Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM ______ TO ______.
Commission file number:
33-27312
LAKELAND BANCORP, INC.
----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2953275
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
250 Oak Ridge Road, Oak Ridge, New Jersey 07438
- ------------------------------------------ -------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (973)697-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
- -----------------------------
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
-1-
The aggregate market value of the voting stock of the registrant held by
non-affiliates (for this purpose, persons and entities other than executive
officers, directors, and 5% or more shareholders) of the registrant, as of
February 1, 2000,is estimated to have been approximately $103,000,000. The
number of shares outstanding of the registrant's Common Stock, as of February 1,
2000, was 12,668,262.
DOCUMENTS INCORPORATED BY REFERENCE:
Lakeland Bancorp, Inc., Proxy Statement for 2000 Annual Meeting of Shareholders
(Part III).
-2-
LAKELAND BANCORP, INC.
Form 10-K Index
PART I
PAGE
Item 1. Business...................................................... 4
Item 2. Properties.................................................... 15
Item 3. Legal Proceedings............................................. 15
Item 4. Submission of Matters to a Vote of Security Holders........... 15
Item 4A. Executive Officers of the Registrant.......................... 15
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters.................................. 18
Item 6. Selected Financial Data....................................... 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 21
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk............................................ 37
Item 8. Financial Statements and Supplementary Data................... 38
Item 9. Changes in and disagreements with Accountants
on Accounting and Financial Disclosure....................... 69
PART III
Item 10. Directors of the Registrant................................... 69
Item 11. Executive Compensation........................................ 69
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................... 69
Item 13. Certain Relationships and Related Transactions................ 69
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................. 69
Signatures............................................................. 73
-3-
PART I
------
ITEM 1 - Business
GENERAL
-------
Lakeland Bancorp, Inc. (the "Company"), a New Jersey corporation, is a bank
holding company, registered with and supervised by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). The Company was organized
in March of 1989 and commenced operations on May 19, 1989, upon consummation of
the acquisition of all of the outstanding stock of Lakeland Bank, formerly named
Lakeland State Bank ("LB" or the "Bank"). On February 20, 1998, the Company
acquired Metropolitan State Bank, which became a subsidiary of the Company. On
July 15, 1999, the Company completed its acquisition of The National Bank of
Sussex County ("NBSC"). On January 28, 2000, the Company merged Metropolitan
State Bank into LB, with LB as the survivor. The Company's primary business
consists of managing and supervising LB and NBSC. The principal source of the
Company's income is dividends paid by its subsidiary banks. At December 31,
1999, the Company had consolidated total assets, deposits, and stockholder's
equity of approximately $830.2 million, $736.7 million, and $72.3 million,
respectively.
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
("Forward-Looking Statements"). Such statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected in such Forward-Looking Statements. Certain factors which could
materially affect such results and the future performance of the Company are
described in Exhibit 99.1 to this Annual Report on Form 10-K.
LB was organized as Lakeland State Bank on May 19, 1969. LB is a state banking
association, the deposits of which are insured by the Federal Deposit Insurance
Corporation ("FDIC"). LB is not a member of the Federal Reserve System. LB is a
full-service commercial bank, offering a complete range of consumer, commercial,
and trust services. LB's 18 branch offices are located in the following five New
Jersey counties: Morris, Passaic, Sussex, Essex and Bergen.
NBSC was organized as The Branchville National Bank in 1933, and became The
National Bank of Sussex County in 1957. It is a federally chartered national
banking association and a member of the Federal Reserve System, and its deposits
are insured by the FDIC. NBSC is a full service commercial bank with ten
branches, an operations center, and an administration center-all within Sussex
County, New Jersey. Its customers primarily are individuals who reside in, and
small to medium-sized businesses that are located in, northwestern New Jersey.
-4-
Commercial Bank Services
Through its bank subsidiaries, the Company offers a broad range of lending,
depository, and related financial services to individuals and small to medium
sized businesses in its northern New Jersey market area. In the lending area,
these services include short and medium term loans, lines of credit, letters of
credit, inventory and accounts receivable financing, real estate construction
loans and mortgage loans. Depository products include: demand deposits, savings
accounts, and time accounts. In addition, the Company offers collection, wire
transfer, and night depository services.
Consumer Banking
The Company also offers a broad range of consumer banking services, including
checking accounts, savings accounts, NOW accounts, money market accounts,
certificates of deposit, secured and unsecured loans, consumer installment
loans, mortgage loans, safe deposit services, and traveler's cheques. LB and
NBSC also provide brokerage services to their customers through a third
party. NBSC also provides insurance services through a joint venture with a
third party.
Trust Services
A variety of fiduciary services are available through a third party. These
include investment management, advisory services, and custodial functions for
individuals. The trust function also administers, in a fiduciary capacity,
pensions, personal trusts, and estates.
-5-
SUPERVISION AND REGULATION
--------------------------
Lakeland Bancorp, Inc.
- ----------------------
The Company is a registered bank holding company under the Federal Bank Holding
Company Act of 1956, as amended (the "Holding Company Act"), and is required to
file with the Federal Reserve Board an annual report and such additional
information as the Federal Reserve Board may require pursuant to the Holding
Company Act. The Company is subject to examination by the Federal Reserve Board.
The Holding Company Act limits the activities which may be engaged in by the
Company and its subsidiaries to those of banking, the ownership and acquisition
of assets and securities of banking organizations, and the management of banking
organizations, and to certain non-banking activities which the Federal Reserve
Board finds, by order or regulation, to be so closely related to banking or
managing or controlling a bank as to be a proper incident thereto. The Federal
Reserve Board is empowered to differentiate between activities by a bank holding
company or a subsidiary thereof and activities commenced by acquisition of a
going concern. With respect to the acquisition of banking organizations, the
Company is required to obtain the prior approval of the Federal Reserve Board
before it may, by merger, purchase or otherwise, directly or indirectly acquire
all or substantially all of the assets of any bank or bank holding company, if,
after such acquisition, it will own or control more than 5% of the voting shares
of such bank or bank holding company.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 permits
bank holding companies to acquire banks in states other than their home state,
regardless of applicable state law. This act also authorizes banks to merge
across state lines, thereby creating interstate branches. Under the act, each
state had the opportunity either to "opt out" of this provision, thereby
prohibiting interstate branching in such state, or to "opt in". Furthermore, a
state may "opt in" with respect to de novo branching, thereby permitting a bank
to open new branches in a state in which the bank does not already have a
branch. Without de novo branching, an out-of-state bank can enter the state only
by acquiring an existing bank. New Jersey enacted legislation to authorize
interstate banking and branching and the entry into New Jersey of foreign
country banks. New Jersey did not authorize de novo branching into the state.
With respect to non-banking activities, the Federal Reserve Board has by
regulation determined that several non-banking activities are closely related to
banking within the meaning of the Holding Company Act and thus may be performed
by bank holding companies. Although the Company's management periodically
reviews other avenues of business opportunities that are included in that
regulation, the Company has no present plans to engage in any of these
activities other than providing brokerage services through a third party.
-6-
Subsidiary banks of a bank holding company are subject to certain restrictions
imposed by the Federal Reserve Board on any extension of credit to the bank
holding company or any of its subsidiaries, on investments in the stock or other
securities of such holding company or its subsidiaries, and on the acceptance of
such stocks or securities as collateral for loans. Moreover, subsidiaries of
bank holding companies are prohibited from engaging in certain tie-in
arrangements (with the holding company or any of its other subsidiaries) in
connection with any extension of credit or lease or sale of property or
furnishing of services.
The policy of the Federal Reserve Board provides that a bank holding company is
expected to act as a source of financial strength to its subsidiary banks and to
commit resources to support such subsidiary banks in circumstances in which it
might not do so absent such policy.
Recent Legislation
- ------------------
On November 12, 1999, the President signed the Gramm-Leach-Bliley Financial
Modernization Act of 1999 into law. The Modernization Act will:
. allow bank holding companies meeting management, capital, and Community
Reinvestment Act standards to engage in a substantially broader range of
nonbanking activities than currently is permissible, including insurance
underwriting and making merchant banking investments in commercial and
financial companies; if a bank holding company elects to become a financial
holding company, it files a certification, effective in 30 days, and
thereafter may engage in certain financial activities without further
approvals;
. allow insurers and other financial services companies to acquire banks;
. remove various restrictions that currently apply to bank holding company
ownership of securities firms and mutual fund advisory companies; and
. establish the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations.
This part of the Modernization Act became effective on March 11, 2000.
On January 19, 2000, the Federal Reserve Board adopted an interim rule allowing
bank holding companies to submit certifications by February 15, to become
financial holding companies on March 11, 2000. The Federal Reserve Board also
provided regulations on procedures which would be used against financial holding
companies which have depository institutions which fall out of compliance with
the management or capital criteria. Only financial holding companies can own
insurance companies and engage in merchant banking.
On January 19, 2000, the Office of the Comptroller of the Currency proposed
rules to allow national banks to form subsidiaries to
-7-
engage in financial activities allowed for financial holding companies. Electing
national banks must meet the same management and capital standards as financial
holding companies, but may not engage in insurance underwriting, real estate
development, or merchant banking. Sections 23A and 23B of the Federal Reserve
Act will apply to financial subsidiaries and the capital invested by a bank in
its financial subsidiaries will be eliminated from the bank's capital in
measuring all capital ratios. National banks have been able to use these rules
effective March 11, 2000.
The Modernization Act also modifies other current financial laws, including laws
related to financial privacy and community reinvestment.
Lakeland Bank
- -------------
LB is a state chartered banking association subject to supervision and
examination by the Department of Banking of the State of New Jersey and the
FDIC. The regulations of the State of New Jersey and FDIC govern most aspects of
their business, including reserves against deposits, loans, investments, mergers
and acquisitions, borrowings, dividends, and location of branch offices. LB is
subject to certain restrictions imposed by law on, among other things, (i) the
maximum amount of obligations of any one person or entity which may be
outstanding at any one time, (ii) investments in stock or other securities of
the Company or any subsidiary of the Company, and (iii) the taking of such stock
or securities as collateral for loans to any borrower.
Under the Community Reinvestment Act ("CRA"), as implemented by FDIC
regulations, a state bank has a continuing and affirmative obligation consistent
with its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community. The
CRA requires the FDIC, in connection with its examination of a state non-member
bank, to assess the bank's record of meeting the credit needs of its community
and to take that record into account in its evaluation of certain applications
by the bank. Under the FDIC's CRA evaluation system, the FDIC focuses on three
tests: (i) a lending test, to evaluate the institution's record of making loans
in its service areas; (ii) an investment test, to evaluate the institution's
record of investing in community development projects, affordable housing and
programs benefiting low or moderate income individuals and businesses; and (iii)
a service test, to evaluate the institution's delivery of services through its
branches, ATMs and other offices.
NBSC
- ----
Almost every aspect of NBSC's operations is regulated or
-8-
supervised by either the Office of the Comptroller of the Currency, the Federal
Reserve Board, or the FDIC. These agencies regulate loans, investments, mergers
and acquisitions, borrowings, dividends, location of branch offices, and
reserves against deposits. NBSC must also comply with federal banking laws.
Among other things, these laws restrict the amount that NBSC may lend a single
borrower at one time.
Regulation of Bank Subsidiaries
- -------------------------------
There are various legal limitations, including Sections 23A and 23B of the
Federal Reserve Act, which govern the extent to which a bank subsidiary may
finance or otherwise supply funds to its holding company or its holding
company's non-bank susidiaries. Under federal law, no bank subsidiary may,
subject to certain limited exceptions, make loans or extensions of credit to, or
investments in the securities of, its parent or the non-bank subsidiaries of its
parent (other than direct subsidiaries of such bank which are not financial
subsidiaries) or take their securities as collateral for loans to any borrower.
Each bank subsidiary is also subject to collateral security requirements for any
loans or extensions of credit permitted by such exceptions.
Securities and Exchange Commission
- ----------------------------------
The common stock of the Company is registered with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934 (the "1934 Act").
As a result, the Company and its officers, directors, and major stockholders are
obligated to file certain reports with the SEC. Furthermore, the Company is
subject to proxy and tender offer rules promulgated pursuant to the 1934 Act.
Effect of Government Monetary Policies
- --------------------------------------
The earnings of the Company are and will be affected by domestic economic
conditions and the monetary and fiscal policies of the United States government
and its agencies.
The monetary policies of the Federal Reserve Board have had, and will likely
continue to have, an important impact on the operating results of commercial
banks through the Board's power to implement national monetary policy in order
to, among other things, curb inflation or combat a recession. The Federal
Reserve Board has a major effect upon the levels of bank loans, investments and
deposits through its open market operations in United States government
securities and through its regulation of, among other things, the discount rate
of borrowings of banks and the reserve requirements against bank deposits. It is
not possible to predict the nature and impact of future changes in monetary
fiscal policies.
FIRREA
- ------
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") restructured the regulation, supervision, and deposit insurance of
savings and loan associations and federal
-9-
savings banks whose deposits were formerly insured by the Federal Savings and
Loan Insurance Corporation. A separate fund, the Bank Insurance Fund ("BIF"),
was established for banks.
FIRREA and the Crime Control Act of 1990 expanded the enforcement powers
available to federal banking regulators including providing greater flexibility
to impose enforcement actions, expanding the persons dealing with a bank who are
subject to enforcement actions, and increasing the potential civil and criminal
penalties.
Under FIRREA, failure to meet capital guidelines could subject a banking
institution to a variety of enforcement remedies available to federal regulatory
authorities, including the termination of deposit insurance by the FDIC.
Furthermore, under FIRREA, a depository institution insured by the FDIC can be
held liable for any loss incurred by, or reasonably expected to be incurred by,
the FDIC in connection with (i) the default of a commonly controlled
FDIC-insured depository institution or (ii) any assistance provided by the FDIC
to a commonly controlled FDIC-insured depository
-10-
institution in danger of default. FIRREA also imposes certain independent
appraisal requirements upon a bank's real estate lending activities and further
imposes certain loan-to-value restrictions on a bank's real estate lending
activities.
Capital Adequacy Guidelines
- ---------------------------
The Federal Reserve Board has adopted Risk-Based Capital Guidelines. These
guidelines establish minimum levels of capital and require capital adequacy to
be measured in part upon the degree of risk associated with certain assets.
Under these guidelines all banks and bank holding companies must have a core or
tier 1 capital-to-risk-weighted-assets ratio of at least 4% and a total
capital-to-risk-weighted-assets ratio of at least 8%. At December 31, 1999, the
Company's Tier 1 capital to risk-weighted assets ratio and total capital to
risk-weighted assets ratio were 15.40% and 16.66%, respectively.
In addition, the Federal Reserve Board and the FDIC have approved leverage ratio
guidelines (Tier I capital to average quarterly assets, less goodwill) for bank
holding companies such as the Company. These guidelines provide for a minimum
leverage ratio of 3% for bank holding companies that meet certain specified
criteria, including that they have the highest regulatory rating. All other
holding companies will be required to maintain a leverage ratio of 3% plus an
additional cushion of at least 100 to 200 basis points. The Company is subject
to similar minimum leverage criteria. The Company's leverage ratio was 8.88% at
December 31, 1999.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), federal banking agencies have established certain additional minimum
levels of capital which accord with guidelines established under that act. See
"FDICIA".
-11-
Dividend Restrictions
- ---------------------
The Company is a legal entity separate and distinct from LB and NBSC. Virtually
all of the revenue of the Company available for payment of dividends on its
capital stock will result from amounts paid to the Company by LB or NBSC. All
such dividends are subject to various limitations imposed by federal and state
laws and by regulations and policies adopted by federal and state regulatory
agencies. Under State law, a bank may not pay dividends unless, following the
dividend payment, the capital stock of the bank would be unimpaired and either
(a) the bank will have a surplus of not less than 50% of its capital stock, or,
if not, (b) the payment of the dividend will not reduce the surplus of the bank.
If, in the opinion of the FDIC, a bank under its jurisdiction is engaged in or
is about to engage in an unsafe or unsound practice (which could include the
payment of dividends), the FDIC may require, after notice and hearing, that such
bank cease and desist from such practice or, as a result of an unrelated
practice, require the bank to limit dividends in the future. The Federal Reserve
Board has similar authority with respect to bank holding companies. In addition,
the Federal Reserve Board and the FDIC have issued policy statements which
provide that insured banks and bank holding companies should generally only pay
dividends out of current operating earnings. Regulatory pressures to reclassify
and charge-off loans and to establish additional loan loss reserves can have the
effect of reducing current operating earnings and thus impacting an
institution's ability to pay dividends. Further, as described herein, the
regulatory authorities have established guidelines with respect to the
maintenance of appropriate levels of capital by a bank or bank holding company
under their jurisdiction. Compliance with the standards set forth in these
policy statements and guidelines could limit the amount of dividends which the
Company and its subsidiary banks may pay. Under FDICIA, banking institutions
which are deemed to be "undercapitalized" will, in most instances, be prohibited
from paying dividends. See "FDICIA". See also the "Dividend Limitation" Note of
the Notes to Consolidated Financial Statements for further information regarding
dividends.
FDICIA
- ------
Enacted in December 1991, FDICIA substantially revised the bank regulatory
provisions of the Federal Deposit Insurance Act and several other federal
banking statutes. Among other things, FDICIA requires federal banking agencies
to broaden the scope of regulatory corrective action taken with respect to banks
that do not meet minimum capital requirements and to take such actions promptly
in order to minimize losses to the FDIC. Under FDICIA, federal banking agencies
were required to establish minimum levels of capital (including both a leverage
limit and a risk-based capital requirement) and specify for each capital measure
the levels at which depository institutions will be considered "well
capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" or "critically undercapitalized".
