LOANS AND OTHER REAL ESTATE

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



(in thousands)	March 31, 2019			December 31, 2018

Commercial, secured by real estate	$	3,436,550		$	3,057,779
Commercial, industrial and other	389,230			336,735
Equipment finance	90,791			87,925
Real estate - residential mortgage	335,290			329,854
Real estate - construction	332,995			319,545
Home equity and consumer	339,815			328,609
Total loans	4,924,671			4,460,447
Less: deferred fees	(3,280		)	(3,714		)
Loans, net of deferred fees	$	4,921,391		$	4,456,733

At March 31, 2019 and December 31, 2018, home equity and consumer loans included overdraft deposit balances of $368,000 and $452,000, respectively. At March 31, 2019 and December 31, 2018, the Company had $1.32 billion and $1.16 billion, respectively, 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 Highlands merger and accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” was $13.7 million which was substantially the same as the balance at acquisition on January 4, 2019. The carrying value of the purchased credit impaired ("PCI") loans acquired in the Pascack Community Bank ("Pascack") acquisition was $145,000 at March 31, 2019 compared to $157,000 at December 31, 2018. The carrying value of PCI loans acquired in the Harmony Bank ("Harmony") acquisition was $485,000 at March 31, 2019 compared to $495,000 at December 31, 2018.

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



	For the Three Months Ended
(in thousands)	March 31, 2019			March 31, 2018

Balance, beginning of period	$	81		$	129
Acquisitions	1,420			—
Accretion	(193		)	(44		)
Net reclassification non-accretable difference	30			28
Balance, end of period	$	1,338		$	113

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:



(in thousands)	March 31, 2019		December 31, 2018

Commercial, secured by real estate	$	9,817	$	7,192
Commercial, industrial and other	2,202		1,019
Equipment finance	383		501
Real estate - residential mortgage	1,740		1,986
Home equity and consumer	1,581		1,432
Total non-accrual loans	$	15,723	$	12,130
Other real estate and other repossessed assets	715		830
TOTAL NON-PERFORMING ASSETS	$	16,438	$	12,960
Troubled debt restructurings, still accruing	$	6,352	$	9,293

Non-accrual loans included $2.8 million and $3.6 million of troubled debt restructurings for the periods ended March 31, 2019 and December 31, 2018, respectively. At March 31, 2019 and December 31, 2018, the Company had $1.2 million and $1.5 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 March 31, 2019 and December 31, 2018, is as follows:



(in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment Greater than 89 Days and Still Accruing
March 31, 2019
Commercial, secured by real estate	$	14,944	$	3,060	$	3,913	$	21,917	$	3,414,633	$	3,436,550	$	—
Commercial, industrial and other	1,084		220		377		1,681		387,549		389,230		—
Equipment finance	358		210		383		951		89,840		90,791		—
Real estate - residential mortgage	2,406		—		1,146		3,552		331,738		335,290		—
Real estate - construction	—		—		3,423		3,423		329,572		332,995		—
Home equity and consumer	1,845		365		1,297		3,507		336,308		339,815		78
	$	20,637	$	3,855	$	10,539	$	35,031	$	4,889,640	$	4,924,671	$	78
December 31, 2018
Commercial, secured by real estate	$	1,477	$	639	$	2,237	$	4,353	$	3,053,426	$	3,057,779	$	—
Commercial, industrial and other	173		243		750		1,166		335,569		336,735		—
Equipment finance	533		13		501		1,047		86,878		87,925		—
Real estate - residential mortgage	743		111		1,776		2,630		327,224		329,854		—
Real estate - construction	—		—		—		—		319,545		319,545		—
Home equity and consumer	1,917		216		850		2,983		325,626		328,609		—
	$	4,843	$	1,222	$	6,114	$	12,179	$	4,448,268	$	4,460,447	$	—

Impaired 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 that have been modified in troubled debt restructurings, but excludes PCI loans. Impaired loans as of March 31, 2019 and December 31, 2018 are as follows:



