in
the commercial loans secured by real estate category.
• Total deposits increased $275.9 million, or 7%, in 2017, which included $40.1 million in noninterest-
bearing deposits.
• The Company’s net interest margin was 3.38% for 2017 compared to 3.41% for 2016.
• The efficiency ratio was 53.40% for 2017, as compared to 56.48% for 2016. The improvement in this
ratio, in part, reflects the realization of cost savings from our acquisitions and the closure of seven
branches in 2016.
Net Income
Net income for 2017 was $52.6 million, or $1.09 per diluted share, compared to net income of
$41.5 million, or $0.95 per diluted share, in 2016. Excluding the impact of the one-time charge taken in 2017
related to the Tax Cuts and Jobs Act of 2017, net income for 2017 was $53.2 million, or $1.11 per diluted share.
Excluding merger related expenses and other items, net income for 2016 was $44.3 million, or $1.02 per diluted
share. The major contributing factor to the increase in net income was an increase in net interest income of
$19.6 million from 2016 to 2017 due to an increase in interest-earning assets resulting from organic growth as
well as the Harmony acquisition.
Net Interest Income
Net interest income is the difference between interest income on earning assets and the cost of funds
supporting those assets. The Company’s net interest income is determined by: (i) the volume of interest-earning
assets that it holds and the yields that it earns on those assets, and (ii) the volume of interest-bearing liabilities
that it has assumed and the rates that it pays on those liabilities.
Net interest income on a tax equivalent basis for 2017 was $166.3 million, compared to $146.6 million in
2016, resulting primarily from growth in average earning assets of $631.6 million. The net interest margin
decreased from 3.41% in 2016 to 3.38% in 2017 primarily as a result of a 13 basis point increase in the cost of
interest-bearing liabilities. The increase in the cost of interest-bearing deposits is primarily attributable to an
increasingly competitive market for deposits, which led the Company to run a time deposit promotion, as well as
higher costing core deposits acquired in the Harmony acquisition. The increase in the cost of funds was partially
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mitigated by an increase in the yield on interest-earning assets of 6 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 $106.7 million. The components of net interest income will be
discussed in greater detail below.
Interest income and expense volume/rate analysis. The following table shows the impact that changes in
average balances of the Company’s assets and liabilities and changes in average interest rates have had on the
Company’s net interest income over the past three years. This information is presented on a tax equivalent basis
assuming a 35% tax rate. If a change in interest income or expense is attributable to a change in volume and a
change in rate, the amount of the change is allocated proportionately.
2017 vs. 2016
2016 vs. 2015
Increase (Decrease)
Due to Change in:
Volume
Rate
Total
Change
Increase (Decrease)
Due to Change in:
Volume
Rate
Total
Change
(in thousands)
INTEREST INCOME
Loans and leases
Taxable investment securities and other
Tax-exempt investment securities
Federal funds sold
$19,713
3,972
404
(96)
$ 2,852
(148)
(84)
407
$22,565
3,824
320
311
$33,166
141
554
309
$ 1,316
459
(256)
198
$34,482
600
298
507
Total interest income
23,993
3,027
27,020
34,170
1,717
35,887
INTEREST EXPENSE
Savings deposits
Interest-bearing transaction accounts
Time deposits
Borrowings
Total interest expense
1
1,334
1,040
(555)
(38)
2,694
1,057
1,786
1,820
5,499
(37)
4,028
2,097
1,231
7,319
50
1,019
1,513
1,089
3,671
51
1,487
637
927
3,102
101
2,506
2,150
2,016
6,773
NET INTEREST INCOME
$22,173
$(2,472) $19,701
$30,499
$(1,385) $29,114
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The following table reflects the components of the Company’s net interest income, setting forth for the
years presented, (1) average assets, liabilities and stockholders’ equity, (2) interest income earned on interest-
earning assets and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-
earning assets and average rates paid on interest-bearing liabilities, (4) the Company’s net interest spread (i.e.,
the average yield on interest-earning assets less the average cost of interest-bearing liabilities) and (5) the
Company’s net interest margin. Rates are computed on a tax equivalent basis assuming a 35% tax rate.
2017
Interest
Income/
Expense
Average
Rates
Earned/
Paid
Average
Balance
2016
Interest
Income/
Expense
Average
Rates
Earned/
Paid
Average
Balance
2015
Interest
Income/
Expense
Average
Rates
Earned/
Paid
Average
Balance
(dollars in thousands)
ASSETS
Interest-earning assets:
Loans and leases (1)
Taxable investment securities and
other
Tax-exempt securities
Federal funds sold (2)
$4,024,257 $172,342
4.28% $3,562,882 $149,777
4.20% $2,773,601 $115,295
4.16%
706,167
104,267
92,295
14,987
3,069
880
2.12% 518,905
2.94%
90,431
0.95% 123,166
11,163
2,749
569
2.15% 512,145
69,307
3.04%
35,059
0.46%
10,563
2,451
62
2.06%
3.54%
0.18%
Total interest-earning assets
4,926,986 191,278
3.88% 4,295,384 164,258
3.82% 3,390,112 128,371
3.79%
Noninterest-earning assets:
Allowance for loan and lease
losses
Other assets
TOTAL ASSETS
(33,148)
373,723
$5,267,561
(31,190)
355,622
$4,619,816
(31,062)
289,786
$3,648,836
LIABILITIES AND
STOCKHOLDERS EQUITY
Interest-bearing liabilities:
Savings accounts
Interest-bearing transaction
$ 486,821 $
276
0.06% $ 485,004 $
313
0.06% $ 399,431 $
212
0.05%
accounts
Time deposits
Borrowings
2,241,259
623,257
357,978
10,186
6,138
8,366
0.45% 1,880,391
0.98% 506,487
2.34% 393,149
6,158
4,041
7,135
0.33% 1,511,954
0.80% 303,682
1.81% 328,936
3,652
1,891
5,119
0.24%
0.62%
1.56%
Total interest-bearing
liabilities
Noninterest-bearing liabilities:
Demand deposits
Other liabilities
Stockholders’ equity
TOTAL LIABILITIES AND
3,709,315
24,966
0.67% 3,265,031
17,647
0.54% 2,544,003
10,874
0.43%
959,298
30,268
568,680
852,629
27,616
474,540
695,630
16,982
392,221
STOCKHOLDERS’ EQUITY
$5,267,561
$4,619,816
$3,648,836
Net interest income/spread
166,312
3.21%
146,611
3.28%
117,497
3.36%
Tax equivalent basis
adjustment
NET INTEREST INCOME
Net interest margin (3)
1,074
$165,238
962
$145,649
857
$116,640
3.38%
3.41%
3.47%
Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, loans held for sale, and deferred loan fees.
Includes interest-bearing cash accounts.
(1)
(2)
(3) Net interest income on a tax equivalent basis divided by interest-earning assets.
Interest income on a tax equivalent basis increased from $164.3 million in 2016 to $191.3 million in 2017,
an increase of $27.0 million, or 16%. The increase in interest income was primarily a result of the Harmony
acquisition as well as organic growth in loans, as the average balance of loans and leases increased
$461.4 million compared to 2016. The yield on average loans and leases of 4.28% in 2017 was 8 basis points
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greater than 2016. The yield on average taxable investment securities and tax-exempt investment securities
decreased by 3 and 10 basis points, respectively, compared to 2016. Interest on taxable investment securities in
2016, included $358,000 in income on called U.S. government agency securities. The decrease in yield on tax-
exempt investment securities was primarily due to securities maturing at higher rates and new purchases of short-
term securities at lower rates.
Interest income on a tax equivalent basis increased from $128.4 million in 2015 to $164.3 million in 2016,
an increase of $35.9 million, or 28%. The increase in interest income was primarily a result of the Pascack and
Harmony acquisitions as well as organic growth in loans, as the average balance of loans and leases increased
$789.3 million compared to 2015. The yield on average loans and leases of 4.20% in 2016 was 4 basis points
greater than 2015. The yield on average taxable investment securities increased 9 basis points, while the yield on
tax-exempt investment securities decreased by 50 basis points, compared to 2015. The decrease in yield on tax-
exempt investment securities was primarily due to securities maturing at higher rates and new purchases of short-
term securities at lower rates.
Total interest expense increased from $17.6 million in 2016 to $25.0 million in 2017, an increase of
$7.3 million, or 41%, primarily due to the increasing rate environment. The cost of average interest-bearing
liabilities increased from 0.54% in 2016 to 0.67% in 2017. The increase in the cost of interest-bearing liabilities
was due to an increase in the cost of borrowings and an increasingly competitive market for deposits. The
53 basis point increase in the cost of borrowings was due primarily to the $75.0 million issuance of subordinated
debt in September 2016 bearing a rate of 5.125%. During 2017, average interest-bearing transaction accounts and
time deposits increased 19% and 23%, respectively, while the yield for those categories increased by 12 basis
points and 18 basis points, respectively.
Total interest expense increased from $10.9 million in 2015 to $17.6 million in 2016, an increase of
$6.8 million, or 62%. The increase in interest income from 2015 to 2016 resulted from a combination of growth
and an increasing rate environment. The cost of average interest-bearing liabilities increased from 0.43% in 2015
to 0.54% in 2016. The yield on interest-bearing transaction accounts and time deposits increased by 9 basis
points and 18 basis points, respectively. The increase in the yield on interest-bearing liabilities was due primarily
to higher costing deposits acquired in the Pascack and Harmony acquisitions, an increase in the cost of
borrowings, and an increasingly competitive market for deposits. As growth in loans exceeded growth in core
deposits from 2015 to 2016, the Company utilized higher cost time deposits and term borrowings from the
Federal Home Loan Bank of New York to fund loan growth. A change in the mix of deposits also contributed to
the increase in the cost of funds. The percentage of time deposits to total interest-bearing liabilities increased
from 12% in 2015 to 16% in 2016, while savings and interest-bearing transaction accounts decreased as a
percentage of interest-bearing liabilities. Time deposits typically pay higher rates than savings and interest-
bearing transaction accounts. Additionally, the $75.0 million subordinated debt offering in September 2016
added $1.0 million to the cost of borrowings in 2016.
Provision for Loan and Lease Losses
In determining the provision for loan and lease losses, management considers national and local economic
conditions; trends in the portfolio including orientation to specific loan types or industries; experience, ability
and depth of lending management in relation to the complexity of the portfolio; adequacy and adherence to
policies, procedures and practices; levels and trends in delinquencies, impaired loans and leases and net charge-
offs and the results of independent third party loan reviews.
The provision for loan and lease losses increased from $4.2 million in 2016 to $6.1 million in 2017. The
increased provision during 2017 was primarily a result of commercial real estate loan growth and higher charge-
offs in commercial construction loans. For more information, please see the discussion under “Risk Elements”
below.
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The provision for loan and lease losses increased from $1.9 million in 2015 to $4.2 million in 2016. The
increased provision during 2016 was primarily a result of increased net charge-offs of $3.9 million (0.11% of
average loans), which were 120% higher than the $1.8 million (0.06% of average loans) for 2015. The increase in
net charge-offs from 2015 to 2016 resulted from a $1.9 million reduction in recoveries during that time period.
Noninterest Income
Noninterest income of $25.4 million in 2017 increased by $4.1 million compared to 2016. Included in
noninterest income in 2017 was $2.5 million in gains on sales of investment securities compared to $370,000 for
the same period last year. Service charges on deposit accounts of $10.7 million in 2017 was $583,000 higher than
2016 due primarily to changes in the fee structure on deposit accounts. Commissions and fees of $4.9 million in
2017 increased $509,000 compared to 2016 due primarily to increases in commercial loan fees and credit card
related merchant service fees. Gains on sales of loans in 2017 of $1.8 million decreased $287,000 compared to
2016 due primarily to a reduced volume of sales. Income on bank owned life insurance at $2.4 million decreased
$208,000 compared to 2016 due primarily to higher death benefits received in 2016. Other income of
$3.1 million in 2017 was $1.4 million higher than 2016 due primarily to a $380,000 increase in gains on sales of
other real estate owned, a $324,000 gain on the payoff of an acquired loan and $881,000 in gains on the sales of
three former branches. Noninterest income represented 13% of total revenue in 2017. (Total revenue is defined as
net interest income plus noninterest income).
Noninterest income of $21.3 million in 2016 increased by $169,000 compared to 2015. Excluding a
$1.8 million gain on debt extinguishment received in 2015, noninterest income increased $2.0 million from 2015
to 2016. Gains on sales of loans of $2.1 million and gain on investment securities of $370,000 in 2016 increased
$442,000 and $129,000, respectively, compared to the same period last year. Income on bank owned life
insurance at $2.6 million increased $545,000 compared to 2015. In 2016, an $864,000 death benefit was received
on a bank owned life insurance policy, compared to a $435,000 death benefit received in 2015. Commissions and
fees totaling $4.3 million decreased $219,000, due primarily to reduced financial services income. Other income
totaling $1.8 million in 2016 was $969,000 higher than 2015, resulting primarily from an increase in swap
income of $659,000 compared to 2015, as well as a $219,000 recovery from a Somerset Hills loan that was
written off prior to the Lakeland acquisition. Noninterest income represented 13% of total revenue in 2016.
Noninterest Expense
Noninterest expense totaling $104.5 million increased $4.6 million in 2017 from 2016. During 2017, the
Company incurred $2.8 million in long-term debt prepayment penalties, and in 2016, the Company incurred
$4.1 million in merger related expenses. Salaries and employee benefits expense of $61.2 million increased
$5.1 million from 2016, primarily due to the addition of Harmony employees during the second half of 2016 and
year-over-year increases in employee salary and benefit costs. FDIC insurance expense of $1.6 million in 2017
decreased $671,000 compared to 2016, due primarily to decreased non-performing loans and increased capital
levels. Data processing expense of $2.0 million increased $102,000 resulting from increases in the cost of mobile
banking and the addition of the Harmony branches in the second half of 2016.
Noninterest expense totaling $99.9 million increased $12.7 million in 2016 from 2015. Included in
noninterest expense during 2016 was $4.1 million in merger related expenses compared to $1.2 million in 2015.
Noninterest expense in 2015 included a $2.4 million long-term debt prepayment fee. Excluding merger related
expenses and the debt prepayment fee, total noninterest expense increased $12.2 million compared to 2015.
Salary and employee benefits of $56.1 million increased by $7.5 million, or 15%, due primarily to the addition of
the Pascack and Harmony employees as well as normal salary and benefit increases. Furniture and equipment
expense, net occupancy expense and telecommunications expense increased $1.1 million, $979,000 and
$183,000, respectively, compared to 2015 due to the addition of the Pascack and Harmony branches. Stationary,
supplies and postage increased $198,000 compared to 2015 primarily due to mailing and supplies associated with
the Pascack and Harmony acquisitions. FDIC insurance expense of $2.2 million in 2016 increased $162,000
-37-
compared to 2015, due to the addition of the Pascack and Harmony deposits. ATM and debit card expense of
$1.6 million increased $184,000 compared to 2015 due primarily to the addition of Pascack and Harmony ATMs
as well as an initiative during 2016 to replace debit cards with the increased security EMV chip cards. Data
processing expense of $1.9 million increased $367,000 primarily due to increases in the cost of mobile banking,
the addition of the Pascack and Harmony branches and because of the usage of Pascack and Harmony systems
before the systems were integrated into Lakeland’s systems. Other expenses of $10.2 million in 2016 increased
$1.2 million compared to 2015 due primarily to higher consulting, courier, director, insurance and investor
relations expenses. The increase in courier expense is due to the outsourcing of the Company’s couriers which
had previously impacted salary expense.
The efficiency ratio, a non-GAAP measure, expresses the relationship between noninterest expense
(excluding long-term debt repayment fees, merger related expenses, provision for unfunded lending
commitments and core deposit amortization) to total tax-equivalent revenue (excluding gains (losses) on
securities and gain on debt extinguishment). In 2017, the Company’s efficiency ratio on a tax equivalent basis
was 53.40% compared to 56.48% in 2016. The efficiency ratio was 60.31% in 2015.
Calculation of Efficiency Ratio (a Non-GAAP Measure)
Total noninterest expense
Less:
For the Year Ended December 31,
2017
2016
2015
2014
2013
(dollars in thousands)
$104,534
$ 99,917
$ 87,211
$ 79,135
$ 78,741
Amortization of core deposit intangibles
Merger related expenses
Long-term debt prepayment fee
Provision for unfunded lending commitments
(654)
—
(2,828)
—
(734)
(4,103)
—
(438)
(415)
(1,152)
(2,407)
(864)
(464)
—
—
65
(288)
(2,834)
(1,209)
(55)
Noninterest expense, as adjusted
$101,052
$ 94,642
$ 82,373
$ 78,736
$ 74,355
Net interest income
Noninterest income
Total revenue
$165,238
25,435
$145,649 $116,640
21,161
21,330
$113,566
17,722
$104,542
20,961
190,673
166,979
137,801
131,288
125,503
Plus: Tax-equivalent adjustment on municipal
securities
1,074
962
857
972
965
Less: Gains on sales of investment securities and
debt extinguishment
Total revenue, as adjusted
(2,524)
(370)
(2,071)
(2)
(2,036)
$189,223
$167,571 $136,587
$132,258
$124,432
Efficiency ratio (Non-GAAP)
53.40%
56.48%
60.31%
59.53%
59.76%
Income Taxes
The Company’s effective income tax rate was 34.3%, 33.9% and 33.2%, in the years ended December 31,
2017, 2016 and 2015, respectively. The effective tax rate increase from 2016 to 2017 was primarily as a result of
a decrease in tax advantaged items as a percent of pre-tax income. A net charge of $602,000 taken in 2017
related to the Tax Cuts and Jobs Act of 2017 was mitigated by the implementation of Accounting Standards
Update 2016-09 which resulted in a $587,000 tax benefit related to excess tax benefits from the exercise of stock
options and the vesting of restricted stock and restricted stock units. The effective tax rate increase from 2015 to
2016 was primarily as a result of a decrease in tax advantaged items as a percent of pre-tax income. Contributing
to the increase in the effective tax rate was the impact of non-deductible merger related expenses, offset by the
impact of interest income from tax-exempt securities and income on bank owned life insurance policies.
-38-
Financial Condition
Total assets increased from $5.09 billion at December 31, 2016 to $5.41 billion at December 31, 2017, an
increase of $312.5 million, or 6%. Loans, net of deferred fees, were $4.15 billion, an increase of $282.1 million,
or 7%, from $3.87 billion at December 31, 2016. Total deposits were $4.37 billion, an increase of $275.9 million,
or 7%, from December 31, 2016. Total assets at year-end 2016 increased $1.22 billion, or 32%, from year-end
2015.
Loans and Leases
Lakeland primarily serves New Jersey, the Hudson Valley region in New York and the surrounding areas.
Its equipment finance division serves a broader market with a primary focus on the Northeast.
Gross loans and leases of $4.16 billion increased by $282.8 million from December 31, 2016, primarily in
the commercial loans secured by real estate category. Commercial loans secured by real estate increased
$274.6 million, or 11%, from December 31, 2016 to December 31, 2017. Leases and real estate construction
loans increased $8.0 million, or 12%, and $53.8 million, or 25%, respectively. Commercial, industrial and other
decreased $9.8 million, or 3%, while real estate-residential mortgages declined $26.7 million, or 8%. The decline
in residential mortgages results from a decision to sell most of the residential loans that the Company originates.
Additionally, home equity and consumer loans decreased $17.1 million, or 5%. Gross loans and leases at
December 31, 2016 of $3.87 billion increased by $905.9 million from December 31, 2015, including Pascack and
Harmony loans, which totaled $319.6 million and $260.8 million, respectively, at acquisition. Excluding
Pascack’s and Harmony’s loans, total loans increased $325.6 million, or 11%, from December 31, 2015 to
December 31, 2016, primarily in the commercial loans secured by real estate category.
The following table sets forth the classification of Lakeland’s gross loans and leases by major category as of
December 31 for each of the last five years:
Commercial, secured by real estate
Commercial, industrial and other
Leases
Real estate - residential mortgage
Real estate - construction
Home equity and consumer
Total loans and leases
Deferred fees
December 31,
2017
2016
2015
2014
2013
$2,831,184
340,400
75,039
322,880
264,908
322,269
$2,556,601
350,228
67,016
349,581
211,109
339,360
(in thousands)
$1,761,589
307,044
56,660
389,692
118,070
334,891
$1,529,761
238,252
54,749
431,190
64,020
337,642
$1,389,861
213,808
41,332
432,831
53,119
339,338
4,156,680
(3,960)
3,873,895
(3,297)
2,967,946
(2,746)
2,655,614
(1,788)
2,470,289
(1,273)
Loans and leases, net
$4,152,720
$3,870,598
$2,965,200
$2,653,826
$2,469,016
At December 31, 2017, there were no concentrations of loans or leases exceeding 10% of total loans and
leases outstanding other than loans that are secured by real estate. Loan concentrations are considered to exist
when there are amounts loaned to a multiple number of borrowers engaged in similar activities which would
cause them to be similarly impacted by economic or other related conditions.
-39-
The following table sets forth maturities and sensitivity to changes in interest rates in commercial loans in
Lakeland’s loan portfolio at December 31, 2017:
Within
One Year
After One
but Within
Five Years
After Five
Years
Total
(in thousands)
$104,115
172,429
120,607
$549,013
88,918
57,298
$2,178,056
79,053
87,003
$2,831,184
340,400
264,908
$397,151
$695,229
$2,344,112
$3,436,492
$ 73,815
323,336
$511,435
183,794
$ 310,066
2,034,046
$ 895,316
2,541,176
$397,151
$695,229
$2,344,112
$3,436,492
Commercial, secured by real estate
Commercial, industrial and other
Real estate - construction
Total
Predetermined rates
Floating or adjustable rates
Total
Risk Elements
Commercial loans and leases are placed on a non-accrual status with all accrued interest and unpaid interest
reversed if (a) because of the deterioration in the financial position of the borrower, they are maintained on a cash
basis (which means payments are applied when and as received rather than on a regularly scheduled basis),
(b) payment of all contractual principal and interest is not expected, or (c) principal and interest have been in
default for a period of 90 days or more unless the obligation is both well-secured and in process of collection.
Residential mortgage loans and closed-end consumer loans are placed on non-accrual status at the time principal
and interest have been in default for a period of 90 days or more, except where there exists sufficient collateral to
cover the defaulted principal and interest payments, and the loans are well-secured and in the process of
collection. Open-end consumer loans secured by real estate are generally placed on non-accrual status and
reviewed for charge-off when principal and interest payments are four months in arrears unless the obligations
are well-secured and in the process of collection. Interest thereafter on such charged-off consumer loans is taken
into income when received only after full recovery of principal. As a general rule, a non-accrual asset may be
restored to accrual status when none of its principal or interest is due and unpaid and satisfactory payments have
been received for a sustained period (usually six months), or when it otherwise becomes well-secured and in the
process of collection.
-40-
The following schedule sets forth certain information regarding Lakeland’s non-accrual loans (including
troubled debt restructurings that are on non-accrual) and past due loans and leases and other real estate owned
and other repossessed assets as of December 31, for each of the last five years:
December 31,
2017
2016
2015
2014
2013
Commercial, secured by real estate
Commercial, industrial and other
Leases, including leases held for sale
Real estate - residential mortgage
Real estate - construction
Home equity and consumer
Total non-accrual loans and leases
Other real estate and other repossessed assets
$ 5,890
184
144
3,860
1,472
2,105
13,655
843
(dollars in thousands)
$10,446
103
316
8,664
—
3,167
$ 7,424
308
88
9,246
188
3,415
$10,413
167
153
6,048
1,472
2,151
$ 7,697
88
—
6,141
831
2,175
20,404
1,072
22,696
983
20,669
1,026
16,932
520
Total non-performing assets
$14,498
$21,476
$23,679
$21,695
$17,452
Non-performing assets as a percentage of total assets
0.27%
0.42%
0.61%
0.61%
0.53%
Loans and leases past due 90 days or more and still accruing
$
200
$
10
$
331
$
66
$ 1,997
Troubled debt restructurings, still accruing
$11,462
$ 8,802
$10,108
$10,579
$10,289
Non-accrual loans and leases decreased to $13.7 million on December 31, 2017 from $20.4 million at
December 31, 2016 due primarily to commercial, secured by real estate which decreased $4.5 million, or 43%,
and residential mortgages which decreased $2.2 million, or 36%.
Non-accruals include 4 loan relationships between $500,000 and $1.0 million totaling $2.4 million, and
2 loan relationships exceeding $1.0 million totaling $2.5 million. All non-accrual loans and leases are in various
stages of litigation, foreclosure, or workout. Non-accrual loans included $2.7 million and $2.4 million in troubled
debt restructurings for the years ended December 31, 2017 and 2016, respectively.
At December 31, 2017 and 2016, Lakeland had $11.5 million and $8.8 million, respectively, in loans that
were restructured and still accruing. Restructured loans are those loans where Lakeland has granted concessions
to the borrower in payment terms, in rate and/or in maturity as a result of the financial difficulties of the
borrower.
For 2017, the gross interest income that would have been recorded, had the loans and leases classified at
year-end as impaired been performing in conformance with their original terms, was approximately $1.5 million.
The amount of interest income actually recorded on those loans and leases for 2017 was $705,000. The resultant
loss of $785,000 for 2017 compares with prior year losses of $1.0 million for 2016 and $792,000 for 2015.
As of December 31, 2017, Lakeland had impaired loans and leases totaling $22.6 million (consisting
primarily of non-accrual and restructured loans and leases), compared to $25.3 million at December 31, 2016.
The valuation allowance of these loans and leases is based primarily on the fair value of the underlying collateral.
Based upon such evaluation, $505,000 has been allocated to the allowance for loan and lease losses for
impairment at December 31, 2017 compared to $529,000 at December 31, 2016. At December 31, 2017,
Lakeland also had $28.3 million in loans and leases that were rated substandard that were not classified as non-
performing or impaired compared to $28.7 million at December 31, 2016.