-12-
Under regulations adopted under these provisions, for an institution to be well
capitalized it must have a total risk-based capital ratio of at least 10%, a
Tier I risk-based capital ratio of at least 6% and a Tier I leverage ratio of at
least 5% and not be subject to any specific capital order or directive. For an
institution to be adequately capitalized it must have a total risk-based capital
ratio of at least 8%, a Tier I risk-based capital ratio of at least 4% and a
Tier I leverage ratio of at least 4% (or in some cases 3%). Under the
regulations, an institution will be deemed to be undercapitalized if it has a
total risk-based capital ratio that is less than 8%, a Tier I risk-based capital
ratio that is less than 4%, or a Tier I leverage ratio of less than 4% (or in
some cases 3%). An institution will be deemed to be significantly
undercapitalized if it has a total risk-based capital ratio that is less than
6%, a Tier I risk-based capital ratio that is less than 3%, or a leverage ratio
that is less than 3% and will be deemed to be critically undercapitalized if it
has a ratio of tangible equity to total assets that is equal to or less than 2%.
An institution may be deemed to be in a capitalization category that is lower
than is indicated by its actual capital position if it receives an
unsatisfactory examination rating or is deemed to be in an unsafe or unsound
condition or to be engaging in unsafe or unsound practices.
In addition, FDICIA requires banking regulators to promulgate standards in a
number of other important areas to assure bank safety and soundness, including
internal controls, information systems and internal audit systems, credit
underwriting, asset growth, compensation, loan documentation and interest rate
exposure.
BIF Premiums and Recapitalization of SAIF
- -----------------------------------------
As FDIC insured banks, LB and NBSC are required to pay premiums from $0.00 to
$0.27 per $100 of insured deposits. A bank's premium rate is based on the FDIC's
assessment of the bank's capitalization and the amount of concern that the bank
generates among regulators. Although LB and NBSC were not liable for FDIC
premiums in 1999, LB and NBSC and all other members of the Bank Insurance Fund
or "BIF" are required to help fund interest payment obligations that the
Financing Corporation ("FICO") has assumed to recapitalize the Savings
Association Insurance Fund ("SAIF"). During 1999, a FICO premium of
approximately 1.19 basis points was charged on BIF deposits.
Proposed Legislation
- --------------------
From time to time proposals are made in the United States Congress, the New
Jersey Legislature, and before various bank regulatory authorities which would
alter the powers of, and place restrictions on, different types of banking
organizations. It is impossible to predict the impact, if any, of potential
legislative trends on the business of the Company and its subsidiaries.
-13-
In accordance with federal law providing for deregulation of interest on all
deposits, banks and thrift organizations are now unrestricted by law or
regulation from paying interest at any rate on most time deposits. It is not
clear whether deregulation and other pending changes in certain aspects of the
banking industry will result in further increases in the cost of funds in
relation to prevailing lending rates.
Competition
- -----------
The Company operates in a highly competitive market environment within northern
New Jersey. Three major multi-bank holding companies in addition to several
large independent regional banks and several large multi-state thrift holding
companies operate within the Company's market area. These larger institutions
have substantially larger lending capacities and typically offer services which
the Company does not offer.
In recent years, the financial services industry has expanded rapidly as
barriers to competition within the industry have become less significant. Within
this industry, banks must compete not only with other banks and traditional
financial institutions, but also with other business corporations that have
begun to deliver financial services.
Concentration
- -------------
The Company is not dependent for deposits or exposed by loan concentrations to a
single customer or a small group of customers the loss of any one or more of
which would have a material adverse effect upon the financial condition of the
Company.
Employees
- ---------
At December 31, 1999, there were 359 persons employed by the Company.
-14-
ITEM 2 - Properties
The Company's principal office is located at 250 Oak Ridge Road, Oak Ridge, New
Jersey. NBSC operates an administrative center and an operations center, all in
Sussex County, New Jersey.
The Company operates 28 banking locations located in Passaic, Morris, Sussex,
Bergen, and Essex Counties, New Jersey. LB's Wantage office is leased under a
lease expiring October 31, 2006. LB's Rockaway office is under a lease expiring
May 15, 2009. LB's Newton office is under a lease expiring October 1, 2000. LB's
Wharton Office is under a lease, expiring August 22, 2005. LB's Ringwood office
is under a lease, expiring March 1, 2003. LB's Wyckoff office is under a lease,
expiring May 31, 2000. LB's Fairfield office is under a lease, expiring March 1,
2001. NBSC's Vernon office is under a lease, expiring September 2001. For
information regarding all of the Company's rental obligations, see Notes to
Consolidated Financial Statements.
All other offices of the Company are owned and are unencumbered.
ITEM 3 - Legal Proceedings
There are no significant pending legal proceedings involving the Company other
than those arising out of routine operations. Lakeland's management does not
anticipate that the ultimate outcome of the Company's litigation will have a
material adverse effect on the financial condition or results of operations of
the Company on a consolidated basis.
ITEM 4 - Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders of the Company
during the fourth quarter of 1999.
ITEM 4A - Executive Officers of the Registrant
The following table sets forth the name and age of each executive officer of the
Company. Each officer is appointed by the Company's Board of Directors. Unless
otherwise indicated, the persons named below have held the position indicated
for more than the past five years.
Officer of Position with the Company,
The Company its Subsidiary Banks,
Name and Age Since and Business Experience
- ------------ ----------- -------------------------------------------
John W. Fredericks 1969 Chairman of the Board of the Company and LB
Age 64 (June, 1999 - Present); President of the
Company and LB (prior years - June, 1999);
President, Fredericks Fuel and Heating
Service (a fuel distribution company)
Robert B. Nicholson 1969 Vice Chairman of the Board of the Company
Age 71 and LB (June,
-15-
1999 - Present); Chairman of the Board of
the Company and LB (prior years - June,
1999); Chairman of the Board, Eastern
Propane Corp. (a fuel distribution company)
Roger Bosma 1999 President and Chief Executive Officer of
Age 57 the Company (June, 1999 - Present);
Executive Vice President, Hudson United
Bancorp (May, 1997 - June, 1999); President
and Chief Executive Officer, Independence
Bank of New Jersey (prior years - May,
1997)
Arthur L. Zande 1971 Vice President and Treasurer of the Company
Age 65 (June, 1999 - Present); President and Chief
Executive Officer, LB (June, 1999 -
Present); Executive Vice President and
Chief Executive Officer (prior years -
June, 1999)
Robert A. Vandenbergh 1999 Executive Vice President and Chief Lending
Age 48 Officer of the Company (October, 1999 -
Present); President, NBSC (November, 1998 -
Present); Executive Vice President,
NBSC (1997 - November, 1998); Chief Lending
Officer, NBSC (prior years - 1997)
Joseph F. Hurley 1999 Executive Vice President and Chief
Age 49 Financial Officer of the Company (November,
1999 - Present); Executive Vice President
and Chief Financial Officer, Hudson United
Bancorp (May, 1997 - November, 1999); Vice
President and Chief Accounting Officer,
Prudential Insurance Company (prior years -
May, 1997)
Jeffrey J. Buonforte 1999 Executive Vice President and Chief Retail
Age 48 Officer of the Company (November, 1999 -
Present); Director, Business Development,
Price Waterhouse
-16-
Coopers (September, 1998 - November, 1999);
Vice President and Senior Regional Manager,
Bank of New York (prior years - September,
1998)
Louis E. Luddecke 1999 Executive Vice President and Chief
Age 53 Operations Officer of the Company (October,
1999 - Present); Executive Vice President
and Chief Financial Officer, Metropolitan
State Bank (prior years - October, 1999)
-17-
PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Shares of the common stock of Lakeland Bancorp, Inc. have been traded under the
symbol LBAI on the NASDAQ National Market since February 22, 2000 and in the
over the counter market prior to this date. As of December 31, 1999, there were
4,047 shareholders of record of common stock. The following table sets forth the
range of the high and low closing prices of the common stock as provided by
Bloomberg and the cash dividend declared per share of common stock:
Closing Dividends
Prices Declared(1)
Year ended December 31, 1999 High Low
------ -------
First Quarter $20.00 $16.00 $0.056
Second Quarter 17.75 15.50 0.056
Third Quarter 16.50 11.68 0.075
Fourth Quarter 14.00 10.38 0.075
Year ended December 31, 1998
First Quarter $16.00 $13.75 $0.043
Second Quarter 15.75 14.25 0.050
Third Quarter 16.00 14.50 0.056
Fourth Quarter 16.75 14.25 0.056
(1) Adjusted to reflect the acquisition of High Point Financial Corp.
The prices listed above reflect inter-dealer prices, without retail mark-up,
mark-down, or commission, and may not necessarily represent actual transactions.
Dividends on the Company's Common Stock are within the discretion of the Board
of Directors of the Company and are dependent upon various factors, including
the future earnings and financial condition of the Company, LB, NBSC and bank
regulatory policies.
The Bank Holding Company Act of 1956 restricts the amount of dividends the
Company can pay. Accordingly, dividends should generally only be paid out of
current earnings, as defined.
The New Jersey Banking Act of 1948 restricts the amount of dividends paid on the
capital stock of New Jersey chartered banks. Accordingly, no dividends shall be
paid by such banks on their capital stock unless, following the payment of such
dividends, the capital stock of the bank will be unimpaired and the bank will
have a surplus of not less than 50% of its capital stock, or, if not, the
payment of such dividend will not reduce the surplus of the bank. Under this
limitation, approximately $ 9.0 million was
-18-
available for payment of dividends from LB and Metropolitan State Bank to the
Company as of December 31, 1999. (Metropolitan State Bank merged into LB in
January, 2000.)
NBSC may not declare dividends in excess of the current year's earnings, plus
the retained earnings from the prior two years without prior approval from the
Office of the Comptroller of the Currency. In addition, if NBSC sustains losses
that exceed its aggregate retained earnings, NBSC may not pay dividends until
the losses are recovered. Under these limitations approximately $3.6 million was
available for the payment of dividends from NBSC to the Company as of December
31, 1999.
Capital guideline and other regulatory requirements may further limit the
Company's and its bank subsidiaries' ability to pay dividends. See "Item 1 -
Business - Supervision and Regulation - Dividend Restrictions."
-19-
ITEM 6
SELECTED CONSOLIDATED FINANCIAL DATA
(Not covered by Report of Independent Public Accountants)
1999 1998 1997 1996 1995
Year Ended December 31 (thousands except per share data)
Interest and fee income $54,031 $51,871 $49,697 $45,160 $42,609
Interest expense 20,241 19,876 19,250 17,545 16,794
------------------------------------------------------------------
Net interest income 33,790 31,995 30,447 27,615 25,815
Provision for possible loan losses 1,781 698 1,026 908 582
Non-interest income 6,292 5,998 6,142 5,227 4,801
Gains (loss) on securities and loans available for sale 32 119 46 (4) 53
Non-interest expenses 30,219 25,033 23,749 21,789 22,043
------------------------------------------------------------------
Income before income taxes 8,114 12,381 11,860 10,141 8,044
Income tax provision 2,714 4,424 4,234 3,845 2,102
------------------------------------------------------------------
Net income $5,400 $7,957 $7,626 $6,296 $5,942
==================================================================
Per-Share Data
Weighted average shares outstanding:
Basic 12,662 12,638 12,535 12,083 11,933
Diluted 12,713 12,719 12,685 12,116 11,966
Earnings per share:
Basic $0.43 $0.63 $0.61 $0.51 $0.50
Diluted $0.42 $0.63 $0.60 $0.50 $0.50
Cash dividend per common share $0.26 $0.21 $0.16 $0.14 $0.13
Book value per common share $5.71 $5.84 $5.40 $4.93 $4.37
At December 31
Investment securities available for sale $152,591 $165,282 $151,186 $136,618 $135,401
Investment securities held to maturity 125,130 90,657 81,775 80,705 72,801
Loans, net of unearned and deferred fees 476,514 450,051 417,955 383,365 337,525
Total assets 830,170 803,024 741,175 674,899 654,147
Total deposits 736,739 711,811 651,901 598,564 570,321
Long-term debt 6,000 5,000 5,000 973 1,781
Total stockholders' equity 72,282 73,763 68,127 61,321 55,197
Performance ratios
Return on average assets 0.65% 1.04% 1.07% 0.98% 0.98%
Return on average equity 7.64% 11.03% 11.73% 11.32% 12.15%
Efficiency ratio 75.25% 65.78% 63.74% 65.18% 69.34%
Net interest margin 4.56% 4.72% 4.78% 4.64% 4.66%
Capital ratios
Tier 1 leverage ratio 8.88% 9.35% 9.48% 9.64% 8.52%
Total risk-based capital ratio 16.66% 17.05% 17.99% 17.47% 16.69%
-20-
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This section presents a review of Lakeland Bancorp, Inc.'s consolidated results
of operations and financial condition. You should read this section in
conjunction with the consolidated financial data that is presented on the
preceding page as well as the accompanying notes to financial statements. As
used in the following discussion, the term "Company" refers to Lakeland Bancorp,
Inc. The Company's wholly owned banking subsidiaries--Lakeland Bank (Lakeland),
the National Bank of Sussex County (NBSC), and Metropolitan State Bank
(Metropolitan)--are collectively referred to as "the Banks."
Financial Overview
The year ended December 31, 1999 represented a year of transition for the
Company. The Company completed its acquisition of The National Bank of Sussex
County, installed a new senior management team and upgraded its computer system.
As a result, the Company incurred merger-related and restructuring charges. In
1999, the Company incurred $3.5 million in merger-related and restructuring
charges and a related $440,000 additional provision for possible loan losses to
conform provisioning policies among subsidiary banks ("one time charges.")
Therefore, the reader should consider net income in two ways: 1) Core Earnings
which exclude any one-time charges, and 2) Net Income which includes one-time
charges.
Net income for 1999 including one time charges was $5.4 million or $0.42
per diluted share. Return on average assets was 0.65% and return on average
equity was 7.64%. In 1998, net income was $8.0 million including merger related
charges or $0.63 per diluted share. Return on Average Assets was 1.04% for 1998
and Return on Average Equity was 11.03% for 1998.
For the year ended December 31, 1999, Core Earnings were $8.2 million and
net income per share on a diluted basis was $0.64. Return on Average Assets was
0.99% and Return on Average Equity was 11.58% excluding one time charges. For
1998, core earnings were $8.2 million excluding $324,000 in pre-tax
merger-related charges or $0.64 per diluted share. Return on Average Assets in
1998 was 1.08% and Return on Average Equity was 11.36% excluding merger related
charges.
Net interest income
Net interest income is the difference between interest income on earning
assets and the interest cost of funds supporting those assets. The Company's net
interest income is determined by: (i) the volume of interest earning assets that
it holds and the yields that it earns on those assets, and (ii) the volume of
interest bearing liabilities that it has assumed and the rates that it pays on
those liabilities. Net interest income increases when the Company can use
non-interest bearing deposits to fund or support interest earning assets.
Net interest income for 1999 on a tax equivalent basis was $35.0 million,
representing an increase of $2.1 million or 6.5% from the $32.9 million earned
in 1998. Net interest income for 1997 was $31.1 million. Net interest income
improved from 1998 to 1999 primarily because earning assets increased by $71.4
million. Similarly, the increase in net interest income in 1998 from 1997
resulted from an increase in earning assets of $45.3 million.
Interest income and expense volume/rate analysis. The following table shows
-------------------------------------------------
the impact that changes in average balances of the Company's assets and
liabilities and changes in average interest rates have had on the Company's net
interest income over the past three years. This information is presented on a
tax equivalent basis assuming a 35% tax rate. If a change in interest income or
expense is attributable to a change in volume and a change in rate, the amount
of the change is allocated proportionately.
-21-
INTEREST INCOME AND EXPENSE VOLUME/RATE ANALYSIS
(tax-equivalent basis, in thousands)
1999 vs. 1998 1998 vs. 1997
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
------------------------------------------------------------------------------
Increase (Decrease) Total Increase (Decrease) Total
Due to Change in: Increase Due to Change in: Increase
------------------------ ----------------------
Volume Rate (Decrease) Volume Rate (Decrease)
------------------------------------------------------------------------------
Interest Income
Loans $2,565 $(1,913) $652 $2,960 $(640) $2,320
Taxable investment securities 1,729 (342) 1,387 (529) (499) (1,028)
Tax-exempt investment securities 1,148 (174) 974 731 (56) 675
Federal funds sold (389) (123) (512) 458 (15) 443
------------------------------------------------------------------------------
Total interest income 5,053 (2,552) 2,501 3,620 (1,210) 2,410
------------------------------------------------------------------------------
Interest Expense
Savings deposits 123 (469) (346) 85 (290) (205)
Interest bearing transaction accounts 683 (170) 513 434 125 559
Time deposits 678 (512) 166 221 (98) 123
Borrowings 69 (37) 32 71 78 149
------------------------------------------------------------------------------
Total interest expense 1,553 (1,188) 365 811 (185) 626
------------------------------------------------------------------------------
NET INTEREST INCOME
(TAX EQUIVALENT BASIS) $3,500 $(1,364) $2,136 $2,809 $(1,025) $1,784
==============================================================================
The following table reflects the components of the Company's net interest
income, setting forth for the years presented, (1) average assets, liabilities
and stockholders' equity, (2) interest income earned on interest-earning assets
and interest expense paid on interest-bearing liabilities, (3) average yields
earned on interest-earning assets and average rates paid on interest-bearing
liabilities, (4) the Company's net interest spread (i.e., the average yield on
interest-earning assets less the average cost of interest-bearing liabilities
and (5) the Company's net yield on interest-earning assets. Rates are computed
on a tax equivalent basis.
