Loans and Leases and Other Real Estate | LOANS AND LEASES AND OTHER REAL ESTATE The following sets forth the composition of Lakeland’s loan and lease portfolio: December 31, 2018 2017 (in thousands) Commercial, secured by real estate $ 3,057,779 $ 2,831,184 Commercial, industrial and other 336,735 340,400 Leases 87,925 75,039 Real estate - residential mortgage 329,854 322,880 Real estate - construction 319,545 264,908 Home equity and consumer 328,609 322,269 Total loans and leases 4,460,447 4,156,680 Less deferred fees (3,714 ) (3,960 ) Loans and leases, net of deferred fees $ 4,456,733 $ 4,152,720 At December 31, 2018 and December 31, 2017 , Lakeland had $1.2 billion and $1.1 billion in loans pledged for potential borrowings at the Federal Home Loan Bank of New York (“FHLB”). As of December 31, 2018 and 2017 , home equity and consumer loans included overdraft deposit balances of $452,000 and $966,000 , respectively. Purchased Credit Impaired Loans The carrying value of loans acquired in the Pascack acquisition and accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” was $157,000 at December 31, 2018 , which was $661,000 less than the balance at the time of acquisition on January 7, 2016 . In the 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. Also in the second quarter of 2017, one of the Pascack PCI loans totaling $218,000 was fully paid off. The carrying value of loans acquired in the Harmony acquisition was $495,000 at December 31, 2018 which was $274,000 less than the balance at the acquisition date on July 1, 2016. In the second quarter of 2017, a Harmony PCI loan with a net value of $247,000 was fully paid off. Under ASC Subtopic 310-30, PCI loans may be aggregated and accounted for as pools of loans if the loans being aggregated have common risk characteristics. The Company elected to account for the loans with evidence of credit deterioration individually rather than aggregate them into pools. The following table presents changes in the accretable yield for PCI loans (in thousands): Years Ended December 31, 2018 2017 Balance, beginning of period $ 129 $ 145 Accretion (182 ) (202 ) Net reclassification non-accretable difference 134 186 Balance, end of period $ 81 $ 129 Portfolio Segments Lakeland currently manages its credit products and the respective exposure to credit losses (credit risk) by the following specific portfolio segments which are levels at which Lakeland develops and documents its systematic methodology to determine the allowance for loan and lease losses attributable to each respective portfolio segment. These segments are: • Commercial, secured by real estate - consists of commercial mortgage loans secured by owner occupied properties and non-owner occupied properties. The loans secured by owner occupied properties involve a variety of property types to conduct the borrower’s operations. The primary source of repayment for this type of loan is the cash flow from the business and is based upon the borrower’s financial health and the ability of the borrower and the business to repay. The loans secured by non-owner occupied properties involve investment properties for warehouse, retail, office space, etc., with a history of occupancy and cash flow. This commercial real estate category contains mortgage loans to the developers and owners of commercial real estate where the borrower intends to operate or sell the property at a profit and use the income stream or proceeds from the sale to repay the loan. • Commercial, industrial and other - are loans made to provide funds for equipment and general corporate needs. Repayment of a loan primarily uses the funds obtained from the operation of the borrower’s business. Commercial loans also include lines of credit that are utilized to finance a borrower’s short-term credit needs and/or to finance a percentage of eligible receivables and inventory. • Leases - includes a small portfolio of equipment leases, which consists of leases primarily for essential equipment used by small to medium sized businesses. • Real estate - residential mortgage - contains permanent mortgage loans principally to consumers secured by residential real estate. Residential real estate loans are evaluated for the adequacy of repayment sources at the time of approval, based upon measures including credit scores, debt-to-income ratios, and collateral values. Loans may be either conforming or non-conforming. • Real estate - construction - construction loans, as defined, are intended to finance the construction of commercial properties and include loans for the acquisition and development of land. Construction loans represent a higher degree of risk than permanent real estate loans and may be affected by a variety of factors such as the borrower’s ability to control costs and adhere to time schedules