LOANS, LEASES AND OTHER REAL ESTATE

The following sets forth the composition of the Company’s loan and lease portfolio:



	September 30, 2018			December 31, 2017
	(in thousands)
Commercial, secured by real estate	$	2,984,430		$	2,831,184
Commercial, industrial and other	334,241			340,400
Leases	82,881			75,039
Real estate - residential mortgage	315,135			322,880
Real estate - construction	297,516			264,908
Home equity and consumer	318,035			322,269
Total loans and leases	4,332,238			4,156,680
Less: deferred fees	(4,120		)	(3,960		)
Loans and leases, net of deferred fees	$	4,328,118		$	4,152,720

At September 30, 2018 and December 31, 2017, home equity and consumer loans included overdraft deposit balances of $310,000 and $966,000, respectively. At both September 30, 2018 and December 31, 2017, the Company had $1.1 billion in loans pledged for actual and potential borrowings at the Federal Home Loan Bank of New York (“FHLB”).

Purchased Credit Impaired Loans

The carrying value of loans acquired in the Pascack Community Bank ("Pascack") acquisition and accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” was $170,000 at September 30, 2018, which was $647,000 less than the balance at the time of acquisition on January 7, 2016. In first quarter of 2017, one of the Pascack purchased credit impaired (“PCI”) loans totaling $127,000 experienced further credit deterioration and was fully charged off. In the second quarter of 2017, a loan with a net value of $218,000 was fully paid off. The carrying value of PCI loans acquired in the Harmony Bank ("Harmony") acquisition was $503,000 at September 30, 2018 which was $266,000 less than the balance at acquisition date on July 1, 2016. In the second quarter of 2017, a loan with a net value of $247,000 was fully paid off.

The following table presents changes in the accretable yield for PCI loans:



	For the Three Months Ended						For the Nine Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
	(in thousands)						(in thousands)
Balance, beginning of period	$	100		$	133		$	129		$	145
Accretion	(58		)	(40		)	(145		)	(138		)
Net reclassification non-accretable difference	41			35			99			121
Balance, end of period	$	83		$	128		$	83		$	128

Non-Performing Assets and Past Due Loans

The following schedule sets forth certain information regarding the Company’s non-performing assets and its accruing troubled debt restructurings, excluding PCI loans:



	September 30, 2018		December 31, 2017
	(in thousands)
Commercial, secured by real estate	$	5,737	$	5,890
Commercial, industrial and other	1,189		184
Leases	441		144
Real estate - residential mortgage	2,347		3,860
Real estate - construction	—		1,472
Home equity and consumer	1,410		2,105
Total non-accrual loans and leases	$	11,124	$	13,655
Other real estate and other repossessed assets	2,754		843
TOTAL NON-PERFORMING ASSETS	$	13,878	$	14,498
Troubled debt restructurings, still accruing	$	9,030	$	11,462

Non-accrual loans included $3.9 million and $2.7 million of troubled debt restructurings for the periods ended September 30, 2018 and December 31, 2017, respectively. Non-accrual real estate-construction loans declined from December 31, 2017 to September 30, 2018 due to a foreclosure on a property which resulted in the property moving into other real estate at the end of June 2018. At September 30, 2018 and December 31, 2017, the Company had $1.6 million and $2.7 million, respectively, in residential mortgages and consumer home equity loans that were in the process of foreclosure which are included in non-accrual loans in the above table.

An age analysis of past due loans, segregated by class of loans as of September 30, 2018 and December 31, 2017, is as follows:



	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Current		Total Loans and Leases		Recorded Investment Greater than 89 Days and Still Accruing
	(in thousands)
September 30, 2018
Commercial, secured by real estate	$	6,068	$	1,393	$	1,328	$	8,789	$	2,975,641	$	2,984,430	$	—
Commercial, industrial and other	540		7		350		897		333,344		334,241		—
Leases	454		110		442		1,006		81,875		82,881		—
Real estate - residential mortgage	2,470		207		1,825		4,502		310,633		315,135		16
Real estate - construction	1,071		—		—		1,071		296,445		297,516		—
Home equity and consumer	2,051		616		1,010		3,677		314,358		318,035		—
	$	12,654	$	2,333	$	4,955	$	19,942	$	4,312,296	$	4,332,238	$	16
December 31, 2017
Commercial, secured by real estate	$	3,663	$	1,082	$	3,817	$	8,562	$	2,822,622	$	2,831,184	$	—
Commercial, industrial and other	80		121		56		257		340,143		340,400		—
Leases	496		139		144		779		74,260		75,039		—
Real estate - residential mortgage	939		908		3,137		4,984		317,896		322,880		—
Real estate - construction	—		—		1,472		1,472		263,436		264,908		—
Home equity and consumer	1,258		310		1,386		2,954		319,315		322,269		200
	$	6,436	$	2,560	$	10,012	$	19,008	$	4,137,672	$	4,156,680	$	200