-22-
CONSOLIDATED STATISTICS ON A TAX EQUIVALENT BASIS
---------------------------- ---------------------------- -----------------------------
1999 1998 1997
---------------------------- ---------------------------- -----------------------------
Average Average Average
Interest rates Interest rates Interest rates
Average Income/ earned/ Average Income/ earned/ Average Income/ earned/
Balance Expense paid Balance Expense paid Balance Expense paid
- ------------------------------------------------------------------------- ----------------------------- ----------------------------
ASSETS (dollars in thousands)
Interest earning assets:
Loans (A) $462,363 $37,278 8.06% $431,233 $36,626 8.49% $396,486 $34,306 8.65%
Taxable investment securities (B) 223,223 13,115 5.88% 193,577 11,728 6.06% 202,135 12,756 6.31%
Tax-exempt securities 55,847 3,563 6.38% 37,594 2,589 6.89% 27,002 1,914 7.09%
Fed funds sold 26,519 1,322 4.99% 34,184 1,834 5.37% 25,654 1,391 5.42%
- ------------------------------------------------------------------------- ----------------------------- ----------------------------
Total interest earning assets 767,952 55,278 7.20% 696,588 52,777 7.58% 651,277 50,367 7.73%
Non-interest earning assets:
Allowance for possible loan losses (8,040) (7,912) (7,741)
Other assets 70,588 72,847 66,736
- ------------------------------------------------------------------------- ----------------------------- ----------------------------
TOTAL ASSETS $830,500 $761,523 $710,272
- -------------------------------------------------------------------------- ---------------------------- ----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings accounts $183,299 $4,186 2.28% $178,615 $4,532 2.54% $175,427 $4,737 2.70%
Interest bearing transaction accounts 165,146 3,695 2.24% 133,961 3,182 2.38% 115,518 2,623 2.27%
Time deposits 229,866 11,495 5.00% 213,007 11,329 5.32% 208,857 11,206 5.37%
Borrowings 19,700 865 4.39% 18,022 833 4.62% 16,267 684 4.20%
- ------------------------------------------------------------------------- ----------------------------- ----------------------------
Total interest bearing liabilities 598,011 20,241 3.38% 543,605 19,876 3.66% 516,069 19,250 3.73%
- ------------------------------------------------------------------------- ----------------------------- ----------------------------
Non-interest bearing liabilities:
Demand deposits 156,725 140,781 124,536
Other liabilities 5,050 4,979 4,653
Stockholders' equity 70,714 72,158 65,014
- ------------------------------------------------------------------------- ----------------------------- ----------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $830,500 $761,523 $710,272
- ------------------------------------------------------------------------- ----------------------------- ----------------------------
Net interest income (tax-equivalent basis) 35,037 3.81% 32,901 3.92% 31,117 4.00%
Tax-equivalent basis adjustment 1,247 906 670
- ------------------------------------------------------------------------- ----------------------------- ----------------------------
NET INTEREST INCOME $33,790 $31,995 $30,447
- ------------------------------------------------------------------------- ----------------------------- ----------------------------
Net interest margin (tax-equivalent basis) (C) 4.56% 4.72% 4.78%
- ------------------------------------------------------------------------- ----------------------------- ----------------------------
(A) Includes non-accrual loans, the effect of which is to reduce the yield
earned on loans, and deferred loan fees.
(B) Includes certificates of deposits and interest-bearing cash accounts.
(C) Net interest income divided by interest earning assets.
Total interest income on a tax equivalent basis increased from $52.8
million in 1998 to $55.3 million in 1999, an increase of $2.5 million. The
increase in interest income in 1999 was due to a $71.4 million increase in
interest earning assets which was partially offset by a 38 basis point decline
in the yield on interest earning assets. The decline in yield reflected the
decrease in the overall interest rate environment which began in 1998 and
continued into the first half of 1999. The increase in interest earning assets
was due to growth in the loan and investment portfolios.
The increase in interest income from $50.4 million in 1997 to $52.8 million
in 1998 resulted from a $45.3 million increase in earning assets which occurred
primarily in the loan area. This was partially offset by a 15 basis point
decline in the yield on earning assets caused by the decline in rates and the
flattening of the yield curve which occurred in 1998.
Total interest expense increased from $19.9 million in 1998 to $20.2
million in 1999 as a result of a $54.4 million increase in interest bearing
liabilities offset by a 28 basis point decline in the Company's cost of funds.
The decline in the cost of funds resulted from the decline of the overall
interest rate environment in the latter half of 1998. Total interest expense
increased from $19.3 million in 1997 to $19.9 million in 1998 as a result of a
$27.5 million increase in interest bearing liabilities partially offset by a 7
basis point decrease in the cost of funds.
-23-
Net Interest Margin
Net interest margin is calculated by dividing net interest income on a
fully taxable equivalent basis by average interest earning assets. The Company's
net interest margin was 4.56%, 4.72% and 4.78% for 1999, 1998 and 1997,
respectively. The decline in the net interest margin from 1998 to 1999 results
from lower rates earned on loans and investment securities which more than
offset lower rates paid on deposits. The loan yield dropped 43 basis points, the
yield on taxable investment securities dropped 18 basis points, and the yield on
the tax-exempt investment portfolio declined 51 basis points. The cost of funds
dropped 28 basis points. The decrease in the net interest margin from 1997 to
1998 resulted from a 25 basis point decline in yields in the taxable investment
portfolio and a 16 basis point decline in the yield on the loan portfolio.
The average cost of the Company's deposits was 2.64%, 2.86% and 2.97%, for
1999, 1998 and 1997, respectively.
Provision For Possible Loan Losses
In determining the provision for possible loan losses, management considers
historical loan loss experience, changes in composition and volume of the
portfolio, the level and composition of non-performing loans, the adequacy of
the allowance for possible loan losses, and prevailing economic conditions. The
provision for possible loan losses was $1.8 million in 1999, $698,000 in 1998,
and $1.0 million in 1997. The increase in the provision from 1998 to 1999 was
due primarily to an increase in the level of net charge-offs from 1998 to 1999.
Net charge-offs increased from $976,000 in 1998 to $2.1 million in 1999. One
loan relationship accounted for $1.1 million or 50.1% in net charge-offs. Net
charge-offs as a percent of average loans outstanding increased from 0.23% in
1998 to 0.45% in 1999. The 1999 provision also included a $440,000 provision
made to conform provisioning policies among subsidiary banks.
The 1998 provision for possible loan losses at $698,000 decreased from $1.0
million in 1997. The 1997 provision for possible loan losses was made in
anticipation of charge-offs that were to be made at Metropolitan State Bank
prior to its acquisition by the Company. The ratio of net charge-offs to average
loans outstanding was 0.08% in 1997.
Non-interest Income
Non-interest income increased $207,000 or 3.4% to $6.3 million in 1999 from
$6.1 million in 1998 and represented 15.8% of total income for 1999. Total
income includes net interest income plus non-interest income. The primary source
of this increase was an increase in service charges collected on deposit
accounts which increased from $4.0 million to $4.2 million, an increase of 5.6%.
This increase was due primarily to increased ATM fees related to the
introduction of a debit card at one of the Company's subsidiaries late in 1998.
Commissions and fees declined marginally from $912,000 in 1998 to $904,000 in
1999. The decline in commissions and fees resulted primarily from a decline in
commissions and fees on investment services. This decline was offset by
increases in loan fees. Other income increased from $1.1 million in 1998 to $1.2
million in 1999 as a result of increases in data processing fees and gains on
sales of loans. Non-interest income decreased $71,000 or 1.1% to $6.1 million in
1998 from $6.2 million in 1997 and represented 16.1% of total income for 1998.
Non-interest Expense
Non-interest expenses in 1999 increased $5.2 million or 20.7% over 1998.
Included in the expense increase is $3.5 million in merger related and
restructuring charges compared to $324,000 of such expenses in 1998. Excluding
merger related charges, non-interest expense increased from $24.7 million to
$26.7 million, a $2.0 million or 8.0% increase. Salaries and benefits, the
largest component of non-interest expense, increased by $1.4 million or 10.4%.
Salary and benefit expense increased due to increased medical claim expense,
normal salary increases and the addition of new people to the Company's senior
management team. Other expense categories increased in the aggregate by $594,000
or 5.3%. Other expenses increased due to increases in the costs of operating and
disposing of other real estate owned which increased from $37,000 in 1998 to
$376,000 in 1999. This increase included a $200,000 write-down on one property
which was sold at the end of 1999. Other expenses that increased included
telephone expense, marketing expense, and expense related automated teller
machines.
-24-
Non-interest expense in 1998 increased $1.3 million or 5.4% over 1997.
Salaries and benefits increased by $574,000 or 4.4%. This increase was due to
increased staffing levels due to branch expansion and normal salary increases.
Furniture and fixtures expense increased $172,000 or 8.0% due to costs incurred
in operating the branch network, as well as costs related to the improvement of
technology. Also included in non-interest expense were $324,000 in one-time
merger related charges related to the acquisition of Metropolitan.
Income Taxes
The Company's effective income tax rate was 33.4%, 35.7% and 35.7%, in the
years ended December 31, 1999, 1998, and 1997, respectively. The Company's
effective tax rate dropped from 35.7% in 1998 to 33.4% in 1999 because of the
increase in the Company's tax-exempt security portfolio. The Company's average
tax-exempt securities increased from $37.6 million in 1998 to $55.8 million in
1999, an increase of $18.2 million or 48.4%.
Financial Condition
Loans
The Banks primarily serve Bergen, Morris, Passaic, Sussex and Essex
counties in Northern New Jersey and the surrounding areas. All of the Bank's
borrowers are U.S. residents or entities.
Total loans increased from $450.1 million on December 31, 1998 to $476.3
million on December 31, 1999, an increase of $26.2 million or 5.8%. The increase
in loans generally was in the mortgage portfolio which increased from $172.3
million in 1998 to $194.4 million in 1999, an increase of $22.1 million or
12.8%. In 1999, one of the Company's subsidiaries, Metropolitan, began offering
mortgages for the first time. Metropolitan generated $15 million in mortgages.
During 1998, loans increased by $31.9 million from 1997 levels of $418.1
million. Most of this increase was in mortgages which increased $30.3 million
over 1997 levels. The increase in 1998 resulted from many people refinancing
because of the low rate environment.
The following table sets forth the classification of the Company's loans by
major category as of December 31 for each of the last five years:
December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
(in thousands)
Commercial $163,033 $159,299 $154,651 $147,386 $142,967
Real estate--mortgage 194,433 172,321 141,972 128,939 107,884
Real estate--construction 11,938 12,526 14,712 9,424 6,397
Home equity and consumer installment 106,878 105,910 106,799 97,550 79,777
---------------------------------------------------------------
$476,282 $450,056 $418,134 $383,299 $337,025
===============================================================
The following table shows the percentage distributions of loans by category
as of December 31 for each of the last five years.
December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
Commercial 34.2% 35.4% 37.0% 38.4% 42.4%
Real estate--mortgage 40.9% 38.3% 34.0% 33.6% 32.0%
Real estate--construction 2.5% 2.8% 3.5% 2.5% 1.9%
Home equity and consumer installment 22.4% 23.5% 25.5% 25.5% 23.7%
---------------------------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0%
===============================================================
At December 31, 1999, there were no concentrations of loans exceeding 10%
of total loans outstanding other than loans that are secured by real estate. For
more information, see Note 4 of the Notes to the Company's
-25-
consolidated financial statements. Loan concentrations are considered to exist
when there are amounts loaned to a multiple number of borrowers engaged in
similar activities which would cause them to be similarly impacted by economic
or other related conditions.
The following table sets forth certain categories of loans as of December
31, 1999, in terms of contractual maturity due:
After one
Within but within After five
(in thousands) one year five years years Total
-------------- ---------------------------------------------------
Types of Loans:
Commercial $50,337 $56,920 $55,776 $163,033
Real Estate--construction 11,763 -- 175 11,938
---------------------------------------------------
Total $62,100 $56,920 $55,951 $174,971
===================================================
Amount of such loans with:
Predetermined rates $21,216 $53,422 $ 51,181 $125,819
Floating or adjustable rates 40,884 3,498 4,770 49,152
---------------------------------------------------
Total $62,100 $56,920 $55,951 $174,971
===================================================
Risk Elements
Commercial loans are placed on a nonaccrual status when principal or
interest is in default for a period of ninety days or more except where there
exists sufficient collateral to cover the defaulted principal and interest
payments or management's knowledge of the specific circumstances warrant
continued accrual. Real estate mortgage loans are placed on nonaccrual status at
the time when foreclosure proceedings are commenced except where there exists
sufficient collateral to cover the defaulted principal and interest payments or
management's knowledge of the specific circumstances warrant continued accrual.
Installment loans are generally charged off when principal and interest payments
are four months in arrears. Interest thereafter on such charged-off installment
loans is taken into income when received.
The following schedule sets forth certain information regarding The
Company's nonaccrual, past due and renegotiated loans and other real estate
owned as of December 31, for each of the last five years:
December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
(in thousands)
Non-performing loans:
Non-accrual loans (A) $2,961 $3,281 $4,850 $5,695 $8,110
Past due loans (B) 2,210 4,265 1,404 2,200 835
Renegotiated loans (C) 389 399 413 505 884
---------------------------------------------------------------
TOTAL NON-PERFORMING LOANS 5,560 7,945 6,667 8,400 9,829
Other real estate owned 418 1,989 1,758 1,313 3,692
---------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS $5,978 $9,934 $8,425 $9,713 $13,521
===============================================================
(A) Generally represents loans as to which the payment of interest or
principal is in arrears for a period of more than ninety days. Current
policy requires that interest previously accrued on these loans and not
yet paid be reversed and charged against the allowance for possible
loan losses during the current period unless the loan is adequately
collateralized as to principal and interest or is in the process of
collection. Interest earned thereafter is only included in income to
the extent that it is received in cash.
(B) Represents loans as to which payments of interest or principal are
contractually past due ninety days or more, but which are currently
accruing income at the contractually stated rates. A determination is
made to continue accruing income on such loans only when such loans are
believed to be fully collectible.
-26-
(C) The loan portfolio includes loans whose terms have been renegotiated
due to financial difficulties of borrowers. All such loans were
performing in accordance with the renegotiated terms and, in
management's view, do not present a significant risk of loss as of
December 31, 1999.
There were no loans at December 31, 1999, other than those included in the
above table, where the Company was aware of any credit conditions of any
borrowers that would indicate a strong possibility of the borrowers not
complying with the present terms and conditions of repayment and which may
result in such loans being included as nonaccrual, past due or renegotiated at a
future date.
Non-accrual loans decreased $320,000 to $3.0 million at December 31, 1999,
from $3.3 million at December 31, 1998. All of these loans are in various stages
of litigation, foreclosure, or workout.
Loans past due ninety days or more and still accruing decreased $2.1
million to $2.2 million at December 31, 1999, from $4.3 million at December 31,
1998.
Other real estate owned declined from $2.0 million on December 31, 1998 to
$418,000 on December 31, 1999, a decline of $1.6 million or 80.0%. The decline
of other real estate owned resulted primarily from sales of the properties.
For 1999, the gross interest income that would have been recorded, had the
loans classified at year-end as either non-accrual or renegotiated been
performing in conformance with their original loan terms, would have been
approximately $486,000. The amount of interest income actually recorded on those
loans for 1999 was $348,000. The resultant income loss of $138,000 for 1999
compares to gains of $13,000 and losses of $43,000 for 1998 and 1997,
respectively.
Loans specifically evaluated are deemed impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreements. Loans which are in process of collection, which is defined as up to
90 days by Lakeland, will not be classified as impaired. A loan is not impaired
during the process of collection of payment if the Company expects to collect
all amounts due, including interest accrued at the contractual interest rate.
All loans identified as impaired are evaluated independently. The Company does
not aggregate such loans for evaluation purposes.
The Company's policy concerning non-accrual loans states that, except for
loans which are considered to be fully collectible by virtue of collateral held
as in the process of collection, loans are placed on a non-accrual status when
payments are 90 days delinquent or more. It is possible for a loan to be on
non-accrual status and not be classified as impaired if the balance of such loan
is relatively small and, therefore, that loan has not been specifically reviewed
for impairment.
Loans, or portions thereof, are charged-off in the period that the loss is
identified. Until such time, an allowance for loan loss is maintained for
estimated losses. With regard to interest income recognition for payments
received on impaired loans, as well as all non-accrual loans, the Company
follows regulatory guidelines, which apply any payments to principal as long as
there is doubt as to the collectibility of the loan balance.
As of December 31, 1999, based on the above criteria, the Company had
impaired loans, totaling $4.3 million. The impairment of these loans is measured
using the present value of future cash flows for three renegotiated loans and is
based on the fair value of the underlying collateral for the remaining loans.
Based upon such evaluation, $511,000 has been allocated to the allowance for
possible loan losses for impairment.
-27-
The following table sets forth for each of the five years ended December
31, 1999, the historical relationships among the amount of loans outstanding,
the allowance for possible loan losses, the provision for possible loan losses,
the amount of loans charged-off and the amount of loan recoveries:
December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
(in thousands)
Balance of the allowance at the
beginning of the year $7,984 $8,262 $7,558 $8,079 $8,781
---------------------------------------------------------------
Loans charged off:
Commercial 1,670 1,134 561 1,384 1,272
Home Equity and consumer 182 476 202 402 380
Real estate--construction -- -- -- -- 86
Real estate--mortgage 571 57 15 161 360
---------------------------------------------------------------
Total loans charged off 2,423 1,667 778 1,947 2,098
---------------------------------------------------------------
Recoveries:
Commercial 228 581 262 353 688
Home Equity and consumer 88 95 157 150 114
Real estate--construction -- -- -- 13 9
Real estate--mortgage 10 15 37 2 3
---------------------------------------------------------------
Total Recoveries 326 691 456 518 814
---------------------------------------------------------------
Net charge-offs: 2,097 976 322 1,429 1,284
Provision for possible loan losses
charged to operations 1,781 698 1,026 908 582
---------------------------------------------------------------
Ending balance $7,668 $7,984 $8,262 $7,558 $8,079
===============================================================
Ratio of net charge-offs to average
loans outstanding 0.45% 0.23% 0.08% 0.40% 0.39%
Ratio of allowance at end of year as a
percentage of year end total loans 1.61% 1.77% 1.98% 1.97% 2.40%
The ratio of the allowance for possible loan losses to loans outstanding
reflects management's evaluation of the underlying credit risk inherent in the
loan portfolio. The determination of the adequacy of the allowance for possible
loan losses and the periodic provisioning for estimated losses included in the
consolidated financial statements is the responsibility of management. The
evaluation process is undertaken on a quarterly basis.