and the risk that constructed units may not be absorbed by the market within the anticipated time frame or at the anticipated price. The loan commitment on these loans often includes an interest reserve to pay interest charges on the outstanding balance of the loan. • Home equity and consumer - includes primarily home equity loans and lines, installment loans, personal lines of credit and automobile loans. The home equity category consists mainly of loans and revolving lines of credit to consumers which are secured by residential real estate. These loans are typically secured with second mortgages on the homes, although many are secured with first mortgages. Other consumer loans include installment loans used by customers to purchase automobiles, boats and recreational vehicles. Non-accrual and Past Due Loans The following schedule sets forth certain information regarding Lakeland’s non-accrual loans and leases, its other real estate owned and other repossessed assets, and accruing troubled debt restructurings (“TDRs”) (in thousands): At December 31, 2018 2017 Commercial, secured by real estate $ 7,192 $ 5,890 Commercial, industrial and other 1,019 184 Leases 501 144 Real estate - residential mortgage 1,986 3,860 Real estate - construction — 1,472 Home equity and consumer 1,432 2,105 Total non-accrual loans and leases 12,130 13,655 Other real estate and other repossessed assets 830 843 Total non-performing assets $ 12,960 $ 14,498 Troubled debt restructurings, still accruing $ 9,293 $ 11,462 Non-accrual loans included $3.6 million and $2.7 million of TDRs for the years ended December 31, 2018 and 2017 , respectively. As of December 31, 2018 , the Company had $1.5 million in residential mortgages and consumer home equity loans included in the table above that were in the process of foreclosure. An age analysis of past due loans, segregated by class of loans as of December 31, 2018 and 2017 , is as follows: December 31, 2018 30-59 Days Past Due 60-89 Days Past Due Greater Than 89 Days Total Past Due Current Total Loans and Leases Recorded Investment Greater than 89 Days and Still Accruing (in thousands) 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 — Leases 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 $ — December 31, 2017 30-59 Days Past Due 60-89 Days Past Due Greater Than 89 Days Total Past Due Current Total Loans and Leases Recorded Investment Greater than 89 Days and Still Accruing (in thousands) 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 Lakeland’s policy regarding impaired loans is discussed in Note 1 – Summary of Accounting Policies – Loans and Leases and Allowance for Loan and Lease Losses. The Company defines impaired loans as all non-accrual loans with recorded investments of $500,000 or greater. Impaired loans also includes all loans modified in troubled debt restructurings. The following tables represent the Company's impaired loans at December 31, 2018 , 2017 and 2016 . December 31, 2018 Recorded Investment in Impaired Loans Contractual Unpaid Principal Balance Related Allowance Interest Income Recognized Average Investment in Impaired Loans (in thousands) Loans without related allowance: Commercial, secured by real estate $ 9,284 $ 9,829 $ — $ 188 $ 7,369 Commercial, industrial and other 1,151 1,449 — 19 1,834 Leases 301 597 — — 376 Real estate - residential mortgage — — — 4 242 Real estate - construction — — — — 726 Home equity and consumer — — — — — Loans with related allowance: Commercial, secured by real estate 7,270 7,597 307 317 7,594 Commercial, industrial and other 209 209 7 12 209 Leases 30 30 14 — 19 Real estate - residential mortgage 730 884 4 20 745 Real estate - construction — — — — — Home equity and consumer 727 765 6 32 898 Total: Commercial, secured by real estate $ 16,554 $ 17,426 $ 307 $ 505 $ 14,963 Commercial, industrial and other 1,360 1,658 7 31 2,043 Leases 331 627 14 — 395 Real estate - residential mortgage 730 884 4 24 987 Real estate - construction — — — — 726 Home equity and consumer 727 765 6 32 898 $ 19,702 $ 21,360 $ 338 $ 592 $ 20,012 December 31, 2017 Recorded Investment in Impaired Loans Contractual Unpaid Principal Balance Related Allowance Interest Income Recognized Average Investment in Impaired Loans (in thousands) Loans without related allowance: Commercial, secured by real estate $ 12,155 $ 12,497 $ — $ 366 $ 12,774 Commercial, industrial and other 618 618 — 25 618 Leases — — — — — Real estate - residential mortgage 963 980 — 15 996 Real estate - construction 1,471 1,471 — — 1,471 Home equity and consumer — — — — 6 Loans with related allowance: Commercial, secured by real estate 5,381 5,721 454 206 5,029 Commercial, industrial and other 164 164 9 14 283 Leases 65 65 30 — 29 Real estate - residential mortgage 781 919 4 27 940 Real estate - construction — — — — — Home