There were no additional loans or leases at December 31, 2017, other than those designated non-performing,
impaired or substandard, where Lakeland was aware of any credit conditions of any borrowers that would
indicate a strong possibility of the borrowers not complying with the present terms and conditions of repayment
-41-
and which may result in such loans or leases 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, 2017, the historical
relationships among the amount of loans and leases outstanding, the allowance for loan and lease losses, the
provision for loan and lease losses, the amount of loans and leases charged off and the amount of loan and lease
recoveries:
Years Ended December 31,
2017
2016
2015
2014
2013
Allowance balance, beginning of the year
$31,245
$30,874
$29,821
$ 28,931
(dollars in thousands)
$30,684
Loans and leases charged off:
Commercial, secured by real estate
Commercial, industrial and other
Leases
Real estate - residential mortgage
Real estate - construction
Home equity and consumer
(762)
(477)
(305)
(441)
(609)
(852)
(410)
(796)
(366)
(1,103)
—
(1,980)
(1,821)
(205)
(548)
(375)
(20)
(1,511)
(2,282)
(999)
(597)
(827)
(25)
(2,697)
(2,026)
(1,324)
(206)
(1,257)
(3,854)
(1,624)
Total loans and leases charged off
(3,446)
(4,655)
(4,480)
(7,427)
(10,291)
Recoveries:
Commercial, secured by real estate
Commercial, industrial and other
Leases
Real estate - residential mortgage
Real estate - construction
Home equity and consumer
Total recoveries
Net charge-offs
Provision for loan and lease losses
Allowance balance, end of year
396
172
59
5
31
903
1,566
(1,880)
6,090
297
202
31
8
18
247
803
2,221
183
26
63
106
129
2,728
999
1,039
19
42
106
220
2,425
1,061
260
121
99
14
283
1,838
(3,852)
4,223
(1,752)
1,942
(5,002)
5,865
(8,453)
9,343
$35,455
$31,245
$30,874
$30,684
$ 29,821
Net charge-offs as a percentage of average loans and leases
outstanding
0.05%
0.11%
0.06%
0.19%
0.36%
Allowance as a percentage of year-end total loans and
leases outstanding
Allowance as a percent of non-accrual loans and leases
0.85%
1.21%
1.04%
259.65% 153.13% 136.03% 148.45% 176.12%
1.16%
0.81%
The ratio of the allowance for loan and lease losses to loans and leases outstanding reflects management’s
evaluation of the underlying credit risk inherent in the loan portfolio as discussed above in “Critical Accounting
Policies, Judgments and Estimates – Allowance for Loan and Lease Losses.”
Non-accrual loans and leases decreased from $20.4 million on December 31, 2016 to $13.7 million on
December 31, 2017 and the allowance for loan and lease losses was 0.85% of total loans and leases on
December 31, 2017 compared to 0.81% of total loans and leases on December 31, 2016. Management believes,
based on appraisals and estimated selling costs, that the majority of its non-performing loans are well secured and
that the reserves on its non-performing loans are adequate. Based upon the process employed and giving
recognition to all accompanying factors related to the loan and lease portfolio, management considers the
allowance for loan and lease losses to be adequate at December 31, 2017.
-42-
The overall balance of the allowance for loan and lease losses of $35.5 million at December 31, 2017
increased $4.2 million from December 31, 2016, an increase of 13%. The change of the allowance within
segments of the loan portfolio reflects changes in the non-performing loans and charge-off statistics within each
segment as well as the level of growth within each segment. Loan reserves are based on a combination of
historical charge-off experience, estimating the appropriate loss emergence and pre-emergence periods and
assigning qualitative factors based on general economic conditions and specific bank portfolio characteristics.
The increase in the allowance from December 31, 2016 to December 31, 2017 within the commercial,
secured by real estate and the real estate-construction segments reflects loan growth in both of these segments as
well as an increase in charge-offs in real estate-construction. The increase in the allowance in commercial,
industrial and other loans relates to the migration of loans into higher risk rating categories. On the other hand,
the decline in the allowance for real estate-residential mortgages and home equity and consumer loans reflects
both a decline in loans outstanding as well as an improvement in asset quality and net charge-offs.
The following table sets forth the allowance for loan and lease losses allocated by loan category and the
percent of loans in each category to total loans at the dates indicated. The allowance for loan and lease losses
allocated to each category is not necessarily indicative of future losses in any particular category and does not
restrict the use of the allowance to absorb losses in other categories.
2017
2016
% of
Loans in
Each
% of
Loans in
Each
December 31,
2015
% of
Loans in
Each
2014
2013
% of
Loans in
Each
% of
Loans in
Each
Category
Allowance
Category Allowance
Category Allowance
Category Allowance
Category Allowance
(dollars in thousands)
Commercial, secured by real
estate
$25,704
68.0% $21,223
66.1% $20,223
59.4% $13,577
57.6% $14,463
56.2%
Commercial, industrial and
other
Leases
Real estate – residential
mortgage
Real estate – construction
Home equity and consumer
Unallocated
Investment Securities
2,313
630
1,557
2,731
2,520
—
8.2%
1.8%
7.8%
6.4%
7.8%
1,723
548
1,964
2,352
3,435
—
9.0%
1.7%
9.0%
5.4%
8.8%
2,637
460
2,588
1,591
3,375
—
10.3%
1.9%
13.1%
4.0%
11.3%
3,196
582
4,020
553
6,333
2,423
9.0%
2.1%
16.2%
2.4%
12.7%
5,331
504
3,214
542
2,737
3,030
8.7%
1.7%
17.5%
2.2%
13.7%
$35,455
100.0% $31,245
100.0% $30,874
100.0% $30,684
100.0% $29,821
100.0%
The Company has classified its investment securities into the available for sale and held to maturity
categories based on its intent and ability to hold the securities to maturity. The Company has no investment
securities classified as trading securities.
-43-
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.
U.S. Treasury and U.S. government agencies
Mortgage-backed securities, residential
Mortgage-backed securities, multifamily
Obligations of states and political subdivisions
Equity securities
Debt securities
December 31,
2017
2016
2015
$180,670
469,245
12,034
94,638
18,089
11,144
(in thousands)
$150,912
442,244
12,246
119,610
21,882
7,424
$127,610
315,918
12,279
82,115
18,645
2,522
$785,820
$754,318
$559,089
The Company also does not own any interests in any hedge funds or private equity funds that are designated
“covered funds” under the Volcker Rule issued in December 2013. All of the Company’s mortgage-backed
securities are issued by U.S. Government or U.S. Government sponsored entities.
The following tables set forth the maturity distribution and weighted average yields (calculated on the basis
of the stated yields to maturity, considering applicable premium or discount), on a fully taxable equivalent basis,
of investment securities as of December 31, 2017, at book value:
Available for Sale
U.S. Treasury and U.S. government agencies
Amount
Yield
Mortgage-backed securities, residential
Amount
Yield
Mortgage-backed securities, multifamily
Amount
Yield
Obligations of states and political subdivisions
Amount
Yield
Debt securities
Amount
Yield
Equity securities
Amount
Yield
Total securities
Amount
Yield
Within
One Year
Over One
but Within
Five Years
Over Five
but Within
Ten Years
After Ten
Years
Total
(dollars in thousands)
$ 4,477
$ 88,753
$ 27,046
$ 26,979
$147,255
1.07%
1.69%
1.78%
2.05%
1.75%
152
2.89%
5,519
2.62%
60,883
347,700
414,254
2.11%
2.19%
2.18%
—
— %
10,077
2.08%
—
— %
—
— %
10,077
2.08%
4,910
2.99%
20,246
23,391
2.66%
2.35%
2,773
3.01%
51,320
2.57%
—
— %
18,089
1.66%
—
— %
—
— %
5,140
5.19%
—
— %
5,140
5.19%
—
— %
—
— %
18,089
1.66%
$27,628
$124,595
$116,460
$377,452
$646,135
1.81%
1.92%
2.22%
2.18%
2.12%
-44-
Held to Maturity
U.S. Treasury and U.S. government agencies
Amount
Yield
Mortgage-backed securities, residential
Amount
Yield
Mortgage-backed securities, multifamily
Amount
Yield
Obligations of states and political subdivisions
Amount
Yield
Debt securities
Amount
Yield
Total securities
Amount
Yield
Other Assets
Within
One Year
Over One
but Within
Five Years
Over Five
but Within
Ten Years
After Ten
Years
Total
(dollars in thousands)
$ 5,001
$21,387
$ 7,027
$ — $ 33,415
1.98%
2.02%
1.76%
— %
1.96%
—
— %
—
— %
—
— %
211
5.05%
54,780
54,991
2.65%
2.66%
1,119
1.09%
—
— %
838
2.37%
1,957
1.63%
10,380
17,599
11,541
1.84%
2.48%
2.88%
3,798
3.13%
43,318
2.49%
1,004
5.75%
—
— %
5,000
4.48%
—
— %
6,004
4.69%
$16,385
$40,105
$23,779
$59,416
$139,685
2.12%
2.20%
2.91%
2.67%
2.51%
Other assets increased from $30.6 million at December 31, 2016 to $35.6 million at December 31, 2017
primarily due to a $3.2 million increase in swap assets.
Deposits
Total deposits increased from $4.09 billion at December 31, 2016 to $4.37 billion at December 31, 2017, an
increase of $275.9 million, or 7%. Noninterest-bearing deposits increased $40.1 million, or 4%, to
$967.3 million. Savings and interest-bearing transaction accounts and time deposits increased $43.3 million and
$192.5 million, respectively.
Total deposits increased from $3.00 billion at December 31, 2015 to $4.09 billion at December 31, 2016, an
increase of $1.10 billion, or 37%. Pascack’s and Harmony’s deposits totaled $304.5 million and $278.1 million,
respectively, at the time of acquisition.
The average amount of deposits and the average rates paid on deposits for the years indicated are
summarized in the following table:
Year Ended December 31,
2017
2016
2015
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Noninterest-bearing demand deposits
Interest-bearing transaction accounts
Savings
Time deposits
(dollars in thousands)
$ 959,298 — % $ 852,629 — % $ 695,630 — %
0.24%
0.05%
0.62%
0.33% 1,511,954
399,431
0.06%
303,682
0.80%
0.45% 1,880,391
485,004
0.06%
506,487
0.98%
2,241,259
486,821
623,257
Total
$4,310,635
0.38% $3,724,511
0.28% $2,910,697
0.20%
-45-
As of December 31, 2017, the aggregate amount of outstanding time deposits issued in amounts of greater
than $250,000, broken down by time remaining to maturity, was as follows (in thousands):
Maturity
Within 3 months
Over 3 through 6 months
Over 6 through 12 months
Over 12 months
Total
$ 40,279
52,306
63,293
24,687
$180,565
Derivatives
Lakeland enters into interest rate swaps (“swaps”) with loan customers to provide a facility to mitigate the
fluctuations in the variable rate on the respective loans. These swaps are matched in offsetting terms to swaps
that Lakeland enters into with an outside third party. The swaps are reported at fair value in other assets or other
liabilities. Lakeland’s swaps qualify as derivatives, but are not designated as hedging instruments; thus any net
gain or loss resulting from changes in the fair value is recognized in other noninterest income.
In 2016, the Company entered into two cash flow hedges in order to hedge the variable cash outflows
associated with its subordinated debentures. The notional value of these hedges was $30.0 million. The
Company’s objectives in using the cash flow hedge is to add stability to interest expense and to manage its
exposure to interest rate movements. The Company used interest rate swaps designated as cash flow hedges
which involved the receipt of variable amounts from a counterparty in exchange for the Company making fixed-
rate payments over the life of the agreements without exchange of the underlying notional amount. In these
particular hedges the Company is paying a third party an average of 1.10% in exchange for a payment at 3 month
LIBOR over a five year period. The effective portion of changes in the fair value of derivatives designated and
that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently
reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2017, the
Company did not record any hedge ineffectiveness.
Further discussion of Lakeland’s financial derivatives is set forth in Note 18 to the audited Consolidated
Financial Statements.
Liquidity
“Liquidity” measures whether an entity has sufficient cash flow to meet its financial obligations and
commitments on a timely basis. The Company is liquid when its subsidiary bank has the cash available to meet
the borrowing and cash withdrawal requirements of customers and the Company can pay for current and planned
expenditures and satisfy its debt obligations.
Lakeland funds loan demand and operation expenses from several sources:
• Net income. Cash provided by operating activities was $67.5 million in 2017 compared to
$50.1 million and $40.8 million in 2016 and 2015, respectively.
• Deposits. Lakeland can offer new products or change its rate structure in order to increase deposits. In
2017, Lakeland generated $275.9 million in deposit growth, compared to $514.7 million in 2016.
•
Sales of securities and overnight funds. At year-end 2017, the Company had $646.1 million in
securities designated “available for sale.” Of these securities, $354.6 million was pledged to secure
public deposits and for other purposes required by applicable laws and regulations.
• Repayments on loans and leases can also be a source of liquidity to fund further loan growth.
-46-
• Overnight credit lines. As a member of the Federal Home Loan Bank of New York (“FHLB”),
Lakeland has the ability to borrow overnight based on the market value of collateral pledged. Lakeland
had no overnight borrowings from the FHLB on December 31, 2017. Lakeland also has overnight
federal funds lines available for it to borrow up to $210.0 million. Lakeland had borrowings against
these lines of $80.0 million at December 31, 2017. Lakeland also has the ability to utilize a line of
credit from the FHLB to secure a portion of its public deposits. Lakeland may also borrow from the
discount window of the Federal Reserve Bank of New York based on the market value of collateral
pledged. Lakeland had no borrowings with the Federal Reserve Bank of New York as of December 31,
2017.
• Other borrowings. Lakeland can also generate funds by utilizing long-term debt or securities sold under
agreements to repurchase that would be collateralized by security or mortgage collateral. At times the
market values of securities collateralizing our securities sold under agreements to repurchase may
decline due to changes in interest rates and may necessitate our lenders to issue a “margin call” which
requires the Company to pledge additional collateral to meet that margin call. For more information
regarding the Company’s borrowings, see Note 8 to the Consolidated Financial Statements.
Management and the Board monitor the Company’s liquidity through the Asset/Liability Committee, which
monitors the Company’s compliance with certain regulatory ratios and other various liquidity guidelines.
The cash flow statements for the periods presented provide an indication of the Company’s sources and uses
of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. Cash
and cash equivalents totaling $142.9 million on December 31, 2017, decreased $32.9 million from December 31,
2016. Operating activities provided $67.5 million in net cash. Investing activities used $355.1 million in net cash,
primarily reflecting an increase in loans and leases and available for sale securities. Financing activities provided
$254.8 million in net cash primarily reflecting a net increase in deposits of $276.5 million, and an increase in
federal funds purchased and securities sold under agreements to repurchase of $68.6 million, partially offset by
net repayments of other borrowings of $71.0 million.
The Company’s management believes that its current level of liquidity is sufficient to meet its current and
anticipated operational needs, including current loan commitments, deposit maturities and other obligations. This
constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual
results could differ materially from anticipated results due to a variety of factors, including uncertainties relating
to general economic conditions; unanticipated decreases in deposits; changes in or failure to comply with
governmental regulations; and uncertainties relating to the analysis of the Company’s assessment of rate sensitive
assets and rate sensitive liabilities and the extent to which market factors indicate that a financial institution such
as Lakeland should match such assets and liabilities.
-47-
Off Balance Sheet Arrangements and Aggregate Contractual Obligations
The following table sets forth contractual obligations and other commitments representing required cash
outflows as of December 31, 2017. Interest on subordinated debentures and other borrowings is calculated based
on current contractual interest rates.
Minimum annual rentals or noncancellable
operating leases
Benefit plan commitments
Remaining contractual maturities of time
deposits
Subordinated debentures
Loan commitments and lines of credit
Other borrowings
Interest on other borrowings (1)
Standby letters of credit
Payment Due Period
Total
Within
One Year
After
One but
Within Three
Years
(in thousands)
After Three
but Within
Five Years
After
Five Years
$
29,832
5,965
$
3,185
307
$
5,898
793
$
4,964
793
$ 15,785
4,072
737,428
104,902
966,441
192,011
61,425
14,832
555,167
—
620,387
70,896
7,984
12,853
150,711
—
181,114
91,144
13,171
1,868
31,550
—
42,246
29,971
10,723
31
—
104,902
122,694
—
29,547
80
Total
$2,112,836
$1,270,779
$444,699
$120,278
$277,080
(1)
Includes interest on other borrowings and subordinated debentures at a weighted rate of 2.86%.
Interest Rate Risk
Closely related to the concept of liquidity is the concept of interest rate sensitivity (i.e., the extent to which
assets and liabilities are sensitive to changes in interest rates). As a financial institution, the Company’s potential
interest rate volatility is a primary component of its market risk. Fluctuations in interest rates will ultimately
impact the level of income and expense recorded on a large portion of the Company’s assets and liabilities, and
the market value of all interest-earning assets, other than those which possess a short term to maturity. Based
upon the Company’s nature of operations, the Company is not subject to foreign currency exchange or
commodity price risk. The Company does not own any trading assets.
The Company’s net income is largely dependent on net interest income. Net interest income is susceptible to
interest rate risk to the extent that interest-bearing liabilities mature or reprice on a different basis than interest-
earning assets. For example, when interest-bearing liabilities mature or reprice more quickly than interest-earning
assets, an increase in market interest rates could adversely affect net interest income. Conversely, when interest-
earning assets reprice more quickly than interest-bearing liabilities, an increase in market interest rates could
increase net interest income.
The Company’s Board of Directors has adopted an Asset/Liability Policy designed to stabilize net interest
income and preserve capital over a broad range of interest rate movements. This policy outlines guidelines and
ratios dealing with, among others, liquidity, volatile liability dependence, investment portfolio composition, loan
portfolio composition, loan-to-deposit ratio and gap analysis ratio. Key quantitative measurements include the
percentage change of net interest income in various interest rate scenarios (net interest income at risk) and
changes in the market value of equity in various rate environments (net portfolio value at risk). The Company’s
performance as compared to the Asset/Liability Policy is monitored by its Board of Directors. In addition, to
effectively administer the Asset/Liability Policy and to monitor exposure to fluctuations in interest rates, the
Company maintains an Asset/Liability Committee (the “ALCO”), consisting of the Chief Executive Officer, the
Chief Financial Officer, a Regional President, Chief Operating Officer, Chief Lending Officer, Chief Retail
-48-
Officer, Chief Credit Officer, Chief Risk Officer, certain other senior officers and certain directors. This
committee meets quarterly to review the Company’s financial results and to develop strategies to implement the
Asset/Liability Policy and to respond to market conditions.
The Company monitors and controls interest rate risk through a variety of techniques, including use of an
interest rate risk management model. With the interest rate risk management model, the Company projects future
net interest income, and then estimates the effect of various changes in interest rates and balance sheet growth
rates on that projected net interest income. The Company also uses the interest rate risk management model to
calculate the change in net portfolio value over a range of interest rate change scenarios.
Interest rate sensitivity modeling is done at a specific point in time and involves a variety of significant
estimates and assumptions. Interest rate sensitivity modeling requires, among other things, estimates of how
much and when yields and costs on individual categories of interest-earning assets and interest-bearing liabilities
will respond to general changes in market rates, future cash flows and discount rates.
Net interest income simulation considers the relative sensitivities of the balance sheet including the effects
of interest rate caps on adjustable rate mortgages and the relatively stable aspects of core deposits. As such, net
interest income simulation is designed to address the probability of interest rate changes and the behavioral
response of the balance sheet to those changes. Market Value of Portfolio Equity represents the fair value of the
net present value of assets, liabilities and off-balance-sheet items. Changes in estimates and assumptions made
for interest rate sensitivity modeling could have a significant impact on projected results and conclusions. These
assumptions could include prepayment rates, sensitivity of non-maturity deposits, decay rates and other similar
assumptions. Therefore, if our assumptions should change, this technique may not accurately reflect the impact
of general interest rate movements on the Company’s net interest income or net portfolio value.
Management reviews the accuracy of its model by back testing its results (comparing predicted results in
past models with current data), and it periodically reviews its prepayment assumptions, decay rates and other
assumptions.
The starting point (or “base case”) for the following table is an estimate of the following year’s net interest
income assuming that both interest rates and the Company’s interest-sensitive assets and liabilities remain at
year-end levels. The net interest income estimated for 2018 (the base case) is $170.0 million. The information
provided for net interest income assumes that changes in interest rates change gradually in equal increments
(“rate ramp”) over the twelve month period.
Rate Ramp
Asset/Liability policy limit
December 31, 2017
December 31, 2016
Changes in Interest Rates
+200 bp
-200 bp
(5.0)%
(1.1)%
(0.5)%
(5.0)%
(3.6)%
(2.4)%
The ALCO’s policy review of interest rate risk includes policy limits for net interest income changes in
various “rate shock” scenarios. Rate shocks assume that current interest rates change immediately. The
information provided for net interest income assumes fluctuations or “rate shocks” for changes in interest rates as
shown in the table below.
Rate Shock
Asset/Liability policy limit
December 31, 2017
December 31, 2016
-49-
Changes in Interest Rates
+300 bp
+200 bp
+100 bp
-100 bp
(15.0)% (10.0)% (5.0)% (5.0)%
0.3% (5.9)%
0.9% (4.8)%
0.3%
1.4%
0.3%
1.9%
In the table above, for a 100 basis point rate decrease in interest rates, net interest income at December 31,
2017 would decrease 5.9% which is slightly above our Asset/Liability Policy limit. Although management
believes that we are in an increasing interest rate environment, the committee will continue to monitor this ratio
to ensure no undue interest rate risk is taken.
The base case for the following table is an estimate of the Company’s net portfolio value for the periods
presented using current discount rates, and assuming the Company’s interest-sensitive assets and liabilities
remain at year-end levels. The net portfolio value at December 31, 2017 (the base case) was $797.7 million. The
information provided for the net portfolio value assumes fluctuations or rate shocks for changes in interest rates
as shown in the table below.
Rate Shock
Asset/Liability policy limit
December 31, 2017
December 31, 2016
Changes in Interest Rates
+300 bp
+200 bp
+100 bp
-100 bp
(25.0)% (20.0)% (10.0)% (10.0)%
(5.0)% (3.3)% (1.4)% (0.4)%
(7.5)% (4.9)% (2.2)% 0.4%
The information set forth above is based on significant estimates and assumptions, and constitutes a
forward-looking statement under the Private Securities Litigation Reform Act of 1995.
The information in the above tables represent the policy scenario that the ALCO reviews on a quarterly
basis. There are also other scenarios run that the ALCO examines that vary depending on the economic
environment. These scenarios include a yield curve flattening scenario and scenarios that show more dramatic
changes in rates. The committee uses alternative scenarios, depending on the economic environment, in its
interest rate management decisions.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements.
Modeling changes in net interest income requires the making of certain assumptions regarding prepayment and
deposit decay rates, which may or may not reflect the manner in which actual yields and costs respond to changes
in market interest rates. While management believes such assumptions are reasonable, there can be no assurance
that assumed prepayment rates and decay rates will approximate actual future loan prepayment and deposit
withdrawal activity. Moreover, the net interest income table presented assumes that the composition of interest
sensitive assets and liabilities existing at the beginning of a period remains constant over the period being
measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve
regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the net
interest income table provides an indication of the Company’s interest rate risk exposure at a particular point in
time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in
market interest rates on net interest income and will differ from actual results.
Effects of Inflation
The impact of inflation, as it affects banks, differs substantially from the impact on non-financial
institutions. Banks have assets which are primarily monetary in nature and which tend to move with inflation.
This is especially true for banks with a high percentage of rate sensitive interest-earning assets and interest-
bearing liabilities. A bank can further reduce the impact of inflation with proper management of its rate
sensitivity gap. This gap represents the difference between interest rate sensitive assets and interest rate sensitive
liabilities. Lakeland attempts to structure its assets and liabilities and manages its gap to protect against
substantial changes in interest rate scenarios, in order to minimize the potential effects of inflation.
Capital Resources
Stockholders’ equity increased from $550.0 million on December 31, 2016 to $583.1 million on
December 31, 2017. The increase in stockholders’ equity from December 31, 2016 to December 31, 2017 was
-50-
primarily due to $52.6 million of net income, partially offset by the payment of cash dividends on common stock
of $18.9 million.
Book value per common share (total common stockholders’ equity divided by the number of shares
outstanding) increased from $11.65 on December 31, 2016 to $12.31 on December 31, 2017, primarily as a result
of net income. Book value per common share was $10.57 on December 31, 2015. Tangible book value per share
increased from $8.70 on December 31, 2016 to $9.38 on December 31, 2017. For more information see “Non-
GAAP Financial Measures.”
The Company and Lakeland are subject to various regulatory capital requirements that are monitored by
federal and state banking agencies. Failure to meet minimum capital requirements can lead to certain supervisory
actions by regulators; any supervisory action could have a direct material adverse effect on the Company or
Lakeland’s financial statements. As of December 31, 2017, the Company and Lakeland met all capital adequacy
requirements to which they are subject.
The final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines
for U.S. banks became effective for the Company on January 1, 2015, with full compliance with all of the final
rule’s requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019. As of
December 31, 2017, the Company’s capital levels remained characterized as “well-capitalized” under the new
rules.
On September 30, 2016, the Company completed an offering of $75.0 million fixed to floating rate
subordinated notes due September 30, 2026. The notes bear interest at a rate of 5.125% per annum until
September 30, 2021 and will then reset quarterly to the then current three-month LIBOR rate plus 397 basis
points until maturity in September 2026 or their earlier redemption. The debt is included in Tier 2 capital for the
Company. On September 30, 2016, the Company contributed $69.9 million to Lakeland’s capital, increasing the
Bank’s capital ratios.
On December 14, 2016, the Company successfully completed an at-the-market common stock issuance. A
total of 2,739,650 shares of the Company’s common stock were sold at a weighted average price of $18.25,
representing gross proceeds to the Company of approximately $50.0 million. Net proceeds from the transaction,
after the sales commission and other expenses, were approximately $48.7 million. The Company contributed
$48.5 million to Lakeland’s capital, increasing the Bank’s capital ratios.
The following table reflects capital ratios of the Company and Lakeland as of December 31, 2017 and 2016:
Capital Ratios
The Company
Lakeland Bank
Required capital ratios including
conservation buffer
“Well capitalized” institution under FDIC
Tier 1 Capital
to Total Average
Assets Ratio
December 31,
2016
2017
Common EquityTier 1
to Risk-Weighted
Assets Ratio
December 31,
2016
2017
Tier 1 Capital
to Risk-Weighted
Assets Ratio
December 31,
2016
2017
Total Capital
to Risk-Weighted
Assets Ratio
December 31,
2016
2017
9.12% 9.07% 10.18% 10.11% 10.87% 10.85% 13.40% 13.48%
10.06% 10.21% 12.00% 12.21% 12.00% 12.21% 12.86% 13.03%
4.00% 4.00% 5.75% 5.125% 7.25% 6.625% 9.25% 8.625%
regulations
5.00% 5.00% 6.50% 6.50% 8.00% 8.00% 10.00% 10.00%
-51-
Non-GAAP Financial Measures
Calculation of Tangible Book Value Per Common
Share
Total common stockholders’ equity at end of period -
GAAP
Less:
2017
2016
December 31,
2015
(dollars in thousands)
2014
2013
$583,122
$550,044
$400,516
$379,438
$351,424
Goodwill
Other identifiable intangible assets, net
136,433
2,362
135,747
3,344
109,974
1,545
109,974
1,960
109,974
2,424
Total tangible common stockholders’ equity at end of
period - Non-GAAP
$444,327
$410,953
$288,997
$267,504
$239,026
Shares outstanding at end of period (1)
47,354
47,223
37,906
37,911
37,874
Book value per share - GAAP (1)
Tangible book value per share - Non-GAAP (1)
$
$
12.31
11.65
10.57
10.01
9.38
8.70
7.62
7.06
9.28
6.31
(1) Adjusted for 5% stock dividends in 2014.