Methodology employed for assessing the adequacy of the allowance consists
of the following criteria:
. The establishment of reserve amounts for all specifically identified
criticized loans that have been designated as requiring attention by
management's internal loan review program.
. The establishment of reserves for pools of homogeneous types of loans
not subject to specific review, including 1 - 4 family residential
mortgages, and consumer loans.
. An allocation for the non-criticized loans in each portfolio is based
upon the historical average loss experience of these portfolios. The
same percentage is applied to all off-balance sheet exposures.
-28-
Consideration is given to the results of ongoing credit quality monitoring
processes, the adequacy and expertise of the Company's lending staff,
underwriting policies, loss histories, delinquency trends, and the cyclical
nature of economic and business conditions. Since many of the Company's loans
depend on the sufficiency of collateral as a secondary source of repayment, any
adverse trend in the real estate markets could affect underlying values
available to protect the Company from loss.
Based upon the process employed and giving recognition to all accompanying
factors related to the loan portfolio, management considers the allowance for
possible loan losses to be adequate at December 31, 1999.
The following table shows how the allowance for possible loan losses is
allocated among the various types of loans that the Company has outstanding.
This allocation is based on management's specific review of the credit risk of
the outstanding loans in each category as well as historical trends.
At December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
(in thousands)
Commercial $6,227 $5,888 $6,250 $5,621 $6,254
Home Equity and consumer 899 993 1,010 1,056 970
Real estate--construction 54 54 114 61 820
Real estate--mortgage 488 1,049 888 820 35
---------------------------------------------------------------
$7,668 $7,984 $8,262 $7,558 $8,079
===============================================================
Investment Securities
The Company has classified its investment securities into the available for
sale and held to maturity categories pursuant to SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities."
The following table sets forth the carrying value of the Company's
investment securities, both available for sale and held to maturity, as of
December 31 for each of the last three years. Investment securities available
for sale are stated at fair value while securities held for maturity are stated
at cost, adjusted for amortization of premiums and accretion of discounts.
December 31,
--------------------------------------
1999 1998 1997
--------------------------------------
(in thousands)
U.S. Treasury and U.S. government agencies $154,298 $139,026 $139,302
Obligations of states and political subdivisions 57,568 49,096 34,760
Mortgage-backed securities 36,888 41,137 50,339
Equity securities 8,479 6,454 5,553
Other debt securities 20,488 20,226 3,007
--------------------------------------
$277,721 $255,939 $232,961
======================================
-29-
The following table sets forth the maturity distribution and weighted
average yields (calculated on the basis of the stated yields to maturity,
considering applicable premium or discount), on a fully taxable equivalent
basis, of investment securities available for sale as of December 31, 1999:
Over one Over five
Within but within but within After ten
Available for sale one year five years ten years years Total
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands)
U.S. Treasury and U.S. government agencies
Amount $14,636 $59,880 $4,584 $2,887 $81,987
Yield 6.26% 5.70% 6.74% 6.69% 5.89%
Obligations of states and political subdivisions
Amount 5,516 9,145 19,757 6,415 40,833
Yield 6.09% 6.35% 6.59% 6.63% 6.47%
Mortgage-backed securities
Amount 984 452 1,736 8,834 12,006
Yield 6.09% 6.19% 6.01% 6.26% 6.21%
Other debt securities
Amount -- 9,286 -- -- 9,286
Yield --% 5.55% --% --% 5.55%
Other equity securities
Amount 8,479 -- -- -- 8,479
Yield 4.58% --% --% --% 4.58%
---------------------------------------------------------------
Total securities
Amount 29,615 78,763 26,077 18,136 152,591
Yield 5.74% 5.76% 6.58% 6.46% 5.98%
===============================================================
The following table sets forth the maturity distribution and weighted
average yields (calculated on the basis of the stated yields to maturity,
considering applicable premium or discount), on a fully taxable equivalent
basis, of investment securities held to maturity as of December 31, 1999:
Over one Over five
Within but within but within After ten
Held to maturity one year five years ten years years Total
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands)
U.S. Treasury and U.S. government agencies
Amount $15,090 $52,730 $3,291 $1,200 $72,311
Yield 6.18% 5.86% 6.52% 4.59% 5.94%
Obligations of states and political subdivisions
Amount 3,072 9,777 3,786 100 16,735
Yield 4.99% 6.33% 6.44% 9.09% 6.12%
Mortgage-backed securities
Amount 294 8,082 15,780 726 24,882
Yield 6.90% 6.45% 6.15% 5.96% 6.25%
Other debt securities
Amount -- 11,002 200 -- 11,202
Yield --% 5.79% 6.66% --% 5.81%
--------------------------------------------------------------
Total securities
Amount 18,456 81,591 23,057 2,026 125,130
Yield 5.99% 5.97% 6.25% 5.31% 6.01%
==============================================================
-30-
Deposits
As of December 31, 1999, the aggregate amount of outstanding time deposits
issued in amounts of $100 or more, broken down by time remaining to maturity,
was as follows (in thousands):
Maturity
-------------
Within 3 months $15,994
Over 3 through 6 months 11,796
Over 6 through 12 months 5,597
Over 12 months 1,661
-----------
Total $35,048
===========
Liquidity
"Liquidity" measures whether an entity has sufficient cash flow to meet its
financial obligations and commitments on a timely basis. The Company is liquid
when its subsidiary banks have the cash available to meet the borrowing and cash
withdrawal requirements of customers and the Company can pay for current and
planned expenditures and satisfy its debt obligations.
Liquidity at the bank subsidiaries. The subsidiary banks fund loan demand
-----------------------------------
and operation expenses from five sources:
. Net income.
. Deposits. The subsidiary banks can offer new products or change their
rate structure in order to increase deposits. In 1999, the Company
generated $24.9 million in funds in net deposit growth.
. Sales of securities and overnight funds. At year end 1999, the Company
had $152.6 million in securities designated "available for sale" and
$9.0 million in overnight funds.
. Overnight credit lines. NBSC and Metropolitan are members of the Federal
Home Loan Bank of New York (FHLB). One membership benefit is that
members can borrow overnight funds. NBSC and Metropolitan have
respective credit lines of $13.5 million and $5.0 million at the FHLB.
After Metropolitan is fully merged into Lakeland in January 2000, its
capacity to borrow with the FHLB will cease. Lakeland Bank has overnight
federal funds lines available for it to borrow up to $6.5 million.
Management of the subsidiary banks believe that their current level of
liquidity is sufficient to meet their current and anticipated operational needs.
The Banks anticipate that they will have sufficient funds available to meet
their current loan commitments and deposit maturities. At December 31, 1999, the
Banks had outstanding loan origination commitments of $72.3 million. Time
deposits that mature in one year or less, at December 31, 1999, totaled $16.0
million. The first sentence in this paragraph constitutes a Forward Looking
Statement under the Private Securities Litigation Reform Act of 1995. Actual
results could differ materially from anticipated results due to a variety of
factors, including uncertainties relating to general economic conditions;
unanticipated decreases in deposits; changes in or failure to comply with
governmental regulations; and uncertainties relating to the analysis of the
Company's assessment of rate sensitive assets and rate sensitive liabilities and
relating to the extent to which market factors indicate that a financial
institution such as Lakeland should match such assets and liabilities.
Interest Rate Risk
Closely related to the concept of liquidity is the concept of interest rate
sensitivity (i.e., the extent to which assets and liabilities are sensitive to
changes in interest rates). Interest rate sensitivity is often measured by the
extent to which mismatches or "gaps" occur in the repricing of assets and
liabilities within a given time period. Gap analysis is utilized to quantify
such mismatches. A "positive" gap results when the amount of earning assets
repricing within a given time period exceeds the amount of interest bearing
liabilities repricing within that time period. A "negative" gap results when the
amount of interest bearing liabilities repricing within a given time period
exceeds the amount of earning assets repricing within such time period.
-31-
In general, a financial institution with a positive gap in relevant time
periods will benefit from an increase in market interest rates and will
experience erosion in net interest income if such rates fall. Likewise, a
financial institution with a negative gap in relevant time periods will normally
benefit from a decrease in market interest rates and will be adversely affected
by an increase in rates. By maintaining a balanced interest rate sensitivity
position, where interest rate sensitive assets roughly equal interest sensitive
liabilities in relevant time periods, interest rate risk can be limited.
As a financial institution, the Company's potential interest rate
volatility is a primary component of its market risk. Fluctuations in interest
rates will ultimately impact the level of income and expense recorded on a large
portion of the Company's assets and liabilities, and the market value of all
interest-earning assets, other than those which possess a short term to
maturity. Based upon the Company's nature of operations, the Company is not
subject to foreign currency exchange or commodity price risk. The Company does
not own any trading assets and does not have any hedging transactions in place,
such as interest rate swaps and caps.
The Company's Board of Directors has adopted an Asset/Liability Policy
designed to stabilize net interest income and preserve capital over a broad
range of interest rate movements. This policy outlines guidelines and ratios
dealing with, among others, liquidity, volatile liability dependence, investment
portfolio composition, loan portfolio composition, loan-to-deposit ratio and gap
analysis ratio. The Company's performance as compared to the Asset/Liability
Policy is monitored by its Board of Directors. In addition, to effectively
administer the Asset/Liability Policy and to monitor exposure to fluctuations in
interest rates, the Company maintains an Asset/Liability Committee, consisting
of the Chief Executive Officer, Chief Financial Officer, Chief Lending Officer,
Chief Retail Officer and certain other senior officers. This committee meets
monthly to review the Company's financial results and to develop strategies to
implement the Asset/Liability Policy and to respond to market conditions.
The Company monitors and controls interest rate risk through a variety of
techniques, including use of traditional interest rate sensitivity analysis
(also known as "gap analysis") and an interest rate risk management model. With
the interest rate risk management model, the Company projects future net
interest income, and then estimates the effect of various changes in interest
rates and balance sheet growth rates on that projected net interest income. The
Company also uses the interest rate risk management model to calculate the
change in net portfolio value over a range of interest rate change scenarios.
Traditional gap analysis involves arranging the Company's interest-earning
assets and interest bearing liabilities by repricing periods and then computing
the difference (or "interest rate sensitivity gap") between the assets and
liabilities that are estimated to reprice during each time period and
cumulatively through the end of each time period.
Both interest rate sensitivity modeling and gap analysis are done at a
specific point in time and involve a variety of significant estimates and
assumptions. Interest rate sensitivity modeling requires, among other things,
estimates of how much and when yields and costs on individual categories of
interest-earning assets and interest-bearing liabilities will respond to general
changes in market rates; future cash flows and discount rates.
Gap analysis requires estimates as to when individual categories of
interest-sensitive assets and liabilities will reprice, and assumes that assets
and liabilities assigned to the same repricing period will reprice at the same
time and in the same amount. Gap analysis does not account for the fact that
repricing of assets and liabilities is discretionary and subject to competitive
and other pressures.
The following table sets forth the estimated maturity/repricing structure
of the Company's interest-earning assets and interest-bearing liabilities at
December 31, 1999. Except as stated below, the amounts of assets or liabilities
shown which reprice or mature during a particular period were determined in
accordance with the contractual terms of each asset or liability. The majority
of interest bearing demand deposits and savings deposits are assumed to be
"core" deposits, or deposits that will remain at the Company regardless of
market interest rates. Therefore, 80% of the interest-bearing deposits and 75%
of the savings deposits are shown as maturing or repricing in the "after 1 but
within 5 years" column. Lakeland has assumed that all interest-bearing demand
accounts and savings accounts will reprice or mature within five years. The
table does not assume any prepayment of fixed-rate loans.
-32-
The table does not necessarily indicate the impact of general interest rate
movements on the Company's net interest income because the repricing of certain
categories of assets and liabilities, for example, prepayments of loans and
withdrawal of deposits, is beyond the Company's control. As a result, certain
assets and liabilities indicated as repricing within a stated period may in fact
reprice at different times and at different rate levels.
Maturing or Repricing
----------------------------------------------------------------------
After 3
Within three months but After 1 but
December 31, 1999 months within 1 year within 5 years After 5 Years Total
- ---------------------------- ----------------------------------------------------------------------
Interest earning assets: (in thousands)
Loans $90,654 $47,020 $165,783 $172,825 $476,282
Investment securities 24,337 31,809 169,584 51,991 277,721
Federal funds sold and interest
bearing cash accounts 10,352 -- -- -- 10,352
----------------------------------------------------------------------
Total earning assets 125,343 78,829 335,367 224,816 764,355
======================================================================
Interest bearing liabilities:
Deposits:
Interest bearing demand 8,219 24,656 131,502 -- 164,377
Savings accounts 11,967 35,900 143,600 -- 191,467
Time deposits 71,628 112,288 29,807 1,613 215,336
----------------------------------------------------------------------
Total interest bearing deposits 91,814 172,844 304,909 1,613 571,180
----------------------------------------------------------------------
Borrowings:
Repurchase agreements 6,825 3,664 -- -- 10,489
Long-term debt -- -- 6,000 -- 6,000
----------------------------------------------------------------------
Total borrowings 6,825 3,664 6,000 -- 16,489
----------------------------------------------------------------------
Total liabilities 98,639 176,508 310,909 1,613 587,669
----------------------------------------------------------------------
Interest rate sensitivity gap 26,704 (97,679) 24,458 223,203 176,686
======================================================================
Cumulative rate sensitivity gap $26,704 ($70,975) ($46,517) $176,686
======================================================================
Interest rate sensitivity gap ratio 127.07% 44.66% 107.87% 13937.76% 130.07%
Cumulative interest rate sensitivity gap ratio 127.07% 74.20% 92.06% 130.07%
Changes in estimates and assumptions made for interest rate sensitivity modeling
and gap analysis could have a significant impact on projected results and
conclusions. Therefore, these techniques may not accurately reflect the impact
of general interest rate movements on the Company's net interest income or net
portfolio value.
Because of the limitations in the gap analysis discussed above, members of
the Company's Asset/Liability Management Committee believe that the interest
sensitivity modeling more accurately reflects the effects and exposure to
changes in interest rates. Net interest income simulation considers the relative
sensitivities of the balance sheet including the effects of interest rate caps
on adjustable rate mortgages and the relatively stable aspects of core deposits.
As such, net interest income simulation is designed to address the probability
of interest rate changes and the behavioral response of the balance sheet to
those changes. Market Value of Portfolio Equity represents the fair value of the
net present value of assets, liabilities and off-balance sheet items.
The starting point (or "base case") for the following table is an estimate
of the Company's net portfolio value at December 31, 1999 using current discount
rates, and an estimate of net interest income for 1999 assuming that both
interest rates and the Company's interest-sensitive assets and liabilities
remain at December 31, 1999 levels. The "rate shock" information in the table
shows estimates of net portfolio value at December 31, 1999 and net interest
income for 2000 assuming fluctuations or "rate shocks" of plus 100 and 200 basis
points and minus 100 and 200 basis points. Rate shocks assume that current
interest rates change immediately. The information set forth in the following
table is based on significant estimates and assumptions, and constitutes a
forward looking statement within the meaning of that term set forth in Rule 173
of the Securities Act of 1933 and Rule 3-6 of the Securities Exchange Act of
1934.
-33-
- --------------------------------------------- -------------------------- ------------------------------
Net Portfolio Value at
December 31, 1999 Net interest income for 2000
- --------------------------------------------- -------------------------- ------------------------------
Rate Scenario Percent Percent
Change Change
From From
Amount Base Case Amount Base Case
- --------------------------------------------- ------------- ------------ ------------- ----------------
(dollars in thousands)
- --------------------------------------------- ------------- ------------ ------------- ----------------
+200 basis point rate shock $108,871 (14.5%) $34,905 (3.6%)
- --------------------------------------------- ------------- ------------ ------------- ----------------
+100 basis point rate shock 117,739 ( 7.5%) 35,560 (1.8%)
- --------------------------------------------- ------------- ------------ ------------- ----------------
Base Case 127,236 0.0% 36,198 0.0%
- --------------------------------------------- ------------- ------------ ------------- ----------------
- -100 basis point rate shock 136,092 6.9% 37,324 3.1%
- --------------------------------------------- ------------- ------------ ------------- ----------------
- -200 basis point rate shock 139,585 9.6% 37,697 4.1%
- --------------------------------------------- ------------- ------------ ------------- ----------------
Capital Resources
Stockholders' equity decreased $1.5 million to $72.3 million at December
31, 1999, from $73.8 million at December 31, 1998, reflecting net income during
the year of $5.4 million, cash dividends to stockholders of $3.3 million, an
unrealized securities loss, net of deferred income taxes, of $3.2 million and
net proceeds from the exercise of stock options of $366,000.
The $9.3 million deficit in undivided profits contained in the December 31,
1998 consolidated financial statements is the result of a bookkeeping entry
charging undivided profits $15.8 million in connection with the Company's
accounting for its 2 for 1 stock split effected in the form of a 100% stock
dividend distributed on October 1, 1998. In accordance with New Jersey corporate
law, the Company's Board of Directors on March 10, 1999, approved the reversing
of this accounting treatment of the stock dividend, thereby moving $10.8 million
from the capital stock account to the undivided profits account to more
accurately reflect the Company's financial condition. This reclassification was
made in the first quarter of 1999.