(in thousands)	Recorded Investment in Impaired Loans		Contractual Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
March 31, 2019
Loans without specific allowance:
Commercial, secured by real estate	$	12,188	$	12,883	$	—	$	8,878	$	52
Commercial, industrial and other	2,309		2,633		—		1,142		4
Equipment finance	301		597		—		301		—
Real estate - residential mortgage	—		—		—		—		—
Real estate - construction	—		—		—		—		—
Home equity and consumer	—		—		—		—		—
Loans with specific allowance:
Commercial, secured by real estate	3,797		4,070		229		6,642		72
Commercial, industrial and other	200		199		8		199		3
Equipment finance	26		26		12		26		—
Real estate - residential mortgage	715		875		4		718		5
Real estate - construction	—		—		—		—		—
Home equity and consumer	700		741		6		697		8
Total:
Commercial, secured by real estate	$	15,985	$	16,953	$	229	$	15,520	$	124
Commercial, industrial and other	2,509		2,832		8		1,341		7
Equipment finance	327		623		12		327		—
Real estate - residential mortgage	715		875		4		718		5
Real estate - construction	—		—		—		—		—
Home equity and consumer	700		741		6		697		8
	$	20,236	$	22,024	$	259	$	18,603	$	144



(in thousands)	Recorded Investment in Impaired Loans		Contractual Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
December 31, 2018
Loans without specific allowance:
Commercial, secured by real estate	$	9,284	$	9,829	—		$	7,369	$	188
Commercial, industrial and other	1,151		1,449		—		1,834		19
Equipment finance	301		597		—		376		—
Real estate - residential mortgage	—		—		—		242		4
Real estate - construction	—		—		—		726		—
Home equity and consumer	—		—		—		—		—
Loans with specific allowance:
Commercial, secured by real estate	7,270		7,597		307		7,594		317
Commercial, industrial and other	209		209		7		209		12
Equipment finance	30		30		14		19		—
Real estate - residential mortgage	730		884		4		745		20
Real estate - construction	—		—		—		—		—
Home equity and consumer	727		765		6		898		32
Total:
Commercial, secured by real estate	$	16,554	$	17,426	$	307	$	14,963	$	505
Commercial, industrial and other	1,360		1,658		7		2,043		31
Equipment finance	331		627		14		395		—
Real estate - residential mortgage	730		884		4		987		24
Real estate - construction	—		—		—		726		—
Home equity and consumer	727		765		6		898		32
	$	19,702	$	21,360	$	338	$	20,012	$	592

Interest income recognized on impaired loans was $144,000 and $177,000 for the three months ended March 31, 2019 and 2018, respectively. Interest that would have been accrued on impaired loans during the first three months of 2019 and 2018 had the loans been performing under original terms would have been $268,000 and $307,000, 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 assesses the quantitative and qualitative risks arising from the credit quality of its loans. 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, guarantor support, 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 March 31, 2019 and December 31, 2018, by the risk ratings discussed above (in thousands):



March 31, 2019	Commercial, Secured by Real Estate		Commercial, Industrial and Other		Real Estate - Construction
RISK RATING
1	$	—	$	2,450	$	—
2	—		18,444		—
3	68,756		36,739		—
4	933,390		88,551		18,204
5	2,247,650		205,999		302,190
5W - Watch	89,295		19,381		5,873
6 - Other assets especially mentioned	46,466		3,988		2,267
7 - Substandard	50,993		13,678		4,461
8 - Doubtful	—		—		—
9 - Loss	—		—		—
Total	$	3,436,550	$	389,230	$	332,995



December 31, 2018	Commercial, Secured by Real Estate		Commercial, Industrial and Other		Real Estate - Construction
RISK RATING
1	$	—	$	1,119	$	—
2	—		18,462		—
3	69,995		36,367		—
4	933,577		91,145		17,375
5	1,910,423		168,474		297,625
5W - Watch	61,626		7,798		3,493
6 - Other assets especially mentioned	38,844		2,033		—
7 - Substandard	43,314		11,337		1,052
8 - Doubtful	—		—		—
9 - Loss	—		—		—
Total	$	3,057,779	$	336,735	$	319,545

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

Allowance for Loan Losses

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2019 and 2018:



(in thousands)	Commercial, Secured by Real Estate			Commercial, Industrial and Other			Equipment Finance			Real Estate- Residential Mortgage			Real Estate- Construction			Home Equity and Consumer			Total
Three Months Ended March 31, 2019
Beginning Balance	$	27,881		$	1,742		$	987		$	1,566		$	3,015		$	2,497		$	37,688
Charge-offs	(187		)	(147		)	(87		)	(50		)	—			(45		)	(516		)
Recoveries	115			97			2			9			5			71			299
Provision	(294		)	900			45			39			(133		)	(49		)	508
Ending Balance	$	27,515		$	2,592		$	947		$	1,564		$	2,887		$	2,474		$	37,979