Impaired Loans

The Company defines impaired loans as all non-accrual loans and leases with recorded investments of $500,000 or greater. Impaired loans also include all loans that have been modified in troubled debt restructurings. Impaired loans as of September 30, 2018 and December 31, 2017 are as follows:



September 30, 2018	Recorded Investment in Impaired Loans		Contractual Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
	(in thousands)
Loans without specific allowance:
Commercial, secured by real estate	$	7,918	$	8,160	$	—	$	7,147	$	136
Commercial, industrial and other	1,329		1,610		—		1,799		14
Leases	301		597		—		258		—
Real estate - residential mortgage	—		—		—		323		4
Real estate - construction	—		—		—		970		—
Home equity and consumer	—		—		—		—		—
Loans with specific allowance:
Commercial, secured by real estate	6,982		7,309		322		7,804		247
Commercial, industrial and other	219		219		8		221		9
Leases	17		17		8		17		—
Real estate - residential mortgage	743		893		4		754		15
Real estate - construction	—		—		—		—		—
Home equity and consumer	871		986		7		907		25
Total:
Commercial, secured by real estate	$	14,900	$	15,469	$	322	$	14,951	$	383
Commercial, industrial and other	1,548		1,829		8		2,020		23
Leases	318		614		8		275		—
Real estate - residential mortgage	743		893		4		1,077		19
Real estate - construction	—		—		—		970		—
Home equity and consumer	871		986		7		907		25
	$	18,380	$	19,791	$	349	$	20,200	$	450



December 31, 2017	Recorded Investment in Impaired Loans		Contractual Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
	(in thousands)
Loans without specific allowance:
Commercial, secured by real estate	$	12,155	$	12,497	—		$	12,774	$	366
Commercial, industrial and other	618		618		—		618		25
Leases	—		—		—		—		—
Real estate - residential mortgage	963		980		—		996		15
Real estate - construction	1,471		1,471		—		1,471		—
Home equity and consumer	—		—		—		6		—
Loans with specific allowance:
Commercial, secured by real estate	5,381		5,721		454		5,029		206
Commercial, industrial and other	164		164		9		283		14
Leases	65		65		30		29		—
Real estate - residential mortgage	781		919		4		940		27
Real estate - construction	—		—		—		—		—
Home equity and consumer	993		1,026		8		1,090		52
Total:
Commercial, secured by real estate	$	17,536	$	18,218	$	454	$	17,803	$	572
Commercial, industrial and other	782		782		9		901		39
Leases	65		65		30		29		—
Real estate - residential mortgage	1,744		1,899		4		1,936		42
Real estate - construction	1,471		1,471		—		1,471		—
Home equity and consumer	993		1,026		8		1,096		52
	$	22,591	$	23,461	$	505	$	23,236	$	705

Interest income recognized on impaired loans was $450,000 and $515,000 for the nine months ended September 30, 2018 and 2017, respectively. Interest that would have been accrued on impaired loans during the first nine months of 2018 and 2017 had the loans been performing under original terms would have been $842,000 and $1.2 million, respectively.

Credit Quality Indicators

The class of loans is 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. Lakeland assigns a credit risk rating 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 commercial loan portfolios. The risk rating system assists senior management in evaluating Lakeland’s commercial 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 commercial 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.