Calculation of Tangible Common Equity
to Tangible Assets
2017
2016
December 31,
2015
(dollars in thousands)
2014
2013
Total tangible common stockholders’
equity at end of period - Non-GAAP
$ 444,327
$ 410,953
$ 288,997
$ 267,504
$ 239,026
Total assets at end of period - GAAP
Less:
Goodwill
Other identifiable intangible assets,
$5,405,639
$5,093,131
$3,869,550
$3,538,325
$3,317,791
136,433
135,747
109,974
109,974
109,974
net
2,362
3,344
1,545
1,960
2,424
Total tangible assets at end of period -
Non-GAAP
$5,266,844
$4,954,040
$3,758,031
$3,426,391
$3,205,393
Common equity to assets - GAAP
10.79%
10.80%
10.35%
10.72%
10.59%
Tangible common equity to tangible
assets - Non-GAAP
8.44%
8.30%
7.69%
7.81%
7.46%
-52-
Calculation of Return on Average Tangible
Common Equity
Net income - GAAP
Total average common stockholders’ equity -
GAAP
Less:
Average goodwill
Average other identifiable intangible assets,
2017
For the Years Ended December 31,
2014
2015
2016
2013
$ 52,580
$ 41,518
$ 31,129
$ 24,969
(dollars in thousands)
$ 32,481
$568,680
$474,540
$392,221
$367,210
$320,923
136,095
130,689
109,974
109,974
100,753
net
2,847
3,225
1,759
2,200
1,513
Total average tangible common stockholders’
equity - Non-GAAP
$429,738
$340,626
$280,488
$255,036
$218,657
Return on average common stockholders’ equity -
GAAP
9.25%
8.75%
8.28%
8.48%
7.78%
Return on average tangible common stockholders’
equity - Non-GAAP
12.24%
12.19%
11.58%
12.21%
11.42%
Reconciliation of Earnings Per Share
Net income - GAAP
Non-routine transactions, net of tax
Debt prepayment charges
Gain on debt extinguishment
Associated gain on sale of investment securities
Excise tax on real estate investment trust (“REIT”) dividend
Adjustment to net deferred tax asset for Tax Cuts and Jobs act
Tax deductible merger related expenses
Non-tax deductible merger related expenses
Net effect of non-routine transactions
For the Years Ended December 31,
2017
2016
2015
(in thousands, except per share amounts)
$41,518
$32,481
$52,580
—
—
—
1,945
(1,343)
—
—
—
—
—
—
—
1,915
866
1,424
(1,082)
(102)
—
—
150
889
$
602
$ 2,781
$ 1,279
Net income available to common shareholders excluding non-routine transactions
Less: earnings allocated to participating securities
53,182
(480)
44,299
(396)
33,760
(263)
Adjusted net income
Weighted average shares - Basic
Weighted average shares - Diluted
Basic earnings per share, GAAP
Diluted earnings per share, GAAP
Basic earnings per share, adjusted for non-routine transactions
Diluted earnings per share, adjusted for non-routine transactions
$52,702
$43,903
$33,497
47,438
47,674
42,912
43,114
37,843
37,993
$
$
$
$
1.10
1.09
1.11
1.11
$
$
$
$
0.96
0.95
1.02
$
$
$
0.85
0.85
0.89
1.02
$ 0.88
-53-
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.
Total interest income
Total interest expense
Net interest income
Provision for loan and lease losses
Noninterest income (excluding investment securities gains)
Gains on investment securities, net
Long-term debt prepayment fee
Core deposit intangible amortization
Noninterest expense
Income before taxes
Income taxes
Net income
Earnings per share of common stock
Basic
Diluted
Total interest income
Total interest expense
Net interest income
Provision for loan and lease losses
Noninterest income (excluding investment securities gains)
Gains on investment securities, net
Merger related expenses
Core deposit intangible amortization
Noninterest expense
Income before taxes
Income taxes
Net income
Earnings per share of common stock
Basic
Diluted
Recent Accounting Pronouncements
Quarter Ended
March 31,
2017
June 30,
2017
September 30,
2017
December 31,
2017
(in thousands, except per share amounts)
$44,796
5,473
$47,212
5,791
$48,735
6,620
$49,461
7,082
39,323
1,218
5,555
2,539
2,828
195
25,447
17,729
5,417
41,421
1,827
6,126
(15)
—
190
25,176
20,339
6,969
42,115
1,827
5,454
—
—
104
24,745
20,893
7,170
42,379
1,218
5,776
—
—
165
25,684
21,088
7,913
$12,312
$13,370
$13,723
$13,175
$
$
0.26
0.26
$
$
0.28
0.28
$
$
0.29
0.29
$
$
0.28
0.27
Quarter Ended
March 31,
2016
June 30,
2016
September 30,
2016
December 31,
2016
(in thousands, except per share amounts)
$37,571
3,721
$39,037
3,935
$43,005
4,487
$43,683
5,504
33,850
1,075
4,497
370
1,721
167
23,536
12,218
4,110
35,102
1,010
4,885
—
685
164
22,866
15,262
5,132
38,518
1,763
6,417
—
1,697
201
24,108
17,166
5,839
38,179
375
5,161
—
—
202
24,570
18,193
6,240
$ 8,108
$10,130
$11,327
$11,953
$
$
0.20
0.20
$
$
0.24
0.24
$
$
0.25
0.25
$
$
0.26
0.26
In February 2018, the Financial Accounting Standards Board (“FASB”) issued an update (ASU 2018-02)
regarding the reclassification of certain tax effects from accumulated other comprehensive income. This update
-54-
requires a reclassification from accumulated other comprehensive income to retained earnings for stranded tax
effects resulting from the newly enacted federal corporate tax rate. The amount of the reclassification would be
the difference between the historical 35% corporate income tax rate and the newly enacted 21% corporate tax
rate. This update would eliminate the stranded tax effects associated with the change in the federal corporate
income tax rate in the Tax Cuts and Jobs Act of 2017 and would improve the usefulness of information reported
to financial statement users. The amendments would be effective for all entities for fiscal years beginning after
December 15, 2018 and interim periods within those fiscal years. Early adoption of the amendments would be
permitted including adoption in any interim period, for public business entities for reporting periods for which
financial statements have not yet been issued and all other entities for reporting periods for which financial
statements have not yet been made available for issuance. An entity would apply the amendments in the update
retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in
the Tax Cuts and Jobs Act of 2017 is recognized. The Company elected to adopt this update in December 2017,
and recorded a $420,000 increase to retained earnings and reduction to accumulated other comprehensive
income.
In August 2017, the FASB issued an update intended to improve and simplify accounting rules around
hedge accounting. Amendments expand and refine hedge accounting for both nonfinancial and financial risk
components and align the recognition and presentation of the effects of the hedging instrument and the hedged
item in the financial statements. The amendments in this update also make certain targeted improvements to
simplify the application of hedge accounting guidance and ease the administrative burden of hedge
documentation requirements and assessing hedge effectiveness. This update will be effective for financial
statements issued for fiscal years and interim periods beginning after December 15, 2019. The Company is still
evaluating the impact that this guidance will have on its financial statements.
In July 2017, the FASB issued guidance which simplifies the accounting for certain financial instruments
with down round features, a provision in an equity-linked financial instrument (or embedded feature) that
provides a downward adjustment of the current exercise price based on the price of future equity offerings. The
provisions of the new guidance related to down rounds are effective for public business entities for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this update is
not expected to have a material impact on the Company’s financial statements because the Company does not
have any equity-linked financial instruments that have such down round features.
In May 2017, the FASB issued an update which provides clarity and reduces diversity in practice when
accounting for the modification of terms and conditions for share-based payment awards. Previous accounting
guidance did not distinguish between modifications which were substantive from modifications that were merely
administrative. The accounting standards update requires entities to account for the effects of a modification
unless the following three conditions are met: the fair value of the modified award is the same as the fair value of
the original award immediately before the original award is modified; the vesting conditions of the modified
award are the same as the vesting conditions of the original award immediately before the original award is
modified; and the classification of the modified award as an equity instrument or a liability instrument is the
same as the classification of the original award immediately before the original award is modified. This update
will be effective for annual and interim periods beginning after December 15, 2017. The adoption of this update
is not expected to have a material impact on the Company’s financial statements.
In March 2017, the FASB issued an update which shortens the amortization period for certain callable debt
securities held at a premium to the earliest call date. Under current GAAP, entities amortize the premium as an
adjustment of yield over the contractual life of the instrument even if the holder is certain that the call will be
exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized
premium is recorded as a loss in earnings. The update shortens the amortization period for certain callable debt
securities held at a premium and requires the premium be amortized to the earliest call date. This update will be
effective for annual and interim periods beginning after December 15, 2018. Entities are required to apply the
amendments on a modified retrospective basis through a cumulative-effect adjustment directly to retained
-55-
earnings as of the beginning of the period of adoption. The adoption of this update is not expected to have a
material impact on the Company’s financial statements.
In March 2017, the FASB issued an update which changes the presentation of net periodic pension cost and
net periodic postretirement benefit cost in a company’s income statement. The amendment requires that an
employer report the service cost component in the same line item as other compensation costs arising from
services rendered by the pertinent employees during the period. The other components of net benefit cost are to
be presented in the income statement separately from the service cost component and outside a subtotal of
income from operations, if one is presented. The amendment is effective for annual and interim periods
beginning after December 15, 2017. Because the Company has minimal benefit plans that require the
measurement of net periodic pension cost and net periodic post retirement benefit cost, the adoption of this
update is not expected to have an impact on the Company’s financial statements.
In January 2017, the FASB issued an update to simplify the test for goodwill impairment. This amendment
eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is
performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should
be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. This update
will be effective for the Company’s financial statements for annual years beginning after December 15, 2019.
The adoption of this update is not expected to have a material impact on the Company’s financial statements.
In January 2017, the FASB issued an update that clarifies the definition of a business as it pertains to
business combinations. This amendment affects all companies and other reporting organizations that must
determine whether they have sold or acquired a business. This update will be effective for the Company’s
financial statements for fiscal years beginning after December 15, 2017. The adoption of this update is not
expected to have an impact on the Company’s financial statements.
In September 2016, the FASB issued an accounting standards update to address diversity in presentation in
how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This
update will be effective for financial statements issued for fiscal years and interim periods beginning after
December 15, 2017. The adoption of this update is not expected to have an impact on the Company’s
consolidated balance sheet or statement of income.
In June 2016, the FASB issued an accounting standards update pertaining to the measurement of credit
losses on financial instruments. This update requires the measurement of all expected credit losses for financial
instruments held at the reporting date based on historical experience, current conditions, and reasonable and
supportable forecasts. Financial institutions and other organizations will now use forward-looking information to
better inform their credit loss estimates. This update is intended to improve financial reporting by requiring
timelier recording of credit losses on loans and other financial instruments held by financial institutions and other
organizations. This update will be effective for financial statements issued for fiscal years and interim periods
beginning after December 15, 2019. The Company is currently evaluating its existing systems and data to support
the new standard as well as assessing the impact that the guidance will have on the Company’s consolidated
financial statements. The Company has formed a working group under the direction of the chief risk officer that
is comprised of individuals from the credit, risk management, finance and project management areas. The
Company has been developing an implementation plan as well as considering various software providers and
consultants to aid it in implementation.
In March 2016, the FASB issued an accounting standards update to simplify employee share-based payment
accounting. The areas for simplification in this update involve several aspects of the accounting for employee
share-based payment transactions, including the income tax consequences, classification of awards as either
equity or liabilities, and classification on the statement of cash flows. The standard specifically requires excess
tax benefits and tax deficiencies to be recorded in the income statement when awards vest or are settled. The
Company adopted this accounting standards update in the first quarter of 2017. As a result, during 2017, the
-56-
Company recorded $587,000 in excess tax benefits in the income statement. The Company elected to continue its
existing practice of estimating the number of awards that will be forfeited. The Company elected to apply the
cash flow classification guidance prospectively, and therefore, prior periods have not been adjusted.
In March 2016, the FASB issued an accounting standards update that requires that embedded derivatives be
separated from the host contract and accounted for separately as derivatives if certain criteria are met, including
the “clearly and closely related” criterion. The amendments in this update clarify the requirements for assessing
whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly
and closely related to their debt hosts. The Company adopted this accounting standards update in the first quarter
of 2017. The adoption of this update did not have an impact on the Company’s financial statements.
In February 2016, FASB issued accounting guidance that requires all lessees to recognize a lease liability
and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease
commencement date. Lessor accounting remains largely unchanged under the new guidance. The guidance is
effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that
reporting period, with early adoption permitted. A modified retrospective approach must be applied for leases
existing at, or entered into after, the beginning of the earliest comparative period presented in the financial
statements. The Company is currently assessing the impact of the new guidance on its consolidated financial
statements by reviewing its existing lease contracts and service contracts that may include embedded leases. The
Company expects to record an increase in assets and liabilities as a result of recognizing a right-of-use asset and
a lease liability for its operating lease commitments.
In January 2016, the FASB issued an accounting standards update intended to improve the recognition and
measurement of financial instruments. Specifically, the accounting standards update requires all equity
instruments, with the exception of those that are accounted for under the equity method of accounting, to be
measured at fair value with changes in the fair value recognized through net income. Additionally, public
business entities are required to use the exit price notion when measuring the fair value of financial instruments
for disclosure purposes. The amendments in this update also require an entity to present separately in other
comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the
instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with
the fair value option for financial instruments. This amendment is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2017. The adoption of this update required an adjustment
on January 1, 2018 from other comprehensive income to retained earnings for the amount of the unrealized gain
on equity securities as of December 31, 2017. Thereafter, any increases or decreases to the market value on these
equity securities will be recorded through the consolidated statement of income.
In May 2014, the FASB issued an accounting standards update that clarifies the principles for recognizing
revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of
promised goods or services to a customer in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for these goods or services. To achieve that core principle, an entity should apply the
following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the
contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in
the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In 2016, the
FASB issued further implementation guidance regarding revenue recognition. This additional guidance included
clarification on certain principal versus agent considerations within the implementation of the guidance as well as
clarification related to identifying performance obligations and licensing. The guidance also requires new
qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance
obligations. The guidance along with its updates is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2017. In evaluating this standard, management has determined that the
majority of revenue earned by the Company is from revenue streams not included in the scope of this standard.
The Company has assessed its revenue streams and reviewed contracts potentially affected by the guidance
including deposit related fees, interchange fees, investment commissions, merchant fee income and other
-57-
noninterest income sources to determine the potential impact the new guidance is expected to have on the
Company’s consolidated financial statements. The Company adopted the guidance on January 1, 2018 using the
modified retrospective method. The Company does not expect a cumulative-effect adjustment to opening
retained earnings as a result of adopting this standard.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk.
See Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
-58-
Item 8 - Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Lakeland Bancorp, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Lakeland Bancorp, Inc. and subsidiaries
(the Company) as of December 31, 2017 and 2016, the related consolidated statements of income,
comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements). In
our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2018 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a
public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
We have served as the Company’s auditor since 2013.
Short Hills, New Jersey
February 28, 2018
-59-
Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash
Interest-bearing deposits due from banks
Total cash and cash equivalents
Investment securities, available for sale, at fair value
Investment securities, held to maturity, at amortized cost with fair value of $138,688
in 2017 and $146,990 in 2016
Federal Home Loan Bank and other membership stock, at cost
Loans and leases, net of deferred fees
Less: allowance for loan and lease losses
Net loans
Loans held for sale
Premises and equipment, net
Accrued interest receivable
Goodwill
Other identifiable intangible assets
Bank owned life insurance
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing
Savings and interest-bearing transaction accounts
Time deposits through $250 thousand
Time deposits over $250 thousand
Total deposits
Federal funds purchased and securities sold under agreements to repurchase
Other borrowings
Subordinated debentures
Other liabilities
TOTAL LIABILITIES
STOCKHOLDERS’ EQUITY:
Common stock, no par value; authorized 70,000,000 shares; issued shares,
47,353,864 at December 31, 2017 and 47,222,914 at December 31, 2016
Retained earnings
Accumulated other comprehensive (loss) income
TOTAL STOCKHOLDERS’ EQUITY
December 31,
2017
2016
(dollars in thousands)
$ 114,138
28,795
$ 169,149
6,652
142,933
175,801
646,135
606,704
139,685
12,576
4,152,720
35,455
4,117,265
456
50,313
14,416
136,433
2,362
107,489
35,576
147,614
15,099
3,870,598
31,245
3,839,353
1,742
52,236
12,557
135,747
3,344
72,384
30,550
$5,405,639
$5,093,131
$ 967,335
2,663,985
556,863
180,565
$ 927,270
2,620,657
404,680
140,228
4,368,748
124,936
192,011
104,902
31,920
4,092,835
56,354
260,866
104,784
28,248
4,822,517
4,543,087
512,734
72,737
(2,349)
583,122
510,861
38,590
593
550,044
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$5,405,639
$5,093,131
The accompanying notes are an integral part of these statements.
-60-
Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
2015
2016
2017
(in thousands, except per share
data)
INTEREST INCOME
Loans, leases and fees
Federal funds sold and interest-bearing deposits with banks
Taxable investment securities and other
Tax-exempt investment securities
TOTAL INTEREST INCOME
INTEREST EXPENSE
Deposits
Federal funds purchased and securities sold under agreements to repurchase
Other borrowings
TOTAL INTEREST EXPENSE
NET INTEREST INCOME
Provision for loan and lease losses
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE
LOSSES
NONINTEREST INCOME
Service charges on deposit accounts
Commissions and fees
Income on bank owned life insurance
Gain on debt extinguishment
Gains on sales of loans
Gain on sales and calls of investment securities, net
Other income
TOTAL NONINTEREST INCOME
NONINTEREST EXPENSE
Salaries and employee benefits
Net occupancy expense
Furniture and equipment
FDIC insurance expense
Stationery, supplies and postage
Marketing expense
Data processing expense
Telecommunications expense
ATM and debit card expense
Core deposit intangible amortization
Other real estate and repossessed asset expense
Long-term debt prepayment fee
Merger related expenses
Other expenses
TOTAL NONINTEREST EXPENSE
Income before provision for income taxes
Provision for income taxes
NET INCOME
PER SHARE OF COMMON STOCK:
Basic earnings
Diluted earnings
Cash dividends
The accompanying notes are an integral part of these statements.
-61-
$172,342 $149,777 $115,295
62
10,563
1,594
880
14,987
1,995
569
11,163
1,787
190,204 163,296 127,514
16,600
198
8,168
10,512
69
7,066
5,755
110
5,009
24,966
17,647
10,874
165,238 145,649 116,640
1,942
4,223
6,090
159,148 141,426 114,698
10,740
4,858
2,354
—
1,836
2,524
3,123
10,157
4,349
2,562
10,024
4,568
2,017
— 1,830
1,681
241
800
2,123
370
1,769
25,435
21,330
21,161
61,166
10,243
8,269
1,577
1,797
1,675
1,993
1,607
2,051
654
181
2,828
—
10,493
56,107
9,935
8,017
2,248
1,727
1,672
1,891
1,631
1,582
734
116
—
4,103
10,154
48,640
8,956
6,930
2,086
1,529
1,586
1,524
1,448
1,398
415
181
2,407
1,152
8,959
104,534
99,917
87,211
80,049
27,469
62,839
21,321
48,648
16,167
$ 52,580 $ 41,518 $ 32,481
$
$
$
1.10 $
1.09 $
0.40 $
0.96 $
0.95 $
0.37 $
0.85
0.85
0.33
Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31,
2016
2015
2017
NET INCOME
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized losses on securities available for sale
Reclassification for securities gains included in net income
Unrealized gains on derivatives
Change in pension liability, net
Other comprehensive loss
TOTAL COMPREHENSIVE INCOME
The accompanying notes are an integral part of these statements.
$52,580
(in thousands)
$41,518
$32,481
(903)
(1,640)
37
(16)
(2,522)
(1,038)
(233)
672
42
(557)
(220)
(157)
—
4
(373)
$50,058
$40,961
$32,108
-62-
Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2017, 2016 and 2015
Common Stock
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
(in thousands)
Total
At December 31, 2014
$384,731
$ (6,816)
$ 1,523
$379,438
Net income
Other comprehensive loss, net of tax
Stock based compensation
Issuance of stock
Retirement of restricted stock
Exercise of stock options, net of excess tax benefits
Cash dividends, common stock
—
—
1,605
22
(254)
183
—
32,481
—
—
—
—
—
(12,586)
—
(373)
—
—
—
—
—
32,481
(373)
1,605
22
(254)
183
(12,586)
At December 31, 2015
$386,287
$ 13,079
$ 1,150
$400,516
Net income
Other comprehensive loss, net of tax
Stock based compensation
Issuance of stock for Pascack acquisition
Issuance of stock for Harmony acquisition
Issuance of stock
Retirement of restricted stock
Exercise of stock options, net of excess tax benefits
Cash dividends, common stock
—
—
1,899
37,221
36,654
48,678
(206)
328
—
41,518
—
—
—
—
—
—
—
(16,007)
—
(557)
—
—
—
—
—
—
—
41,518
(557)
1,899
37,221
36,654
48,678
(206)
328
(16,007)
At December 31, 2016
$510,861
$ 38,590
$
593
$550,044
Net income
Other comprehensive loss, net of tax
Adjustment related to implementation of ASU 2018-02
Stock based compensation
Retirement of restricted stock
Exercise of stock options
Cash dividends, common stock
—
—
—
2,325
(773)
321
—
52,580
—
420
—
—
—
(18,853)
—
(2,522)
(420)
—
—
—
—
52,580
(2,522)
—
2,325
(773)
321
(18,853)
At December 31, 2017
$512,734
$ 72,737
$(2,349)
$583,122
The accompanying notes are an integral part of these statements.
-63-
Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2016
2015
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premiums, discounts and deferred loan fees and costs
Depreciation and amortization
Amortization of intangible assets
Provision for loan and lease losses
Stock based compensation
Loans originated for sale
Proceeds from sales of loans held for sale
Gains on sales of securities
Gains on sales of loans held for sale
Gains on proceeds from bank owned life insurance policies
Gains on debt redemption and extinguishment
Gains on other real estate and other repossessed assets
Loss (gain) on sale of premises and equipment
Long-term debt prepayment penalty
Deferred tax expense (benefit)
Excess tax benefits
Increase in other assets
Increase in other liabilities
NET CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash acquired in acquisitions
Proceeds from repayments and maturities of available for sale securities
Proceeds from repayments and maturities of held to maturity securities
Proceeds from sales of available for sale securities
Purchase of available for sale securities
Purchase of held to maturity securities
Proceeds from redemptions of Federal Home Loan Bank stock
Purchases of Federal Home Loan Bank stock
Purchase of bank owned life insurance
Death benefit proceeds from bank owned life insurance policy
Net increase in loans and leases
Proceeds from dispositions and sales of bank premises and equipment
Purchases of premises and equipment
Proceeds from sales of other real estate and other repossessed assets
NET CASH USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits
Increase (decrease) in federal funds purchased and securities sold under agreements to
repurchase
Proceeds from other borrowings
Repayments of other borrowings
Redemption of subordinated debentures, net
Net proceeds from issuance of subordinated debt
Exercise of stock options
Net proceeds from issuance of common stock
Retirement of restricted stock
Excess tax benefits
Dividends paid
NET CASH PROVIDED BY FINANCING ACTIVITIES
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
CASH AND CASH EQUIVALENTS, END OF YEAR
-64-
(in thousands)
$ 52,580
$ 41,518
$ 32,481
5,153
4,536
654
6,090
2,325
(60,783)
63,905
(2,524)
(1,836)
(109)
—
(646)
(838)
2,828
16,904
587
(25,065)
3,705
4,581
3,961
734
4,223
1,899
(85,365)
86,859
(370)
(2,003)
(864)
—
(248)
117
—
(987)
—
(5,600)
1,618
4,151
3,410
415
1,942
1,605
(71,833)
72,873
(241)
(1,681)
(435)
(1,830)
(102)
(6)
2,407
(824)
—
(5,257)
3,691
67,466
50,073
40,766
—
91,314
43,218
4,500
(140,565)
(35,841)
13,497
(10,974)
(33,000)
312
(289,914)
1,638
(3,972)
4,638
68,751
79,425
28,421
15,654
(245,699)
(59,715)
3,054
(323)
—
2,129
(334,040)
21
(3,977)
3,545
—
71,368
24,453
33,613
(92,904)
(33,811)
456
(4,697)
(7,000)
1,186
(315,067)
696
(4,838)
1,608
(355,149)
(442,754)
(324,937)
276,537
515,437
204,854
68,582
306,184
(377,183)
—
—
321
—
(773)
—
(18,853)
(94,880)
14,921
(91,798)
—
73,516
285
48,678
(206)
43
(16,007)
42,299
117,000
(50,000)
(8,170)
—
124
22
(254)
59
(12,586)
254,815
449,989
293,348
(32,868)
175,801
57,308
118,493
9,177
109,316
$ 142,933
$ 175,801
$ 118,493
Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Supplemental schedule of non-cash investing and financing activities:
Cash paid during the period for income taxes
Cash paid during the period for interest
Transfer of loans and leases into other repossessed assets and other real estate owned
Acquisitions of Pascack and Harmony:
Non-cash assets acquired:
Federal Home Loan Bank stock
Investment securities held for maturity
Investment securities available for sale
Loans, including loans held for sale
Goodwill and other intangible assets, net
Other assets
Total non-cash assets acquired
Liabilities assumed:
Deposits
Other borrowings
Other liabilities
Total liabilities assumed
Common stock issued for acquisitions
The accompanying notes are an integral part of these statements.
Years Ended December 31,
2015
2016
2017
(in thousands)
$27,423
24,571
3,763
$ 21,744
16,435
3,386
$16,737
10,770
1,462
—
—
—
—
—
—
—
—
—
—
—
—
3,742
10,810
7,474
579,560
29,060
32,381
663,027
(582,526)
(66,622)
(8,755)
(657,903)
73,875
—
—
—
—
—
—
—
—
—
—
—
—
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Lakeland Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
Lakeland Bancorp, Inc. (the “Company”) is a bank holding company whose principal activity is the
ownership and management of its wholly owned subsidiary, Lakeland Bank (“Lakeland”). Lakeland
operates under a state bank charter and provides full banking services and, as a state bank, is subject to
regulation by the New Jersey Department of Banking and Insurance. Lakeland generates commercial,
mortgage and consumer loans and receives deposits from customers located primarily in Northern and
Central New Jersey. Through a third party, Lakeland also provides non-deposit products, such as securities
brokerage services, including mutual funds and variable annuities.
Lakeland operates as a commercial bank offering a wide variety of commercial loans and leases and, to
a lesser degree, consumer credits. Its primary strategic aim is to establish a reputation and market presence
as the “small and middle market business bank” in its principal markets. Lakeland funds its loans primarily
by offering demand deposit, savings and money market, and time deposit accounts to both commercial
enterprises and individuals. Additionally, it originates residential mortgage loans, and services such loans
which are owned by other investors. Lakeland also has an equipment finance division which provides
equipment lease financing primarily to small and medium sized business clients and an asset based lending
department which specializes in utilizing particular assets to fund the working capital needs of borrowers.
