ACQUISITIONS

Harmony Bank

On July 1, 2016, the Company completed its acquisition of Harmony Bank (“Harmony”), a bank located in Ocean County, New Jersey. Effective upon the opening of business on July 1, 2016, Harmony was merged into Lakeland Bank. Harmony operated three branches in Ocean County, New Jersey. This merger allowed the Company to expand its presence to Ocean County. The merger agreement provided that shareholders of Harmony would receive 1.25 shares of the Company’s common stock for each share of Harmony Bank common stock that they owned at the effective time of the merger. The Company issued an aggregate of 3,201,109 shares of its common stock in the merger. Outstanding Harmony stock options were paid out in cash at the difference between $14.31 (Lakeland’s closing stock price on July 1, 2016 of $11.45 multiplied by 1.25) and the average strike price of $9.07 for a total cash payment of $869,000.

During 2017, the Company revised the estimate of the fair value of the acquired assets as of the acquisition date as a result of additional information obtained. The adjustment, net of tax, related to the fair market value of certain loans and the valuation of core deposit intangible, resulted in a $685,000 increase to goodwill.

The acquisition was accounted for under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed in the acquisition were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition, including the use of a third party valuation specialist. The following table summarizes the estimated fair value of the acquired assets and liabilities assumed at the date of acquisition for Harmony, net of cash consideration paid.



	(in thousands)
Cash and cash equivalents	$	27,809
Securities available for sale	7,474
Securities held to maturity	6,885
Federal Home Loan Bank stock	780
Loans	259,985
Premises and equipment	3,125
Goodwill	11,147
Identifiable intangible assets	1,088
Accrued interest receivable and other assets	8,146
Total assets acquired	326,439
Deposits	(278,060		)
Other borrowings	(9,314		)
Other liabilities	(2,411		)
Total liabilities assumed	(289,785		)
Net assets acquired	$	36,654

Loans acquired in the Harmony acquisition were recorded at fair value, and there was no carryover related to the allowance for loan and lease losses. The fair value of loans acquired from Harmony was estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted for estimated future credit losses and the rate of prepayments. Projected cash flows were then discounted to present value using a risk-adjusted market rate for similar loans.

The following is a summary of the loans accounted for in accordance with ASC 310-30 that were acquired in the Harmony acquisition as of the closing date.



	Acquired Credit Impaired Loans
	(in thousands)
Contractually required principal and interest at acquisition	$	1,264
Contractual cash flows not expected to be collected (non-accretable difference)	(398		)
Expected cash flows at acquisition	866
Interest component of expected cash flows (accretable difference)	(97		)
Fair value of acquired loans	$	769

The core deposit intangible totaled $691,000 and is being amortized over its estimated useful life of approximately 10 years using an accelerated method. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes.

The fair value of deposit liabilities with no stated maturities such as checking, money market and savings accounts, was assumed to equal the carrying amounts since these deposits are payable on demand. The fair values of certificates of deposits and IRAs represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit.

Pascack Bancorp

On January 7, 2016, the Company completed its acquisition of Pascack Bancorp, Inc. (“Pascack”), a bank holding company headquartered in Waldwick, New Jersey. Pascack was the parent of Pascack Community Bank, which operated 8 branches in Bergen and Essex Counties in New Jersey. This acquisition enabled the Company to broaden its presence in Bergen and Essex counties. Effective as of the close of business on January 7, 2016, Pascack merged into the Company, and Pascack Community Bank merged into Lakeland Bank. The merger agreement provided that the shareholders of Pascack would receive, at their election, for each outstanding share of Pascack common stock that they owned at the effective time of the merger, either 0.9576 shares of Lakeland Bancorp common stock or $11.35 in cash, subject to proration as described in the merger agreement, so that 90% of the aggregate merger consideration was shares of Lakeland Bancorp common stock and 10% was cash. Lakeland Bancorp issued 3,314,284 shares of its common stock in the merger and paid approximately $4.5 million in cash, including the cash paid in connection with the cancellation of Pascack stock options. Outstanding Pascack stock options were paid out in cash at the difference between $11.35 and an average strike price of $7.37 for a total cash payment of $122,000. This transaction resulted in $15.3 million of goodwill and generated $1.5 million in core deposit intangibles.



	(in thousands)
Cash and cash equivalents	$	40,942
Securities held to maturity	3,925
Federal Home Loan Bank stock	2,962
Loans	319,575
Premises and equipment	14,438
Goodwill	15,311
Identifiable intangible assets	1,514
Accrued interest receivable and other assets	6,672
Total assets acquired	405,339
Deposits	(304,466		)
Other borrowings	(57,308		)
Other liabilities	(6,344		)
Total liabilities assumed	(368,118		)
Net assets acquired	$	37,221

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

The following is a summary of the loans accounted for in accordance with ASC 310-30 that were acquired in the Pascack acquisition as of the closing date.



	Acquired Credit Impaired Loans
	(in thousands)
Contractually required principal and interest at acquisition	$	4,932
Contractual cash flows not expected to be collected (non-accretable difference)	4,030
Expected cash flows at acquisition	902
Interest component of expected cash flows (accretable difference)	85
Fair value of acquired loans	$	817

The core deposit intangible totaled $1.5 million and is being amortized over its estimated useful life of approximately 10 years using an accelerated method. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes.

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.