Business Combinations

12 Months Ended

Dec. 31, 2022

Business Combination and Asset Acquisition [Abstract]

Provident Financial Services, Inc.

On September 26, 2022, the Company entered into definitive merger agreement with Provident Financial Services, Inc. ("Provident") pursuant to which the companies will combine in an all-stock merger. Under the terms of the merger agreement, the Company will merge with and into Provident, with Provident as the surviving corporation, and Lakeland Bank will merge with and into Provident Bank, with Provident Bank as the surviving bank. Following the closing of the transaction, Lakeland shareholders will receive 0.8319 shares of Provident common stock for each share of Lakeland common stock they own. Upon completion of the transaction, Provident shareholders will own approximately 58% and Lakeland shareholders will own approximately 42% of the combined company. As of September 26, 2022, the transaction is valued at approximately $1.3 billion on a fully diluted basis. The combined company is expected to have more than $25 billion in total assets, $18 billion in total loans and $20 billion in total deposits.

The transaction has been approved by the boards of directors of both companies and on February 1, 2023, shareholders of each company approved the proposed merger. The merger is expected to close in the second quarter of 2023, subject to satisfaction of customary closing conditions, including receipt of customary regulatory approvals.

The Company incurred merger-related expenses on the anticipated transaction with Provident of $4.0 million during 2022.

1st Constitution Bancorp

On January 6, 2022, the Company completed its acquisition of 1st Constitution Bancorp ("1st Constitution"), a bank holding company headquartered in Cranbury, New Jersey. 1st Constitution was the parent of 1st Constitution Bank, which operated 25 branches in Bergen, Mercer, Middlesex, Monmouth, Ocean and Somerset Counties in New Jersey. This acquisition enabled the Company to broaden its presence in those counties. Effective as of the close of business on January 6, 2022, 1st Constitution merged into the Company and 1st Constitution Bank merged into Lakeland. Pursuant to the merger agreement, the shareholders of 1st Constitution received for each outstanding share of 1st Constitution common stock that they owned at the effective time of the merger, 1.3577 shares of Lakeland Bancorp, Inc. common stock. The Company issued 14,020,495 shares of its common stock in the merger. Outstanding 1st Constitution options were paid out in cash at the difference between $25.55 and an average strike price of $15.95 for a total cash payment of $559,000.

The acquisition was accounted for under the acquisition method of accounting and accordingly, the assets acquired and liabilities assumed in the acquisition were recorded at their estimated fair values as of the acquisition date. 1st Constitution's assets were recorded at their preliminary estimated fair values as of January 6, 2022 and 1st Constitution's results of operations have been included in the Company's Consolidated Statements of Income from that date forward.

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 calculation of goodwill is subject to change for up to one year after the closing date of the transaction as additional information relative to closing date estimates and uncertainties becomes available. As the Company finalizes its analysis of these assets and liabilities, there may be adjustments to the recorded carrying values. The goodwill is not deductible for tax purposes.

The following table summarizes the estimated fair value of the acquired assets and liabilities assumed at the date of acquisition for 1st Constitution.


(in thousands)
Assets acquired:
Cash and cash equivalents	$	326,236
Securities, available for sale	217,774
Securities, held to maturity	124,485
Federal Home Loan Bank stock	1,247
Loans held for sale	4,620
Loans	1,095,266
Premises and equipment	13,748
Right-of-use assets, operating lease	12,991
Goodwill	115,552
Identifiable intangible assets	9,018
Bank owned life insurance	37,580
Accrued interest receivable and other assets	8,820
Total assets acquired	1,967,337

Deposits	(1,650,613)

Subordinated debt	(14,734)
Operating lease liabilities	(12,991)
Other liabilities	(3,257)
Total liabilities assumed	(1,681,595)
Net assets acquired	$	285,742

Loans acquired in the 1st Constitution acquisition were recorded at fair value and subsequently accounted for in accordance with ASC Topic 310. There was no carryover related allowance for loan losses. The fair values of loans acquired from 1st Constitution were estimated using the discounted cash flow method 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 based on the relative risk of the cash flows, taking into account the loan type, liquidity risk, maturity of the loans, servicing costs, and a required return on capital; the monthly principal and interest cash flows were discounted to present value and summed to arrive at the calculated value of loans.