The Company and Lakeland are subject to regulations of certain state and federal agencies and,
accordingly, are periodically examined by those regulatory authorities. As a consequence of the extensive
regulation of commercial banking activities, Lakeland’s business is particularly susceptible to being affected
by state and federal legislation and regulations.
Basis of Financial Statement Presentation
The accounting and reporting policies of the Company and its subsidiaries conform with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) and predominant practices
within the banking industry. The consolidated financial statements include the accounts of the Company,
Lakeland, Lakeland NJ Investment Corp., Lakeland Investment Corp., Lakeland Equity, Inc. and Lakeland
Preferred Equity, Inc. All significant intercompany balances and transactions have been eliminated in
consolidation. Certain reclassifications have been made in the consolidated financial statements to conform
with current year classifications.
The preparation of financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements. These estimates and assumptions also affect reported amounts of revenues
and expenses during the reporting period. Actual results could differ from these estimates. The principal
estimates that are particularly susceptible to significant change in the near term relate to the allowance for
loan and lease losses and the valuation of the Company’s investment securities portfolio. The policies
regarding these estimates are discussed below.
The Company’s operating segments are components of its enterprise for which separate financial
information is available and is evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and assess performance. The Company’s chief operating decision maker is its Chief
Executive Officer. All of the Company’s financial services activities are interrelated, and each activity is
dependent and assessed based on how each of the activities of the Company supports the others. For
example, commercial lending is dependent upon the ability of Lakeland to fund itself with retail deposits
and other borrowings and to manage interest rate and credit risk. The situation is also similar for consumer
and residential mortgage lending. Moreover, the Company primarily operates in one market area, Northern
and Central New Jersey and contiguous areas. Therefore, all significant operating decisions are based upon
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analysis of the Company as one operating segment or unit. Accordingly, the Company has determined that it
has one operating segment and thus one reporting segment.
Cash and Cash Equivalents
Cash and cash equivalents are defined as cash on hand, cash items in the process of collection, amounts
due from banks and federal funds sold with an original maturity of three months or less. A portion of
Lakeland’s cash on hand and on deposit with the Federal Reserve Bank was required to meet regulatory
reserve and clearing requirements.
Investment Securities
Investment securities are classified as held to maturity or available for sale. Management determines
the appropriate classification of investment securities at the time of purchase. Investments in securities, for
which management has both the ability and intent to hold to maturity, are classified as held to maturity and
carried at cost, adjusted for the amortization of premiums and accretion of discounts computed by the
effective interest method. Investments in debt and equity securities, which management believes may be
sold prior to maturity due to changes in interest rates, prepayment risk, liquidity requirements, or other
factors, are classified as available for sale. Net unrealized gains and losses for such securities, net of tax
effect, are reported as other comprehensive income (loss) and excluded from the determination of net
income. Gains or losses on disposition of investment securities are based on the net proceeds and the
adjusted carrying amount of the securities sold using the specific identification method. Losses are recorded
through the statement of income when the impairment is considered other-than-temporary, even if a
decision to sell has not been made.
The Company evaluates its investment securities portfolio for impairment each quarter. In estimating
other-than-temporary losses, the Company considers the length of time and the extent to which the fair
value has been less than cost, the financial condition and near-term prospects of the issuer, and whether the
Company is more likely than not to sell the security before recovery of its cost basis. If a security has been
impaired for more than twelve months, and the impairment is deemed other-than-temporary, a write down
will occur in that quarter. If a loss is deemed to be other-than-temporary, it is recognized as a realized loss in
the income statement with the security assigned a new cost basis.
If the Company intends to sell an impaired security, the Company records an other-than-temporary loss
in an amount equal to the entire difference between the fair value and amortized cost. If a security is
determined to be other-than-temporarily impaired, but the Company does not intend to sell the security, only
the credit portion of the estimated loss is recognized in earnings in gain (loss) on securities, with the other
portion of the loss recognized in other comprehensive income. If a determination is made that an equity
security is other-than-temporarily impaired, the unrealized loss will be recognized as an other-than-
temporary impairment charge in noninterest income as a component of gain (loss) on investment securities.
Loans and Leases and Allowance for Loan and Lease Losses
Loans and leases that management has the intent and ability to hold for the foreseeable future or until
maturity or payoff are stated at the amount of unpaid principal and are net of unearned discount, unearned
loan fees and an allowance for loan and lease losses.
Interest income is accrued as earned on a simple interest basis, adjusted for prepayments. All
unamortized fees and costs related to the loan are amortized over the life of the loan using the interest
method. Accrual of interest is discontinued on a loan or lease when management believes, after considering
economic and business conditions and collection efforts, that the borrower’s financial condition is such that
full collection of interest and principal is doubtful. When a loan or lease is placed on such non-accrual
status, all accumulated accrued interest receivable is reversed out of current period income.
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Commercial loans and leases are placed on a non-accrual status with all accrued interest and unpaid
interest reversed if (a) because of the deterioration in the financial position of the borrowers they are
maintained on a cash basis (which means payments are applied when and as received rather than on a
regularly scheduled basis), (b) payment in full of interest or principal is not expected, or (c) principal and
interest have been in default for a period of 90 days or more unless the obligation is both well-secured and
in process of collection. Residential mortgage loans and closed-end consumer loans are placed on non-
accrual status at the time principal and interest have been in default for a period of 90 days or more, except
where there exists sufficient collateral to cover the defaulted principal and interest payments, and the loans
are well-secured and in the process of collection. Open-end consumer loans secured by real estate are
generally placed on non-accrual and reviewed for charge-off when principal and interest payments are four
months in arrears unless the obligations are well-secured and in the process of collection. Interest thereafter
on such charged-off loans is taken into income when received only after full recovery of principal. As a
general rule, a non-accrual asset may be restored to accrual status when none of its principal or interest is
due and unpaid, satisfactory payments have been received for a sustained period (usually six months), or
when it otherwise becomes well-secured and in the process of collection.
The Company defines impaired loans as all non-accrual loans with recorded investments of $500,000
or greater. Impaired loans also include all loans modified as troubled debt restructurings. Loans and leases
are considered impaired when, based on current information and events, it is probable that Lakeland will be
unable to collect all amounts due in accordance with the original contractual terms of the loan agreement,
including scheduled principal and interest payments.
Impairment is measured based on the present value of expected cash flows discounted at the loan’s
effective interest rate, or as a practical expedient, Lakeland may measure impairment based on a loan’s
observable market price, or the fair value of the collateral, less estimated costs to sell, if the loan is
collateral-dependent. Regardless of the measurement method, Lakeland measures impairment based on the
fair value of the collateral when it is determined that foreclosure is probable. Most of Lakeland’s impaired
loans are collateral-dependent. Shortfalls in collateral or cash flows are charged-off or specifically reserved
for in the period the short-fall is identified. Charge-offs are recommended by the Chief Credit Officer and
approved by the Board.
Lakeland groups impaired commercial loans under $500,000 into homogeneous pools and collectively
evaluates them. Interest received on impaired loans and leases may be recorded as interest income.
However, if management is not reasonably certain that an impaired loan and lease will be repaid in full, or if
a specific time frame to resolve full collection cannot yet be reasonably determined, all payments received
are recorded as reductions of principal.
Purchased Credit-Impaired (“PCI”) loans are loans acquired through acquisition or purchased at a
discount that is due, in part, to credit quality. PCI loans are accounted for in accordance with ASC Subtopic
310-30 and are initially recorded at fair value (as determined by the present value of expected future cash
flows) with no valuation allowance (i.e., the allowance for loan losses). The difference between the
undiscounted cash flows expected at acquisition and the initial carrying amount (fair value) of the covered
loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the
life of the loans. Contractually required payments for interest and principal that exceed the undiscounted
cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield
adjustment, as a loss accrual or a valuation allowance. Reclassifications of the non-accretable difference to
the accretable yield may occur subsequent to the loan acquisition dates due to increases in expected cash
flows of the loans and results in an increase in yield on a prospective basis. Subsequent to acquisition date,
further credit deterioration of a PCI loan will result in a valuation allowance recognized in the allowance for
loan and lease losses.
Loans are classified as troubled debt restructured loans (“TDRs”) in cases where borrowers experience
financial difficulties and Lakeland makes certain concessionary modifications to contractual terms.
Restructured loans typically involve a modification of terms such as a reduction of the stated interest rate, an
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extended moratorium of principal payments and/or an extension of the maturity date at a stated interest rate
lower than the current market rate for a new loan with similar risk. Nonetheless, restructured loans are
classified as impaired loans.
If a loan has been restructured, it will continue to be classified as a TDR until it is fully repaid or until
it meets all of the following criteria: 1) the borrower is no longer experiencing financial difficulties, 2) the
rate is not less than the rate provided for similar credit risk, 3) other terms are no less favorable than similar
new debt and 4) no concessions were granted.
The allowance for loan and lease losses is the estimated amount considered necessary to cover probable
and reasonably estimable incurred losses inherent in the loan portfolio at the balance sheet date. In
determining the allowance, we make significant estimates and judgments, and, therefore, have identified the
allowance as a critical accounting policy. The allowance is established through a provision for loan and
lease losses charged against income. Loan principal considered to be uncollectible by management is
charged against the allowance.
The allowance for loan and lease losses has been determined in accordance with U.S. GAAP. We are
responsible for the timely and periodic determination of the amount of the allowance required. We believe
that our allowance is adequate to cover identifiable losses, as well as estimated losses inherent in our
portfolio for which certain losses are probable but not specifically identifiable.
The determination of the adequacy of the allowance for loan and lease losses and the periodic
provisioning for estimated losses included in the consolidated financial statements is the responsibility of
management and the Board of Directors. Management performs a formal quarterly evaluation of the
allowance for loan and lease losses. This quarterly process is performed by the credit administration
department and approved by the Chief Credit Officer. All supporting documentation with regard to the
evaluation process is maintained by the credit administration department. Each quarter, the evaluation along
with the supporting documentation is reviewed by the finance department before approval by the Chief
Credit Officer. The allowance evaluation is then presented to an Allowance for Loan and Lease Losses
committee, which gives final approval to the allowance evaluation before presented to the Board of
Directors for their approval.
Additionally, the Company continually evaluates, through its governance process, the development of
the allowance for loan and lease losses methodology. During the 3rd quarter of 2017, the Company refined
and enhanced its quantitative framework by implementing loss migration periods to determine historical
loss rates. It also enhanced its qualitative framework to complement the loss migration historical loss rates.
These enhancements were implemented to increase the level of precision in the allowance for loan and lease
losses and did not result in a material change in the required allowance for loan and lease losses.
The methodology employed for assessing the adequacy of the allowance consists of the following
criteria:
• The establishment of specific reserve amounts for impaired loans and leases, including PCI loans.
• The establishment of reserves for pools of homogeneous loans and leases not subject to specific
review, including impaired loans under $500,000, leases, 1 – 4 family residential mortgages, and
consumer loans.
The establishment of reserve amounts for pools of homogeneous loans and leases are based upon the
determination of historical loss rates, which are adjusted to reflect current conditions through the use of
qualitative factors. The qualitative factors considered by the Company includes an evaluation of the results
of the Company’s independent loan review function, the Company’s reporting capabilities, the adequacy
and expertise of Lakeland’s lending staff, underwriting policies, loss histories, trends in the portfolio,
delinquency trends, economic and business conditions and capitalization rates. Since many of Lakeland’s
loans depend on the sufficiency of collateral as a secondary source of repayment, any adverse trends in the
real estate market could affect the underlying values available to protect Lakeland from losses.
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Additionally, management determines the loss emergence periods for each loan segment, which are
used to define loss migration periods and establish appropriate ranges for qualitative adjustments for each
loan segment. The loss emergence period is the estimated time from the date of a loss event (such as a
personal bankruptcy) to the actual recognition of the loss (typically via the first partial or full loan charge-
off), and is determined based upon a study of our past loss experience by loan segment. All of the factors
considered in the analysis of the adequacy of the allowance for loan and lease losses may be subject to
change. To the extent actual outcomes differ from management estimates, additional provisions for loan and
lease losses may be required that would adversely impact earnings in future periods.
A loan that management designates as impaired is reviewed for charge-off when it is placed on non-
accrual status with a resulting charge-off if the loan is not secured by collateral having sufficient liquidation
value to repay the loan if the loan is collateral dependent or charged off if deemed uncollectible. For a loan
that is not collateral dependent, a reserve may be established for any shortfall in expected cash flows.
Charge-offs are recommended by the Chief Credit Officer and approved by the Board.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of
aggregate cost or estimated fair value. Gains and losses on sales of loans are specifically identified and
accounted for in accordance with U.S. GAAP which requires that an entity engaged in mortgage banking
activities classify the retained mortgage-backed security or other interest, which resulted from the
securitization of a mortgage loan held for sale, based upon its ability and intent to sell or hold these
investments.
Premises and Equipment, Net
Premises and equipment, including leasehold improvements, are stated at cost less accumulated
depreciation. Depreciation expense is computed on the straight-line method over the estimated useful lives
of the assets. Leasehold improvements are depreciated over the shorter of the estimated useful lives of the
improvements or the terms of the related leases.
Other Real Estate Owned and Other Repossessed Assets
Other real estate owned (OREO) and other repossessed assets, representing property acquired through
foreclosure (or deed-in-lieu-of-foreclosure), are carried at fair value less estimated disposal costs of the
acquired property. Costs relating to holding the assets are charged to expense. An allowance for OREO or
other repossessed assets is established, through charges to expense, to maintain properties at fair value less
estimated costs to sell. Operating results of OREO and other repossessed assets, including rental income and
operating expenses, are included in other expenses.
Mortgage Servicing
Lakeland performs various servicing functions on loans owned by others. A fee, usually based on a
percentage of the outstanding principal balance of the loan, is received for these services. At December 31,
2017 and 2016, Lakeland was servicing approximately $23.0 million and $26.9 million, respectively, of
loans for others.
Lakeland originates certain mortgages under a definitive plan to sell or securitize those loans and
service the loans owned by the investor. Upon the transfer of the mortgage loans in a sale or a securitization,
Lakeland records the servicing assets retained. Lakeland records mortgage servicing rights and the loans
based on relative fair values at the date of origination and evaluates the mortgage servicing rights for
impairment at each reporting period. Lakeland also originates loans that it sells to other banks and investors
and does not retain the servicing rights.
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Mortgage Servicing Rights
When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair
value with the income statement effect recorded in gains on sales of loans. Fair value is based on market
prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation
model that calculates the present value of estimated future net servicing income. All classes of servicing
assets are subsequently measured using the amortization method which requires servicing rights to be
amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing
income of the underlying loans. As of December 31, 2017 and 2016, Lakeland had originated mortgage
servicing rights of $88,000 and $124,000, respectively.
Under the amortization measurement method, Lakeland subsequently measures servicing rights at fair
value at each reporting date and records any impairment in value of servicing assets in earnings in the period
in which the impairment occurs. The fair values of servicing rights are subject to fluctuations as a result of
changes in estimated and actual prepayment speeds and default rates and losses. Servicing fee income,
which is reported on the income statement as commissions and fees, is recorded for fees earned for servicing
loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per
loan, and are recorded as income when earned.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been
surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Company, put presumptively beyond the reach of the transferor and its creditors even in
bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from
taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not
maintain effective control over the transferred assets through an agreement to repurchase them before their
maturity or the ability to unilaterally cause the holder to return specific assets.
Derivatives
Lakeland enters into interest rate swaps (“swaps”) with loan customers to provide a facility to mitigate
the fluctuations in the variable rate on the respective loans. These swaps are matched in offsetting terms to
swaps that Lakeland enters into with an outside third party. The swaps are reported at fair value in other
assets or other liabilities. Lakeland’s swaps qualify as derivatives, but are not designated as hedging
instruments, thus any net gain or loss resulting from changes in the fair value is recognized in other
noninterest income.
The credit risk associated with derivatives executed with customers is similar as that involved in
extending loans and is subject to normal credit policies. Collateral is obtained based on management’s
assessment of the customer. The positions of customer derivatives are recorded at fair value and changes in
value are included in noninterest income on the consolidated statement of income.
Cash flow hedges are used primarily to minimize the variability in cash flows of assets or liabilities, or
forecasted transactions caused by interest rate fluctuations. Changes in the fair value of derivatives
designated as cash flow hedges are recorded in accumulated other comprehensive income and are
reclassified into the line item in the income statement in which the hedged item is recorded in the same
period the hedged item affects earnings. Hedge ineffectiveness and gains and losses on the component of a
derivative excluded in assessing hedge effectiveness are recorded in the same income statement line item.
Further discussion of Lakeland’s financial derivatives is set forth in Note 18 to the Consolidated
Financial Statements.
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Earnings Per Share
Earnings per share is calculated on the basis of the weighted average number of common shares
outstanding during the year. Basic earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average common shares outstanding during the period.
Diluted earnings per share takes into account the potential dilution that could occur if securities or other
contracts to issue common stock were exercised and converted into common stock.
Employee Benefit Plans
The Company has certain employee benefit plans covering substantially all employees. The Company
accrues such costs as incurred.
We recognize the overfunded or underfunded status of pension and postretirement benefit plans in
accordance with U.S. GAAP. Actuarial gains and losses, prior service costs or credits, and any remaining
transition assets or obligations are recognized as a component of Accumulated Other Comprehensive
Income, net of tax effects, until they are amortized as a component of net periodic benefit cost.
Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in addition to net income from operations. Other
comprehensive income (loss) includes items recorded directly in equity such as unrealized gains or losses on
securities available for sale as well unrealized gains (losses) recorded on derivatives and benefit plans.
Goodwill and Other Identifiable Intangible Assets
Goodwill is presumed to have an indefinite useful life and is tested, at least annually, for impairment at
the reporting unit level. Impairment exists when the carrying amount of goodwill exceeds its implied fair
value. For purposes of our goodwill impairment testing, we have identified a single reporting unit,
community banking.
U.S. GAAP permits an entity to make a qualitative assessment of whether it is more likely than not that
a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill
impairment test. The Company completed its annual qualitative assessment as of November 30, 2017 and
concluded that there was less than a 50% probability that the fair value of the reporting unit is less than its
carrying amount and, therefore, the two-step goodwill impairment test was not required.
Bank Owned Life Insurance
Lakeland invests in bank owned life insurance (“BOLI”). BOLI involves the purchasing of life
insurance by Lakeland on a chosen group of employees. Lakeland is the owner and beneficiary of the
policies. At December 31, 2017 and 2016, Lakeland had $107.5 million and $72.4 million, respectively, in
BOLI. Income earned on BOLI was $2.4 million, $2.6 million and $2.0 million for the years ended
December 31, 2017, 2016 and 2015, respectively. BOLI is accounted for using the cash surrender value
method and is recorded at its net realizable value.
Income Taxes
The Company accounts for income taxes under the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect
when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and
liabilities. The principal types of differences between assets and liabilities for financial statement and tax
return purposes are allowance for loan and lease losses, core deposit intangibles, deferred loan fees and
deferred compensation.
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Variable Interest Entities
Management has determined that Lakeland Bancorp Capital Trust II and Lakeland Bancorp Capital
Trust IV (collectively, “the Trusts”) qualify as variable interest entities. The Trusts issued mandatorily
redeemable preferred stock to investors and loaned the proceeds to the Company. The Trusts hold, as their
sole asset, subordinated debentures issued by the Company. The Company is not considered the primary
beneficiary of the Trusts, therefore the Trusts are not consolidated in the Company’s financial statements.
The Company’s maximum exposure to the Trusts is $30.0 million at December 31, 2017 which is the
Company’s liability to the Trusts and includes the Company’s investment in the Trusts.
The Federal Reserve has issued guidance on the regulatory capital treatment for the trust preferred
securities issued by the Trusts. The rule retains the current maximum percentage of total capital permitted
for trust preferred securities at 25%, but enacts other changes to the rules governing trust preferred securities
that affect their use as part of the collection of entities known as “restricted core capital elements.” The rule
allows bank holding companies to continue to count trust preferred securities as Tier 1 Capital. The
Company’s capital ratios continue to be categorized as “well-capitalized” under the regulatory framework
for prompt corrective action. Under the Collins Amendment to the Dodd-Frank Wall Street Reform and
Consumer Protection Act, any new issuance of trust preferred securities by the Company would not be
eligible as regulatory capital.
New Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board (“FASB”) issued an update (ASU 2018-
02) regarding the reclassification of certain tax effects from accumulated other comprehensive income. This
update requires a reclassification from accumulated other comprehensive income to retained earnings for
stranded tax effects resulting from the newly enacted federal corporate tax rate. The amount of the
reclassification would be the difference between the historical 35% corporate income tax rate and the newly
enacted 21% corporate tax rate. This update would eliminate the stranded tax effects associated with the
change in the federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 and would improve the
usefulness of information reported to financial statement users. The amendments would be effective for all
entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years.
Early adoption of the amendments would be permitted including adoption in any interim period, for public
business entities for reporting periods for which financial statements have not yet been issued and all other
entities for reporting periods for which financial statements have not yet been made available for issuance.
An entity would apply the amendments in the update retrospectively to each period in which the effect of
the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 is recognized.
The Company elected to adopt this update in December 2017, and recorded a $420,000 increase to retained
earnings and reduction to accumulated other comprehensive income.
In August 2017, the FASB issued an update intended to improve and simplify accounting rules around
hedge accounting. Amendments expand and refine hedge accounting for both nonfinancial and financial risk
components and align the recognition and presentation of the effects of the hedging instrument and the
hedged item in the financial statements. The amendments in this update also make certain targeted
improvements to simplify the application of hedge accounting guidance and ease the administrative burden
of hedge documentation requirements and assessing hedge effectiveness. This update will be effective for
financial statements issued for fiscal years and interim periods beginning after December 15, 2019. The
Company is still evaluating the impact that this guidance will have on its financial statements.
In July 2017, the FASB issued guidance which simplifies the accounting for certain financial
instruments with down round features, a provision in an equity-linked financial instrument (or embedded
feature) that provides a downward adjustment of the current exercise price based on the price of future
equity offerings. The provisions of the new guidance related to down rounds are effective for public
business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15,
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2018. The adoption of this update is not expected to have a material impact on the Company’s financial
statements because the Company does not have any equity-linked financial instruments that have such down
round features.
In May 2017, the FASB issued an update which provides clarity and reduces diversity in practice when
accounting for the modification of terms and conditions for share-based payment awards. Previous
accounting guidance did not distinguish between modifications which were substantive from modifications
that were merely administrative. The accounting standards update requires entities to account for the effects
of a modification unless the following three conditions are met: the fair value of the modified award is the
same as the fair value of the original award immediately before the original award is modified; the vesting
conditions of the modified award are the same as the vesting conditions of the original award immediately
before the original award is modified; and the classification of the modified award as an equity instrument
or a liability instrument is the same as the classification of the original award immediately before the
original award is modified. This update will be effective for annual and interim periods beginning after
December 15, 2017. The adoption of this update is not expected to have a material impact on the
Company’s financial statements.
In March 2017, the FASB issued an update which shortens the amortization period for certain callable
debt securities held at a premium to the earliest call date. Under current GAAP, entities amortize the
premium as an adjustment of yield over the contractual life of the instrument even if the holder is certain
that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a
premium, the unamortized premium is recorded as a loss in earnings. The update shortens the amortization
period for certain callable debt securities held at a premium and requires the premium be amortized to the
earliest call date. This update will be effective for annual and interim periods beginning after December 15,
2018. Entities are required to apply the amendments on a modified retrospective basis through a cumulative-
effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of
this update is not expected to have a material impact on the Company’s financial statements.
In March 2017, the FASB issued an update which changes the presentation of net periodic pension cost
and net periodic postretirement benefit cost in a company’s income statement. The amendment requires that
an employer report the service cost component in the same line item as other compensation costs arising
from services rendered by the pertinent employees during the period. The other components of net benefit
cost are to be presented in the income statement separately from the service cost component and outside a
subtotal of income from operations, if one is presented. The amendment is effective for annual and interim
periods beginning after December 15, 2017. Because the Company has minimal benefit plans that require
the measurement of net periodic pension cost and net periodic post retirement benefit cost, the adoption of
this update is not expected to have an impact on the Company’s financial statements.
In January 2017, the FASB issued an update to simplify the test for goodwill impairment. This
amendment eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill
impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An
impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting
unit’s fair value. This update will be effective for the Company’s financial statements for annual years
beginning after December 15, 2019. The adoption of this update is not expected to have a material impact
on the Company’s financial statements.
In January 2017, the FASB issued an update that clarifies the definition of a business as it pertains to
business combinations. This amendment affects all companies and other reporting organizations that must
determine whether they have sold or acquired a business. This update will be effective for the Company’s
financial statements for fiscal years beginning after December 15, 2017. The adoption of this update is not
expected to have an impact on the Company’s financial statements.
In September 2016, the FASB issued an accounting standards update to address diversity in
presentation in how certain cash receipts and cash payments are presented and classified in the statement of
cash flows. This update will be effective for financial statements issued for fiscal years and interim periods
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beginning after December 15, 2017. The adoption of this update is not expected to have an impact on the
Company’s consolidated balance sheet or statement of income.
In June 2016, the FASB issued an accounting standards update pertaining to the measurement of credit
losses on financial instruments. This update requires the measurement of all expected credit losses for
financial instruments held at the reporting date based on historical experience, current conditions, and
reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-
looking information to better inform their credit loss estimates. This update is intended to improve financial
reporting by requiring timelier recording of credit losses on loans and other financial instruments held by
financial institutions and other organizations. This update will be effective for financial statements issued
for fiscal years and interim periods beginning after December 15, 2019. The Company is currently
evaluating its existing systems and data to support the new standard as well as assessing the impact that the
guidance will have on the Company’s consolidated financial statements. The Company has formed a
working group under the direction of the chief risk officer that is comprised of individuals from the credit,
risk management, finance and project management areas. The Company has been developing an
implementation plan as well as considering various software providers and consultants to aid it in
implementation.
In March 2016, the FASB issued an accounting standards update to simplify employee share-based
payment accounting. The areas for simplification in this update involve several aspects of the accounting for
employee share-based payment transactions, including the income tax consequences, classification of
awards as either equity or liabilities, and classification on the statement of cash flows. The standard
specifically requires excess tax benefits and tax deficiencies to be recorded in the income statement when
awards vest or are settled. The Company adopted this accounting standards update in the first quarter of
2017. As a result, during 2017, the Company recorded $587,000 in excess tax benefits in the income
statement. The Company elected to continue its existing practice of estimating the number of awards that
will be forfeited. The Company elected to apply the cash flow classification guidance prospectively, and
therefore, prior periods have not been adjusted.
In March 2016, the FASB issued an accounting standards update that requires that embedded
derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria
are met, including the “clearly and closely related” criterion. The amendments in this update clarify the
requirements for assessing whether contingent call or put options that can accelerate the payment of
principal on debt instruments are clearly and closely related to their debt hosts. The Company adopted this
accounting standards update in the first quarter of 2017. The adoption of this update did not have an impact
on the Company’s financial statements.