The following table shows the Company’s commercial loan portfolio as of September 30, 2018 and December 31, 2017, by the risk ratings discussed above (in thousands):



September 30, 2018	Commercial, Secured by Real Estate		Commercial, Industrial and Other		Real Estate - Construction
RISK RATING
1	$	—	$	279	$	—
2	—		17,907		—
3	70,548		42,177		—
4	903,866		84,973		28,780
5	1,886,023		163,114		266,054
5W - Watch	46,537		8,428		1,611
6 - Other assets especially mentioned	41,237		5,444		—
7 - Substandard	36,219		11,919		1,071
8 - Doubtful	—		—		—
9 - Loss	—		—		—
Total	$	2,984,430	$	334,241	$	297,516



December 31, 2017	Commercial, Secured by Real Estate		Commercial, Industrial and Other		Real Estate - Construction
RISK RATING
1	$	—	$	392	$	—
2	—		26,968		—
3	76,824		35,950		—
4	862,537		96,426		15,502
5	1,779,908		150,928		246,806
5W - Watch	47,178		8,779		—
6 - Other assets especially mentioned	40,245		8,670		—
7 - Substandard	24,492		12,287		2,600
8 - Doubtful	—		—		—
9 - Loss	—		—		—
Total	$	2,831,184	$	340,400	$	264,908

The risk rating tables above do not include residential mortgage loans, consumer loans, or leases because they are evaluated on their payment status.

Allowance for Loan and Lease Losses

The following table details activity in the allowance for loan and lease losses by portfolio segment for the three and nine months ended September 30, 2018 and 2017:



Three Months Ended September 30, 2018	Commercial, Secured by Real Estate			Commercial, Industrial and Other			Leases			Real Estate- Residential Mortgage			Real Estate- Construction			Home Equity and Consumer			Total
	(in thousands)
Beginning Balance	$	26,174		$	2,012		$	1,264		$	1,585		$	3,063		$	2,506		$	36,604
Charge-offs	(24		)	(151		)	(368		)	(38		)	—			(172		)	(753		)
Recoveries	135			177			2			2			4			76			396
Provision	1,361			(70		)	(12		)	(62		)	(166		)	(5		)	1,046
Ending Balance	$	27,646		$	1,968		$	886		$	1,487		$	2,901		$	2,405		$	37,293



Three Months Ended September 30, 2017	Commercial, Secured by Real Estate			Commercial, Industrial and Other			Leases			Real Estate- Residential Mortgage			Real Estate- Construction			Home Equity and Consumer			Total
	(in thousands)
Beginning Balance	$	23,344		$	1,688		$	529		$	1,754		$	2,596		$	2,912		$	32,823
Charge-offs	(315		)	(196		)	(87		)	(98		)	—			(173		)	(869		)
Recoveries	26			28			7			3			4			76			144
Provision	1,673			572			65			(90		)	(135		)	(258		)	1,827
Ending Balance	$	24,728		$	2,092		$	514		$	1,569		$	2,465		$	2,557		$	33,925



Nine Months Ended September 30, 2018	Commercial, Secured by Real Estate			Commercial, Industrial and Other			Leases			Real Estate- Residential Mortgage			Real Estate- Construction			Home Equity and Consumer			Total
	(in thousands)
Beginning Balance	$	25,704		$	2,313		$	630		$	1,557		$	2,731		$	2,520		$	35,455
Charge-offs	(256		)	(1,452		)	(463		)	(131		)	(248		)	(416		)	(2,966		)
Recoveries	440			273			7			7			12			243			982
Provision	1,758			834			712			54			406			58			3,822
Ending Balance	$	27,646		$	1,968		$	886		$	1,487		$	2,901		$	2,405		$	37,293



Nine Months Ended September 30, 2017	Commercial, Secured by Real Estate			Commercial, Industrial and Other			Leases			Real Estate- Residential Mortgage			Real Estate- Construction			Home Equity and Consumer			Total
	(in thousands)
Beginning Balance	$	21,223		$	1,723		$	548		$	1,964		$	2,352		$	3,435		$	31,245
Charge-offs	(618		)	(430		)	(250		)	(408		)	(609		)	(784		)	(3,099		)
Recoveries	390			150			39			3			24			301			907
Provision	3,733			649			177			10			698			(395		)	4,872
Ending Balance	$	24,728		$	2,092		$	514		$	1,569		$	2,465		$	2,557		$	33,925

Loans receivable summarized by portfolio segment and impairment method are as follows:



September 30, 2018	Commercial, Secured by Real Estate		Commercial, Industrial and Other		Leases		Real Estate- Residential Mortgage		Real Estate- Construction		Home Equity and Consumer		Total
	(in thousands)
Ending Balance: Individually evaluated for impairment	$	14,900	$	1,548	$	318	$	743	$	—	$	871	$	18,380
Ending Balance: Collectively evaluated for impairment	2,968,859		332,693		82,563		314,392		297,516		317,162		4,313,185
Ending Balance: Loans acquired with deteriorated credit quality	671		—		—		—		—		2		673
Ending Balance (1)	$	2,984,430	$	334,241	$	82,881	$	315,135	$	297,516	$	318,035	$	4,332,238



