Loans and Other Real Estate

6 Months Ended

Jun. 30, 2020

Receivables [Abstract]

Loans and Other Real Estate

LOANS AND OTHER REAL ESTATE

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

(in thousands)	June 30, 2020		December 31, 2019
Commercial, secured by real estate	$	3,961,476	$	3,589,593
Commercial, industrial and other	402,239		431,934
Paycheck Protection Program ("PPP")	325,999		—
Equipment finance	115,651		111,076
Real estate - residential mortgage	334,455		335,191
Real estate - construction	299,441		335,169
Home equity and consumer	329,866		337,977
Total loans	5,769,127		5,140,940
Less: deferred fees	(12,972)		(3,117)
Loans, net of deferred fees	$	5,756,155	$	5,137,823

At June 30, 2020 and December 31, 2019, home equity and consumer loans included overdraft deposit balances of $213,000 and $789,000, respectively. At June 30, 2020 and December 31, 2019, the Company had $1.7 billion and $1.3 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 following sets forth the carrying value of the purchased credit impaired ("PCI") loans acquired in mergers:

(in thousands)	June 30, 2020		December 31, 2019
Acquisition
Highlands	$	7,464	$	8,194
Pascack Community Bank ("Pascack")	105		113
Harmony Bank ("Harmony")	439		441
Total	$	8,008	$	8,748

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

	For the Three Months Ended				For the Six Months Ended
(in thousands)	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Balance, beginning of period	$	291	$	1,338	$	363	$	81
Acquisitions	—		11		—		1,431
Accretion	(270)		(188)		(414)		(381)
Net reclassification non-accretable difference	162		30		234		60
Balance, end of period	$	183	$	1,191	$	183	$	1,191

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)	June 30, 2020		December 31, 2019
Commercial, secured by real estate	$	24,703	$	12,314
Commercial, industrial and other	1,546		1,539
Equipment finance	400		284
Real estate - residential mortgage	2,860		3,428
Real estate - construction	912		967
Home equity and consumer	2,432		2,606
Total non-accrual loans	$	32,853	$	21,138
Other real estate and other repossessed assets	354		563
TOTAL NON-PERFORMING ASSETS	$	33,207	$	21,701
Troubled debt restructurings, still accruing	$	4,667	$	5,650

Non-accrual loans included $1.2 million and $1.6 million of troubled debt restructurings at June 30, 2020 and December 31, 2019, respectively. At June 30, 2020 and December 31, 2019, the Company had $1.4 million and $2.0 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 aging analysis of past due loans, excluding PCI loans which are accounted for on a pool basis, segregated by class of loans as of June 30, 2020 and December 31, 2019, 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
June 30, 2020
Commercial, secured by real estate	$	4,276	$	5,644	$	21,598	$	31,518	$	3,924,531	$	3,956,049	$	—
Commercial, industrial and other (including PPP)	66		327		1,156		1,549		725,813		727,362		—
Equipment finance	104		35		400		539		115,112		115,651		—
Real estate - residential mortgage	732		370		1,508		2,610		331,433		334,043		—
Real estate - construction	66		—		694		760		297,901		298,661		—
Home equity and consumer	528		340		1,690		2,558		326,795		329,353		58
	$	5,772	$	6,716	$	27,046	$	39,534	$	5,721,585	$	5,761,119	$	58
December 31, 2019
Commercial, secured by real estate	$	3,578	$	1,200	$	9,702	$	14,480	$	3,569,008	$	3,583,488	$	—
Commercial, industrial and other	353		71		1,064		1,488		429,502		430,990		—
Equipment finance	166		80		284		530		110,546		111,076		—
Real estate - residential mortgage	1,138		251		2,075		3,464		331,337		334,801		—
Real estate - construction	—		—		967		967		333,418		334,385		—
Home equity and consumer	1,573		287		1,533		3,393		334,059		337,452		—
	$	6,808	$	1,889	$	15,625	$	24,322	$	5,107,870	$	5,132,192	$	—