In February 2016, FASB issued accounting guidance that requires all lessees to recognize a lease
liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the
lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The
guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods
within that reporting period, with early adoption permitted. A modified retrospective approach must be
applied for leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements. The Company is currently assessing the impact of the new guidance on
its consolidated financial statements by reviewing its existing lease contracts and service contracts that may
include embedded leases. The Company expects to record an increase to assets and liabilities as a result of
recognizing a right-of-use asset and a lease liability for its operating lease commitments.
In January 2016, the FASB issued an accounting standards update intended to improve the recognition
and measurement of financial instruments. Specifically, the accounting standards update requires all equity
instruments, with the exception of those that are accounted for under the equity method of accounting, to be
measured at fair value with changes in the fair value recognized through net income. Additionally, public
business entities are required to use the exit price notion when measuring the fair value of financial
instruments for disclosure purposes. The amendments in this update also require an entity to present
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separately in other comprehensive income the portion of the total change in the fair value of a liability
resulting from a change in the instrument-specific credit risk when the entity has elected to measure the
liability at fair value in accordance with the fair value option for financial instruments. This amendment is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.
The adoption of this update required an adjustment on January 1, 2018 from other comprehensive income to
retained earnings for the amount of the unrealized gain on equity securities as of December 31, 2017.
Thereafter, any increases or decreases to the market value on these equity securities will be recorded
through the consolidated statement of income.
In May 2014, the FASB issued an accounting standards update that clarifies the principles for
recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict
the transfer of promised goods or services to a customer in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for these goods or services. To achieve that core
principle, an entity should apply the following steps: (i) identify the contract(s) with a customer; (ii) identify
the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction
price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity
satisfies a performance obligation. In 2016, the FASB issued further implementation guidance regarding
revenue recognition. This additional guidance included clarification on certain principal versus agent
considerations within the implementation of the guidance as well as clarification related to identifying
performance obligations and licensing. The guidance also requires new qualitative and quantitative
disclosures, including disaggregation of revenues and descriptions of performance obligations. The guidance
along with its updates is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2017. In evaluating this standard, management has determined that the majority of
revenue earned by the Company is from revenue streams not included in the scope of this standard. The
Company has assessed its revenue streams and reviewed contracts potentially affected by the guidance
including deposit related fees, interchange fees, investment commissions, merchant fee income and other
noninterest income sources to determine the potential impact the new guidance is expected to have on the
Company’s consolidated financial statements. The Company adopted the guidance on January 1, 2018 using
the modified retrospective method. The Company does not expect a cumulative-effect adjustment to
opening retained earnings as a result of adopting this standard.
NOTE 2 - ACQUISITIONS
Harmony Bank
On July 1, 2016, the Company completed its acquisition of Harmony Bank (“Harmony”), a bank
located in Ocean County, New Jersey. Effective upon the opening of business on July 1, 2016, Harmony
was merged into Lakeland Bank. Harmony operated three branches in Ocean County, New Jersey. This
merger allowed the Company to expand its presence to Ocean County. The merger agreement provided that
shareholders of Harmony would receive 1.25 shares of the Company’s common stock for each share of
Harmony Bank common stock that they owned at the effective time of the merger. The Company issued an
aggregate of 3,201,109 shares of its common stock in the merger. Outstanding Harmony stock options were
paid out in cash at the difference between $14.31 (Lakeland’s closing stock price on July 1, 2016 of
$11.45 multiplied by 1.25) and the average strike price of $9.07 for a total cash payment of $869,000.
During 2017, the Company revised the estimate of the fair value of the acquired assets as of the
acquisition date as a result of additional information obtained. The adjustment, net of tax, related to the fair
market value of certain loans and the valuation of core deposit intangible, resulted in a $685,000 increase to
goodwill.
The acquisition was accounted for under the acquisition method of accounting. Accordingly, the assets
acquired and liabilities assumed in the acquisition were recorded at their estimated fair values based on
management’s best estimates using information available at the date of the acquisition, including the use of
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a third party valuation specialist. The following table summarizes the estimated fair value of the acquired
assets and liabilities assumed at the date of acquisition for Harmony, net of cash consideration paid.
Cash and cash equivalents
Securities available for sale
Securities held to maturity
Federal Home Loan Bank stock
Loans
Premises and equipment
Goodwill
Identifiable intangible assets
Accrued interest receivable and other assets
Total assets acquired
Deposits
Other borrowings
Other liabilities
Total liabilities assumed
Net assets acquired
(in thousands)
$ 27,809
7,474
6,885
780
259,985
3,125
11,147
1,088
8,146
326,439
(278,060)
(9,314)
(2,411)
(289,785)
$ 36,654
Loans acquired in the Harmony acquisition were recorded at fair value, and there was no carryover
related to the allowance for loan and lease losses. The fair value of loans acquired from Harmony was
estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were
adjusted for estimated future credit losses and the rate of prepayments. Projected cash flows were then
discounted to present value using a risk-adjusted market rate for similar loans.
The following is a summary of the loans accounted for in accordance with ASC 310-30 that were
acquired in the Harmony acquisition as of the closing date.
Contractually required principal and interest at acquisition
Contractual cash flows not expected to be collected (non-accretable
difference)
Expected cash flows at acquisition
Interest component of expected cash flows (accretable difference)
Fair value of acquired loans
Acquired
Credit
Impaired
Loans
(in thousands)
$1,264
(398)
866
(97)
$ 769
The core deposit intangible totaled $691,000 and is being amortized over its estimated useful life of
approximately 10 years using an accelerated method. The goodwill will be evaluated annually for
impairment. The goodwill is not deductible for tax purposes.
The fair value of deposit liabilities with no stated maturities such as checking, money market and
savings accounts, was assumed to equal the carrying amounts since these deposits are payable on demand.
The fair values of certificates of deposits and IRAs represent the present value of contractual cash flows
discounted at market rates for similar certificates of deposit.
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Pascack Bancorp
On January 7, 2016, the Company completed its acquisition of Pascack Bancorp, Inc. (“Pascack”), a
bank holding company headquartered in Waldwick, New Jersey. Pascack was the parent of Pascack
Community Bank, which operated 8 branches in Bergen and Essex Counties in New Jersey. This acquisition
enabled the Company to broaden its presence in Bergen and Essex counties. Effective as of the close of
business on January 7, 2016, Pascack merged into the Company, and Pascack Community Bank merged into
Lakeland Bank. The merger agreement provided that the shareholders of Pascack would receive, at their
election, for each outstanding share of Pascack common stock that they owned at the effective time of the
merger, either 0.9576 shares of Lakeland Bancorp common stock or $11.35 in cash, subject to proration as
described in the merger agreement, so that 90% of the aggregate merger consideration was shares of
Lakeland Bancorp common stock and 10% was cash. Lakeland Bancorp issued 3,314,284 shares of its
common stock in the merger and paid approximately $4.5 million in cash, including the cash paid in
connection with the cancellation of Pascack stock options. Outstanding Pascack stock options were paid out
in cash at the difference between $11.35 and an average strike price of $7.37 for a total cash payment of
$122,000. This transaction resulted in $15.3 million of goodwill and generated $1.5 million in core deposit
intangibles.
The acquisition was accounted for under the acquisition method of accounting. Accordingly, the assets
acquired and liabilities assumed in the acquisition were recorded at their estimated fair values based on
management’s best estimates using information available at the date of the acquisition, including the use of
a third party valuation specialist. The following table summarizes the estimated fair value of the acquired
assets and liabilities assumed at the date of acquisition for Pascack, net of cash consideration paid.
Cash and cash equivalents
Securities held to maturity
Federal Home Loan Bank stock
Loans
Premises and equipment
Goodwill
Identifiable intangible assets
Accrued interest receivable and other assets
Total assets acquired
Deposits
Other borrowings
Other liabilities
Total liabilities assumed
Net assets acquired
(in thousands)
$ 40,942
3,925
2,962
319,575
14,438
15,311
1,514
6,672
405,339
(304,466)
(57,308)
(6,344)
(368,118)
$ 37,221
Loans acquired in the Pascack acquisition were recorded at fair value, and there was no carryover
related to the allowance for loan and lease losses. The fair value of loans acquired from Pascack was
estimated using cash flow projections based on remaining maturity and repricing terms. Cash flows were
adjusted for estimated future credit losses and the rate of prepayments. Projected cash flows were then
discounted to present value using a risk-adjusted market rate for similar loans.
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The following is a summary of the loans accounted for in accordance with ASC 310-30 that were
acquired in the Pascack acquisition as of the closing date.
Contractually required principal and interest at acquisition
Contractual cash flows not expected to be collected (non-accretable
difference)
Expected cash flows at acquisition
Interest component of expected cash flows (accretable difference)
Fair value of acquired loans
Acquired
Credit
Impaired
Loans
(in thousands)
$4,932
4,030
902
85
$ 817
The core deposit intangible totaled $1.5 million and is being amortized over its estimated useful life of
approximately 10 years using an accelerated method. The goodwill will be evaluated annually for
impairment. The goodwill is not deductible for tax purposes.
The fair value of deposit liabilities with no stated maturities such as checking, money market and
savings accounts, was assumed to equal the carrying amounts since these deposits are payable on demand.
The fair values of certificates of deposits and IRAs represent the present value of contractual cash flows
discounted at market rates for similar certificates of deposit.
Direct costs related to the Pascack and Harmony acquisitions were expensed as incurred. During the
years ended December 31, 2016 and 2015, the Company incurred $4.1 million and $1.2 million
respectively, of merger and acquisition integration-related expenses, which have been separately stated in
the Company’s consolidated statements of income.
NOTE 3 - EARNINGS PER SHARE
The Company uses the two class method to compute earnings per common share. Participating
securities include non-vested restricted stock and non-vested restricted stock units. The following tables
present the computation of basic and diluted earnings per share for the periods presented.
Year Ended December 31, 2017
Basic earnings per share
Net income available to common shareholders
Less: earnings allocated to participating
Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
(in thousands, except per share amounts)
$52,580
47,438
$ 1.11
securities
(480)
—
Net income available to common shareholders
$52,100
47,438
(0.01)
$ 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
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Year Ended December 31, 2016
Basic earnings per share
Net income available to common shareholders
Less: earnings allocated to participating
Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
(in thousands, except per share amounts)
$41,518
42,912
$ 0.97
securities
(396)
—
Net income available to common shareholders
$41,122
42,912
(0.01)
$ 0.96
Effect of dilutive securities
Stock options and restricted stock
—
202
(0.01)
Diluted earnings per share
Net income available to common shareholders
plus assumed conversions
$41,122
43,114
$ 0.95
Year Ended December 31, 2015
Basic earnings per share
Net income available to common shareholders
Less: earnings allocated to participating
Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
(in thousands, except per share amounts)
$32,481
37,844
$ 0.86
securities
(263)
—
(0.01)
Net income available to common shareholders
$32,218
37,844
$ 0.85
Effect of dilutive securities
Stock options and restricted stock
—
149
—
Diluted earnings per share
Net income available to common shareholders
plus assumed conversions
$32,218
$37,993
$ 0.85
There were no antidilutive options to purchase common stock to be excluded from the above
computations.
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NOTE 4 - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and the fair value of the Company’s available
for sale and held to maturity investment securities are as follows:
December 31, 2017
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
December 31, 2016
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Fair
Value
Amortized
Cost
(in thousands)
$148,968
$
78
$(1,791) $147,255 $118,537
$ 102
$(1,280) $117,359
AVAILABLE FOR SALE
U.S. Treasury and U.S.
government agencies
Mortgage-backed securities,
residential
419,538
479
(5,763)
414,254
406,851
1,174
(4,487)
403,538
Mortgage-backed securities,
multifamily
Obligations of states and
political subdivisions
Debt securities
Equity securities
HELD TO MATURITY
U.S. government agencies
Mortgage-backed securities,
residential
Mortgage-backed securities,
multifamily
Obligations of states and
political subdivisions
Debt securities
10,133
7
(63)
10,077
10,192
30
(35)
10,187
51,289
5,000
15,545
448
140
3,000
(417)
—
(456)
51,320
5,140
18,089
48,868
5,350
17,314
391
63
5,000
(933)
(1)
(432)
48,326
5,412
21,882
$650,473
$4,152
$(8,490) $646,135 $607,112
$6,760
$(7,168) $606,704
December 31, 2017
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
December 31, 2016
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Fair
Value
Amortized
Cost
(in thousands)
$ 33,415
$
24
$ (402) $ 33,037 $ 33,553
$ 144
$ (430) $ 33,267
54,991
1,957
43,318
6,004
249
—
306
14
(978)
54,262
38,706
(22)
1,935
2,059
(188)
—
43,436
6,018
71,284
2,012
369
—
269
51
(598)
38,477
(44)
2,015
(385)
—
71,168
2,063
$139,685
$ 593
$(1,590) $138,688 $147,614
$ 833
$(1,457) $146,990
The following table lists contractual maturities of investment securities classified as available for sale
and held to maturity. Expected maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment penalties.
December 31, 2017
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
Equity securities
Total securities
Available for Sale
Held to Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
9,387
109,655
56,380
29,835
205,257
429,671
15,545
(in thousands)
$
9,387
108,999
55,577
29,752
203,715
424,331
18,089
$ 16,385
38,986
23,568
3,798
82,737
56,948
—
$ 16,401
38,903
23,392
3,795
82,491
56,197
—
$650,473
$646,135
$139,685
$138,688
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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,
2016
2015
2017
Sale proceeds
Gross gains
Gross losses
$4,500
2,539
(15)
(in thousands)
$15,654
370
—
$33,613
304
(63)
Gains or losses on sales of securities are based on the net proceeds and the adjusted carrying amount of
the securities sold using the specific identification method.
Securities with a carrying value of approximately $400.4 million and $443.4 million at December 31,
2017 and 2016, respectively, were pledged to secure public deposits and for other purposes required by
applicable laws and regulations.
The following table indicates the length of time individual securities have been in a continuous
unrealized loss position at December 31, 2017 and 2016:
December 31, 2017
Less than 12 Months 12 Months or Longer
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Number of
Securities Fair Value
Unrealized
Losses
(dollars in thousands)
AVAILABLE FOR SALE
U.S. Treasury and U.S. government agencies
Mortgage-backed securities, residential
Mortgage-backed securities, multifamily
Obligations of states and political subdivisions
Equity securities
HELD TO MATURITY
U.S. government agencies
Mortgage-backed securities, residential
Mortgage-backed securities, multifamily
Obligations of states and political subdivisions
27
118
1
39
2
187
4
25
2
23
54
$135,160 $1,791
5,763
357,126
63
5,088
417
22,582
456
9,657
$529,613 $8,490
$ 22,091 $ 402
978
22
188
45,293
1,935
21,381
$ 90,700 $1,590
$ 80,391 $ 646 $ 54,769 $1,145
4,040
63
340
456
157,739
5,088
12,970
9,657
199,387
—
9,612
—
1,723
—
77
—
$289,390 $2,446 $240,223 $6,044
$ 15,371 $
26,090
1,935
15,353
95 $
426
22
56
6,720 $ 307
552
—
132
19,203
—
6,028
$ 58,749 $ 599 $ 31,951 $ 991
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December 31, 2016
Less than 12 Months 12 Months or Longer
Total
AVAILABLE FOR SALE
U.S. Treasury and U.S. government agencies
Mortgage-backed securities, residential
Mortgage-backed securities, multifamily
Obligations of states and political subdivisions
Debt securities
Equity securities
HELD TO MATURITY
U.S. government agencies
Mortgage-backed securities, residential
Mortgage-backed securities, multifamily
Obligations of states and political subdivisions
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Number of
securities Fair Value
Unrealized
Losses
(dollars in thousands)
$ 94,153 $1,280
4,078
35
933
1
94
292,873
5,178
29,904
350
6,030
$ —
15,453
—
—
—
4,720
$428,488 $6,421
$20,173
$ 17,147 $ 430
535
44
384
27,909
2,015
50,302
$ —
1,061
—
401
$ 97,373 $1,393
$ 1,462
$—
409
—
—
—
338
$747
$—
63
—
1
$ 64
18
91
1
54
1
2
$ 94,153 $1,280
4,487
308,326
35
5,178
933
29,904
1
350
432
10,750
167
$448,661 $7,168
3
15
2
43
63
$ 17,147 $ 430
598
44
385
28,970
2,015
50,703
$ 98,835 $1,457
Management has evaluated the securities in the above table and has concluded that none of the
securities with unrealized losses has impairments that are other-than-temporary. Fair value below cost is
solely due to interest rate movements and is deemed temporary.
Investment securities, including the mortgage-backed securities and corporate securities, are evaluated
on a periodic basis to determine if factors are identified that would require further analysis. In evaluating the
Company’s securities, management considers the following items:
• The Company’s ability and intent to hold the securities, including an evaluation of the need to sell
the security to meet certain liquidity measures, or whether the Company has sufficient levels of
cash to hold the identified security in order to recover the entire amortized cost of the security;
• The financial condition of the underlying issuer;
• The credit ratings of the underlying issuer and if any changes in the credit rating have occurred;
• The length of time the security’s fair value has been less than amortized cost; and
• Adverse conditions related to the security or its issuer if the issuer has failed to make scheduled
payments or other factors.
If the above factors indicate an additional analysis is required, management will perform a discounted
cash flow analysis evaluating the security.
As of December 31, 2017, the equity securities included investments in other financial institutions for
market appreciation purposes. These equities had a purchase price of $2.2 million and market value of
$5.2 million as of December 31, 2017.
As of December 31, 2017, equity securities also included $12.9 million in investment funds that do not
have a quoted market price, but use net asset value per share or its equivalent to measure fair value. The
investment funds include $3.3 million in funds that are primarily invested in community development loans
that are guaranteed by the Small Business Administration (SBA). Because the funds are primarily
guaranteed by the federal government there are minimal changes in market value between accounting
periods. These funds can be redeemed within 60 day’s notice at the net asset value less unpaid management
fees with the approval of the fund manager. As of December 31, 2017, the net amortized cost equaled the
market value of the investment. There are no unfunded commitments related to this investment. The
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investment funds also include $9.6 million in funds that are invested in government guaranteed loans,
mortgage-backed securities, small business loans and other instruments supporting affordable housing and
economic development. The Company may redeem these funds at the net asset value calculated at the end of
the current business day less any unpaid management fees. As of December 31, 2017, the amortized cost of
these securities was $10.1 million and the fair value was $9.6 million. There are no restrictions on
redemptions for the holdings in these investments other than the notice required by the fund manager. There
are no unfunded commitments related to this investment.
NOTE 5 - LOANS AND LEASES AND OTHER REAL ESTATE
The following sets forth the composition of Lakeland’s loan and lease portfolio:
Commercial, secured by real estate
Commercial, industrial and other
Leases
Real estate - residential mortgage
Real estate - construction
Home equity and consumer
Total loans and leases
Less deferred fees
Loans and leases, net of deferred fees
December 31,
2017
2016
(in thousands)
$2,831,184
340,400
75,039
322,880
264,908
322,269
$2,556,601
350,228
67,016
349,581
211,109
339,360
4,156,680
(3,960)
3,873,895
(3,297)
$4,152,720
$3,870,598
At December 31, 2017 and December 31, 2016, Lakeland had $1.1 billion and $942.0 million in loans
pledged for potential borrowings at the Federal Home Loan Bank of New York (“FHLB”). As of
December 31, 2017 and 2016, home equity and consumer loans included overdraft deposit balances of
$966,000 and $364,000, respectively.
Purchased Credit Impaired Loans
The carrying value of loans acquired in the Pascack acquisition and accounted for in accordance with
ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” was
$190,000 at December 31, 2017, which was $627,000 less than the balance at the time of acquisition on
January 7, 2016. In the first quarter of 2017, one of the Pascack purchased credit impaired loans totaling
$127,000 experienced further credit deterioration and was fully charged off. Also in the second quarter of
2017, one of the Pascack PCI loans totaling $218,000 was fully paid off. The carrying value of loans
acquired in the Harmony acquisition was $520,000 at December 31, 2017 which was $249,000 less than the
balance at acquisition date on July 1, 2016. In the second quarter of 2017, a Harmony PCI loan with a net
value of $247,000 was fully paid off.
Under ASC Subtopic 310-30, PCI loans may be aggregated and accounted for as pools of loans if the
loans being aggregated have common risk characteristics. The Company elected to account for the loans
with evidence of credit deterioration individually rather than aggregate them into pools.
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The following table presents changes in the accretable yield for PCI loans (in thousands):
Balance, beginning of period
Acquisitions
Accretion
Net reclassification non-accretable difference
Balance, end of period
Years Ended December 31,
2017
$ 145
—
(202)
186
$ 129
2016
$—
182
(98)
61
$145
Portfolio Segments
Lakeland currently manages its credit products and the respective exposure to credit losses (credit risk)
by the following specific portfolio segments which are levels at which Lakeland develops and documents its
systematic methodology to determine the allowance for loan and lease losses attributable to each respective
portfolio segment. These segments are:
• Commercial, secured by real estate - consists of commercial mortgage loans secured by owner
occupied properties and non-owner occupied properties. The loans secured by owner occupied
properties involve a variety of property types to conduct the borrower’s operations. The primary
source of repayment for this type of loan is the cash flow from the business and is based upon the
borrower’s financial health and the ability of the borrower and the business to repay. The loans
secured by non-owner occupied properties involve investment properties for warehouse, retail,
office space, etc., with a history of occupancy and cash flow. This commercial real estate category
contains mortgage loans to the developers and owners of commercial real estate where the
borrower intends to operate or sell the property at a profit and use the income stream or proceeds
from the sale to repay the loan.
• Commercial, industrial and other - are loans made to provide funds for equipment and general
corporate needs. Repayment of a loan primarily uses the funds obtained from the operation of the
borrower’s business. Commercial loans also include lines of credit that are utilized to finance a
borrower’s short-term credit needs and/or to finance a percentage of eligible receivables and
inventory.
• Leases - includes a small portfolio of equipment leases, which consists of leases primarily for
essential equipment used by small to medium sized businesses.
• Real estate - residential mortgage - contains permanent mortgage loans principally to consumers
secured by residential real estate. Residential real estate loans are evaluated for the adequacy of
repayment sources at the time of approval, based upon measures including credit scores, debt-to-
income ratios, and collateral values. Loans may be either conforming or non-conforming.
• Real estate - construction - construction loans, as defined, are intended to finance the construction
of commercial properties and include loans for the acquisition and development of land.
Construction loans represent a higher degree of risk than permanent real estate loans and may be
affected by a variety of factors such as the borrower’s ability to control costs and adhere to time
schedules and the risk that constructed units may not be absorbed by the market within the
anticipated time frame or at the anticipated price. The loan commitment on these loans often
includes an interest reserve to pay interest charges on the outstanding balance of the loan.
• Home equity and consumer - includes primarily home equity loans and lines, installment loans,
personal lines of credit and automobile loans. The home equity category consists mainly of loans
and revolving lines of credit to consumers which are secured by residential real estate. These loans
are typically secured with second mortgages on the homes, although many are secured with first
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mortgages. Other consumer loans include installment loans used by customers to purchase
automobiles, boats and recreational vehicles.
Non-accrual and Past Due Loans
The following schedule sets forth certain information regarding Lakeland’s non-accrual loans and
leases, its other real estate owned and other repossessed assets, and accruing troubled debt restructurings
(“TDRs”) (in thousands):
Commercial, secured by real estate
Commercial, industrial and other
Leases
Real estate - residential mortgage
Real estate - construction
Home equity and consumer
Total non-accrual loans and leases
Other real estate and other repossessed assets
TOTAL NON-PERFORMING ASSETS
Troubled debt restructurings, still accruing
At December 31,
2017
2016
$ 5,890
184
144
3,860
1,472
2,105
13,655
843
$10,413
167
153
6,048
1,472
2,151
20,404
1,072
$14,498
$21,476
$11,462
$ 8,802
Non-accrual loans included $2.7 million and $2.4 million of TDRs for the years ended December 31,
2017 and 2016, respectively. As of December 31, 2017, the Company had $2.7 million in residential
mortgages and consumer home equity loans included in the table above that were in the process of
foreclosure.
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An age analysis of past due loans, segregated by class of loans as of December 31, 2017 and 2016 is as
follows:
December 31, 2017
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than
89 Days
Total
Past Due
Current
Total Loans
and Leases
(in thousands)
Recorded
Investment Greater
than 89 Days and
Still Accruing
Commercial, secured by real
estate
Commercial, industrial and other
Leases
Real estate - residential mortgage
Real estate - construction
Home equity and consumer
$ 3,663
80
496
939
—
1,258
$1,082
121
139
908
—
310
$ 3,817 $ 8,562 $2,822,622 $2,831,184
340,400
75,039
322,880
264,908
322,269
340,143
74,260
317,896
263,436
319,315
257
779
4,984
1,472
2,954
56
144
3,137
1,472
1,386
$ 6,436
$2,560
$10,012 $19,008 $4,137,672 $4,156,680
$—
—
—
—
—
200
$200
December 31, 2016
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than
89 Days
Total
Past Due
Current
Total Loans
and Leases
(in thousands)
Recorded
Investment Greater
than 89 Days and
Still Accruing
$—
—
—
—
—
10
$ 10
Commercial, secured by real
estate
Commercial, industrial and other
Leases
Real estate - residential mortgage
Real estate - construction
Home equity and consumer
$ 6,082
1,193
132
2,990
3,409
1,260
$1,234
213
78
1,057
—
129
$ 9,313 $16,629 $2,539,972 $2,556,601
350,228
67,016
349,581
211,109
339,360
348,780
66,653
340,204
206,228
335,922
1,448
363
9,377
4,881
3,438
42
153
5,330
1,472
2,049
$15,066
$2,711
$18,359 $36,136 $3,837,759 $3,873,895
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Impaired Loans
Lakeland’s policy regarding impaired loans is discussed in Note 1 – Summary of Accounting Policies –
Loans and Leases and Allowance for Loan and Lease Losses. The Company defines impaired loans as all
non-accrual loans with recorded investments of $500,000 or greater. Impaired loans also includes all loans
modified in troubled debt restructurings. The following tables represent the Company’s impaired loans at
December 31, 2017, 2016 and 2015.