equity and consumer 993 1,026 8 52 1,090 Total: Commercial, secured by real estate $ 17,536 $ 18,218 $ 454 $ 572 $ 17,803 Commercial, industrial and other 782 782 9 39 901 Leases 65 65 30 — 29 Real estate - residential mortgage 1,744 1,899 4 42 1,936 Real estate - construction 1,471 1,471 — — 1,471 Home equity and consumer 993 1,026 8 52 1,096 $ 22,591 $ 23,461 $ 505 $ 705 $ 23,236 December 31, 2016 Recorded Investment in Impaired Loans Contractual Unpaid Principal Balance Related Allowance Interest Income Recognized Average Investment in Impaired Loans (in thousands) Loans without related allowance: Commercial, secured by real estate $ 12,764 $ 13,195 $ — $ 229 $ 13,631 Commercial, industrial and other 603 603 — 24 1,109 Leases — — — — — Real estate - residential mortgage 1,880 3,146 — 16 2,430 Real estate - construction 1,471 1,471 — — 12 Home equity and consumer 139 139 — — 388 Loans with related allowance: Commercial, secured by real estate 5,860 6,142 392 273 6,549 Commercial, industrial and other 349 349 12 17 360 Leases — — — — 1 Real estate - residential mortgage 1,031 1,100 31 30 1,011 Real estate - construction — — — — — Home equity and consumer 1,188 1,211 94 59 1,184 Total: Commercial, secured by real estate $ 18,624 $ 19,337 $ 392 $ 502 $ 20,180 Commercial, industrial and other 952 952 12 41 1,469 Leases — — — — 1 Real estate - residential mortgage 2,911 4,246 31 46 3,441 Real estate - construction 1,471 1,471 — — 12 Home equity and consumer 1,327 1,350 94 59 1,572 $ 25,285 $ 27,356 $ 529 $ 648 $ 26,675 Interest which would have been accrued on impaired loans and leases during 2018 , 2017 and 2016 was $1.1 million , $1.5 million and $1.7 million , respectively. Credit Quality Indicators The class of loans are 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. It is the policy of Lakeland to require that a Credit Risk Rating be assigned 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 loan portfolios. The risk rating system assists Senior Management in evaluating Lakeland’s 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 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. “Pass” ratings on loans are given to loans that management considers to be of acceptable or better quality. A rating of 5W, or “Watch” is a loan that requires more than the usual amount of monitoring due to declining earnings, strained cash flow, increasing leverage and/or weakening market. These borrowers generally have limited additional debt capacity and modest coverage and average or below average asset quality, margins and market share. Rating 6, “Other Assets Especially Mentioned” is used for loans exhibiting identifiable credit weakness which if not checked or corrected could weaken the loan quality or inadequately protect the bank’s credit position at some future date. Rating 7, “Substandard,” is used on loans that are inadequately protected by the current sound worth and paying capacity of the obligors or of the collateral pledged, if any. A substandard loan has a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt. Rating 8, “Doubtful,” are loans that exhibit all of the weaknesses inherent in substandard loans, but have the added characteristics that the weaknesses make collection or liquidation in full improbable on the basis of existing facts. Rating 9, “Loss,” is a rating for loans or portions of loans that are considered uncollectible and of such little value that their continuance as bankable loans is not warranted. The following table shows Lakeland’s commercial loan portfolio as of December 31, 2018 and 2017 , by the risk ratings discussed above (in thousands): December 31, 2018 Commercial, Secured by Real Estate Commercial, Industrial and Other RISK RATING Real Estate - Construction 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 December 31, 2017 Commercial, Secured by Real Estate Commercial, Industrial and Other RISK RATING Real Estate - Construction 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 This table does not include residential mortgage loans, consumer loans, or leases because they are evaluated on their payment status as pass or substandard, which is defined as non-accrual or past due 90 days or more. Allowance for Loan and Lease Losses The following table details activity in the allowance for loan and lease losses by portfolio segment and the related recorded investment in loans and leases for the years ended December 31, 2018 and 2017 : December 31, 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 (421 ) (1,452 ) (507 ) (131 ) (248 ) (588 ) (3,347 ) Recoveries 468 317 23 10 17 332 1,167 Provision 2,130 564 841 130 515 233 4,413 Ending balance $ 27,881 $ 1,742 $ 987 $ 1,566 $ 3,015 $ 2,497 $ 37,688 Allowance for Loan and Leases Losses 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 Loans and