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 June 30, 2020 and December 31, 2019 are as follows:

(in thousands)	Recorded Investment in Impaired  Loans		Contractual Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired  Loans		Interest Income Recognized
June 30, 2020
Loans without specific allowance:
Commercial, secured by real estate	$	24,245	$	24,541	$	—	$	19,502	$	79
Commercial, industrial and other	1,308		1,313		—		1,336		8
Equipment finance	—		—		—		—		—
Real estate - residential mortgage	1,516		1,647		—		1,577		—
Real estate - construction	694		694		—		1,043		10
Home equity and consumer	—		—		—		—		—
Loans with specific allowance:
Commercial, secured by real estate	3,222		3,472		187		3,308		75
Commercial, industrial and other	102		101		5		101		3
Equipment finance	17		17		7		19		—
Real estate - residential mortgage	644		827		67		651		9
Real estate - construction	—		—		—		—		—
Home equity and consumer	607		712		5		616		15
Total:
Commercial, secured by real estate	$	27,467	$	28,013	$	187	$	22,810	$	154
Commercial, industrial and other	1,410		1,414		5		1,437		11
Equipment finance	17		17		7		19		—
Real estate - residential mortgage	2,160		2,474		67		2,228		9
Real estate - construction	694		694		—		1,043		10
Home equity and consumer	607		712		5		616		15
	$	32,355	$	33,324	$	271	$	28,153	$	199

(in thousands)	Recorded Investment in Impaired  Loans		Contractual Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired  Loans		Interest Income Recognized
December 31, 2019
Loans without specific allowance:
Commercial, secured by real estate	$	12,478	$	12,630	$	—	$	10,386	$	164
Commercial, industrial and other	1,391		1,381		—		1,334		16
Equipment finance	—		—		—		—		—
Real estate - residential mortgage	803		815		—		233		—
Real estate - construction	1,663		1,661		—		82		2
Home equity and consumer	—		—		—		—		—
Loans with specific allowance:
Commercial, secured by real estate	3,470		3,706		228		4,554		190
Commercial, industrial and other	113		113		5		113		6
Equipment finance	23		23		10		21		—
Real estate - residential mortgage	1,512		1,682		104		926		19
Real estate - construction	—		—		—		—		—
Home equity and consumer	671		765		5		693		29
Total:
Commercial, secured by real estate	$	15,948	$	16,336	$	228	$	14,940	$	354
Commercial, industrial and other	1,504		1,494		5		1,447		22
Equipment finance	23		23		10		21		—
Real estate - residential mortgage	2,315		2,497		104		1,159		19
Real estate - construction	1,663		1,661		—		82		2
Home equity and consumer	671		765		5		693		29
	$	22,124	$	22,776	$	352	$	18,342	$	426

Interest income recognized on impaired loans was $199,000 and $266,000 for the six months ended June 30, 2020 and 2019, respectively. Interest that would have been accrued on impaired loans during the first six months of 2020 and 2019 had the loans been performing under original terms would have been $808,000 and $500,000, 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 June 30, 2020 and December 31, 2019, by the risk ratings discussed above (in thousands):

June 30, 2020	Commercial, Secured by Real Estate		Commercial, Industrial and Other (including PPP)		Real Estate - Construction		Total Commercial Loans
RISK RATING
1	$	—	$	326,662	$	—	$	326,662
2	—		16,730		—		16,730
3	70,963		36,872		—		107,835
4	903,575		90,751		18,674		1,013,000
5	1,969,384		167,781		239,847		2,377,012
5W - Watch	834,041		61,609		27,106		922,756
6 - Other assets especially mentioned	96,908		20,553		12,119		129,580
7 - Substandard	86,605		7,280		1,695		95,580
8 - Doubtful	—		—		—		—
9 - Loss	—		—		—		—
Total	$	3,961,476	$	728,238	$	299,441	$	4,989,155