December 31, 2017
Loans without related allowance:
Commercial, secured by real estate
Commercial, industrial and other
Leases
Real estate - residential mortgage
Real estate - construction
Home equity and consumer
Loans with related allowance:
Commercial, secured by real estate
Commercial, industrial and other
Leases
Real estate - residential mortgage
Real estate - construction
Home equity and consumer
Total:
Commercial, secured by real estate
Commercial, industrial and other
Leases
Real estate - residential mortgage
Real estate - construction
Home equity and consumer
Recorded
Investment in
Impaired Loans
Contractual
Unpaid
Principal
Balance
Interest
Income
Recognized
Average
Investment in
Impaired Loans
Related
Allowance
(in thousands)
$12,155
618
—
963
1,471
—
5,381
164
65
781
—
993
$17,536
782
65
1,744
1,471
993
$22,591
$12,497
618
—
980
1,471
—
5,721
164
65
919
—
1,026
$18,218
782
65
1,899
1,471
1,026
$23,461
$—
—
—
—
—
—
454
9
30
4
—
8
$454
9
30
4
—
8
$505
$366
25
—
15
—
—
206
14
—
27
—
52
$572
39
—
42
—
52
$705
$12,774
618
—
996
1,471
6
5,029
283
29
940
—
1,090
$17,803
901
29
1,936
1,471
1,096
$23,236
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December 31, 2016
Loans without related allowance:
Commercial, secured by real estate
Commercial, industrial and other
Leases
Real estate - residential mortgage
Real estate - construction
Home equity and consumer
Loans with related allowance:
Commercial, secured by real estate
Commercial, industrial and other
Leases
Real estate - residential mortgage
Real estate - construction
Home equity and consumer
Total:
Commercial, secured by real estate
Commercial, industrial and other
Leases
Real estate - residential mortgage
Real estate - construction
Home equity and consumer
Recorded
Investment in
Impaired Loans
Contractual
Unpaid
Principal
Balance
Interest
Income
Recognized
Average
Investment in
Impaired Loans
Related
Allowance
(in thousands)
$12,764
603
—
1,880
1,471
139
5,860
349
—
1,031
—
1,188
$18,624
952
—
2,911
1,471
1,327
$25,285
$13,195
603
—
3,146
1,471
139
6,142
349
—
1,100
—
1,211
$19,337
952
—
4,246
1,471
1,350
$27,356
$—
—
—
—
—
—
392
12
—
31
—
94
$392
12
—
31
—
94
$229
24
—
16
—
—
273
17
—
30
—
59
$502
41
—
46
—
59
$529
$648
$13,631
1,109
—
2,430
12
388
6,549
360
1
1,011
—
1,184
$20,180
1,469
1
3,441
12
1,572
$26,675
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December 31, 2015
Loans without related allowance:
Commercial, secured by real estate
Commercial, industrial and other
Leases
Real estate - residential mortgage
Real estate - construction
Home equity and consumer
Loans with related allowance:
Commercial, secured by real estate
Commercial, industrial and other
Leases
Real estate - residential mortgage
Real estate - construction
Home equity and consumer
Total:
Commercial, secured by real estate
Commercial, industrial and other
Leases
Real estate - residential mortgage
Real estate - construction
Home equity and consumer
Recorded
Investment in
Impaired Loans
Contractual
Unpaid
Principal
Balance
Interest
Income
Recognized
Average
Investment in
Impaired Loans
Related
Allowance
(in thousands)
$14,065
209
—
2,195
—
574
5,721
1,023
6
832
380
1,001
$19,786
1,232
6
3,027
380
1,575
$26,006
$14,712
887
—
2,242
—
575
5,918
1,023
6
865
380
1,013
$20,630
1,910
6
3,107
380
1,588
$27,621
$—
—
—
—
—
—
598
77
1
73
21
73
$598
77
1
73
21
73
$843
$344
14
—
—
—
5
271
32
—
37
13
54
$615
46
—
37
13
59
$770
$12,928
749
—
2,096
94
762
6,249
717
—
840
308
1,006
$19,177
1,466
—
2,936
402
1,768
$25,749
Interest which would have been accrued on impaired loans and leases during 2017, 2016 and 2015 was
$1.5 million, $1.7 million and $1.6 million, respectively.
Credit Quality Indicators
The class of loans are determined by internal risk rating. Management closely and continually monitors
the quality of its loans and leases and assesses the quantitative and qualitative risks arising from the credit
quality of its loans and leases. It is the policy of Lakeland to require that a Credit Risk Rating be assigned to
all commercial loans and loan commitments. The Credit Risk Rating System has been developed by
management to provide a methodology to be used by Loan Officers, Department Heads and Senior
Management in identifying various levels of credit risk that exist within Lakeland’s loan portfolios. The risk
rating system assists Senior Management in evaluating Lakeland’s loan portfolio, analyzing trends and
determining the proper level of required reserves to be recommended to the Board. In assigning risk ratings,
management considers, among other things, a borrower’s debt service coverage, earnings strength, loan to
value ratios, industry conditions and economic conditions. Management categorizes loans and commitments
into a one (1) to nine (9) numerical structure with rating 1 being the strongest rating and rating 9 being the
weakest. Ratings 1 through 5W are considered “Pass” ratings. “Pass” ratings on loans are given to loans that
management considers to be of acceptable or better quality. A rating of 5W, or “Watch” is a loan that
requires more than the usual amount of monitoring due to declining earnings, strained cash flow, increasing
leverage and/or weakening market. These borrowers generally have limited additional debt capacity and
modest coverage and average or below average asset quality, margins and market share. Rating 6, “Other
Assets Especially Mentioned” is used for loans exhibiting identifiable credit weakness which if not checked
or corrected could weaken the loan quality or inadequately protect the bank’s credit position at some future
-90-
date. Rating 7, “Substandard,” is used on loans that are inadequately protected by the current sound worth
and paying capacity of the obligors or of the collateral pledged, if any. A substandard loan has a well-
defined weakness or weaknesses that may jeopardize the liquidation of the debt. Rating 8, “Doubtful,” are
loans that exhibit all of the weaknesses inherent in substandard loans, but have the added characteristics that
the weaknesses make collection or liquidation in full improbable on the basis of existing facts. Rating 9,
“Loss,” is a rating for loans or portions of loans that are considered uncollectible and of such little value that
their continuance as bankable loans is not warranted.
The following table shows Lakeland’s commercial loan portfolio as of December 31, 2017 and 2016,
by the risk ratings discussed above (in thousands):
December 31, 2017
RISK RATING
1
2
3
4
5
5W - Watch
6 - Other assets especially mentioned
7 - Substandard
8 - Doubtful
9 - Loss
Total
December 31, 2016
RISK RATING
1
2
3
4
5
5W - Watch
6 - Other assets especially mentioned
7 - Substandard
8 - Doubtful
9 - Loss
Commercial,
Secured by
Real Estate
Commercial,
Industrial
and Other
$
—
—
76,824
862,537
1,779,908
47,178
40,245
24,492
—
—
$
392
26,968
35,950
96,426
150,928
8,779
8,670
12,287
—
—
Real Estate -
Construction
$ —
—
—
15,502
246,806
—
—
2,600
—
—
$2,831,184
$340,400
$264,908
Commercial,
Secured by
Real Estate
Commercial,
Industrial
and Other
Real Estate -
Construction
$
—
—
82,102
729,281
1,615,331
68,372
33,015
28,500
—
—
$
1,449
26,743
36,644
135,702
129,366
6,395
5,242
8,687
—
—
$ —
—
—
28,177
175,595
1,223
—
6,114
—
—
Total
$2,556,601
$350,228
$211,109
This table does not include residential mortgage loans, consumer loans, or leases because they are
evaluated on their payment status as pass or substandard, which is defined as non-accrual or past due 90
days or more.
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Allowance for Loan and Lease Losses
The following table details activity in the allowance for loan and lease losses by portfolio segment and
the related recorded investment in loans and leases for the years ended December 31, 2017 and 2016:
December 31, 2017
Commercial,
Secured by
Real Estate
Commercial,
Industrial
and Other
Leases
Real
Estate -
Residential
Mortgage
(in thousands)
Real Estate -
Construction
Home
Equity and
Consumer
Total
Beginning balance
$
Charge-offs
Recoveries
Provision
$
21,223
(762)
396
4,847
1,723 $
(477)
172
895
548 $
(305)
59
328
1,964 $
(441)
5
29
2,352 $
(609)
31
957
3,435 $
(852)
903
(966)
31,245
(3,446)
1,566
6,090
Ending balance
$
25,704
$
2,313 $
630 $
1,557 $ 2,731 $
2,520 $
35,455
Ending balance: Individually
evaluated for impairment
Ending balance: Collectively
evaluated for impairment
$
454 $
9 $
30 $
4 $ — $
8 $
505
25,250
2,304
600
1,553
2,731
2,512 $
34,950
Ending balance
$
25,704
$
2,313 $
630 $
1,557 $ 2,731 $
2,520 $
35,455
LOANS AND LEASES
Ending balance: Individually
evaluated for impairment
Ending balance: Collectively
evaluated for impairment
Ending balance: Loans
acquired with deteriorated
credit quality
$
17,536 $
782 $
65 $
1,744 $
1,471 $
993 $
22,591
2,812,941
339,618
74,974
321,136
263,437
321,273 $4,133,379
707
—
—
—
—
3 $
710
Ending balance (1)
$2,831,184
$340,400 $75,039 $322,880 $264,908 $322,269 $4,156,680
(1) Excludes deferred fees
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December 31, 2016
Commercial,
Secured by
Real Estate
Commercial,
Industrial
and Other
Leases
Real
Estate -
Residential
Mortgage
(in thousands)
Real Estate -
Construction
Home
Equity and
Consumer
Total
Beginning balance
$
Charge-offs
Recoveries
Provision
$
20,223
(410)
297
1,113
2,637 $
(796)
202
(320)
460 $
(366)
31
423
2,588 $
(1,103)
8
471
1,591 $
—
18
743
3,375 $
(1,980)
247
1,793
30,874
(4,655)
803
4,223
Ending balance
$
21,223
$
1,723 $
548 $
1,964 $ 2,352 $
3,435 $
31,245
Ending balance: Individually
evaluated for impairment
Ending balance: Collectively
evaluated for impairment
$
392 $
12 $ — $
31 $ — $
94 $
529
20,831
1,711
548
1,933
2,352
3,341 $
30,716
Ending balance
$
21,223
$
1,723 $
548 $
1,964 $ 2,352 $
3,435 $
31,245
LOANS AND LEASES
Ending balance: Individually
evaluated for impairment
Ending balance: Collectively
evaluated for impairment
Ending balance: Loans
acquired with deteriorated
credit quality
$
18,624 $
952 $ — $
2,911 $
1,471 $
1,327 $
25,285
2,536,858
349,001
67,016
346,670
209,638
338,019 $3,847,202
1,119
275
—
—
—
14 $
1,408
Ending balance (1)
$2,556,601
$350,228 $67,016 $349,581 $211,109 $339,360 $3,873,895
(1) Excludes deferred fees
Lakeland also maintains a reserve for unfunded lending commitments which are included in other
liabilities. This reserve was $2.5 million for each of the years ended December 31, 2017 and December 31,
2016. Lakeland analyzes the adequacy of the reserve for unfunded lending commitments in conjunction with
its analysis of the adequacy of the allowance for loan and lease losses. For more information on this
analysis, see “Risk Elements” in Management’s Discussion and Analysis.
Troubled Debt Restructurings (“TDRs”)
TDRs are those loans where significant concessions have been made to borrowers experiencing
financial difficulties. Restructured loans typically involve a modification of terms such as a reduction of the
stated interest rate lower than the current market rate of a new loan with similar risk, an extended
moratorium of principal payments and/or an extension of the maturity date. Lakeland considers the potential
losses on these loans as well as the remainder of its impaired loans when considering the adequacy of the
allowance for loan losses.
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The following table summarizes loans and leases that have been restructured during the periods
presented:
Commercial, secured by real estate
Commercial, industrial and other
Leases
Real estate - residential mortgage
Home equity and consumer
For the Year Ended December 31, 2017
For the Year Ended December 31, 2016
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number of
Contracts
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number of
Contracts
(dollars in thousands)
$4,618
124
65
—
—
$4,618
124
65
—
—
$4,807
$4,807
1
—
—
1
3
5
8
2
6
—
—
16
$303
—
—
255
285
$843
$303
—
—
255
285
$843
The following table presents loans and leases modified as TDRs within the previous 12 months from
December 31, 2017 and 2016 that have defaulted during the subsequent twelve months:
For the Year Ended
December 31, 2017
For the Year Ended
December 31, 2016
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
(dollars in thousands)
2
—
—
2
$ 35
—
—
$ 35
—
1
1
2
$—
255
162
$417
Leases
Real estate - residential mortgage
Home equity and consumer
Related Party Loans
Lakeland has entered into lending transactions in the ordinary course of business with directors,
executive officers, principal stockholders and affiliates of such persons on similar terms, including interest
rates and collateral, as those prevailing for comparable transactions with other borrowers not related to
Lakeland. At December 31, 2017 and 2016, loans to these related parties amounted to $27.5 million and
$22.3 million, respectively. There were new loans of $9.7 million to related parties and repayments of
$4.5 million from related parties in 2017.
Mortgages Held for Sale
Residential mortgages originated by the bank and held for sale in the secondary market are carried at
the lower of cost or fair market value. Fair value is generally determined by the value of purchase
commitments on individual loans. Losses are recorded as a valuation allowance and charged to earnings. As
of December 31, 2017, Lakeland had $456,000 in mortgages held for sale compared to $1.7 million as of
December 31, 2016.
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Lease Receivables
Future minimum lease payments of lease receivables are expected as follows (in thousands):
2018
2019
2020
2021
2022
Thereafter
$26,796
20,356
15,113
9,046
3,280
448
$75,039
Other Real Estate and Other Repossessed Assets
At December 31, 2017, Lakeland had other real estate and other repossessed assets of $843,000 and $0,
respectively. The other real estate that the Company held at December 31, 2017 consisted of $843,000 in
residential property acquired as a result of foreclosure proceedings or through a deed in lieu of foreclosure.
At December 31, 2016, Lakeland had other real estate and other repossessed assets of $1.1 million and
$9,000, respectively. The other real estate that the Company held at December 31, 2016 consisted of $1.1
million in residential property acquired as a result of foreclosure proceedings or through a deed in lieu of
foreclosure. For the years ended December 31, 2017, 2016 and 2015, Lakeland had writedowns of $98,000,
$0 and $119,000, respectively, on other real estate and other repossessed assets which are included in other
real estate and repossessed asset expense in the Consolidated Statement of Income.
NOTE 6 - PREMISES AND EQUIPMENT
Land
Buildings and building improvements
Leasehold improvements
Furniture, fixtures and equipment
Less accumulated depreciation and amortization
Estimated
Useful Lives
Indefinite
10 to 50 years
10 to 25 years
2 to 30 years
December 31,
2017
2016
(in thousands)
$10,626
46,985
12,953
26,923
97,487
47,174
$ 10,981
49,475
12,967
33,692
107,115
54,879
$50,313
$ 52,236
Depreciation expense was $5.0 million, $5.0 million and $4.0 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
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NOTE 7 - TIME DEPOSITS
At December 31, 2017, the schedule of maturities of certificates of deposit is as follows (in thousands):
Year
2018
2019
2020
2021
2022
NOTE 8 - DEBT
Lines of Credit
$555,167
107,251
43,460
31,254
296
$737,428
As a member of the Federal Home Loan Bank of New York (FHLB), Lakeland has the ability to
borrow overnight based on the market value of collateral pledged. As of December 31, 2017 and 2016, there
were no overnight borrowings from the FHLB. As of December 31, 2017, Lakeland also had overnight
federal funds lines available for it to borrow up to $210.0 million. Lakeland borrowed $80.0 million and
$32.0 million against these lines as of December 31, 2017 and 2016, respectively. Lakeland may also
borrow from the discount window of the Federal Reserve Bank of New York based on the market value of
collateral pledged. Lakeland had no borrowings with the Federal Reserve Bank of New York as of
December 31, 2017 or 2016.
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
Short-term borrowings at December 31, 2017 and 2016 consisted of short-term securities sold under
agreements to repurchase and federal funds purchased. Securities underlying the agreements were under
Lakeland’s control. The following tables summarize information relating to securities sold under
agreements to repurchase and federal funds purchased for the years presented. For purposes of the tables,
the average amount outstanding was calculated based on a daily average.
Federal Funds Purchased
2017
2016
2015
Balance at December 31
Interest rate at December 31
Maximum amount outstanding at any month-end
during the year
Average amount outstanding during the year
Weighted average interest rate during the year
$ 80,000
(dollars in thousands)
$ 32,000
$115,000
1.71%
0.85%
0.65%
$168,784
$ 13,264
1.42%
$133,434
8,708
$
0.71%
$130,000
$ 22,734
0.45%
Securities Sold Under Agreements to Repurchase
2017
2016
2015
Balance at December 31
Interest rate at December 31
Maximum amount outstanding at any month-end
during the year
Average amount outstanding during the year
Weighted average interest rate during the year
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$ 44,936
(dollars in thousands)
$ 24,354
$ 36,234
0.02%
0.02%
0.02%
$ 44,936
$ 28,480
$ 32,872
$ 27,535
$ 40,140
$ 31,293
0.03%
0.03%
0.03%
Other Borrowings
FHLB Debt
At December 31, 2017, advances from the FHLB totaling $172.0 million, with a weighted average
interest rate of 1.69%, will mature within 4 years. These advances are collateralized by certain securities and
first mortgage loans.
At December 31, 2016, advances from the FHLB totaling $220.9 million, with a weighted average
interest rate of 1.81%, will mature within 4 years. These advances are collateralized by certain securities and
first mortgage loans.
FHLB debt matures as follows (in thousands):
2018
2019
2020
2021
$ 50,896
40,263
50,881
29,971
$172,011
In the first quarter of 2017, the Company repaid an aggregate of $34.0 million in advances from the
FHLB and recorded $638,000 in long-term debt prepayment fees.
Long-term Securities Sold Under Agreements to Repurchase
At December 31, 2017, Lakeland had $20.0 million in long-term securities sold under agreements to
repurchase compared to $40.0 million at December 31, 2016. These borrowings are collateralized by certain
securities. The borrowings had a weighted average interest rate of 2.25% and 3.26% on December 31, 2017
and December 31, 2016, respectively. The remaining $20.0 million matures in 2018. In the first quarter of
2017, the Company repaid an aggregate of $20.0 million in long-term securities sold under agreements to
repurchase and recorded $2.2 million in long-term debt prepayment fees.
The above FHLB debt and long-term securities sold under agreements to repurchase are collateralized
by certain securities. At times the market value of securities collateralizing our borrowings may decline due
to changes in interest rates and may necessitate our lenders to issue a “margin call” which requires Lakeland
to pledge additional securities to meet that margin call. As of December 31, 2017, the Company had
$73.7 million in mortgage-backed securities pledged for its short-term and long-term securities sold under
agreements to repurchase.
Subordinated Debentures
On September 30, 2016, the Company completed an offering of $75.0 million of fixed to floating rate
subordinated notes due September 30, 2026. The notes will bear interest at a rate of 5.125% per annum until
September 30, 2021 and will then reset quarterly to the then current three-month LIBOR plus 397 basis
points until maturity in September 30, 2026, or their earlier redemption. The debt is included in
Tier 2 capital for the Company. Debt issuance costs totaled $1.5 million and are being amortized to
maturity. Subordinated debt is presented net of issuance costs on the consolidated balance sheet.
In May 2007, the Company issued $20.6 million of junior subordinated debentures due August 31,
2037 to Lakeland Bancorp Capital Trust IV, a Delaware business trust. The distribution rate on these
securities was 6.61% for 5 years and floats at LIBOR plus 152 basis points thereafter. The debentures are
the sole asset of the Trust. The Trust issued 20,000 shares of trust preferred securities, $1,000 face value, for
total proceeds of $20.0 million. The Company’s obligations under the debentures and related documents,
taken together, constitute a full, irrevocable and unconditional guarantee on a subordinated basis by the
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Company of the Trust’s obligations under the preferred securities. The preferred securities are callable by
the Company on or after August 1, 2012, or earlier if the deduction of related interest for federal income
taxes is prohibited, treatment as Tier I capital is no longer permitted, or certain other contingencies arise.
The preferred securities must be redeemed upon maturity of the debentures in 2037. On August 3, 2015, the
Company acquired and extinguished $10.0 million of Lakeland Bancorp Capital Trust IV debentures and
recorded a $1.8 million gain on the extinguishment of debt.
In June 2003, the Company issued $20.6 million of junior subordinated debentures due June 30, 2033
to Lakeland Bancorp Capital Trust II, a Delaware business trust. The distribution rate on these securities
was 5.71% for 5 years and floats at LIBOR plus 310 basis points thereafter. The debentures are the sole
asset of the Trust. The Trust issued 20,000 shares of trust preferred securities, $1,000 face value, for total
proceeds of $20.0 million. The Company’s obligations under the debentures and related documents, taken
together, constitute a full, irrevocable and unconditional guarantee on a subordinated basis by the Company
of the Trust’s obligations under the preferred securities. The preferred securities are callable by the
Company on or after June 30, 2008, or earlier if the deduction of related interest for federal income taxes is
prohibited, treatment as Tier I capital is no longer permitted, or certain other contingencies arise. The
preferred securities must be redeemed upon maturity of the debentures in 2033.
In June 2016, the Company entered into two cash flow swaps totaling $30.0 million in order to hedge
the variable cash outflows associated with the junior subordinated debentures issued to Lakeland Capital
Trust II and Lakeland Capital Trust IV. For more information please see Note 18 – Derivatives.
NOTE 9 - STOCKHOLDERS’ EQUITY
On December 14, 2016, the Company successfully completed an at-the-market common stock
issuance. A total of 2,739,650 shares of the Company’s common stock were sold at a weighted average
price of $18.25, representing gross proceeds to the Company of approximately $50.0 million. Net proceeds
from the transaction, after the sales commission and other expenses, were approximately $48.7 million.
On July 1, 2016, the Company completed its acquisition of Harmony Bank, a bank located in Ocean
County, New Jersey. Lakeland Bancorp issued an aggregate of 3,201,109 shares of its common stock in the
merger. Outstanding Harmony stock options were paid out in cash at the difference between $14.31
(Lakeland’s closing stock price on July 1, 2016 of 11.45 multiplied by 1.25) and the average strike price of
$9.07 for a total cash payment of $869,000.
On January 7, 2016, the Company completed its acquisition of Pascack Bancorp, Inc. (“Pascack”), a
bank holding company headquartered in Waldwick, New Jersey. Lakeland Bancorp issued 3,314,284 shares
of its common stock in the merger and paid approximately $4.5 million in cash, including the cash paid in
connection with the cancellation of Pascack stock options. Outstanding Pascack stock options were paid out
in cash at the difference between $11.35 and an average strike price of $7.37 for a total cash payment of
$122,000.
NOTE 10 - INCOME TAXES
The components of income taxes are as follows:
Years Ended December 31,
2016
2017
2015
Current tax provision
Deferred tax expense (benefit)
Total provision for income taxes
$10,565
16,904
(in thousands)
$22,308
(987)
$16,991
(824)
$27,469
$21,321
$16,167
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
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Act requires the Company to reflect the changes associated with the law’s provisions in its consolidated
financial statements as of and for the year ended December 31, 2017. The Company recorded an increase in
its net deferred tax asset of $1.3 million to reflect the reduction in the federal corporate income tax rate from
35% to 21%.
During 2017, the Company implemented a tax planning strategy which resulted in an increase in
deferred tax liabilities, a higher deferred tax provision and an $1.9 million excise tax recorded through
current tax expense . Consequently, as a result of the Tax Cuts and Jobs Act being passed and the effect of
the tax planning strategy, the net impact on the financial statements was $602,000 in additional tax expense.
The income tax provision reconciled to the income taxes that would have been computed at the
statutory federal rate of 35% is as follows:
Years Ended December 31,
2016
2017
2015
Federal income tax, at statutory rates
Increase (deduction) in taxes resulting from:
Tax-exempt income
Excise tax on real estate investment trust (“REIT”)
dividend
Adjustment to net deferred tax asset for Tax Cuts
and Jobs Act
State income tax, net of federal income tax effect
Excess tax benefits from employee share-based
payments
Other, net
$28,017
(in thousands)
$21,994
$17,028
(1,652)
(1,671)
(1,467)
1,945
(1,343)
931
(587)
158
—
—
552
—
446
—
—
132
—
474
Provision for income taxes
$27,469
$21,321
$16,167
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The net deferred tax asset consisted of the following:
Deferred tax assets:
Allowance for loan and lease losses
Stock based compensation plans
Purchase accounting fair market value adjustments
Non-accrued interest
Deferred compensation
Depreciation and amortization
Other-than-temporary impairment loss on investment securities
Unrealized losses on securities available for sale
Other, net
Gross deferred tax assets
Deferred tax liabilities:
Core deposit intangible from acquired companies
Undistributed income from subsidiary not consolidated for tax return purposes (REIT)
Deferred loan costs
Prepaid expenses
Deferred gain on securities
Unfunded pension benefits
Unrealized gains on hedging derivative
Other
Gross deferred tax liabilities
Net deferred tax assets
December 31,
2017
2016
(in thousands)
$10,662
769
1,441
394
2,007
805
77
1,108
675
$13,775
1,095
2,752
730
2,648
1,486
255
292
767
17,938
23,800
664
12,015
1,169
524
116
7
229
357
15,081
1,366
924
1,545
641
194
18
361
841
5,890
$ 2,857
$17,910
In 2016, the Company recorded net deferred tax assets (liabilities) of $4.4 million and ($164,000) as a
result of the acquisitions of Pascack and Harmony, respectively.
The Company evaluates the realizability of its deferred tax assets by examining its earnings history and
projected future earnings and by assessing whether it is more likely than not that carryforwards would not be
realized. Based upon the majority of the Company’s deferred tax assets having no expiration date, the Company’s
earnings history, and the projections of future earnings, the Company’s management believes that it is more likely
than not that all of the Company’s deferred tax assets as of December 31, 2017 will be realized.
The Company evaluates tax positions that may be uncertain using a recognition threshold of more
likely than not, and a measurement attribute for all tax positions taken or expected to be taken on a tax
return, in order for those tax positions to be recognized in the financial statements. The Company had no
unrecognized tax benefits or related interest or penalties at December 31, 2017 or 2016.
The Company is subject to U.S. federal income tax law as well as income tax of various state
jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws
and regulations and require significant judgment to apply. With few significant exceptions, the Company is
no longer subject to U.S. federal examinations by tax authorities for the years before 2015 or to state and
local examinations by tax authorities for the years before 2014.
NOTE 11 - EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
The Company has a profit sharing plan for all its eligible employees. The Company’s discretionary
annual contribution to the plan is determined by its Board of Directors. Annual contributions are allocated to
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participants on a point basis with accumulated benefits payable at retirement, or, at the discretion of the plan
committee, upon termination of employment. Contributions made by the Company were $600,000 a year for
years ended 2016 and 2015. There were no contributions made by the Company in 2017.
Benefit Obligations from Somerset Hills Acquisition
Somerset Hills, acquired by the Company in 2013, entered into a non-qualified Supplemental
Executive Retirement Plan (“SERP”) with its former Chief Executive Officer and its Chief Financial Officer
which entitles them to a benefit of $48,000 and $24,000, respectively, per year for 15 years after the earlier
of retirement or death. The former chief executive officer and the beneficiary of the Chief Financial Officer
are currently being paid out under the plan. As of December 31, 2017 and 2016, the Company had a liability
of $702,000 and $717,000, respectively, for these SERPs and recognized an expense of $33,000, $0 and
$95,000 in 2017, 2016 and 2015, respectively.