For loans acquired without evidence of more-than-insignificant deterioration in credit quality since origination, the Company prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into pools based on similar characteristics, such as loan type, fixed or adjustable interest rates, payment type, index rate and caps/floors, and non-accrual status. The loans were valued at the sub-pool level and were pooled at the summary level based on loan type. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these market rates was used as the fair value interest rate that a market participant would utilize.

Loans acquired that have experienced more-than-insignificant deterioration in credit quality since origination are considered PCD loans. The Company evaluated acquired loans for deterioration in credit quality based on any of, but not limited to, the following: (1) non-accrual status; (2) troubled debt restructured designation; (3) risk ratings of special mention, substandard or doubtful; and (4) delinquency status. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. Additionally for PCD loans, an allowance for loan losses was calculated using management's best estimate of projected losses over the remaining life of the loans, in accordance with ASC 326-20. This represents the portion of loan balances that has been deemed uncollectible based on the Company's expectation of future cash flows for the PCD loans. For loans that were put in collection status immediately, Management made a best estimate of the loan's fair value based on an analysis of the credit and our lien position. For all other loans, the fair value was determined using discounted cash flows as described above for non-PCD loans.

The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired.


(in thousands)
Gross amortized cost basis at January 6, 2022	$	1,110,600
Interest rate fair value adjustment on all loans	3,057
Credit fair value adjustment on non-PCD loans	(6,314)
Fair value of acquired loans at January 6, 2022	1,107,343
Allowance for credit losses on PCD loans	(12,077)
Fair value of acquired loans, net, as of January 6 2022	$	1,095,266

The following is a summary of the PCD loans acquired in the 1st Constitution acquisition as of the closing date.


(in thousands)
Gross amortized cost basis at January 6, 2022	$	140,300
Interest component of expected cash flows (accretable difference)	(3,792)
Allowance for credit losses on PCD loans	(12,077)
Net PCD loans	$	124,431

The Company acquired 25 branches through the 1st Constitution merger, eight of which were owned premises. The fair value of the properties acquired was derived by valuations prepared by an independent third party using the sales comparison approach to value the property as improved.

As part of the 1st Constitution acquisition, the Company added 17 lease obligations. The Company recorded a $13.0 million right of use asset and lease liability for these lease obligations.

The core deposit intangible totaled $9.0 million and is being amortized over its estimated useful life of approximately ten years using an accelerated method. The goodwill will be evaluated annually for impairment and is not deductible for tax purposes.

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

Direct costs related to the 1st Constitution acquisition were expensed as incurred. The Company recorded $4.6 million and $1.8 million in merger-related expenses related to the 1st Constitution acquisition in 2022 and 2021, respectively.

Supplemental Pro Forma Financial Information

The following table presents financial information regarding the former 1st Constitution operations included in the Consolidated Statements of Income from the date of the acquisition, January 6, 2022, through December 31, 2022. In addition the table provides condensed pro forma financial information assuming that the 1st Constitution acquisition had been completed as of January 1, for 2021 and 2022. The table has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisitions occurred as of the beginning of the periods presented, nor is it indicative of future results. The pro forma information does not reflect management's estimate of any revenue-enhancing opportunities nor anticipated cost savings that may have occurred as a result of the integration and consolidation of 1st Constitution's operations. The pro forma information reflects adjustments related to certain purchase accounting fair value adjustments, amortization of core deposit and other intangibles and related income tax effects.


(in thousands, except per share amounts)	Actual from acquisition to December 31, 2022		Pro forma December 31, 2022		Pro forma December 31, 2021
Net interest income	$	50,218	$	315,021	$	293,590
Provision for loan losses	6		8,514		(8,796)
Noninterest income	17,077		27,797		36,936
Noninterest expense	30,216		191,241		185,355
Net income	26,947		106,663		114,581
Earnings per share:
Fully diluted	$	0.42	$	1.62	$	1.77