(in thousands)	Commercial, Secured by Real Estate			Commercial, Industrial and Other			Equipment Finance			Real Estate- Residential Mortgage			Real Estate- Construction		Home Equity and Consumer			Total
Three Months Ended March 31, 2018
Beginning Balance	$	25,704		$	2,313		$	630		$	1,557		$	2,731	$	2,520		$	35,455
Charge-offs	(22		)	(1,012		)	(23		)	(93		)	—		(100		)	(1,250		)
Recoveries	31			20			2			2			5		95			155
Provision	104			447			433			123			196		(19		)	1,284
Ending Balance	$	25,817		$	1,768		$	1,042		$	1,589		$	2,932	$	2,496		$	35,644

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



(in thousands)	Commercial, Secured by Real Estate		Commercial, Industrial and Other		Equipment Finance		Real Estate- Residential Mortgage		Real Estate- Construction		Home Equity and Consumer		Total
March 31, 2019
Ending Balance: Individually evaluated for impairment	$	15,985	$	2,509	$	327	$	715	$	—	$	700	$	20,236
Ending Balance: Collectively evaluated for impairment	3,413,062		384,213		90,464		334,177		329,566		338,573		4,890,055
Ending Balance: Loans acquired with deteriorated credit quality	7,503		2,508		—		398		3,429		542		14,380
Ending Balance (1)	$	3,436,550	$	389,230	$	90,791	$	335,290	$	332,995	$	339,815	$	4,924,671



(in thousands)	Commercial, Secured by Real Estate		Commercial, Industrial and Other		Equipment Finance		Real Estate- Residential Mortgage		Real Estate- Construction		Home Equity and Consumer		Total
December 31, 2018
Ending Balance: Individually evaluated for impairment	$	16,554	$	1,360	$	331	$	730	$	—	$	727	$	19,702
Ending Balance: Collectively evaluated for impairment	3,040,573		335,375		87,594		329,124		319,545		327,882		4,440,093
Ending balance: Loans acquired with deteriorated credit quality	652		—		—		—		—		—		652
Ending Balance (1)	$	3,057,779	$	336,735	$	87,925	$	329,854	$	319,545	$	328,609	$	4,460,447


(1)	Excludes deferred fees

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



(in thousands)	Commercial, Secured by Real Estate		Commercial, Industrial and Other		Equipment Finance		Real Estate- Residential Mortgage		Real Estate- Construction		Home Equity and Consumer		Total
March 31, 2019
Ending Balance: Individually evaluated for impairment	$	229	$	8	$	12	$	4	$	—	$	6	$	259
Ending Balance: Collectively evaluated for impairment	27,286		2,584		935		1,560		2,887		2,468		37,720
Ending Balance	$	27,515	$	2,592	$	947	$	1,564	$	2,887	$	2,474	$	37,979



(in thousands)	Commercial, Secured by Real Estate		Commercial, Industrial and Other		Equipment Finance		Real Estate- Residential Mortgage		Real Estate- Construction		Home Equity and Consumer		Total
December 31, 2018
Ending Balance: Individually evaluated for impairment	$	307	$	7	$	14	$	4	$	—	$	6	$	338
Ending Balance: Collectively evaluated for impairment	27,574		1,735		973		1,562		3,015		2,491		37,350
Ending Balance	$	27,881	$	1,742	$	987	$	1,566	$	3,015	$	2,497	$	37,688

Lakeland also maintains a reserve for unfunded lending commitments which is included in other liabilities. This reserve was $2.3 million as of March 31, 2019 and December 31, 2018. 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 losses.

The following table summarizes loans that have been restructured during the three months ended March 31, 2019 and 2018:



	For the Three Months Ended March 31, 2019					For the Three Months Ended March 31, 2018
(dollars in thousands)	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment

Commercial, secured by real estate	—	$	—	$	—	2	$	1,657	$	1,657
	—	$	—	$	—	2	$	1,657	$	1,657

There were no loans as of March 31, 2019 and 2018 that were restructured within the previous twelve months that have subsequently defaulted.

Other Real Estate and Other Repossessed Assets

At March 31, 2019 and December 31, 2018, the Company had other real estate owned of $715,000 and $830,000, respectively. Included in other real estate owned was residential property acquired as a result of foreclosure proceedings totaling $624,000 and $702,000 at March 31, 2019 and December 31, 2018, respectively. There were no balances of other repossessed assets at both March 31, 2019 and December 31, 2018.