401(k) plan
The Company has a 401(k) plan covering substantially all employees providing they meet eligibility
requirements. The Company matches 50% of the first 6% contributed by the participants to the 401(k) plan.
The Company’s contributions in 2017, 2016 and 2015 totaled $1.0 million, $911,000 and $760,000,
respectively.
Supplemental Executive Retirement Plans
In December 2003, the Company entered into a supplemental executive retirement plan (SERP)
agreement with its former CEO that provides annual retirement benefits of $150,000 a year for a 15 year
period when the former CEO reached the age of 65. Our former CEO retired and is receiving annual
retirement benefits pursuant to the plan. In 2008, the Company entered into a SERP agreement with its
current CEO that provides annual retirement benefits of $150,000 for a 15 year period when the CEO
reaches the age of 65. In November 2008, the Company entered into a SERP with a Regional President that
provides annual retirement benefits of $90,000 a year for a 10 year period upon his reaching the age of 65.
In December 2015, the Company entered into a SERP with a former Regional President that provides
$84,500 a year for a 15 year period upon his reaching the age of 66 in November 2016. The Company
intends to fund its obligations under the deferred compensation arrangements with the increase in cash
surrender value of bank owned life insurance policies. In 2017, 2016 and 2015, the Company recorded
compensation expense of $261,000, $746,000 and $814,000, respectively, for these plans. The accrued
liability for these plans was $3.5 million for each of the years ended December 31, 2017 and 2016.
Deferred Compensation Agreement
In February 2015, the Company entered into a Deferred Compensation Agreement with its CEO where
it would contribute $16,500 monthly into a deferral account which would earn interest at an annual rate of
the Company’s prior year return on equity, provided that the Company’s return on equity remained in a
range of 0% to 15%. The Company has agreed to make such contributions each month that the CEO is
actively employed from February 2015 through December 31, 2022. The expense incurred in 2017, 2016
and 2015 was $244,000, $222,000 and $188,000, respectively, and the accrued liability at December 31,
2017 and 2016 was $654,000 and $410,000, respectively. Following the CEO’s normal retirement date, he
shall be paid out in 180 consecutive monthly installments.
Elective Deferral Plan
In March 2015, the Company established an Elective Deferral Plan for eligible executives in which the
executive may elect to contribute a portion of his base salary and bonus to a deferral account which will earn
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an interest rate of 75% of the Company’s prior year return on equity provided that the return on equity
remains in the range of 0% to 15%. The Company recorded an expense of $55,000, $22,000 and $3,000 in
2017, 2016 and 2015, respectively, and had a liability recorded of $916,000 and $512,000 at December 31,
2017 and 2016, respectively.
NOTE 12 - DIRECTORS RETIREMENT PLAN
The Company provides a retirement plan that directors appointed to the board prior to 2009 who
completed five years of service may retire and receive benefit payments ranging from $5,000 through
$17,500 per annum, depending upon years of credited service, for a period of ten years. This plan is
unfunded. The following tables present the status of the plan and the components of net periodic plan cost
for the years then ended. The measurement date for the accumulated benefit obligation is December 31 of
the years presented.
Accrued plan cost included in other liabilities
Amount not recognized as component of net postretirement benefit cost
Recognized in accumulated other comprehensive income
Net actuarial gain
Unrecognized prior service cost
Amounts not recognized as a component of net postretirement benefit (benefit)
Net periodic plan cost included the following components:
Service cost
Interest cost
Amortization of prior service cost
December 31,
2017
2016
(in thousands)
$671
$673
$ 28
—
$ (2)
—
$ 28
$ (2)
Years Ended December 31,
2017
2016
2015
(in thousands)
$21
23
3
$47
$19
26
12
$57
$19
46
13
$78
A discount rate of 3.30%, 3.68% and 3.87% was assumed in the plan valuation for 2017, 2016 and
2015, respectively. As the benefit amount is not dependent upon compensation levels, a rate of increase in
compensation assumption was not utilized in the plan valuation.
The director’s retirement plan holds no plan assets. The benefits expected to be paid in each of the next
five years and in aggregate for the five years thereafter are as follows (in thousands):
2018
2019
2020
2021
2022
2023 - 2027
$ 75
63
63
37
37
240
The Company expects its contribution to the director’s retirement plan to be $75,000 in 2018.
The amount in accumulated other comprehensive income expected to be recognized as a component of
net periodic benefit cost in 2018 is $0.
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NOTE 13 - STOCK-BASED COMPENSATION
Employee Stock Option Plans
The Company’s shareholders approved the 2009 Equity Compensation Program, which authorizes the
granting of incentive stock options, supplemental stock options, restricted shares and restricted stock units to
employees of the Company, including those employees serving as officers and directors of the Company.
The plan authorizes the issuance of up to 2.3 million shares in connection with options and awards granted
under the 2009 program. The Company’s stock option grants under this plan expire 10 years from the date
of grant, ninety days after termination of service other than for cause, or one year after death or disability of
the grantee. In 2014, the Company began issuing restricted stock units (RSUs), some of which have
performance conditions attached to them. The Company generally issues shares for option exercises from its
treasury stock using the cost method or issues new shares if no treasury shares are available.
The Company established the 2000 Equity Compensation Program which authorizes the granting of
incentive stock options, supplemental stock options and restricted stock to employees of the Company,
which includes those employees serving as officers and directors of the Company. The plan authorized
2,613,185 shares of common stock of the Company. All of the Company’s stock option grants expire 10
years from the date of grant, thirty days after termination of service other than for cause, or one year after
death or disability of the grantee. The Company has no option or restricted stock awards with market or
performance conditions attached to them under the 2000 Equity Compensation Program. No further awards
will be granted from the 2000 program.
The Company has outstanding stock options issued to its directors as well as options assumed under the
Somerset Hills’ stock option plans at the time of merger. As of December 31, 2017 and 2016, respectively,
81,442 and 111,829 options granted to directors were outstanding. As of December 31, 2017 and 2016, there
were 20,774 and 23,415 options outstanding, respectively, under the Somerset Hills’ stock option plans.
Excess tax benefits of stock based compensation were $587,000, $43,000 and $59,000 for the years
2017, 2016 and 2015, respectively.
A summary of the status of the Company’s option plans as of December 31, 2017 and the changes
during the year ending on that date is represented below.
Outstanding, beginning of year
Granted
Exercised
Expired
Forfeited
Weighted
Average
Remaining
Contractual
Term
(in Years)
Aggregate
Intrinsic
Value
4.18
$1,450,533
Number of
Shares
135,250
—
(33,023)
—
(11)
Weighted
Average
Exercise
Price
$8.79
—
9.72
—
7.97
Outstanding, end of year
102,216
$8.49
Options exercisable at year-end
102,216
$8.49
4.27
4.27
$1,101,806
$1,101,806
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A summary of the Company’s non-vested options under the Company’s option plans as of
December 31, 2017 and changes for the year then ended is presented below.
Non-vested, Balance at of January 1, 2017
Granted
Vested
Number of
Shares
10,501
—
(10,501)
Weighted-
Average
Grant-date
Fair Value
$3.31
—
3.31
Non-vested, December 31, 2017
—
$ —
As of December 31, 2017, there was no unrecognized compensation expense related to unvested stock
options under the 2009 Equity Compensation Program. Compensation expense recognized for stock options
was $14,000, $35,000 and $35,000 for 2017, 2016 and 2015, respectively.
The aggregate intrinsic values of options exercised in 2017 and 2016 were $337,000 and $292,000,
respectively. Exercise of stock options during 2017 and 2016 resulted in cash receipts of $321,000 and
$285,000, respectively. The total fair value of options that vested in 2017 and 2016 were $35,000 and
$35,000, respectively.
Information regarding the Company’s restricted stock for the year ended December 31, 2017 is as
follows:
Outstanding, Balance at of January 1, 2017
Granted
Vested
Forfeited
Number of
Shares
42,875
13,176
(32,904)
(165)
Weighted
Average
Price
$ 9.72
18.20
9.79
10.34
Outstanding, December 31, 2017
22,982
$14.44
In 2017, the Company granted 13,176 shares of restricted stock to non-employee directors at a grant
date fair value of $18.20 per share under the Company’s 2009 Equity Compensation Program. These shares
will vest over a one year period, totaling $240,000 in compensation expense. In 2016, the Company granted
23,952 shares of restricted stock to non-employee directors at a grant date fair value of $10.02 per share
under the Company’s 2009 Equity Compensation Program. These shares vested over a one year period,
totaling $240,000 in compensation expense. No restricted stock was granted in 2015.
The total fair value of the restricted stock vested during the year ended December 31, 2017 was
approximately $322,000. Compensation expense recognized for restricted stock was $287,000, $353,000
and $497,000 in 2017, 2016 and 2015, respectively. There was approximately $6,000 in unrecognized
compensation expense related to restricted stock grants as of December 31, 2017, which is expected to be
recognized over a period of 0.09 years.
In 2017, the Company granted 132,523 RSUs at a weighted average grant date fair value of $19.92 per
share under the Company’s 2009 Equity Compensation Program. These units vest within a range of two to
three years. A portion of these RSUs will vest subject to certain performance conditions in the restricted
stock unit agreement. There are also certain provisions in the compensation program which state that if a
holder of the RSUs reaches a certain age and years of service, the person has effectively earned a portion of
the RSUs at that time. Compensation expense on these restricted stock units is expected to average
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approximately $880,000 per year over a three year period. In 2016, the Company granted 180,926 RSUs at a
weighted average grant date fair value of $10.45 per share under the Company’s 2009 Equity Compensation
Program. These units vest within a range of two to three years. Compensation expense on these restricted
stock units is expected to average approximately $630,000 per year over a three year period. In 2015, the
Company granted 137,009 RSUs at a weighted average grant date fair value of $11.08 per share under the
Company’s 2009 Equity Compensation Program. Compensation expense on these restricted stock units is
expected to average $506,000 per year over a three year period. Compensation expense for restricted stock
units was $2.0 million, $1.5 million and $1.1 million in 2017, 2016 and 2015, respectively. There was
approximately $1.8 million in unrecognized compensation expense related to restricted stock units as of
December 31, 2017, which is expected to be recognized over a period of 1.10 years.
Information regarding the Company’s RSUs and changes during the year ended December 31, 2017 is
as follows:
Outstanding, Balance at of January 1, 2017
Granted
Vested
Forfeited
Outstanding, December 31, 2017
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Lease Obligations
Number of
RSUs
302,344
132,523
(148,585)
(18,550)
Weighted
Average
Price
$10.76
19.92
13.01
12.45
267,732
$13.93
Lakeland is obligated under various non-cancelable operating leases on building and land used for
office space and banking purposes. These leases contain renewal options and escalation clauses. Rent
expense under long-term operating leases amounted to approximately $3.1 million, $3.2 million and $2.7
million for the years ended December 31, 2017, 2016 and 2015, respectively, including rent expense to
related parties of $144,000 in 2017, $141,000 in 2016, and $143,000 in 2015. At December 31, 2017, the
minimum commitments under all noncancellable leases with remaining terms of more than one year and
expiring through 2033 are as follows (in thousands):
Year
2018
2019
2020
2021
2022
Thereafter
$ 3,185
3,045
2,853
2,635
2,329
15,785
$29,832
Litigation
There are no pending legal proceedings involving the Company or Lakeland other than those arising in
the normal course of business. Management does not anticipate that the potential liability, if any, arising out
of such legal proceedings will have a material effect on the financial condition or results of operations of the
Company and Lakeland on a consolidated basis.
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NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
Lakeland is party to financial instruments with off-balance-sheet risk in the normal course of business
to meet the financing needs of its customers. These financial instruments include commitments to extend
credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial
statements when they become payable. Those instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or
notional amounts of those instruments reflect the extent of involvement Lakeland has in particular classes of
financial instruments.
Lakeland’s exposure to credit loss in the event of non-performance by the other party to the financial
instrument for commitments to extend credit and standby letters of credit is represented by the contractual or
notional amount of those instruments. Lakeland uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Lakeland generally requires collateral or other security to support financial instruments with credit risk.
The approximate contract amounts are as follows:
December 31,
2017
2016
(in thousands)
Financial instruments whose contract amounts represent
credit risk
Commitments to extend credit
Standby letters of credit and financial guarantees
written
$966,441
$921,979
14,832
15,170
At December 31, 2017 and 2016 there were $20,000 and $10,000, respectively, in commitments to lend
additional funds to borrowers whose terms have been modified in troubled debt restructurings.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. Lakeland evaluates each customer’s creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by Lakeland upon extension of credit, is based on management’s
credit evaluation.
Standby letters of credit are conditional commitments issued by Lakeland to guarantee the payment by
or performance of a customer to a third party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers. Lakeland holds deposit
accounts, residential or commercial real estate, accounts receivable, inventory and equipment as collateral to
support those commitments for which collateral is deemed necessary. The extent of collateral held for those
commitments at December 31, 2017 and 2016 varies based on management’s credit evaluation.
Lakeland issues financial and performance letters of credit. Financial letters of credit require Lakeland
to make payment if the customer fails to make payment, as defined in the agreements. Performance letters
of credit require Lakeland to make payments if the customer fails to perform certain non-financial
contractual obligations. Lakeland defines the initial fair value of these letters of credit as the fees received
from the customer. Lakeland records these fees as a liability when issuing the letters of credit and amortizes
the fee over the life of the letter of credit.
The maximum potential undiscounted amount of future payments of these letters of credit as of
December 31, 2017 was $14.8 million and they expire through 2024. Lakeland’s exposure under these
letters of credit would be reduced by actual performance, subsequent termination by the beneficiaries and by
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any proceeds that Lakeland obtained in liquidating the collateral for the loans, which varies depending on
the customer.
As of December 31, 2017, Lakeland had $966.4 million in loan and lease commitments, with $620.4
million maturing within one year, $181.1 million maturing after one year but within three years, $42.2
million maturing after three years but within five years, and $122.7 million maturing after five years. As of
December 31, 2017, Lakeland had $14.8 million in standby letters of credit, with $12.9 million maturing
within one year, $1.9 million maturing after one year but within three years, $31,000 maturing after three
years but within five years and $80,000 maturing after five years.
Lakeland grants loans primarily to customers in New Jersey, the Hudson Valley Region in New York
State, and surrounding areas. Certain of Lakeland’s consumer loans and lease customers are more
diversified nationally. Although Lakeland has a diversified loan portfolio, a large portion of its loans are
secured by commercial or residential real property. Although Lakeland has a diversified loan portfolio, a
substantial portion of its debtors’ ability to honor their contracts is dependent upon the economy.
Commercial and standby letters of credit were granted primarily to commercial borrowers.
NOTE 16 - COMPREHENSIVE INCOME (LOSS)
The Company reports comprehensive income (loss) in addition to net income (loss) from operations.
Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of
certain financial information that historically has not been recognized in the calculation of net income.
-107-
The following table shows the changes in the balances of each of the components of other
comprehensive income for the periods presented.
Unrealized losses on available for sale securities
Unrealized holding losses arising during period
Reclassification adjustment for net gains realized in net income
Net unrealized losses on available for sale securities
Unrealized gain on derivatives
Change in pension liabilities
Other comprehensive loss, net
Unrealized losses on available for sale securities
Unrealized holding losses arising during period
Reclassification adjustment for net gains realized in net income
Net unrealized losses on available for sale securities
Unrealized gain on derivatives
Change in pension liabilities
Other comprehensive loss, net
Year Ended December 31, 2017
Before
Tax Amount
Tax Benefit
(Expense)
Net of
Tax Amount
(in thousands)
$(1,406)
(2,524)
$ 503
884
(3,930)
57
(27)
1,387
(20)
11
$ (903)
(1,640)
(2,543)
37
(16)
$(3,900)
$1,378
$(2,522)
Year Ended December 31, 2016
Before
Tax Amount
Tax Benefit
(Expense)
Net of
Tax Amount
(in thousands)
$(1,816)
(370)
$ 778
137
(2,186)
1,033
70
915
(361)
(28)
$(1,038)
(233)
(1,271)
672
42
$(1,083)
$ 526
$ (557)
Year Ended December 31, 2015
Before
Tax Amount
Tax Benefit
(Expense)
Net of
Tax Amount
(in thousands)
Unrealized losses on available for sale securities
Unrealized holding losses arising during period
Reclassification adjustment for net gains realized in net income
$ (375)
(241)
$ 155
84
$ (220)
(157)
Net unrealized losses on available for sale securities
Change in pension liabilities
Other comprehensive loss, net
(616)
3
239
1
(377)
4
$ (613)
$ 240
$ (373)
-108-
Balance at of January 1, 2017
Other comprehensive income (loss) before classifications
Amounts reclassified from accumulated other comprehensive
income
Net current period other comprehensive income (loss)
Adjustment for implementation of ASU 2018-02
Balance at December 31, 2017
Balance at of January 1, 2016
Other comprehensive income (loss) before classifications
Amounts reclassified from accumulated other comprehensive
income
Net current period other comprehensive income (loss)
Balance at December 31, 2016
Balance at of January 1, 2015
Other comprehensive income (loss) before classifications
Amounts reclassified from accumulated other comprehensive
income
Net current period other comprehensive income (loss)
Balance at December 31, 2015
Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
$ (117)
(903)
(1,640)
(2,543)
(572)
$(3,232)
$ 1,154
(1,038)
(233)
(1,271)
$ (117)
$ 1,531
(220)
(157)
(377)
$ 1,154
Unrealized
Gains (Losses)
on Derivatives
Pension
Items
Total
(in thousands, net of tax)
$ 38
$672
$
593
37
—
37
153
$862
$—
672
—
672
$672
$—
—
—
—
$—
(16)
(882)
—
(16)
(1)
(1,640)
(2,522)
(420)
$ 21
$(2,349)
$ (4) $ 1,150
42
(324)
—
42
$ 38
(233)
(557)
593
$
$ (8) $ 1,523
4
(216)
—
(157)
4
(373)
$ (4) $ 1,150
NOTE 17 - FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in
the principal or most advantageous market for an asset or liability in an orderly transaction between market
participants at the measurement date. U.S. GAAP establishes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value into three broad levels giving the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the
lowest level priority to unobservable inputs (level 3 measurements). The following describes the three levels
of fair value hierarchy:
Level 1 - unadjusted quoted prices in active markets for identical assets or liabilities; includes U.S.
Treasury Notes, and other U.S. Government Agency securities that actively trade in over-the-counter
markets; equity securities and mutual funds that actively trade in over-the-counter markets.
Level 2 - quoted prices for similar assets or liabilities in active markets; or quoted prices for identical
or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are
observable for the asset or liability including yield curves, volatilities, and prepayment speeds.
Level 3 - unobservable inputs for the asset or liability that reflect the Company’s own assumptions
about assumptions that market participants would use in the pricing of the asset or liability and that are
consequently not based on market activity but on particular valuation techniques.
The Company’s assets that are measured at fair value on a recurring basis are its available for sale
investment securities and its interest rate swaps. The Company obtains fair values on its securities using
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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).
The following table sets forth the Company’s financial assets that were accounted for at fair value on a
recurring basis as of the periods presented by level within the fair value hierarchy. During the years ended
December 31, 2017 and 2016, the Company did not make any transfers between recurring Level 1 fair value
measurements and recurring Level 2 fair value measurements. Financial assets and liabilities are classified
in their entirety based on the lowest level of input that is significant to the fair value measurement:
December 31, 2017
Assets:
Investment securities, available for sale
U.S. Treasury and government agencies
Mortgage-backed securities
Obligations of states and political subdivisions
Corporate debt securities
Equity securities
Total securities available for sale
Other Assets(1)
Total Assets
Liabilities:
Other Liabilities(1)
Total Liabilities
(1) Derivatives
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(in thousands)
$ 5,415
—
—
—
5,147
10,562
$141,840
424,331
51,320
5,140
12,942
635,573
—
6,555
$—
—
—
—
—
—
—
Total Fair
Value
$147,255
424,331
51,320
5,140
18,089
646,135
6,555
$10,562
$642,128
$—
$652,690
$ —
$ —
$
$
5,465
5,465
$—
$—
$
$
5,465
5,465
-110-
December 31, 2016
Assets:
Investment securities, available for sale
U.S. Treasury and government agencies
Mortgage-backed securities
Obligations of states and political subdivisions
Corporate debt securities
Equity securities
Total securities available for sale
Other Assets(1)
Total Assets
Liabilities:
Other Liabilities(1)
Total Liabilities
(1) Derivatives
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(in thousands)
$ 5,931
—
—
—
7,748
13,679
$111,428
413,725
48,326
5,412
14,134
593,025
—
3,378
$—
—
—
—
—
—
—
Total Fair
Value
$117,359
413,725
48,326
5,412
21,882
606,704
3,378
$13,679
$596,403
$—
$610,082
$ —
$ —
$
$
2,345
2,345
$—
$—
$
$
2,345
2,345
The following table sets forth the Company’s financial assets subject to fair value adjustments
(impairment) on a non-recurring basis. Assets are classified in their entirety based on the lowest level of
input that is significant to the fair value measurement:
December 31, 2017
Assets:
Impaired loans and leases
Loans held for sale
Other real estate owned and other repossessed assets
December 31, 2016
Assets:
Impaired loans and leases
Loans held for sale
Other real estate owned and other repossessed assets
(Level 1)
(Level 2)
(Level 3)
(in thousands)
$—
—
—
$—
456
—
$22,591
—
843
(Level 1)
(Level 2)
(Level 3)
(in thousands)
Total
Fair Value
$22,591
456
843
Total
Fair Value
$—
—
—
$ —
1,742
—
$25,285
—
1,072
$25,285
1,742
1,072
Impaired loans and leases are evaluated and valued at the time the loan is identified as impaired at the
lower of cost or market value. Because most of Lakeland’s impaired loans are collateral dependent, fair
value is generally measured based on the value of the collateral, less estimated costs to sell, securing these
loans and leases and is classified at a level 3 in the fair value hierarchy. Collateral may be real estate,
accounts receivable, inventory, equipment and/or other business assets. The value of the real estate is
assessed based on appraisals by qualified third party licensed appraisers. The appraisers may use the income
approach to value the collateral using discount rates (with ranges of 5-11%) or capitalization rates (with
ranges of 5-10%) to evaluate the property. The value of the equipment may be determined by an appraiser,
if significant, inquiry through a recognized valuation resource, or by the value on the borrower’s financial
statements. Field examiner reviews on business assets may be conducted based on the loan exposure and
reliance on this type of collateral. Appraised and reported values may be discounted based on management’s
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historical knowledge, changes in market conditions from the time of valuation, and/or management’s
expertise and knowledge of the client and client’s business. Impaired loans and leases are reviewed and
evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the
same factors identified above.
The Company has a held for sale loan portfolio that consists of residential mortgages that are being
sold in the secondary market. The Company records these mortgages at the lower of cost or fair market
value. Fair value is generally determined by the value of purchase commitments.
Other real estate owned (OREO) and other repossessed assets, representing property acquired through
foreclosure or deed in lieu of foreclosure, are carried at fair value less estimated disposal costs of the
acquired property. Fair value on other real estate owned is based on the appraised value of the collateral
using discount rates or capitalization rates similar to those used in impaired loan valuation. The fair value of
other repossessed assets is estimated by inquiry through a recognized valuation resource.
Changes in the assumptions or methodologies used to estimate fair values may materially affect the
estimated amounts. Changes in economic conditions, locally or nationally, could impact the value of the
estimated amounts of impaired loans, OREO and other repossessed assets.
Fair Value of Certain Financial Instruments
Estimated fair values have been determined by the Company using the best available data and an
estimation methodology suitable for each category of financial instruments. Management is concerned that
there may not be reasonable comparability between institutions due to the wide range of permitted
assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high
degree of subjectivity in estimating financial instrument fair values.
The estimation methodologies used, the estimated fair values, and recorded book balances at
December 31, 2017 and December 31, 2016 are outlined below.
This summary, as well as the table below, excludes financial assets and liabilities for which carrying
value approximates fair value. For financial assets, these include cash and cash equivalents. For financial
liabilities, these include noninterest-bearing demand deposits, savings and interest-bearing transaction
accounts and federal funds sold and securities sold under agreements to repurchase. The estimated fair value
of demand, savings and interest-bearing transaction accounts is the amount payable on demand at the
reporting date. Carrying value is used because there is no stated maturity on these accounts, and the
customer has the ability to withdraw the funds immediately. Also excluded from this summary and the
following table are those financial instruments recorded at fair value on a recurring basis, as previously
described.
The fair value of investment securities held to maturity was measured using information from the same
third-party servicer used for investment securities available for sale using the same methodologies discussed
above. Investment securities held to maturity includes $9.8 million in short-term municipal bond
anticipation notes and $1.0 million in subordinated debt that are non-rated and do not have an active
secondary market or information readily available on standard financial systems. As a result, the securities
are classified as Level 3 securities. Management performs a credit analysis before investing in these
securities.
Federal Home Loan Bank of New York (“FHLB”) stock is an equity interest that can be sold to the
issuing FHLB, to other FHLBs, or to other member banks at its par value. Because ownership of these
securities is restricted, they do not have a readily determinable fair value. As such, the Company’s FHLB
stock is recorded at cost or par value and is evaluated for impairment each reporting period by considering
the ultimate recoverability of the investment rather than temporary declines in value. The Company’s
evaluation primarily includes an evaluation of liquidity, capitalization, operating performance,
commitments, and regulatory or legislative events.
-112-
The net loan portfolio at December 31, 2017 and December 31, 2016 has been valued using a present
value discounted cash flow where market prices were not available. The discount rate used in these
calculations is the estimated current market rate for new loans with similar credit risk. The valuation of our
loan portfolio is consistent with accounting guidance but does not fully incorporate the exit price approach.
For fixed maturity certificates of deposit, fair value was estimated based on the present value of
discounted cash flows using the rates currently offered for deposits of similar remaining maturities. The
carrying amount of accrued interest payable approximates its fair value.
The fair value of long-term debt is based upon the discounted value of contractual cash flows. The
Company estimates the discount rate using the rates currently offered for similar borrowing arrangements.
The fair value of subordinated debentures is based on bid/ask prices from brokers for similar types of
instruments.
The fair values of commitments to extend credit and standby letters of credit are estimated using the
fees currently charged to enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair
value also considers the difference between current levels of interest rates and the committed rates. The fair
value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting
date. The fair values of commitments to extend credit and standby letters of credit are deemed immaterial.