December 31, 2019	Commercial, Secured by Real Estate		Commercial, Industrial and Other		Real Estate - Construction		Total Commercial Loans
RISK RATING
1	$	—	$	898	$	—	$	898
2	—		17,988		—		17,988
3	74,072		39,112		—		113,184
4	965,825		107,376		17,941		1,091,142
5	2,332,863		215,975		307,824		2,856,662
5W - Watch	100,347		30,192		6,959		137,498
6 - Other assets especially mentioned	55,438		11,328		—		66,766
7 - Substandard	61,048		9,065		2,445		72,558
8 - Doubtful	—		—		—		—
9 - Loss	—		—		—		—
Total	$	3,589,593	$	431,934	$	335,169	$	4,356,696

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

Allowance for Loan Losses

The Coronavirus Aid, Relief and Economic Security ("CARES") Act, a stimulus package signed into law on March 27, 2020 to address economic disruption caused by the COVID-19 pandemic, provided financial institutions with the option to defer adoption of the Financial Accounting Standards Board's Accounting Standard Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326) until the earlier of the end of the pandemic or December 31, 2020. The Company elected to defer adoption of ASU 2016-13 and its Current Expected Credit Loss methodology ("CECL").

The following table details activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2020 and 2019:

(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 June 30, 2020
Beginning Balance	$	34,793	$	5,489	$	1,257	$	1,600	$	3,344	$	2,401	$	48,884
Charge-offs	—		—		(14)		—		—		(127)		(141)
Recoveries	21		13		24		—		16		22		96
Provision	8,466		(804)		1,704		(164)		(241)		39		9,000
Ending Balance	$	43,280	$	4,698	$	2,971	$	1,436	$	3,119	$	2,335	$	57,839

(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 June 30, 2019
Beginning Balance	$	27,515	$	2,592	$	947	$	1,564	$	2,887	$	2,474	$	37,979
Charge-offs	—		(38)		(293)		—		—		(82)		(413)
Recoveries	25		947		—		2		60		62		1,096
Provision	555		(868)		401		40		(239)		111		—
Ending Balance	$	28,095	$	2,633	$	1,055	$	1,606	$	2,708	$	2,565	$	38,662

(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
Six Months Ended June 30, 2020
Beginning Balance	$	28,950	$	3,289	$	957	$	1,725	$	2,672	$	2,410	$	40,003
Charge-offs	(169)		—		(98)		(116)		—		(241)		(624)
Recoveries	47		43		38		20		48		41		237
Provision	14,452		1,366		2,074		(193)		399		125		18,223
Ending Balance	$	43,280	$	4,698	$	2,971	$	1,436	$	3,119	$	2,335	$	57,839

(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
Six Months Ended June 30, 2019
Beginning Balance	$	27,881	$	1,742	$	987	$	1,566	$	3,015	$	2,497	$	37,688
Charge-offs	(187)		(185)		(380)		(50)		—		(127)		(929)
Recoveries	140		1,044		2		11		65		133		1,395
Provision	261		32		446		79		(372)		62		508
Ending Balance	$	28,095	$	2,633	$	1,055	$	1,606	$	2,708	$	2,565	$	38,662

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

(in thousands)	Commercial, Secured by Real Estate		Commercial, Industrial and Other (including PPP)		Equipment Finance		Real Estate- Residential Mortgage		Real Estate- Construction		Home Equity and Consumer		Total
June 30, 2020
Ending Balance: Individually evaluated for impairment	$	27,467	$	1,410	$	17	$	2,160	$	694	$	607	$	32,355
Ending Balance: Collectively evaluated for impairment	3,928,582		725,952		115,634		331,883		297,967		328,746		5,728,764
Ending Balance: Loans acquired with deteriorated credit quality	5,427		876		—		412		780		513		8,008
Ending Balance (1)	$	3,961,476	$	728,238	$	115,651	$	334,455	$	299,441	$	329,866	$	5,769,127