Leases 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 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) Beginning balance $ 21,223 $ 1,723 $ 548 $ 1,964 $ 2,352 $ 3,435 $ 31,245 Charge-offs (762 ) (477 ) (305 ) (441 ) (609 ) (852 ) (3,446 ) Recoveries 396 172 59 5 31 903 1,566 Provision 4,847 895 328 29 957 (966 ) 6,090 Ending balance $ 25,704 $ 2,313 $ 630 $ 1,557 $ 2,731 $ 2,520 $ 35,455 Allowance for Loan and Leases Losses 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 Loans and Leases 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 Lakeland also maintains a reserve for unfunded lending commitments which are included in other liabilities. This reserve was $2.3 million and $2.5 million as of December 31, 2018 and December 31, 2017 , respectively. Lakeland analyzes the adequacy of the reserve for unfunded lending commitments in conjunction with its analysis of the adequacy of the allowance for loan and lease losses. For more information on this analysis, see “Risk Elements” in Management’s Discussion and Analysis. Troubled Debt Restructurings Troubled Debt Restructurings ("TDRs") are those loans where significant concessions have been made to borrowers experiencing financial difficulties. Restructured loans typically involve a modification of terms such as a reduction of the stated interest rate lower than the current market rate of a new loan with similar risk, an extended moratorium of principal payments and/or an extension of the maturity date. Lakeland considers the potential losses on these loans as well as the remainder of its impaired loans when considering the adequacy of the allowance for loan losses. The following table summarizes loans and leases that have been restructured during the periods presented: For the Year Ended December 31, 2018 For the Year Ended December 31, 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 5 $ 3,348 $ 3,348 8 $ 4,618 $ 4,618 Commercial, industrial and other 1 950 950 2 124 124 Leases 1 15 15 6 65 65 7 $ 4,313 $ 4,313 16 $ 4,807 $ 4,807 The following table presents loans and leases modified as TDRs within the previous 12 months from December 31, 2018 and 2017 that have defaulted during the subsequent twelve months: For the Year Ended December 31, 2018 For the Year Ended December 31, 2017 Number of Contracts Recorded Investment Number of Contracts Recorded Investment (dollars in thousands) Commercial, secured by real estate 1 $ 171 — $ — Leases — $ — 2 $ 35 1 $ 171 2 $ 35 Related Party Loans Lakeland has entered into lending transactions in the ordinary course of business with directors, executive officers, principal stockholders and affiliates of such persons on similar terms, including interest rates and collateral, as those prevailing for comparable transactions with other borrowers not related to Lakeland. At December 31, 2018 and 2017 , loans to these related parties amounted to $53.1 million and $27.5 million , respectively. There were new loans of $18.7 million to related parties and repayments of $10.8 million from related parties in 2018 . There was also a net addition of $17.7 million in existing loans for related party relationships that either commenced or ceased during 2018. Mortgages Held for Sale Residential mortgages originated by the bank and held for sale in the secondary market are carried at the lower of cost or fair market value. Fair value is generally determined by the value of purchase commitments on individual loans. Losses are recorded as a valuation allowance and charged to earnings. As of December 31, 2018 , Lakeland had $1.1 million in mortgages held for sale compared to $456,000 as of December 31, 2017 . Lease Receivables Future minimum lease payments of lease receivables are expected as follows (in thousands): 2019 $ 30,384 2020 24,297 2021 18,089 2022 10,814 2023 3,969 Thereafter 372 $ 87,925 Other Real Estate and Other Repossessed Assets At December 31, 2018 , Lakeland had other real estate and other repossessed assets of $830,000 and $0 , respectively. The other real estate that the Company held at December 31, 2018 consisted of $702,000 in residential property acquired as a result of foreclosure proceedings or through a deed in lieu of foreclosure. At December 31, 2017 , Lakeland had other real estate and other repossessed assets of $843,000 and $0 , respectively. The other real estate that the Company held at December 31, 2017 consisted of $843,000 in residential property acquired as a result of foreclosure proceedings or through a deed in lieu of foreclosure. For the years ended December 31, 2018 , 2017 and 2016 , Lakeland had writedowns of $70,000 , $98,000 and $0 , respectively, on other real estate and other repossessed assets which are included in other real estate and repossessed asset expense in the Consolidated Statement of Income. |