The following table presents the carrying values, fair values and placement in the fair value hierarchy
of the Company’s financial instruments as of December 31, 2017 and December 31, 2016:
December 31, 2017
Financial Assets:
Investment securities held to maturity
Federal Home Loan and other
membership bank stock
Loans and leases, net
Financial Liabilities:
Certificates of deposit
Other borrowings
Subordinated debentures
December 31, 2016
Financial Assets:
Investment securities held to maturity
Federal Home Loan and other
membership bank stock
Loans and leases, net
Financial Liabilities:
Certificates of deposit
Other borrowings
Subordinated debentures
Carrying
Value
Fair Value
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
(in thousands)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ 139,685
$ 138,688
$—
$127,901
$
10,787
12,576
4,117,265
12,576
4,114,516
737,428
192,011
104,902
732,417
189,080
97,244
—
—
—
—
—
Carrying
Value
Fair Value
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
(in thousands)
12,576
—
—
4,114,516
732,417
189,080
—
Significant
Other
Observable
Inputs
(Level 2)
—
—
97,244
Significant
Unobservable
Inputs
(Level 3)
$ 147,614
$ 146,990
$—
$111,403
$
35,587
15,099
3,839,353
15,099
3,832,465
544,908
260,866
104,784
543,399
264,586
94,476
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—
—
—
—
—
15,099
—
—
3,832,465
543,399
264,586
—
—
—
94,476
NOTE 18 - DERIVATIVES
Lakeland is a party to interest rate derivatives that are not designated as hedging instruments. Under a
program, Lakeland executes interest rate swaps with commercial lending customers to facilitate their
respective risk management strategies. These interest rate swaps with customers are simultaneously offset
by interest rate swaps that Lakeland executes with a third party, such that Lakeland minimizes its net risk
exposure resulting from such transactions. Because the interest rate swaps associated with this program do
not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and
the offsetting swaps are recognized directly in earnings. The changes in the fair value of the swaps offset
each other, except for the credit risk of the counterparties, which is determined by taking into consideration
the risk rating, probability of default and loss given default for all counterparties. As of December 31, 2017
and 2016, Lakeland had $500,000 and $7.5 million, respectively, in securities pledged for collateral on its
interest rate swaps.
In June 2016, the Company entered into two cash flow hedges in order to hedge the variable cash
outflows associated with its floating rate subordinated debentures (See Note 8). The notional value of these
hedges was $30.0 million. The Company’s objective in using the cash flow hedge is to add stability to
interest expense and to manage its exposure to interest rate movements. The Company used interest rate
swaps designated as cash flow hedges which involved the receipt of variable amounts from a counterparty in
exchange for the Company making fixed-rate payments over the life of the agreements without exchange of
the underlying notional amount. In these particular hedges the Company is paying a third party an average
of 1.10% in exchange for a payment at 3 month LIBOR. The effective portion of changes in the fair value of
derivatives designated and that qualify as cash flow hedges are recorded in accumulated other
comprehensive income and are subsequently reclassified into earnings in the period that the hedged
forecasted transaction affects earnings. During the year ended December 31, 2017, the Company did not
record any hedge ineffectiveness. The Company recognized $29,000 of accumulated other comprehensive
income that was reclassified into interest expense during 2017. The Company did not enter into any hedges
in 2017.
Amounts reported in accumulated other comprehensive income related to derivatives will be
reclassified to interest expense as interest payments are made on the Company’s debt. During the next
twelve months, the Company estimates that $178,000 will be reclassified as a decrease to interest expense
should the rate environment remain the same.
The following table presents summary information regarding these derivatives for the periods
presented (dollars in thousands):
December 31, 2017
Notional Amount
Average
Maturity (Years)
Weighted Average
Rate Fixed
Weighted Average
Variable Rate
Fair Value
Classified in Other Assets:
3rd Party interest rate swaps
Customer interest rate swaps
Interest rate swap (cash flow
hedge)
Classified in Other Liabilities:
Customer interest rate swaps
3rd party interest rate swaps
$110,076
82,760
30,000
$110,076
82,760
8.8
11.5
3.5
8.8
11.5
3.87%
4.74%
1 Mo. LIBOR + 2.11% $ 3,634
1 Mo. LIBOR + 2.21% 1,831
1.10%
3 Mo. LIBOR
1,090
3.87%
4.74%
1 Mo. LIBOR + 2.11% $(3,634)
1 Mo. LIBOR + 2.21% (1,831)
December 31, 2016
Notional Amount
Customer interest rate swaps
3rd party interest rate swaps
Interest rate swap (cash flow
hedge)
$ 129,252
(129,252)
30,000
Average
Maturity (Years)
Weighted Average
Rate Fixed
Weighted Average
Variable Rate
Fair Value
4.03%
4.03%
1.10%
1 Mo. LIBOR + 2.10% $(2,345)
1 Mo. LIBOR + 2.10% 2,345
3 Mo. LIBOR
1,033
10.9
10.9
4.5
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NOTE 19 - REGULATORY MATTERS
The Bank Holding Company Act of 1956 restricts the amount of dividends the Company can pay.
Accordingly, dividends should generally only be paid out of current earnings, as defined.
The New Jersey Banking Act of 1948 restricts the amount of dividends paid on the capital stock of
New Jersey chartered banks. Accordingly, no dividends shall be paid by such banks on their capital stock
unless, following the payment of such dividends, the capital stock of Lakeland will be unimpaired, and:
(1) Lakeland will have a surplus, as defined, of not less than 50% of its capital stock, or, if not, (2) the
payment of such dividend will not reduce the surplus, as defined, of Lakeland. Under these limitations,
approximately $507.9 million was available for payment of dividends from Lakeland to the Company as of
December 31, 2017.
The Company and Lakeland are subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory –
and possible additional discretionary – actions by regulators that, if undertaken, could have a direct material
effect on the Company’s and Lakeland’s consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Company must meet specific
capital guidelines that involve quantitative measures of the Company’s and Lakeland’s assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and
Lakeland’s capital amounts and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulations to ensure capital adequacy require the Company and
Lakeland to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 2017, that the Company and Lakeland met all capital adequacy requirements to
which they are subject.
As of December 31, 2017, the most recent notification from the FDIC categorized Lakeland as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well
capitalized, Lakeland must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1
capital and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that
notification that management believes have changed the institution’s category.
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As of December 31, 2017 and 2016, the Company and Lakeland have the following capital ratios based
on the then current regulations:
December 31, 2017
Amount
Ratio
Amount
Ratio
Amount
Ratio
(dollars in thousands)
For Capital
Adequacy Purposes with
Capital Conservation
Buffer
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Actual
Total capital (to risk-weighted assets)
Company
Lakeland
Tier 1 capital (to risk-weighted assets)
Company
Lakeland
Common equity Tier 1 capital (to risk-
weighted assets)
Company
Lakeland
$589,047
563,910
13.40% > $406,477 > 9.25%
12.86% 405,552
N/A
9.25% > $438,435 > 10.00%
N/A
$477,453
525,979
10.87% > $318,590 > 7.25%
12.00% 317,865
N/A
7.25% > $350,748
N/A
> 8.00%
$447,453
525,979
10.18% > $252,675 > 5.75%
12.00% 252,100
N/A
5.75% > $284,983
N/A
> 6.50%
Tier 1 capital (to average assets)
Company
Lakeland
$477,453
525,979
9.12% > $209,431 > 4.00%
10.06% 209,239
N/A
4.00% > $261,548
N/A
> 5.00%
December 31, 2016
Amount
Ratio
Amount
Ratio
Amount
Ratio
(dollars in thousands)
For Capital
Adequacy Purposes with
Capital Conservation
Buffer
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Actual
Total capital (to risk-weighted assets)
Company
Lakeland
Tier 1 capital (to risk-weighted assets)
Company
Lakeland
Common equity Tier 1 capital (to risk-
weighted assets)
Company
Lakeland
Tier 1 capital (to average assets)
Company
Lakeland
$549,391
530,458
13.48% > $351,431 > 8.625%
13.03% 350,996
N/A
8.625% > $406,952 > 10.00
N/A
$442,124
496,737
10.85% > $269,940 > 6.625%
12.21% 269,605
N/A
6.625% > $325,561
N/A
> 8.00
$412,124
496,737
10.11% > $208,821 > 5.125%
12.21% 208,563
N/A
5.125% > $264,519
N/A
> 6.50
$442,124
496,737
9.07% > $194,927
10.21% 194,691
> 4.00%
N/A
4.00% > $243,364
N/A
> 5.00
The final rules implementing the Basel Committee on Banking Supervisions capital guidelines for U.S.
Banks became effective for the Company on January 1, 2015, with full compliance with all the final rule’s
requirements phased in over a multi-year schedule, to be fully phased in by January 1, 2019. The Basel
Rules require a “capital conservation buffer.” The implementation of the capital conservation buffer began
on January 1, 2016 at the 0.625% level and increases by 0.625% every January 1 until it reaches 2.5% on
January 1, 2019.
-116-
NOTE 20 - GOODWILL AND OTHER INTANGIBLE ASSETS
The Company recorded goodwill of $136.4 million and $135.7 million at December 31, 2017 and
December 31, 2016, respectively, which includes $11.1 million from the Harmony merger in 2016, $15.3
million from the Pascack merger in 2016 and $110.0 million from prior acquisitions.
Core deposit intangible was $2.4 million on December 31, 2017 compared to $3.3 million on
December 31, 2016. The Company recorded $691,000, $1.5 million and $2.7 million in core deposit
intangible for the Harmony, Pascack and Somerset Hills acquisitions, respectively. In 2017, it has amortized
$654,000 in core deposit intangible. The estimated future amortization expense for each of the succeeding
five years ended December 31 is as follows (in thousands):
For the Year Ended
2018
2019
2020
2021
2022
$594
505
415
326
236
NOTE 21 - CONDENSED FINANCIAL INFORMATION – PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS
ASSETS
Cash and due from banks
Investment securities, available for sale
Investment securities, held to maturity
Investment in subsidiaries
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Other liabilities
Subordinated debentures
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
December 31,
2017
2016
(in thousands)
$ 17,695
5,158
1,000
659,180
6,013
$ 11,675
7,757
1,000
631,500
5,018
$689,046
$656,950
$
1,022
104,902
583,122
$
2,122
104,784
550,044
$689,046
$656,950
-117-
CONDENSED STATEMENTS OF OPERATIONS
Years Ended December 31,
2016
2017
2015
INCOME
Dividends from subsidiaries
Other income
TOTAL INCOME
EXPENSE
Interest on subordinated debentures
Noninterest expenses
TOTAL EXPENSE
Income before (benefit) provision for income taxes
Income taxes (benefit) provision
Income before equity in undistributed income of subsidiaries
Equity in undistributed income of subsidiaries
(in thousands)
$26,665
2,750
$20,687
199
$23,376
1,987
29,415
20,886
25,363
5,091
377
5,468
2,171
442
2,613
23,947
(2,018)
18,273
(845)
25,965
26,615
19,118
22,400
1,009
605
1,614
23,749
67
23,682
8,799
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
$52,580
$41,518
$32,481
-118-
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2016
2015
2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Gain on securities
Amortization of subordinated debt costs
Gain on early extinguishment of debt
Excess tax benefits
(Increase) decrease in other assets
(Decrease) increase in other liabilities
Equity in undistributed income of subsidiaries
(in thousands)
$ 52,580
$ 41,518
$ 32,481
(2,539)
118
—
587
(1,927)
(17)
(26,615)
—
30
—
—
(922)
1,010
(22,400)
(29)
—
(1,830)
—
3,861
176
(8,799)
NET CASH PROVIDED BY OPERATING ACTIVITIES
22,187
19,236
25,860
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in acquisition
Purchases of available for sale securities
Purchases of held to maturity securities
Proceeds from sale of available for sale securities
Contribution to subsidiary
—
(79)
—
3,217
—
(5,356)
(62)
—
—
(124,373)
—
(56)
(1,000)
29
—
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
3,138
(129,791)
(1,027)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid on common stock
Proceeds from issuance of common stock, net
Proceeds from issuance of subordinated debt, net
Redemption of subordinated debentures, net
Retirement of restricted stock
Excess tax benefits
Exercise of stock options
(18,853)
—
—
—
(773)
—
321
(16,007)
48,678
73,516
—
(206)
43
285
(12,586)
22
—
(8,170)
(254)
59
124
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
(19,305)
106,309
(20,805)
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
CASH AND CASH EQUIVALENTS, END OF YEAR
6,020
11,675
(4,246)
15,921
4,028
11,893
$ 17,695
$ 11,675
$ 15,921
ITEM 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable
ITEM 9A – Controls and Procedures.
Disclosure Controls
As of the end of the period covered by this Annual Report on Form 10-K, the Company’s management,
including the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934) pursuant to Securities Exchange Act Rule 15d-15(b).
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Based on their evaluation as of December 31, 2017, the Company’s Chief Executive Officer and Chief
Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective in ensuring that the
information required to be disclosed by the Company in the reports that the Company files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms and are operating in an effective manner and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
The management of Lakeland Bancorp, Inc. and its subsidiaries (the “Company”) is responsible for
establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934.
The Company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and includes those policies and procedures
that:
•
•
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management
and the board of directors of the Company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that
controls may become inadequate because of changes in conditions or because of declines in the degree of
compliance with policies or procedures.
The Company’s management assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2017. In making this assessment, the Company’s management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal
Control-Integrated Framework (2013).
As of December 31, 2017, based on management’s assessment, the Company’s internal control over
financial reporting was effective.
Our independent registered public accounting firm, KPMG LLP, audited our internal control over financial
reporting as of December 31, 2017. Their report, dated February 28, 2018, expressed an unqualified opinion on
our internal control over financial reporting.
Changes in Internal Controls Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during
the quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.
-120-
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Lakeland Bancorp, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Lakeland Bancorp, Inc. and subsidiaries’ (the Company) internal control over financial
reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016,
the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash
flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively,
the consolidated financial statements), and our report dated February 28, 2018 expressed an unqualified opinion
on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Short Hills, New Jersey
February 28, 2018
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ITEM 9B – Other Information.
None.
PART III
ITEM 10 - Directors, Executive Officers and Corporate Governance.
The Company responds to this Item by incorporating by reference the material responsive to this Item in the
Company’s definitive proxy statement for its 2018 Annual Meeting of Shareholders.
ITEM 11 - Executive Compensation.
The Company responds to this Item by incorporating by reference the material responsive to this Item in the
Company’s definitive proxy statement for its 2018 Annual Meeting of Shareholders.
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The Company responds to this Item by incorporating by reference the material responsive to this Item in the
Company’s definitive proxy statement for its 2018 Annual Meeting of Shareholders.
EQUITY COMPENSATION PLAN INFORMATION
The following table gives information about the Company’s common stock that may be issued upon the
exercise of options under the Company’s Amended and Restated 2000 Equity Compensation Program and the
Company’s 2009 Equity Compensation Program as of December 31, 2017. These plans were the Company’s
only equity compensation plans in existence as of December 31, 2017. The 2009 Equity Compensation Program
is the successor to the 2000 Equity Compensation Program, and no additional awards will be granted under the
2000 Equity Compensation Program. No warrants or rights may be granted, or are outstanding, under the 2000 or
the 2009 Equity Compensation Programs.
Plan Category
Equity Compensation Plans Approved by
Shareholders
Equity Compensation Plans Not Approved by
Shareholders
TOTAL
(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))
372,156
—
372,156
$8.89
—
$8.89
1,266,067
—
1,266,067
The number in column (a) does not include a total of 20,774 shares of Lakeland common stock that are issuable
upon the exercise of options assumed in the Somerset Hills merger with a weighted average exercise price of
$6.91.
ITEM 13 - Certain Relationships and Related Transactions, and Director Independence.
The Company responds to this Item by incorporating by reference the material responsive to this Item in the
Company’s definitive proxy statement for its 2018 Annual Meeting of Shareholders.
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ITEM 14 - Principal Accounting Fees and Services.
The Company responds to this Item by incorporating by reference the material responsive to this Item in the
Company’s definitive proxy statement for its 2018 Annual Meeting of Shareholders.
ITEM 15 - Exhibits and Financial Statement Schedules.
PART IV
(a) 1. The following portions of the Company’s consolidated financial statements are set forth in Item 8 of this
Annual Report:
(i) Consolidated Balance Sheets as of December 31, 2017 and 2016.
(ii) Consolidated Statements of Operations for each of the three years in the period ended December 31,
2017.
(iii) Consolidated Statements of Changes in Stockholders’ Equity for each of the three years in the period
ended December 31, 2017.
(iv) Consolidated Statements of Cash Flows for each of the three years in the period ended December 31,
2017.
(v) Notes to Consolidated Financial Statements.
(vi) Report of Independent Registered Public Accounting Firm.
(a) 2. Financial Statement Schedules
All financial statement schedules are omitted as the information, if applicable, is presented in the
consolidated financial statements or notes thereto.
(a) 3. Exhibits
3.1
3.2
3.3
3.4
4.1
4.2
Registrant’s Restated Certificate of Incorporation, dated May 19, 2005, including Certificate of
Amendment dated February 4, 2009 to the Registrant’s Restated Certificate of Incorporation, is
incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with
the SEC on February 9, 2009.
Certificate of Amendment, dated January 29, 2009, to the Registrant’s Restated Certificate of
Incorporation is incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on
Form 8-K filed with the SEC on February 3, 2009.
Certificate of Amendment, dated May 8, 2013, to the Registrant’s Restated Certificate of
Incorporation is incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on
Form 8-K filed with the SEC on May 14, 2013.
Registrant’s Amended and Restated Bylaws are incorporated by reference to Exhibit 3.3 to the
Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012.
Indenture, dated as of September 30, 2016, between Lakeland Bancorp, Inc. and U.S. Bank
National Association, as Trustee, is incorporated by reference to Exhibit 4.1 to the Registrant’s
Current Report on Form 8-K filed with the SEC on September 30, 2016.
First Supplemental Indenture, dated as of September 30, 2016, between Lakeland Bancorp, Inc.
and U.S. Bank National Association, as Trustee, is incorporated by reference to Exhibit 4.2 to the
Registrant’s Current Report on Form 8-K filed with the SEC on September 30, 2016.
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10.1+
10.2+
10.3+
10.4+
10.5+
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
10.13+
Lakeland Bancorp, Inc. Amended and Restated 2000 Equity Compensation Program is
incorporated by reference to Appendix A to the Registrant’s definitive proxy materials for its 2005
Annual Meeting of Shareholders.
Lakeland Bancorp, Inc. 2009 Equity Compensation Program, as amended and restated effective
February 27, 2014, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report
on Form 8-K filed with the SEC on February 28, 2014.
Employment Agreement, dated as of April 2, 2008 and executed on May 22, 2008, among
Lakeland Bancorp, Inc., Lakeland Bank and Thomas J. Shara, is incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 28, 2008.
Supplemental Executive Retirement Plan Agreement for Thomas J. Shara, effective as of April 2,
2008, among Lakeland Bancorp, Inc., Lakeland Bank and Thomas J. Shara is incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on
May 28, 2008.
Change of Control Agreement dated March 1, 2001, among Lakeland Bancorp, Inc., Lakeland
Bank and Joseph F. Hurley is incorporated by reference to Exhibit 10.8 to the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2000.
Change of Control Agreement dated March 1, 2001, among Lakeland Bancorp, Inc., Lakeland
Bank and Robert A. Vandenbergh is incorporated by reference to Exhibit 10.9 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2000.
Amendments to Change of Control Agreements, dated March 10, 2003, among Lakeland Bancorp,
Inc., Lakeland Bank and each of Joseph F. Hurley and Robert A. Vandenbergh are incorporated by
reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2002.
Lakeland Bancorp, Inc. Directors’ Deferred Compensation Plan, as amended and restated, is
incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed
with the SEC on December 30, 2008.
Second Amendatory Agreement to Change in Control Agreement, dated as of December 31, 2008,
among Lakeland Bancorp, Inc., Lakeland Bank and Joseph F. Hurley, is incorporated by reference
to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on December
30, 2008.
Second Amendatory Agreement to Change in Control Agreement, dated as of December 31, 2008,
among Lakeland Bancorp, Inc., Lakeland Bank and Robert A. Vandenbergh, is incorporated by
reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed with the SEC on
December 30, 2008.
Supplemental Executive Retirement Plan Agreement, effective as of December 23, 2008, among
Lakeland Bancorp, Inc., Lakeland Bank and Robert A. Vandenbergh, is incorporated by reference
to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K filed with the SEC on December
30, 2008.
Amendment No. 3 to Salary Continuation Agreement, dated as of December 31, 2008, among
Lakeland Bancorp, Inc., Lakeland Bank and Robert A. Vandenbergh, is incorporated by reference
to Exhibit 10.8 to the Registrant’s Current Report on Form 8-K filed with the SEC on December
30, 2008.
Change in Control Agreement, dated as of June 12, 2009, among Lakeland Bancorp, Inc.,
Lakeland Bank and Ronald E. Schwarz, is incorporated by reference to Exhibit 10.25 to the
Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010.
10.14+
Somerset Hills Bancorp 2001 Combined Stock Option Plan is incorporated by reference to Exhibit
4.6 to the Registrant’s Registration Statement on Form S-8 filed with the SEC on June 3, 2013.
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10.15+
10.16+
10.17+
10.18+
10.19+
10.20+
10.21+
10.22+
10.23+
10.24+
10.25+
10.26+
10.27+
10.28+
Somerset Hills Bancorp 2007 Equity Incentive Plan is incorporated by reference to Exhibit 4.7 to
the Registrant’s Registration Statement on Form S-8 filed with the SEC on June 3, 2013.
Somerset Hills Bancorp 2012 Equity Incentive Plan is incorporated by reference to Exhibit 4.8 to
the Registrant’s Registration Statement on Form S-8 filed with the SEC on June 3, 2013.
Change of Control Agreement, dated October 31, 2013, among Lakeland Bancorp, Inc., Lakeland
Bank and Timothy J. Matteson, is incorporated by reference to Exhibit 10.2 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2013.
Deferred Compensation Agreement, dated February 27, 2015, among Lakeland Bancorp, Inc.,
Lakeland Bank and Thomas J. Shara, is incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed with the SEC on March 2, 2015.
Lakeland Bancorp, Inc. Elective Deferral Plan is incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed with the SEC on March 20, 2015.
Amendment, dated August 7, 2015, to Employment Agreement, dated April 2, 2008 and executed
May 22, 2008, among Lakeland Bancorp, Inc., Lakeland Bank and Thomas J. Shara, is
incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed
with the SEC on August 7, 2015.
Amendment, dated August 7, 2015, to Change in Control Agreement, dated March 1, 2001, as
amended by agreements dated March 10, 2003 and December 31, 2008, among Lakeland Bancorp,
Inc., Lakeland Bank and Joseph F. Hurley, is incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed with the SEC on August 7, 2015.
Amendment, dated August 7, 2015, to Change in Control Agreement, dated March 1, 2001, as
amended by agreements dated March 10, 2003 and December 31, 2008, among Lakeland Bancorp,
Inc., Lakeland Bank and Robert A. Vandenbergh, is incorporated by reference to Exhibit 10.3 to
the Registrant’s Current Report on Form 8-K filed with the SEC on August 7, 2015.
Amendment, dated August 7, 2015, to Change in Control Agreement, dated June 12, 2009, among
Lakeland Bancorp, Inc., Lakeland Bank and Ronald E. Schwarz, is incorporated by reference to
Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed with the SEC on August 7,
2015.
Amendment, dated August 7, 2015, to Change in Control Agreement, dated October 31, 2013, as
amended, among Lakeland Bancorp, Inc., Lakeland Bank and Timothy J. Matteson, is incorporated
by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q for the period
ended June 30, 2015.
Change in Control Agreement, dated as of April 11, 2016, among Lakeland Bancorp, Inc.,
Lakeland Bank and James Nigro, is incorporated by reference to Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q filed with the SEC on May 10, 2016.
Amendatory Agreement, dated as of January 1, 2017, to Change in Control Agreement, dated as of
March 1, 2001, as amended, among Lakeland Bancorp, Inc., Lakeland Bank and Robert A.
Vandenbergh, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K filed with the SEC on January 4, 2017.
Amendatory Agreement, dated as of February 23, 2017, to Change in Control Agreement, dated as
of November 24, 2008, as amended, among Lakeland Bancorp, Inc., Lakeland Bank and David S.
Yanagisawa, is incorporated by reference to Exhibit 10.29 to the Registrant’s Annual Report on
Form 10-K filed with the SEC on March 15, 2017.
Change in Control Agreement, dated as of March 15, 2017, among Lakeland Bancorp, Inc.,
Lakeland Bank and Thomas Splaine, is incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed with the SEC on March 16, 2017.
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10.29
10.30+
10.31+
12.1
21.1
23.1
24.1
31.1
31.2
32.1
Master Agreement, dated October 31, 2017 among Lakeland Bancorp, Inc., Lakeland Bank and
Fiserv Solutions, LLC. (Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment.)
Amended Change in Control Agreement, dated January 1, 2018, among Lakeland Bancorp, Inc.,
Lakeland Bank and Ellen Lalwani.
Change in Control Agreement, dated January 1, 2018, among Lakeland Bancorp, Inc., Lakeland
Bank and John Rath.
Statement of Ratios of Earnings to Fixed Charges.
Subsidiaries of Registrant.
Consent of KPMG LLP.
Power of Attorney.
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
+ Denotes management contract or compensatory plan, contract or arrangement.
ITEM 16 – Form 10-K Summary.
Not applicable.
-126-
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.
Dated: February 28, 2018
By:/s/ Thomas J. Shara
LAKELAND BANCORP, INC.
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*
Bruce D. Bohuny
/s/ Mary Ann Deacon*
Mary Ann Deacon
/s/ Edward B. Deutsch*
Edward B. Deutsch
/s/ Brian Flynn*
Brian Flynn
/s/ Mark J. Fredericks*
Mark J. Fredericks
/s/ Janeth C. Hendershot*
Janeth C. Hendershot
/s/ Lawrence R. Inserra, Jr.*
Lawrence R. Inserra, Jr.
/s/ Thomas J. Marino*
Thomas J. Marino
/s/ Robert E. McCracken*
Robert E. McCracken
/s/ Robert B. Nicholson, III*
Robert B. Nicholson, III
/s/ Joseph P. O’Dowd*
Joseph P. O’Dowd
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
-127-
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
Signature
/s/ Thomas J. Shara
Thomas J. Shara
/s/ Stephen R. Tilton, Sr.*
Stephen R. Tilton, Sr.
/s/ Thomas Splaine
Thomas Splaine
*By: /s/ Thomas J. Shara
Thomas J. Shara
Attorney-in-Fact
Capacity
Date
Director, President and Chief
Executive Officer (Principal
Executive Officer)
February 28, 2018
Director
February 28, 2018
Executive Vice President and Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
February 28, 2018
February 28, 2018
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M I S S I O N S T A T E M E N T
Lakeland Bank is and will remain
a community-foff cused financial institution
committed to providing shareholders with returns
that consistently exceed those of our peers.
We will provide a challenging, yet rewarding environment
foff r our employees, who will foff ster
the delivery of superior customer service
that exceeds customer expectations
by understanding and anticipating their financial needs
each and every time we interact with them.
250 Oak Ridge Road | Oak Ridge, NJ 07438 | t: 973-697-2000 | LakelandBank.com | Stock symbol: LBAI