The FDIC's risk-based capital policy statement imposes a minimum capital
standard on insured banks. The minimum ratio of risk-based capital to risk-
weighted assets (including certain off-balance sheet items, such as standby
letters of credit) is 8%. At least half of the total capital is to be comprised
of common stock equity and qualifying perpetual preferred stock, less goodwill
("Tier I capital"). The remainder ("Tier II capital") may consist of mandatory
convertible debt securities, qualifying subordinated debt, other preferred stock
and a portion of the allowance for possible loan losses. The Federal Reserve
Board has adopted a similar risk-based capital guideline for Lakeland which is
computed on a consolidated basis.
In addition, the bank regulators have adopted minimum leverage ratio
guidelines (Tier I capital to average quarterly assets, less goodwill) for
financial institutions. These guidelines provide for a minimum leverage ratio of
3% for financial institutions that meet certain specified criteria, including
that they have the highest regulatory rating. All other holding companies are
required to maintain a leverage ratio of 3% plus an additional cushion of at
least 100 to 200 basis points.
-34-
The following table reflects capital ratios of the Company and its
subsidiaries as of December 31, 1999:
Tier 1 Capital Tier 1 Capital Total Capital
to Total Average to Risk-Weighted to Risk-Weighted
Assets Ratio Assets Ratio Assets Ratio
December 31, December 31, December 31,
Capital Ratios: 1999 1998 1999 1998 1999 1998
------------------------------------------------------------------------------
The Company 8.88% 9.35% 15.40% 15.80% 16.66% 17.05%
Lakeland Bank 9.07% 9.18% 15.31% 15.52% 16.42% 16.77%
NBSC 7.84% 8.53% 15.23% 16.19% 16.50% 17.46%
Metropolitan 7.74% 8.16% 12.44% 12.74% 13.50% 13.81%
"Well capitalized" institution under FDIC
Regulations 5.00% 5.00% 6.00% 6.00% 10.00% 10.00%
Recent Accounting Pronouncements
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activity was issued. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
imbedded in other contracts, and for hedging activities. Subsequent to this
statement, SFAS No. 137 was issued which amended the effective date of SFAS 133
to all fiscal years beginning after June 15, 2000. Earlier application is
permitted only as of the beginning of any fiscal quarter. Management is
currently reviewing the provisions of SFAS No. 133.
Year 2000 Compliance
The event of the year 2000 brought to the attention of the business
community an important issue regarding how existing software and operating
systems could accommodate a four digit year rather than a two digit year. The
Company identified potential problems associated with Year 2000 issue and
implemented a plan designated to ensure that all technology systems used in
connection with the Company's business could handle date related data in a
manner which would provide accurate results.
The Company formed a committee of representatives from its various areas to
monitor this project. The Company prepared a schedule of vendors and assigned a
priority status to them determining how critical each vendor was to the
Company's operations. The vendor's readiness was assessed and a decision was
made regarding how to approach possible problems based on the priority assigned
to the vendor. Lakeland required assurances from the vendors regarding their
year 2000 readiness and put a program in place to test the vendor's readiness.
The Company also ascertained its customers' Year 2000 readiness recognizing
that any failure on the part of its customers could result in additional expense
or loss. The Company sent out questionnaires to its larger customers and based
on their responses, was comfortable with their responses. The Company felt that
its borrowers were responding adequately to the Year 2000 issue.
The Company also employed a consultant to assist in the preparation of a
contingency plan in the event there were any system interruptions due to Year
2000 issues. Each manager identified the resources required to sustain daily
operations in his or her area of responsibility. The Company also prepared a
list of potential Year 2000 interruption scenarios and assigned a probability as
to the scenario occurring; the Company then allocated contingency plan resources
based on the likelihood of that scenario occurring.
The rollover from 1999 to 2000 was uneventful for the Company and its
subsidiaries. The Company's computer systems continued processing into the year
2000 without any difficulties. Each of the Company's subsidiaries had a team of
key personnel who closely monitored events during the rollover period. There
were no problems with any third party vendors with whom the Company has material
relationships. In the final quarter of 1999, the Company closely monitored its
liquidity and the cash needs of its customers. At year-end, the Company
-35-
had $12.3 million in cash in their branch offices, which is approximately $4.5
million higher than normal. After the rollover into 2000, the Company gradually
reduced its excess cash back to normal levels.
The committee of representatives that Lakeland formed to monitor its year
2000 compliance continues to monitor key areas. Although the Company's computer
systems were tested regarding the extra day in February, management closely
monitored the systems as February 29 approached. The Company's computer systems
processed on February 29 without any difficulties.
Total costs related to the year 2000 were approximately $170,000, all of
which were expensed prior to January 1, 2000. The Company does not anticipate
any additional Year 2000 costs.
Effects of Inflation
The impact of inflation, as it affects banks, differs substantially from
the impact on non-financial institutions. Banks have assets which are primarily
monetary in nature and which tend to move with inflation. This is especially
true for banks with a high percentage of rate sensitive interest earning assets
and interest bearing liabilities. A bank can further reduce the impact of
inflation with proper management of its rate sensitivity gap. This gap
represents the difference between interest sensitive assets and interest rate
sensitive liabilities. Lakeland attempts to structure its assets and liabilities
and manage its gap to protect against substantial changes in interest rate
scenarios, thus minimizing the potential effects of inflation.
-36-
ITEM 7A - Quantitative and Qualitative Disclosures About Market
Risks
See"Management's Discussion and Analysis of Financial Condition and Results of
Operations"
-37-
ITEM 8 - Financial Statements and Supplementary Data
Lakeland Bancorp, Inc. and Subsidiaries
Independent Auditor's Report
- --------------------------------------------------------------------------------
Accountants and Grant Thornton [LOGO]
Management Consultants Grant Thornton LLP
The US Member firm of
Grant Thornton International
Board of Directors and Stockholders
Lakeland Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Lakeland
Bancorp, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income and comprehensive income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lakeland
Bancorp, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
January 14, 2000 (except for note 19, as to which
the date is March 8, 2000)
Suite 3100
Two Commerce Square
2001 Market Street
Philadelphia, PA 19103-7080
Tel: 215-561-4200
Fax: 215-561-1066
-38-
Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Cash and due from banks $31,386 $35,105
Federal funds sold 8,956 28,700
- ----------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 40,342 63,805
Interest bearing deposits with banks 216 204
Investment securities available for sale 152,591 165,282
Investment securities held to maturity; fair value of $122,751
in 1999 and $91,846 in 1998 125,130 90,657
Loans, net of deferred loan fees 476,514 450,051
Less: allowance for possible loan losses 7,668 7,984
- ----------------------------------------------------------------------------------------------------------------------
Net loans 468,846 442,067
Premises and equipment - net 21,897 20,755
Accrued interest receivable 5,979 5,704
Other assets 15,169 14,550
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $830,170 $803,024
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Deposits:
Non-interest bearing $165,559 $153,111
Savings and interest bearing transaction accounts 355,845 327,210
Time deposits under $100 180,287 192,121
Time deposits $100 and over 35,048 39,369
- ----------------------------------------------------------------------------------------------------------------------
Total deposits 736,739 711,811
Securities sold under agreements to repurchase 10,489 8,110
Long-term debt 6,000 5,000
Other liabilities 4,660 4,340
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 757,888 729,261
- ----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies -- --
Stockholders' equity:
Common stock, no par value, 1999; par value $2.50 per share, 1998;
authorized shares, 40,000,000 at December 31, 1999 and 14,806,718 at
December 31, 1998; issued shares, 12,672,262 at December 31, 1999
and 1998; outstanding shares, 12,668,262 at December 31, 1999 and
12,663,662 at December 31, 1998 71,330 31,681
Additional Paid-in-Capital -- 50,836
Retained Earnings (Accumulated Deficit) 3,548 (9,297)
Treasury stock, at cost, 4,000 shares in 1999 and 8,600 in 1998 (67) (129)
Accumulated other comprehensive income (loss) (2,381) 841
Loan for options exercised (148) (169)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 72,282 73,763
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $830,170 $803,024
======================================================================================================================
See accompanying notes to consolidated financial statements.
-39-
Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED INCOME STATEMENTS
Years Ended December 31,
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
INTEREST INCOME
Loans and fees $37,278 $36,626 $34,306
Federal funds sold 1,322 1,834 1,391
Taxable investment securities 13,115 11,728 12,756
Tax exempt investment securities 2,316 1,683 1,244
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 54,031 51,871 49,697
- ----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 19,376 19,043 18,566
Securities sold under agreements to repurchase 563 531 541
Long-term debt 302 302 143
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 20,241 19,876 19,250
- ----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 33,790 31,995 30,447
Provision for possible loan losses 1,781 698 1,026
- ----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 32,009 31,297 29,421
NON-INTEREST INCOME
Service charges on deposit accounts 4,214 3,991 3,966
Commissions and fees 904 912 1,036
Gain on the sales of securities 32 119 46
Other income 1,174 1,095 1,140
- ----------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 6,324 6,117 6,188
- ----------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 14,898 13,503 12,929
Net occupancy expense 2,285 2,319 2,375
Furniture and equipment 2,346 2,352 2,180
Stationary, supplies and postage 1,296 1,400 1,332
Merger and restructuring charges 3,521 324 --
Other expenses 5,873 5,135 4,933
- ----------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 30,219 25,033 23,749
- ----------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 8,114 12,381 11,860
Provision for income taxes 2,714 4,424 4,234
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $5,400 $7,957 $7,626
======================================================================================================================
EARNINGS PER COMMON SHARE
Basic $0.43 $0.63 $0.61
- ----------------------------------------------------------------------------------------------------------------------
Diluted $0.42 $0.63 $0.60
- ----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
(in thousands)
NET INCOME $5,400 $7,957 $7,626
- ----------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME NET OF TAX:
Unrealized securities gains (losses) arising during period (3,202) 358 320
Less: reclassification for gains included in Net Income 20 71 27
- ----------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) (3,222) 287 293
- ----------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $2,178 $8,244 $7,919
======================================================================================================================
See accompanying notes to consolidated financial statements
-40-
Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Common stock Retained Other
------------------------ Additional earnings Comprehensive Loan for
Number of Paid-in (Accumulated Treasury Income Options
Shares Amount Capital deficit) Stock (Loss) Exercised Total
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
BALANCE JANUARY 1, 1997 5,923,471 $14,809 $43,237 $3,014 $-- $261 $-- $61,321
Net Income 1997 -- -- -- 7,626 -- -- -- 7,626
Other comprehensive income,
net of tax -- -- -- -- -- 293 -- 293
Exercise of stock options -- -- (24) -- 64 -- -- 40
Stock dividends 326,042 815 6,684 (7,499) -- -- -- --
Stock issuances 55,685 139 760 -- -- -- -- 899
Cash dividend -- -- -- (1,988) -- -- -- (1,988)
Purchase of treasury stock -- -- -- -- (64) -- -- (64)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 6,305,198 15,763 50,657 1,153 -- 554 -- 68,127
Net Income 1998 -- -- -- 7,957 -- -- -- 7,957
Other comprehensive income,
net of tax -- -- -- -- -- 287 -- 287
Exercise of stock options 15,000 37 (231) -- 653 -- -- 459
Stock dividends 6,328,256 15,821 -- (15,821) -- -- -- --
Stock issuances 23,808 60 410 -- -- -- -- 470
Loan issued for options exercised -- -- -- -- -- -- (169) (169)
Cash dividend -- -- -- (2,586) -- -- -- (2,586)
Purchase of treasury stock -- -- -- -- (782) -- -- (782)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1998 12,672,262 31,681 50,836 (9,297) (129) 841 (169) 73,763
Net Income 1999 -- -- -- 5,400 -- -- -- 5,400
Other comprehensive loss,
net of tax -- -- -- -- -- (3,222) -- (3,222)
Reallocate for no par value stock -- 40,077 (50,836) 10,759 -- -- -- --
Exercise of stock options -- (428) -- -- 697 -- -- 269
Payment on loan issued for
options exercised -- -- -- -- -- -- 21 21
Cash dividend -- -- -- (3,314) -- -- -- (3,314)
Purchase of treasury stock -- -- -- -- (635) -- -- (635)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1999 12,672,262 $71,330 $0 $3,548 ($67) ($2,381) ($148) $72,282
====================================================================================================================================
See accompanying notes to consolidated financial statements
-41-
Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES (in thousands)
Net income $5,400 $7,957 $7,626
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of premiums, discounts and deferred loan fees
and costs 554 1,011 1,185
Depreciation and amortization 2,343 1,758 1,569
Provision for loan losses 1,781 698 1,026
Provision for losses on other real estate 200 -- 121
(Gain) loss on sales and calls of securities (32) (119) (46)
Gain on sale of student loans -- -- (11)
Gains on dispositions of premises and equipment 20 (63) (139)
(Gain) loss on other real estate owned (57) (10) 17
Deferred income tax 347 19 665
Increase in other assets (802) (890) (719)
(Decrease) increase in other liabilities 341 (4) 1,319
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,095 10,357 12,613
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest bearing deposits with banks (12) (102) 221
Proceeds from repayments on and maturity of securities:
Available for sale 27,401 57,081 52,019
Held for maturity 23,423 26,982 23,150
Proceeds from sales of securities available for sale 12,755 23,891 17,821
Purchase of securities:
Available for sale (57,817) (105,296) (87,522)
Held for maturity (33,468) (26,181) (24,786)
Net increase in loans (37,174) (39,139) (36,382)
Purchase of loans -- -- (2,855)
Sales of loans and participation interest in loan 8,852 5,962 3,378
Cash received for land held for sale -- -- 20
Proceeds from dispositions of premises and equipment -- 9 26
Capital expenditures (3,574) (5,849) (3,066)
Net decrease in other real estate owned 1,429 258 286
- -------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (58,185) (62,384) (57,690)
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 24,928 59,910 53,316
Increase (decrease) in securities sold under agreements
to repurchase 2,379 (3,627) 3,347
Proceeds from long term repurchase agreements 1,000 -- 5,000
Repayments of long-term debt principal -- -- (1,295)
Proceeds from common stock issuances -- 470 899
Purchase of treasury stock (635) (782) (64)
Exercise of stock options 269 290 40
Dividends paid (3,314) (2,586) (1,988)
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 24,627 53,675 59,255
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (23,463) 1,648 14,178
Cash and cash equivalents, beginning of year 63,805 62,157 47,979
- -------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $40,342 $63,805 $62,157
=======================================================================================================
See accompanying notes to consolidated financial statements
-42-
Lakeland Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
Lakeland Bancorp, Inc. (the Company) is a bank holding company whose
principal activity is the ownership and management of its wholly owned
subsidiaries, Lakeland Bank (Lakeland), The National Bank of Sussex County
(NBSC) and Metropolitan State Bank (Metropolitan) (collectively, the Banks).
The Banks combine to generate commercial, mortgage and consumer loans and to
receive deposits from customers located primarily in Northern New Jersey.
NBSC also provides securities brokerage services, including mutual funds and
variable annuities, and provides insurance services through a joint venture.
Lakeland and Metropolitan operate under state bank charters and provide full
banking services and, as state banks, each is subject to regulation by the
New Jersey Department of Banking and Insurance. NBSC is a federally
chartered national banking association and a member of the Federal Reserve
System.
The Banks operate as commercial banks offering a wide variety of commercial
loans and, to a lesser degree, consumer credits, primarily indirect
automobile loans. Their primary future strategic aim is to establish a
reputation and market presence as the "small and middle market business
bank" in their principal markets. The Company funds its loans primarily by
offering time, savings and money market, and demand deposit accounts to both
commercial enterprises and individuals. Additionally, the Company originates
residential mortgage loans, and services such loans which are owned by other
investors.
The Company and the Banks are subject to regulations of certain state and
federal agencies and, accordingly, they are periodically examined by those
regulatory authorities. As a consequence of the extensive regulation of
commercial banking activities, the Banks' business is particularly
susceptible to being affected by state and federal legislation and
regulations.
Basis of financial statement presentation
The accounting and reporting policies of the Company and the Banks conform
with generally accepted accounting principles and predominant practices
within the banking industry. The consolidated financial statements include
the accounts of the Company and the Company's wholly owned subsidiaries,
Lakeland, NBSC and Metropolitan. All intercompany balances and transactions
have been eliminated. As described in Note 2, the Company's acquisitions of
NBSC in 1999, and Metropolitan in 1998, were accounted for under the pooling
of interests method of accounting. Accordingly, all prior period amounts
have been restated to reflect the acquisitions.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements. These estimates and assumptions also affect
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates. Significant estimates
implicit in these financial statements are as follows.
The principal estimates that are particularly susceptible to significant
change in the near term relate to the allowance for possible loan losses and
other real estate owned.
-43-
The evaluation of the adequacy of the allowance for possible loan losses
includes, among other factors, an analysis of historical loss rates, by
category, applied to current loan totals. However, actual losses may be
higher or lower than historical trends, which vary. Actual losses on
specified problem loans, which also are provided for in the evaluation, may
vary from estimated loss percentages, which are established based upon a
limited number of potential loss classifications.
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires
that public business enterprises report certain information about operating
segments. SFAS No. 131 requires that public business enterprises report
certain information about their products and services, the geographic areas
in which they operate, and their major customers. The Company's three
banking subsidiaries--Lakeland, NBSC and Metropolitan--which meet the
criteria to be considered in the aggregate, have been aggregated for segment
reporting. Lakeland Bancorp, Inc., the banks' holding company is not a
reportable segment because it does not exceed any of the quantitative
thresholds.
Investment securities
The Company accounts for its investment securities in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
This standard requires investments in securities to be classified in one of
three categories: held to maturity, trading, or available for sale.