December 31, 2017	Commercial, Secured by Real Estate		Commercial, Industrial and Other		Leases		Real Estate- Residential Mortgage		Real Estate- Construction		Home Equity and Consumer		Total
	(in thousands)
Ending Balance: Individually evaluated for impairment	$	17,536	$	782	$	65	$	1,744	$	1,471	$	993	$	22,591
Ending Balance: Collectively evaluated for impairment	2,812,941		339,618		74,974		321,136		263,437		321,273		4,133,379
Ending balance: Loans acquired with deteriorated credit quality	707		—		—		—		—		3		710
Ending Balance (1)	$	2,831,184	$	340,400	$	75,039	$	322,880	$	264,908	$	322,269	$	4,156,680


(1)	Excludes deferred fees

The allowance for loan and lease losses is summarized by portfolio segment and impairment classification as follows:



September 30, 2018	Commercial, Secured by Real Estate		Commercial, Industrial and Other		Leases		Real Estate- Residential Mortgage		Real Estate- Construction		Home Equity and Consumer		Total
	(in thousands)
Ending Balance: Individually evaluated for impairment	$	322	$	8	$	8	$	4	$	—	$	7	$	349
Ending Balance: Collectively evaluated for impairment	27,324		1,960		878		1,483		2,901		2,398		36,944
Ending Balance	$	27,646	$	1,968	$	886	$	1,487	$	2,901	$	2,405	$	37,293



December 31, 2017	Commercial, Secured by Real Estate		Commercial, Industrial and Other		Leases		Real Estate- Residential Mortgage		Real Estate- Construction		Home Equity and Consumer		Total
	(in thousands)
Ending Balance: Individually evaluated for impairment	$	454	$	9	$	30	$	4	$	—	$	8	$	505
Ending Balance: Collectively evaluated for impairment	25,250		2,304		600		1,553		2,731		2,512		34,950
Ending Balance	$	25,704	$	2,313	$	630	$	1,557	$	2,731	$	2,520	$	35,455

Lakeland also maintains a reserve for unfunded lending commitments which is included in other liabilities. This reserve was $2.5 million for each of the periods ended September 30, 2018 and December 31, 2017. The Company analyzes the adequacy of the reserve for unfunded lending commitments quarterly.

Troubled Debt Restructurings

Loans are classified as troubled debt restructured loans in cases where borrowers experience financial difficulties and Lakeland makes certain concessionary modifications to contractual terms. Restructured loans typically involve a modification of terms such as a reduction of the stated interest rate, a moratorium of principal payments and/or an extension of the maturity date at a stated interest rate lower than the current market rate of a new loan with similar risk. The Company considers the potential losses on these loans as well as the remainder of its impaired loans while considering the adequacy of the allowance for loan and lease losses.

The following table summarizes loans that have been restructured during the three and nine months ended September 30, 2018 and 2017:



	For the Three Months Ended September 30, 2018					For the Three Months Ended September 30, 2017
	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	(dollars in thousands)
Commercial, secured by real estate	1	$	1,175	$	1,175	1	$	473	$	473
	1	$	1,175	$	1,175	1	$	473	$	473



	For the Nine Months Ended September 30, 2018					For the Nine Months Ended September 30, 2017
	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	(dollars in thousands)
Commercial, secured by real estate	4	$	3,002	$	3,002	5	$	3,511	$	3,511
Commercial, industrial and other	1	950		950		2	124		124
	5	$	3,952	$	3,952	7	$	3,635	$	3,635

The following table summarizes as of September 30, 2018 and 2017, loans that were restructured within the previous twelve months that have subsequently defaulted:



	September 30, 2018			September 30, 2017
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)
Commercial, secured by real estate	1	$	171	—	$	—
	1	$	171	—	$	—

Other Real Estate and Other Repossessed Assets

At September 30, 2018 and December 31, 2017, the Company had other real estate owned of $2.8 million and $843,000, respectively. Included in other real estate owned was residential property acquired as a result of foreclosure proceedings totaling $2.1 million and $843,000 at September 30, 2018 and December 31, 2017, respectively. There were no balances of other repossessed assets at both September 30, 2018 and December 31, 2017.