(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, 2019
Ending Balance: Individually evaluated for impairment	$	15,948	$	1,504	$	23	$	2,315	$	1,663	$	671	$	22,124
Ending Balance: Collectively evaluated for impairment	3,567,540		429,486		111,053		332,486		332,722		336,781		5,110,068
Ending balance: Loans acquired with deteriorated credit quality	6,105		944		—		390		784		525		8,748
Ending Balance (1)	$	3,589,593	$	431,934	$	111,076	$	335,191	$	335,169	$	337,977	$	5,140,940

(1)Excludes deferred fees

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
June 30, 2020
Ending Balance: Individually evaluated for impairment	$	187	$	5	$	7	$	67	$	—	$	5	$	271
Ending Balance: Collectively evaluated for impairment	43,093		4,693		2,964		1,369		3,119		2,330		57,568
Ending Balance	$	43,280	$	4,698	$	2,971	$	1,436	$	3,119	$	2,335	$	57,839

(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, 2019
Ending Balance: Individually evaluated for impairment	$	228	$	5	$	10	$	104	$	—	$	5	$	352
Ending Balance: Collectively evaluated for impairment	28,722		3,284		947		1,621		2,672		2,405		39,651
Ending Balance	$	28,950	$	3,289	$	957	$	1,725	$	2,672	$	2,410	$	40,003

Lakeland has not allocated a reserve for loan losses on PPP loans as these loans are 100% guaranteed by the SBA. Lakeland also maintains a reserve for unfunded lending commitments which is included in other liabilities. This reserve was $2.0 million and $1.8 million as of June 30, 2020 and December 31, 2019, respectively. The Company analyzes the adequacy of the reserve for unfunded lending commitments quarterly.

Troubled Debt Restructurings

Loans are classified as troubled debt restructured loans ("TDR") 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.

Section 4013 of the CARES Act, as interpreted by the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (Revised)" (“Revised Statement”), dated April 17, 2020, includes criteria that enable financial institutions to exclude from TDR status loans that are modified in connection with COVID-19. Under these provisions, TDR status is not required for the term of a loan modification if (i) the loan modification is made in connection with COVID-19, (ii) the loan was not past due more than 30 days as of December 31, 2019 and (iii) the loan modification is entered into during the period between March 1, 2020, and the earlier of (a) 60 days after COVID-19 is no longer characterized as a National Emergency or (b) December 31, 2020. Furthermore, pursuant to the Revised Statement, for loan modifications that do not meet these criteria but are made in connection with COVID-19, such loans may be presumed not to be TDR if the loan was current at the time the loan modification program was implemented and the modifications are short-term (e.g., six months). If the criteria are not met under either Section 4013 or the Revised Statement, banks are required to follow their existing accounting policies to determine whether COVID-related modifications should be accounted for as a TDR. The Company has elected to suspend the classification of loan modifications as TDR if they qualify under Section 4013 or the Revised Statement. For past due status, the CARES Act also provides for lenders to continue

to report loans in the same delinquency bucket they were in at the time of modification. The Company has applied this guidance related to modifications during the first half of 2020.

There are no loans that were restructured during the three and six months ended June 30, 2020 and 2019 that met the definition of a TDR. As of June 30, 2020, commercial loans totaling $967.0 million were granted 90-day, COVID-related payment deferments, of which 87% were commercial real estate loans. In addition, payment deferments on residential and consumer loans totaled $53.0 million at June 30, 2020.

The following table summarizes as of June 30, 2020 and 2019, loans that were TDRs within the previous twelve months that have subsequently defaulted:

	June 30, 2020			June 30, 2019
(dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Construction	1	$	694	—	$	—
Home equity and consumer	2	73		—	$	—
	3	$	767	—	$	—

Other Real Estate and Other Repossessed Assets

At June 30, 2020 and December 31, 2019, the Company had other real estate owned of $354,000 and $563,000, respectively, consisting of residential property acquired as a result of foreclosure proceedings. There were no balances of other repossessed assets at either June 30, 2020 or December 31, 2019.