Investments in debt and equity securities, for which management has both the
ability and intent to hold to maturity, are carried at cost, adjusted for
the amortization of premiums and accretion of discounts computed by the
interest method. Investments in debt and equity securities, which management
believes may be sold prior to maturity due to changes in interest rates,
prepayment risk and equity, liquidity requirements, or other factors, are
classified as available for sale. Net unrealized gains and losses for such
securities, net of tax effect, are reported as other comprehensive income
and excluded from the determination of net income. The Company does not
engage in security trading. Gains or losses on disposition of investment
securities are based on the net proceeds and the adjusted carrying amount of
the securities sold using the specific identification method.
Loans and allowance for possible loan losses
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are stated at the amount of unpaid
principal and are net of unearned discount, unearned loan fees and an
allowance for possible loan losses. The allowance for possible loan losses
is established through a provision for possible loan losses charged to
expense. Loan principal considered to be uncollectible by management is
charged against the allowance for possible loan losses. The allowance is an
amount that management believes will be adequate to absorb possible losses
on existing loans that may become uncollectible based upon an evaluation of
known and inherent risks in the loan portfolio. The evaluation takes into
consideration such factors as changes in the nature and size of the loan
portfolio, overall portfolio quality, specific problem loans, and current
and future economic conditions which may affect the borrowers' ability to
pay. The evaluation also details historical losses by loan category, the
resulting loss rates for which are projected at current loan total amounts.
Loss estimates for specified problem loans are also detailed.
Interest income is accrued as earned on a simple interest basis. Accrual of
interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection of interest is
doubtful. When a loan is placed on such non-accrual status, all accumulated
accrued interest receivable applicable to periods prior to the current year
is charged off to the allowance for possible loan losses. Interest which had
accrued in the current year is reversed out of current period income. Loans
90 days or more past due and still accruing interest must have both
principal and accruing interest adequately secured and must be in the
process of collection.
-44-
The Company accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures". This standard requires that a creditor measure impairment
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, except that as a practical expedient, a
creditor may measure impairment based on a loan's observable market price,
or the fair value of the collateral if the loan is collateral-dependent.
Regardless of the measurement method, a creditor must measure impairment
based on the fair value of the collateral when the creditor determines that
foreclosure is probable.
Bank premises and equipment
Bank premises and equipment, including leasehold improvements, are stated at
cost less accumulated depreciation. Depreciation expense is computed on the
straight-line method over the estimated useful lives of the assets.
Leasehold improvements are depreciated over the shorter of the estimated
useful lives of the improvements or the terms of the related leases.
Other real estate owned
Other real estate owned (OREO), representing property acquired through
foreclosure, is carried at the lower of the principal balance of the secured
loan or fair value less estimated disposal costs of the acquired property.
Costs relating to holding the assets are charged to expense. An allowance
for OREO has been established, through charges to OREO expense, to maintain
properties at the lower of cost or fair value less estimated cost to sell.
Operating results of OREO, including rental income, operating expenses and
gains and losses realized from the sale of properties owned, are included in
other expenses.
Mortgage servicing
The Company performs various servicing functions on loans owned by others. A
fee, usually based on a percentage of the outstanding principal balance of
the loan, is received for these services. At December 31, 1999 and 1998, the
Banks were servicing approximately $39.7 million and $41.9 million,
respectively, of loans for others.
On January 1, 1998, the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," as amended by SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of SFAS No. 125," which provides accounting guidance on
transfers of financial assets, servicing of financial assets and
extinguishments of liabilities. The Company originates mortgages under a
definitive plan to sell or securitize those loans and service the loans
owned by the investor. Upon the transfer of the mortgage loans in a sale or
a securitization, the Company records the servicing assets retained in
accordance with SFAS No. 125. The Company records mortgage servicing rights
and the loans based on relative fair values at the date of origination.
Long-lived assets
The Company accounts for long-lived assets in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 provides guidance on when to
recognize and how to measure impairment losses of long-lived assets and
certain identifiable intangibles and how to value long-lived assets to be
disposed of.
Restrictions on cash and due from banks
The Banks are required to maintain reserves against customer demand deposits
by keeping cash on hand or balances with the Federal Reserve Bank of New
York in a non-interest bearing account. The amounts of those reserves and
cash balances at December 31, 1999 and 1998 were approximately $300,000 and
$1.4 million, respectively.
Earnings per common share
The Company follows the provisions of SFAS No. 128, "Earnings Per Share,"
which eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share in conjunction with the
disclosure of the methodology used in computing such earnings per share.
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted average common
shares outstanding during the period. Diluted earnings per share takes into
account the potential dilution that could occur if securities or other
contracts to issue common stock were exercised and converted into common
stock. Earnings per share calculations for 1997 have been restated to
reflect the adoption of SFAS No. 128.
-45-
Employee benefit plans
The Banks have certain employee benefit plans covering substantially all
employees. The Banks accrue such costs as incurred.
The Company follows the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," which contains a fair value-based method for
valuing stock-based compensation that entities may use, which measures
compensation cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, the standard permits entities to continue
accounting for employee stock options and similar equity instruments under
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees." Entities that continue to account for stock options
using APB Opinion No. 25 are required to make pro forma disclosures of net
income and earnings per share, as if the fair value-based method of
accounting defined in SFAS No. 123 had been applied. The Company's stock
option plans are accounted for under APB Opinion No. 25.
Statement of cash flows
Cash and cash equivalents are defined as cash on hand, cash items in the
process of collection, amounts due from banks and federal funds sold with an
original maturity of three months or less. Cash paid for income taxes was
$2.8 million, $4.2 million and $3.8 million in 1999, 1998 and 1997,
respectively. Cash paid for interest was $20.3 million, $19.8 million and
$18.7 million in 1999, 1998 and 1997, respectively.
1999 1998 1997
--------------------------------------
(in thousands)
Supplemental schedule of noncash investing and
financing activities:
Transfer of securities available for sale to securities held
to maturity $25,396 $10,121 $ --
Transfer of loans receivable to other real estate owned 457 772 771
Loans to facilitate the sale of other real estate owned 475 565 33
Transfer of premises to other real estate owned -- 272 81
Comprehensive income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS
No. 130 requires the reporting of comprehensive income in addition to net
income from operations. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial
information that historically has not been
-46-
recognized in the calculation of net income. As required, the provisions of
SFAS No. 130 have been retroactively applied to previously reported
periods. The application of SFAS No. 130 had no material effect on the
Company's consolidated financial condition or operations.
December 31, 1999
--------------------------------------------------
(in thousands)
Tax Net of
Before tax (expense) tax
amount benefit amount
---------- --------- --------
Unrealized gains (losses) on investment securities
Unrealized holding losses arising during the period ($5,132) $1,930 ($3,202)
Less reclassification adjustment for gains
realized in net income 32 (12) 20
------- ------ -------
Other comprehensive losses, net ($5,164) $1,942 ($3,222)
======= ====== =======
December 31, 1998
--------------------------------------------------
(in thousands)
Tax Net of
Before tax (expense) tax
amount benefit amount
---------- --------- --------
Unrealized gains on investment securities
Unrealized holding gains arising during the period $597 ($239) $358
Less reclassification adjustment for gains
realized in net income 119 (48) 71
---- ---- ----
Other comprehensive income, net $478 ($191) $287
==== ===== ====
December 31, 1998
--------------------------------------------------
(in thousands)
Tax Net of
Before tax (expense) tax
amount benefit amount
---------- --------- --------
Unrealized gains on investment securities
Unrealized holding gains arising during the period $534 ($214) $320
Less reclassification adjustment for gains
realized in net income 46 (19) 27
---- ----- ----
Other comprehensive income, net $488 ($195) $293
==== ===== ====
Other information
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activity was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments imbedded in other contracts, and for hedging
activities. Subsequent to this statement, SFAS No. 137 was issued which
amended the effective date of SFAS 133 to all fiscal years beginning after
June 15, 2000. Earlier application is permitted only as of the beginning of
any fiscal quarter. Management is currently reviewing the provisions of
SFAS No. 133.
-47-
Reclassifications
Certain reclassifications have been made to the prior period financial
statements to conform to the 1999 presentation.
NOTE 2 - ACQUISITIONS
On July 15, 1999, the Company completed a merger with High Point Financial
Corp. (High Point). Under the terms of the merger, each share of High Point
common stock not previously owned by the Company was converted into 1.20
shares of Company common stock, resulting in the issuance of 4,160,674
shares of the Company's common stock and The National Bank of Sussex County
(NBSC) became a wholly-owned subsidiary of the Company. This merger was
accounted for under the pooling of interests method of accounting.
The results of operations of previous separate companies follows:
December 31, 1999
- -----------------------------------------------------------------------------------------------
Net
Net Interest Income Income
- ------------------------------------------------------------------------------------------------
(in thousands)
- ------------------------------------------------------------------------------------------------
Lakeland Bancorp, Inc. $28,473 $4,352
The National Bank of Sussex County as of July 15, 1999 5,317 1,048
- ------------------------------------------------------------------------------------------------
$33,790 $5,400
=================================================================================================
On February 20, 1998, the Company completed a merger with Metropolitan State
Bank (Metropolitan). Under the terms of the merger, each share of
Metropolitan common stock was converted into 0.941 shares of Company common
stock, resulting in the issuance of 669,968 shares of the Company's common
stock and Metropolitan become a wholly-owned subsidiary of the Company. This
merger was accounted for under the pooling of interests method of
accounting. As of January 28, 2000, Metropolitan was merged into Lakeland.
There was no impact on results of operations.
The results of operations of previous separate companies follows:
- ------------------------------------------------------------------------------------------------
December 31, 1998
- ------------------------------------------------------------------------------------------------
Net
(in thousands) Net Interest Income Income
- ------------------------------------------------------------------------------------------------
(in thousands)
- ------------------------------------------------------------------------------------------------
Lakeland Bancorp, Inc. $31,314 $7,809
Metropolitan State Bank, as of February 20, 1998 681 148
- ------------------------------------------------------------------------------------------------
$31,995 $7,957
================================================================================================
-48-
NOTE 3 - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and the fair value of
the Company's available for sale and held to maturity securities are as
follows:
AVAILABLE FOR SALE December 31, 1999 December 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and
U.S. government agencies $83,693 $92 $(1,798) $81,987 $81,088 $1,092 $(137) $82,043
Mortgage-backed securities 12,330 54 (378) 12,006 18,022 140 (48) 18,114
Obligations of states and
political subdivisions 42,236 23 (1,426) 40,833 44,221 443 (81) 44,583
Other debt securities 9,683 -- (397) 9,286 14,163 25 (100) 14,088
Other equity securities 8,467 12 -- 8,479 6,442 12 -- 6,454
- ----------------------------------------------------------------------------------------------------------------------------------
$156,409 $181 $(3,999) $152,591 $163,936 $1,712 $(366) $165,282
==================================================================================================================================
HELD TO MATURITY December 31, 1999 December 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and
U.S. government agencies $72,311 $48 $(1,197) $71,162 $56,983 $982 $(27) $57,938
Mortgage-backed securities 24,882 15 (522) 24,375 23,023 213 (10) 23,226
States and political
subdivisions 16,735 12 (240) 16,507 4,513 78 -- 4,591
Other 11,202 -- (495) 10,707 6,138 6 (53) 6,091
- ----------------------------------------------------------------------------------------------------------------------------------
$125,130 $75 $(2,454) $122,751 $90,657 $1,279 $(90) $91,846
==================================================================================================================================
-49-
The following table lists maturities of debt and equity securities at
December 31, 1999 classified as available for sale and held to maturity:
December 31, 1999
- -------------------------------------------------------------------------------------------------------
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------
(in thousands)
Due in one year or less $20,130 $20,152 $18,162 $18,199
Due after one year through
five years 80,203 78,311 73,509 71,885
Due after five years through ten
years 25,304 24,341 7,277 7,109
Due after ten years 9,975 9,302 1,300 1,183
- --------------------------------------------------------------------------------------------------------
135,612 132,106 100,248 98,376
Mortgage-backed securities 12,330 12,006 24,882 24,375
Other investments 8,467 8,479 -- --
- --------------------------------------------------------------------------------------------------------
Total securities $156,409 $152,591 $125,130 $122,751
========================================================================================================
Year ended December 31,
1999 1998 1997
------- ------- -------
(in thousands)
Sales proceeds $12,801 $23,891 $17,821
Gross gains 38 143 63
Gross losses 6 24 17
Securities with a carrying value of approximately $29.2 million and $26.8
million at December 31, 1999 and 1998, respectively, were pledged to secure
public deposits and for other purposes required by applicable laws and
regulations.
NOTE 4 - LOANS
December 31,
1999 1998
----------------------------------------------------------------------------
(in thousands)
Commercial $163,033 $159,299
Real estate-construction 11,938 12,526
Real estate-mortgage 194,433 172,321
Installment 106,878 105,910
----------------------------------------------------------------------------
Total loans 476,282 450,056
----------------------------------------------------------------------------
Less:deferred fees (costs) (232) 5
----------------------------------------------------------------------------
Loans net of deferred fees (costs) 476,514 450,051
============================================================================
-50-
Changes in the allowance for possible loan losses are as follows:
Year ended December 31,
---------------------------------
1999 1998 1997
-------- -------- ------
(in thousands)
Balance at beginning of year $ 7,984 $ 8,262 $ 7,558
Provision for possible loan losses 1,781 698 1,026
Loans charged off (2,423) (1,667) (778)
Recoveries 326 691 456
------- ------- -------
Balance at ending of year $ 7,668 $ 7,984 $ 8,262
======= ======= =======
The balance of impaired loans was $4.3 million and $4.3 million at December
31, 1999 and 1998, respectively. The Banks have identified a loan as
impaired when it is probable that interest and principal will not be
collected according to the contractual terms of the loan agreements. The
allowance for possible loan losses associated with impaired loans was
$511,000, $638,000 and $1.3 million at December 31, 1999, 1998 and 1997,
respectively. The average recorded investment on impaired loans was $4.3
million, $5.9 million and $6.5 million during 1999, 1998 and 1997,
respectively, and the income recognized, primarily on the cash basis, on
impaired loans was $325,000, $621,000 and $657,000 during 1999, 1998 and
1997, respectively. Interest which would have been accrued on impaired loans
during 1999, 1998 and 1997 was $486,000, $593,000 and $765,000,
respectively. The Banks' policy for interest income recognition on impaired
loans is to recognize income on restructured loans under the accrual method.
The Banks recognize income on non-accrual loans under the cash basis when
the loans are both current and the collateral on the loan is sufficient to
cover the outstanding obligation to the Banks; if these factors do not
exist, the Banks will not recognize income.
Non-performing loans consist of loans past due 90 days or more, nonaccrual
loans and renegotiated loans. Loans past due 90 days or more are those loans
as to which payment of interest or principal is in arrears for a period of
90 days or more but is adequately collateralized as to interest and
principal or is in the process of collection. Nonaccrual loans are those on
which income under the accrual method has been discontinued with subsequent
interest payments credited to interest income when received, or if ultimate
collectibility of principal is in doubt, applied as principal reductions.
Renegotiated loans are loans whose contractual interest rates have been
reduced or where other significant modifications have been made due to
borrowers' financial difficulties. Interest on these loans is either accrued
or credited directly to interest income. Non-performing loans were as
follows:
December 31,
------------------------------------
1999 1998 1997
------------------------------------
(in thousands)
Non-performing loans:
Non-accrual loans $2,961 $3,281 $4,850
Past due loans 90 days or more 2,210 4,265 1,404
Renegotiated loans 389 399 413
------------------------------------
$5,560 $7,945 $6,667
====================================
The impact of the above non-performing loans on interest income is as
follows:
December 31,
-----------------------
1999 1998 1997
------ ----- ----
(in thousands)
Interest income if performing in accordance with
original terms $ 486 $ 593 $ 765
Interest income actually recorded 348 606 722
----- ----- -----
$ 138 $ (13) $ 43
===== ===== =====
The Banks have entered into lending transactions in the ordinary course of
business with directors, executive officers, principal stockholders and
affiliates of such persons on the same terms as those prevailing for
comparable transactions with other borrowers. These loans at December 31,
1999, were current as to principal and interest
-51-
payments, and do not involve more than normal risk of collectibility. At
December 31, 1999, loans to these related parties amounted to $19.4
million. An analysis of activity in loans to related parties at December
31, 1999, resulted in new loans of $10.6 million and repayments of $9.1
million.
NOTE 5 - PREMISES AND EQUIPMENT
Estimated December 31,
useful lives 1999 1998
-------------------------------------------------------------------------------------------------------
(in thousands)
Land $4,178 $4,273
Buildings and building improvements 10 to 50 years 13,795 13,501
Leasehold improvements 10 to 50 years 1,660 1,008
Furniture, fixtures and equipment 2 to 30 years 11,808 10,591
-------------------------------------------------------------------------------------------------------
31,441 29,373
Less accumulated depreciation and amortization 9,544 8,618
-------------------------------------------------------------------------------------------------------
$21,897 $20,755
=======================================================================================================
NOTE 6 - DEPOSITS
At December 31, 1999, the schedule of maturities of certificates of deposit
is as follows (in thousands):
Year
----
2000 $179,527
2001 22,859
2002 5,447
2003 4,099
2004 1,393
Thereafter 2,010
--------
$215,335
========
NOTE 7 - Debt
Lines of Credit
As of December 31, 1999, NBSC and Metropolitan had approved but unused
borrowing capacity with the Federal Home Loan Bank (FHLB), collateralized by
FHLB stock, of $13.5 million and $5.0 million, respectively. Borrowings
under this arrangement have an interest rate that fluctuates based on market
conditions and customer demand. As of December 31, 1999 and 1998, there were
no related outstanding borrowings. After Metropolitan is fully merged into
Lakeland in January 2000, its capacity to borrow with the FHLB will cease.
-52-
Securities Sold Under Agreements to Repurchase
Borrowed money at December 31, 1999 and 1998 consisted of short-term
securities sold under agreements to repurchase. Securities underlying the
agreements were under NBSC's and Metropolitan's control. The table below
summarizes information relating to those securities sold for 1999, 1998 and
1997. For purposes of the table, the average amount outstanding was
calculated based on a daily average.
1999 1998 1997
--------------------------------------
(in thousands)
Balance at December 31 $10,489 $8,110 $11,737
Interest rate at December 31 4.02% 3.52% 4.80%
Maximum amount outstanding at any month-end during the year $18,351 $18,019 $23,472
Average amount outstanding during the year $13,981 $13,021 $13,957
Weighted average interest rate during the year 3.70% 4.05% 3.79%
Long-Term Debt
NBSC sold $5 million in securities under an agreement to repurchase to the
Federal Home Loan Bank (the FHLB) of New York. The securities bear an
interest rate of 5.98% and have a maturity date of August 20, 2002, subject
to an early call at the option of the FHLB on August 20, 2000 and quarterly
thereafter.
Metropolitan has a $1 million five year convertible advance with the FHLB of
New York. The borrowing has an interest rate of 5.03% and a maturity date of
April 13, 2004, subject to the FHLB's option to convert this advance on
April 13, 2001 and quarterly thereafter. The FHLB may convert the advance
with four business days notice for the same or less principal amount at the
then current market rates. If the Company chooses not to replace the
funding, the Company will repay the convertible advance including any
accrued interest on the optional conversion date.
NOTE 8 - STOCKHOLDERS' EQUITY
On July 19, 1999, the Corporation amended its Certificate of Incorporation
to increase the number of authorized common shares from 14,806,718 shares
with a par value of $2.50 to 40,000,000 shares with no par value. As a
result, the additional paid in capital account has been combined with the
common stock account as presented in the consolidated statement of changes
in stockholders' equity.
On August 26, 1998, the Company's Board of Directors authorized a 2 for 1
stock split effected in the form of a 100% stock dividend, which was
distributed on October 1, 1998. The deficit in undivided profits contained
in the December 31, 1998 consolidated financial statements is primarily the
result of a bookkeeping entry charging undivided profits $10.8 million in
connection with the Company's accounting for its 2 for 1 stock split
effected in the form of a 100% stock dividend distributed October 1, 1998.
In accordance with New Jersey corporate law, the Company's Board of
Directors on March 10, 1999, approved the reversing of this accounting
treatment of the stock dividend, thereby moving the $10.8 million from the
capital stock account to the undivided profits account to more accurately
reflect the Company's financial condition. This reclassification was
reflected in the Company's consolidated statement of changes in
stockholders' equity as of December 31, 1999.
On August 27, 1997, the Company's Board of Directors authorized a 5% stock
dividend, which was distributed on October 15, 1997.
-53-
NOTE 9 - INCOME TAXES
The components of income taxes are as follows:
Years Ended December 31,
1999 1998 1997
----------------------------------------------------------------------------
(in thousands)
Current $2,367 $4,345 $ 3,569
Deferred 347 79 665
----------------------------------------------------------------------------
Total provision for income taxes $2,714 $4,424 $4,234
============================================================================
The income tax provision reconciled to the income taxes that would have been
computed at the statutory federal rate is as follows:
Years Ended December 31,
1999 1998 1997
Amount Percent Amount Percent Amount Percent
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Federal income tax, at statutory rates $2,757 34.0 $4,209 34.0 $4,032 34.0
Increase (deduction) in taxes resulting from:
Change in valuation allowance -- -- (214) (1.7) (34) (0.3)
Non-taxable interest income (797) (9.8) (497) (4.0) (353) (3.0)
State income tax, net of federal
income tax effect 243 3.0 566 4.6 524 4.4
Other-net 511 6.3 360 2.9 65 0.5
- -----------------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes $2,714 33.5 $4,424 35.7 $4,234 35.7
=======================================================================================================================
The net deferred tax asset consisted of the following:
December 31,
1999 1998
- --------------------------------------------------------------------------------
(thousands)
Valuation reserves for land held for sale and other
real estate 660 793
Allowance for possible loan losses 2,170 1,779
Non-accrued interest 398 622
Depreciation 61 162
Deferred compensation 658 479
Other, net 48 356
Unrealized losses on securities available for sale 1,437 --
------ ------
Net deferred tax asset 5,432 4,191
====== ======
Deferred tax liabilities
Unrealized gain on securities available for sale -- 505
Other 371 220
------ ------
371 725
------ ------
Net deferred tax assets, included in other assets $5,061 $3,466
====== ======
-54-
NOTE 10 - EARNINGS PER SHARE
The Company's calculation of earnings per share in accordance with SFAS No.
128 is as follows:
Year ended December 31, 1999
---------------------------------------
(in thousands except per share amounts)
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Basic earnings per share
Net income available to common shareholders $5,400 12,662 $ 0.43
Effect of dilutive securities
Stock options -- 51 (0.01)
------ ------ ------
Diluted earnings per share
Net income available to common shareholders
plus assumed conversions $5,400 12,713 $ 0.42
====== ====== ======
Year ended December 31, 1998
---------------------------------------
(in thousands except per share amounts)
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Basic earnings per share
Net income available to common shareholders $7,957 12,638 $0.63
Effect of dilutive securities
Stock options -- 81 --
------ ------ -----
Diluted earnings per share
Net income available to common shareholders
plus assumed conversions $7,957 12,719 $0.63
====== ====== =====
Year ended December 31, 1997
---------------------------------------
(in thousands except per share amounts)
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Basic earnings per share
Net income available to common shareholders $7,626 12,535 $ 0.61
Effect of dilutive securities
Stock options -- 150 (0.01)
------ ------ ------
Diluted earnings per share
Net income available to common shareholders
plus assumed conversions $7,626 12,685 $ 0.60
====== ====== ======
-55-
NOTE 11 - EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
Lakeland has a profit sharing plan for all its eligible employees.
Lakeland's annual contribution to the plan is determined by Lakeland's Board
of Directors. Annual contributions are allocated to participants on a point
basis with accumulated benefits payable at retirement, or, at the discretion
of the plan committee, upon termination of employment. Contributions made by
the Company were approximately $250,000 for the year ended December 31,
1999, and $200,000 for each of the years ended December 31, 1998 and 1997.
Salary Continuation Agreements
During 1996, NBSC entered into a salary continuation agreement with its
Chief Executive Officer and its President which entitle them to certain
payments upon their retirement. As part of the merger, Lakeland placed in
trusts amounts equal to the present value of the amounts that would be owed
to them in their retirement. These amounts would be $722,000 for the Chief
Executive Officer and $381,000 for the President. Lakeland has no further
obligation to pay additional amounts pursuant to these agreements.
Former CEO Retirement Benefits
In January 1997, Metropolitan entered into an agreement with its former
Chief Executive Officer (CEO), which provides for an annual retirement
benefit of $35,000 for a 15-year period. In February 1999, the Company
entered into an additional agreement with this CEO. Such agreement provides
for an additional retirement benefit of $35,000 per annum for a fifteen year
period as well as certain retiree medical benefits. The present value of
this obligation was charged to operations. During 1999, 1998 and 1997,
$179,000, $154,000 and $194,000, respectively, was charged to operations
related to these obligations.
Retirement Savings Plans (401K plans)
NBSC has a retirement savings plan (commonly known as a "401(k)") covering
qualified employees. NBSC's contributions to the 401(k) totaled $86,000 in
1999, $76,000 in 1998, and $85,000 in 1997.
Metropolitan has a 401(k) plan covering substantially all employees.
Beginning January 1, 1998, Metropolitan matched 50% of employee
contributions for all participants, not to exceed 5% of their total salary.
Contributions made by Metropolitan were $26,000 and $27,000, respectively,
for the years ended December 31, 1999 and 1998.
Employee Stock Ownership Plan
NBSC has an Employee Stock Ownership Plan ("ESOP"). NBSC's contributions to
the ESOP totaled $200,000 each year ended December 31, 1999, 1998, and 1997.
These amounts are included in "salaries and employee benefits."
Postretirement Health Care Benefits
NBSC provides postretirement health care benefits and life insurance
coverage to its employees who meet certain predefined criteria. The expected
cost of these benefits is charged to expense during the years that eligible
employees render service.
-56-
The accumulated postretirement benefit obligations (APBO's) as of December 31,
1999 and 1998 were as follows:
December 31,
----------------------------------
1999 1998
---- ----
(in thousands)
Accumulated postretirement benefit obligation, January 1 $184 $ 390
---------------- ----------
Service cost 12 8
Interest cost 15 12
Actuarial gain 40 (213)
Estimated benefit payments (9) (13)
---------------- ----------
Total accumulated postretirement benefit obligation 242 184
Unrecognized net gain due to past experience different
from that assumed and effects of changes in assumptions made 133 183
Unamortized transition obligation (111) (119)
---------------- ----------
Accrued accumulated postretirement benefit obligation $ 264 $ 248
============= =========
In 1998, NBSC changed its method of providing hospital and medical benefits
to its retirees from a traditional point of service plan to a fully insured
Medicare Supplement plan. As a result, the costs to offer health benefits to
NBSC's retirees were substantially reduced. This reduction resulted in a
reduction in NBSC's unamortized transition obligation of $198,000.
The components of net periodic post retirement benefit cost are as follows:
December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ -----------
(in thousands)
Service cost, benefits attributed to employee service
during the year $ 12 $ 8 $ 20
Interest cost on APBO 15 12 25
Amortization of transition obligation 8 8 22
Amortization of gains (13) (18) (32)
------------- --------- ----------
Net periodic postretirement benefit cost $ 22 $ 10 $ 35
============= ========= =========
The discount rate used to determine the NBSC's APBO for 1999 was 7.25%, for
1998 was 6.75% and for 1997 was 7.0%. The rate of increase projected for
future compensation levels was 4.0%. NBSC projected that the cost of medical
benefits would increase at the following rates: 8% in 2000 grading down to
5.0% in 2006 and each year thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one percentage point change in
assumed health care cost trend rates would have the following effects:
Increase Decrease
--------- ----------
Effect on total of service and interest cost components 6.3% (5.2%)
Effect on the postretirement benefit obligation 4.8% (4.0%)
-57-
Deferred Compensation Arrangements
High Point had established deferred compensation arrangements for certain
directors and executives of High Point and NBSC. The deferred compensation
plans differ, but generally provide for annual payments for ten to fifteen
years following retirement. The Company's liabilities under these
arrangements are being accrued from the commencement of the plans over the
participants' remaining periods of service. The Company intends to fund its
obligations under the deferred compensation arrangements with the proceeds
of life insurance policies that it has purchased on the respective
participants. The deferred compensation plans do not hold any assets.
NOTE 12 - DIRECTORS RETIREMENT PLAN
The Board of Directors of the Company adopted a plan, effective January 1,
1997, which provides that any director having completed ten years of service
may retire and continue to be paid for a period of ten years at a rate of
$5,000, $7,500, $10,000 or $12,500 per annum, depending upon years of
credited service. This plan is unfunded. The following tables present the
status of the plan and the components of net periodic plan cost for the
years then ended.
December 31,
---------------------------------
1999 1998
---- ----
(in thousands)
Actuarial present value of benefit obligation
Vested $ 276 $266
Nonvested 4 11
----------- ----
$ 280 $277
========== ===
Projected benefit obligation $ 316 $293
Unrecognized net loss (23) (14)
Unrecognized prior service cost being amortized over fifteen years (178) (193)
----------- -----
Accrued plan cost included in other liabilities $ 115 $ 86
========== ====
Year ended December 31,
-----------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
Net periodic plan cost included the following components:
Service cost $ 1 $ 1 $ 2
Interest cost 21 19 18
Amortization of prior service cost 16 16 16
---------- ---- ----
$ 38 $ 36 $ 36
========== ==== ====
A discount rate of 7% was assumed in the plan valuation. As the benefit
amount is not dependent upon compensation levels, a rate of increase in
compensation assumption was not utilized in the plan valuation.
-58-
NOTE 13 - STOCK OPTION PLANS
Employee Incentive Stock Option Plans
The Company has assumed the outstanding options granted under three employee
stock option plans established by High Point so that key employees could
benefit from increases in the price of the Company's common stock and would
therefore have an incentive to contribute to the Company's success. The 1997
plan covers options to purchase up to 162,000 shares; the 1990 plan covers
options to purchase up to 60,000 shares; and the 1987 plan covers options to
purchase up to 60,065 shares.
In November 1995, options to purchase an aggregate of 114,000 shares of
stock were granted under the 1987 and 1990 stock option plans. Each option
had an exercise price of $5.63, which was the fair value of a share on the
date of grant. All of these options vested within three months after the
date of grant.
In October 1997, High Point granted options to purchase an aggregate of
6,000 shares of stock under the 1990 stock option plan. Each option had an
exercise price of $10.52, which was the fair value of a share on the date of
grant. All of these options vested on the date of grant.
Non-employee Director Stock Option Plan
The Company has assumed outstanding options granted under the 1996
Non-employee Director Stock Option Plan established by High Point. Options
granted under this plan were at fair market value as of the date of grant.
These options vest at a rate of 20% a year for five years.
Had compensation cost for the plans been determined based on the fair value
of the options at the grant dates consistent with SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below.
1999 1998 1997
---- ---- ----
(in thousands, except per share data)
Net income As reported $ 5,400 $ 7,957 $ 7,626
Pro forma 5,335 7,924 7,579
Net income per common share - basic As reported $ 0.43 $ 0.63 $ 0.61
Pro forma 0.42 0.63 0.60
Net income per common share - diluted As reported $0.42 $ 0.63 $ 0.60
Pro forma 0.42 0.62 0.60
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related
to grants before 1995.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 1997: dividend rate of $0.10 in 1997;
expected volatility 31% in 1997; risk-free interest rates of 5.50% in 1997
and expected lives of 7 years. There were no options granted in 1998 or
1999.
-59-
A summary of the status of the Company's option plans as of December 31, 1999,
1998 and 1997 and the changes during the years ending on those dates is
represented below:
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise of exercise
Shares price Shares price Shares price
------ ----- ------ ----- ------ -----
Outstanding, beginning of year 130,800 $5.81 213,600 $ 5.77 231,000 $ 5.63
Granted --- --- --- --- 6,000 10.52
Exercised (47,000) 5.75 (81,600) 5.63 (7,200) 5.63
Forfeited (1,200) 10.52 (1,200) 10.52 (16,200) 5.63
--------- - --------- ---------
Outstanding, end of year 82,600 $ 5.77 130,800 $ 5.81 213,600 $ 5.77
====== ======== =========
Options exercisable at year end 82,600 130,800 213,600
====== ======= =======
Weighted average fair value of
options granted during the
year $ - $ - $10.52
=== ======== =====
The following table summarizes information about options outstanding at
December 31, 1999:
Options outstanding Options exercisable
------------------------------------------------------------------------ ------------------------------
Weighted
Number average Weighted Number Weighted
outstanding at remaining average outstanding at average
Range of December 31, contractual exercise December 31, exercise
exercise prices 1999 life (years) price 1999 price
------------------- ------------------- ----------------- -------------- ------------------- ---------
$ 5.63 80,200 7.67 $5.63 80,200 $5.63
10.52 2,400 7.75 10.52 2,400 10.52
------- -------
82,600 82,600
====== ======
NOTE 14 - RELATED PARTY TRANSACTIONS
In 1988, NBSC sold certain banking and other premises to FMI, Inc. The
banking premises were leased back to the Company (as the successor of High
Point) for periods ranging from 10 to 15 years. The Company (as the
successor of High Point) realized a gain on this transaction, which was
deferred and was amortized into income over the applicable lease terms. As
of December 31, 1997, the unamortized deferred gain was approximately
$216,000. In July 1998, NBSC repurchased those branches and other premises
sold to FMI, Inc. for $3.2 million, the fair market value at the time of the
transaction. The unamortized deferred gain of $150,000 was used to reduce
the cost basis of the property. FMI, Inc. is a wholly owned subsidiary of
Franklin Mutual Insurance Co. The president of FMI, Inc. was a member of
High Point's Board of Directors.
-60-
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Lease Obligations
Rentals under long-term operating leases amounted to approximately $325,000,
$511,000, and $627,000 for the years ended December 31, 1999, 1998 and 1997,
respectively, including rent expense to related parties of $58,000 in 1999,
$335,000 in 1998 and $486,000 in 1997. At December 31, 1999, the minimum
commitments, which include rental, real estate tax and other related
amounts, under all noncancellable leases with remaining terms of more than
one year and expiring through 2008 are as follows(in thousands):
December 31,
------------
2000 $ 332
2001 303
2002 299
2003 265
2004 277
Thereafter 1,887
---------
$3,363
=========
Litigation
From time to time, the Company and its subsidiaries are defendants in legal
proceedings relating to their respective businesses. Management does not
believe that the outcome of any legal proceeding that was pending as of
December 31, 1999, or any other contingent liability or commitment, will
materially affect the Company's consolidated financial position or results
of operations.
NOTE 16 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
The Banks are parties to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of their
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Such financial instruments are recorded in
the financial statements when they become payable. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated balance sheets. The
contract or notional amounts of those instruments reflect the extent of
involvement the Banks have in particular classes of financial instruments.
The Banks' exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual or notional
amount of those instruments. The Banks use the same credit policies in
making commitments and conditional obligations as they do for
on-balance-sheet instruments.
Unless noted otherwise, the Banks do not require collateral or other
security to support financial instruments with credit risk. The approximate
contract amounts are as follows:
December 31,
-----------------------
1999 1998
---- ----
(in thousands)
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit $72,269 $ 97,924
Standby letters of credit and financial guarantees written 3,855 3,419
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Banks evaluate each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Banks upon extension of
credit, is based on management's credit evaluation.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Banks
-61-
hold residential or commercial real estate, accounts receivable, inventory
and equipment as collateral supporting those commitments for which
collateral is deemed necessary. The extent of collateral held for those
commitments at December 31, 1999 and 1998 varies up to 100%.
The Banks grant loans primarily to customers in its immediately adjacent
suburban counties which include Bergen, Morris, Passaic, Sussex and Essex
counties. Although the Banks have diversified loan portfolios, a large
portion of their loans are secured by commercial or residential real
property. The Banks do not generally engage in non-recourse lending and
typically will require the principals of any commercial borrower to obligate
themselves personally on the loan. Although the Banks have diversified loan
portfolios, a substantial portion of their debtors' ability to honor their
contracts is dependent upon the economic sector. Commercial and standby
letters of credit were granted primarily to commercial borrowers.
NOTE 17 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an entity's
assets and liabilities considered to be financial instruments. For the
Company, as for most financial institutions, the majority of its assets and
liabilities are considered financial instruments as defined in SFAS No. 107.
However, many such instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange
transaction. Also, it is the Company's general practice and intent to hold
its financial instruments to maturity and not to engage in trading or sales
activities, except for certain loans. Therefore, the Company had to use
significant estimations and present value calculations to prepare this
disclosure.
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the
wide range of permitted assumptions and methodologies in the absence of
active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
Estimated fair values have been determined by the Company using the best
available data and an estimation methodology suitable for each category of
financial instruments. The estimation methodologies used, the estimated fair
values, and recorded book balances at December 31, 1999 and 1998 are
outlined below.
For cash and cash equivalents and interest bearing deposits with banks, the
recorded book values approximate fair values. The estimated fair values of
investment securities are based on quoted market prices, if available.
Estimated fair values are based on quoted market prices of comparable
instruments if quoted market prices are not available.
The net loan portfolio at December 31, 1999 and 1998 has been valued using a
present value discounted cash flow where market prices were not available.
The discount rate used in these calculations is the estimated current market
rate adjusted for credit risk. The carrying value of accrued interest
approximates fair value.
The estimated fair values of demand deposits (i.e. interest (checking) and
non-interest bearing demand accounts, savings and certain types of money
market accounts) are, by definition, equal to the amount payable on demand
at the reporting date (i.e. their carrying amounts). The carrying amounts of
variable rate accounts approximate their fair values at the reporting date.
For fixed maturity certificates of deposit, fair value was estimated using
the rates currently offered for deposits of similar remaining maturities.
The carrying amount of accrued interest payable approximates its fair value.
-62-
The fair value of securities sold under agreements to repurchase and
long-term debt are based upon discounted value of contractual cash flows.
The Company estimates the discount rate using the rates currently offered
for similar borrowing arrangements.
The fair values of commitments to extend credit and standby letters of
credit are estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counter parties. For fixed-rate loan
commitments, fair value also considers the difference between current levels
of interest rates and the committed rates. The fair value of guarantees and
letters of credit is based on fees currently charged for similar agreements
or on the estimated cost to terminate them or otherwise settle the
obligations with the counter parties at the reporting date.
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
December 31,
---------------------------------------------------
1999 1998
---------------------------------------------------
Carrying Estimated Carrying Estimated
Value fair value Value fair value
- -------------------------------------------------------------------------------------------------------
Financial Assets: (in thousands)
Cash and cash equivalents $40,342 $40,342 $63,805 $63,805
Interest bearing deposits with banks 216 216 204 204
Investment securities available for sale 152,591 152,591 165,282 165,282
Investment securities held to maturity 125,130 122,751 90,657 91,846
Loans 476,282 470,384 450,056 454,601
Financial Liabilities:
Deposits $736,739 $737,353 $711,811 $714,837
Federal funds purchased and securities sold under
agreements to repurchase 10,489 10,489 8,110 8,110
Long-term debt 6,000 6,000 5,000 5,298
Commitments:
Standby letters of credit --- 15 --- 3
NOTE 18 - REGULATORY MATTERS
The Bank Holding Company Act of 1956 restricts the amount of dividends the
Company can pay. Accordingly, dividends should generally only be paid out of
current earnings, as defined.
The New Jersey Banking Act of 1948 restricts the amount of dividends paid on
the capital stock of New Jersey chartered banks. Accordingly, no dividends
shall be paid by such banks on their capital stock unless, following the
payment of such dividends, the capital stock of the banks will be
unimpaired, and (1) the banks will have a surplus, as defined, of not less
than 50% of their capital, or, if not, (2) the payment of such dividend will
not reduce the surplus, as defined, of the banks. Under these limitations,
approximately $9.0 million was available for payment of dividends from
Lakeland and Metropolitan to the Company as of December 31, 1999.
NBSC may not declare dividends in excess of the current year's earnings,
plus the retained earnings from the prior two years, without prior approval
from the Office of the Comptroller of the Currency. In addition, if NBSC
sustains losses that exceed its aggregate retained earnings, NBSC may not
pay dividends until the losses are recovered. Under these limitations
approximately $3.6 million was available for the payment of dividends from
NBSC to the Company as of December 31, 1999.
-63-
The Company and the Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possible
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Company's and the Banks' consolidated
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific
capital guidelines that involve quantitative measures of the Company's and
the Banks' assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's and the
Banks' capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets, and of Tier 1 capital to average
assets. Management believes, as of December 31, 1999, that the Company and
the Banks met all capital adequacy requirements to which they are subject.
As of December 31, 1999, the Company and the Banks met all regulatory
requirements for classification as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Company and the Banks must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the
table. There are no conditions or events since that notification that
management believes have changed the institutions' category.
As of December 31, 1999 and 1998, the Company and the Banks had the
following capital ratios:
For capital
Actual adequacy purposes
------------------- ------------------------------------------------------------------
Amount Ratio Amount Ratio
------ ----- -------------------------------- ------------------------------
(dollars in thousands)
As of December 31, 1999
Total capital
(to risk-weighted
assets)
Company $80,738 16.66% Greater than or equal to $38,773 Greater than or equal to 8.00%
Lakeland 43,691 16.42 21,286 8.00
NBSC 23,769 16.50 11,525 8.00
Metropolitan 9,576 13.50 5,677 8.00
Tier I capital
(to risk-weighted
assets)
Company $74,663 15.40% Greater than or equal to $19,386 Greater than or equal to 4.00%
Lakeland 40,734 15.31 10,643 4.00
NBSC 21,941 15.23 5,763 4.00
Metropolitan 8,825 12.44 2,838 4.00
Tier I capital
(to average assets)
Company $74,663 8.88% Greater than or equal to $33,643 Greater than or equal to 4.00%
Lakeland 40,734 9.07 17,964 4.00
NBSC 21,941 7.84 11,197 4.00
Metropolitan 8,825 7.74 4,560 4.00
To be well
capitalized under
prompt corrective
action provisions
---------------------------------------------------------------------
Amount Ratio
--------------------------------- ---------------------------------
(dollars in thousands)
As of December 31, 1999
Total capital
(to risk-weighted
assets)
Company Greater than or equal to $48,605 Greater than or equal to 10.00%
Lakeland 26,608 10.00
NBSC 14,407 10.00
Metropolitan 7,095 10.00
Tier I capital
(to risk-weighted
assets)
Company Greater than or equal to $29,080 Greater than or equal to 6.00%
Lakeland 15,965 6.00
NBSC 8,644 6.00
Metropolitan 4,257 6.00
Tier I capital
(to average assets)
Company Greater than or equal to $42,040 Greater than or equal to 5.00%
Lakeland 22,455 5.00
NBSC 13,992 5.00
Metropolitan 5,701 5.00
-64-
For capital
Actual adequacy purposes
--------------------- ------------------------------------------------------------------
Amount Ratio Amount Ratio
-------- ----- -------------------------------- ------------------------------
(dollars in thousands)
As of December 31, 1998
Total capital
(to risk-weighted
assets)
Company $78,690 17.05% Greater than or equal to $36,921 Greater than or equal to 8.00%
Lakeland 42,840 16.77 $20,437 8.00%
NBSC 23,538 17.46 $10,782 8.00%
Metropolitan 8,961 13.81 $5,191 8.00%
Tier I capital
(to risk-weighted
assets)
Company $72,922 15.80% Greater than or equal to $78,461 Greater than or equal to 4.00%
Lakeland 39,648 15.52 $10,219 4.00
NBSC 21,824 16.19 $5,391 4.00
Metropolitan 8,264 12.74 $2,595 4.00
Tier I capital
(to average assets)
Company $72,922 9.35% Greater than or equal to $31,163 Greater than or equal to 4.00%
Lakeland 39,648 9.18 $17,275 4.00
NBSC 21,824 8.53 $10,239 4.00
Metropolitan 8,264 8.16 $4,051 4.00
To be well
capitalized under
prompt corrective
action provisions
---------------------------------------------------------------------
Amount Ratio
--------------------------------- ---------------------------------
(dollars in thousands)
As of December 31, 1998
Total capital
(to risk-weighted
assets)
Company Greater than or equal to $46,152 Greater than or equal to 10.00%
Lakeland $25,546 10.00%
NBSC $13,478 10.00%
Metropolitan $6,489 10.00%
Tier I capital
(to risk-weighted
assets)
Company Greater than or equal to $27,691 Greater than or equal to 6.00%
Lakeland $15,327 6.00%
NBSC $8,087 6.00%
Metropolitan $3,893 6.00%
Tier I capital
(to average assets)
Company Greater than or equal to $38,954 Greater than or equal to 5.00%
Lakeland 21,593 5.00
NBSC 12,792 5.00
Metropolitan 5,064 5.00
-65-
NOTE 19 - SUBSEQUENT EVENTS
In February 2000, the Company's Board of Directors approved a 2000 stock
option plan (2000 plan) to issue options to employees and directors. The
2000 plan is subject to shareholder approval.
In February 2000, the Company's Board of Directors approved a stock
repurchase plan of its common stock. Repurchases can be made from time to
time and will be used for general corporate purposes. No time limit has been
set for the completion of this program.
NOTE 20 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the Company,
which in the opinion of management reflected all adjustments, consisting
only of nonrecurring adjustments, necessary for a fair presentation of the
Company's results of operations.
Quarter ended
----------------------------------------------------
March 31, June 30, September 30,December 31,
1999 1999 1999 1999
----------------------------------------------------
(In Thousands, Except Per Share Amounts)
Total interest income $13,015 $13,424 $13,804 $13,788
Total interest expense 5,092 5,102 5,041 5,006
----------------------------------------------------
Net interest income 7,923 8,322 8,763 8,782
Provision for possible loan losses 105 160 140 1,376
Non-interest income 1,514 1,634 1,495 1,681
Merger related expenses --- --- 2,431 1,090
Non-interest expense 6,625 6,428 6,641 7,004
----------------------------------------------------
Income before taxes 2,707 3,368 1,046 993
Income taxes 867 1,090 671 86
----------------------------------------------------
Net income $1,840 $2,278 $375 $907
====================================================
Earnings per share
Basic $0.15 $0.17 $0.03 $0.08
Diluted $0.15 $0.17 $0.03 $0.07
Quarter ended
---------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
---------------------------------------------------------
(In Thousands, Except Per Share Amounts)
Total interest income $12,724 $12,727 $12,931 $13,489
Total interest expense 4,915 4,846 5,001 5,114
---------------------------------------------------------
Net interest income 7,809 7,881 7,930 8,375
Provision for possible loan losses 49 53 62 534
Non-interest income 1,558 1,483 1,443 1,633
Non-interest expense 6,407 6,239 5,937 6,450
---------------------------------------------------------
Income before taxes 2,911 3,072 3,374 3,024
Income taxes 1,032 1,105 1,176 1,111
---------------------------------------------------------
Net income $1,879 $1,967 $2,198 $1,913
=========================================================
Earnings per share
Basic $0.15 $0.16 $0.17 $0.15
Diluted $0.15 $0.16 $0.17 $0.15
-66-
NOTE 21 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY:
BALANCE SHEETS
December 31,
ASSETS 1999 1998
- -------------------------------------------------------------------------------------------------------
(in thousands)
Cash and due from banks $130 $288
Federal funds sold --- 142
Investment securities available for sale 18 18
Investment in bank subsidiary 69,111 70,570
Land held for sale 1,935 1,865
Other assets 1,303 924
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS $72,497 $73,807
=======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------
Other liabilities $215 $44
Stockholders' equity 72,282 73,763
- -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $72,497 $73,807
=======================================================================================================
INCOME STATEMENTS
Years Ended December 31,
INCOME 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
(in thousands)
Dividends from subsidiary $5,010 $2,650 $2,421
Other income 41 11 61
- -------------------------------------------------------------------------------------------------------
TOTAL INCOME 5,051 2,661 2,482
- -------------------------------------------------------------------------------------------------------
EXPENSE
Interest expense --- --- 32
Non-interest expenses 1,662 396 233
- -------------------------------------------------------------------------------------------------------
TOTAL EXPENSE 1,662 396 265
- -------------------------------------------------------------------------------------------------------
Income before benefit for income taxes 3,389 2,265 2,217
Benefit for income taxes (267) (120) (70)
- -------------------------------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiaries 3,656 2,385 2,287
Equity in undistributed income of subsidiaries 1,744 5,572 5,339
- -------------------------------------------------------------------------------------------------------
NET INCOME $5,400 $7,957 $7,626
=======================================================================================================
-67-
STATEMENTS OF CASH FLOWS
Years Ended December 31,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES (in thousands)
Net income $5,400 $7,957 $7,626
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
(Increase) decrease in other assets (447) 44 (333)
Increase (decrease) in other liabilities 171 199 (9)
Equity in undistributed income of subsidiaries (1,744) (5,572) (5,589)
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,380 2,628 1,695
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale and maturity of investment
securities available for sale --- --- 198
Decrease in interest bearing deposits with banks --- --- 123
Proceeds received from option on land held for sale --- --- 20
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES --- --- 341
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 269 470 899
Cash dividends paid on common stock (3,314) (2,586) (1,988)
Repayments of long-term debt --- --- (973)
Purchase of treasury stock (635) (782) (64)
Exercise of stock options --- 290 40
- -------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (3,680) (2,608) (2,086)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (300) 20 (50)
Cash and cash equivalents, beginning of year 430 410 460
- -------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $130 $430 $410
=======================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST PAID $ --- $ --- $41
-68-
ITEM 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
The Company changed accountants from Radics & Co., LLC to Grant Thornton LLP
during the Company's two most recent fiscal years. Information concerning this
change was previously filed in Amendment No. 1 to the Registrant's Registration
Statement on Form S-4 filed with the SEC on June 8, 1999.
PART III
---------
ITEM 10 - Directors and Executive Officers of the Registrant
The Company responds to this Item by incorporating by reference the material
responsive to this Item in the Company's definitive proxy statement for its 2000
Annual Meeting of Shareholders.
ITEM 11 - Executive Compensation
The Company responds to this Item by incorporating by reference the material
responsive to this Item in the Company's definitive proxy statement for its 2000
Annual Meeting of Shareholders.
ITEM 12 - Security Ownership of Certain Beneficial Owners and
Management
The Company responds to this Item by incorporating by reference the material
responsive to this Item in the Company's definitive proxy statement for its 2000
Annual Meeting of Shareholders.
ITEM 13 - Certain Relationships and Related Transactions
The Company responds to this Item by incorporating by reference the material
responsive to this Item in the Company's definitive proxy statement for its 2000
Annual Meeting of Shareholders.
PART IV
--------
ITEM 14 - Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) 1. The following portions of the Company's consolidated financial
statements are set forth in Item 8 of this Annual Report.
(i) Consolidated Statements of Condition as of December 31, 1999 and
1998.
(ii) Consolidated Statements of Income for each of the three
-69-
years ended December 31, 1999, 1998 and 1997.
(iii) Consolidated Statements of Changes in Stockholders' Equity for
each of the three years ended December 31, 1999, 1998, and 1997.
(iv) Consolidated Statements of Cash Flows for each of the three years
ended December 31, 1999, 1998 and 1997.
(v) Notes to Consolidated Financial Statements
(vi) Report of Grant Thornton LLP
-70-
(a) 2. Financial Statement Schedules
All financial statement schedules are omitted as the information, if applicable,
is presented in the consolidated financial statements or notes thereto.
(a) 3. Exhibits
3.1 Certificate of Incorporation of the Registrant, as amended, is
incorporated by reference to Exhibit 3.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999.
3.2 By Laws of the Registrant are incorporated herein by reference to
Exhibit 4.2 to the Registration Statement on Form S-3 filed by the
Registrant with the Commission on March 30, 1990.
10.1 Amended and Restated Agreement and Plan of Reorganization, dated as
of January 14, 1998, by and between the Registrant and Metropolitan
State Bank is incorporated by reference to Appendix A to the Proxy
Statement --Prospectus, dated January 15, 1998, contained in the
Registant's Registration Statement on Form S-4 (No. 333-42851).
10.2 Lakeland State Bank Directors' Deferred Compensation Plan is
incorporated by reference to Exhibit 10.2 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997, filed with
the Commission on March 26, 1998.
10.3 Agreement and Plan of Merger, dated as of December 7, 1998, by and
between the Registrant and High Point Financial Corp., is
incorporated by reference to Annex A , the joint proxy statement
prospectus, dated June 8, 1999, contained in the Registrant's
Registration Statement on Form S-4 (No 333-79907).
10.4 Stock Option Agreement, dated as of December 7, 1998, by and between
the Registrant and High Point Financial Corp., is incorporated by
reference to Annex D, the joint proxy statement prospectus, dated
June 8, 1999, contained in the Registrant's Registration Statement on
Form S-4 (No.333-79907).
10.5 Lakeland Bancorp, Inc. 2000 Equity Compensation Program (subject to
shareholder approval).
10.6 Employment Agreement - Change in Control, Severance and Employment
Agreement for Roger Bosma, dated as of January 1, 2000, among
Lakeland Bancorp, Inc., Lakeland Bank and Roger Bosma.
10.7 Amended and Restated Agreement and Plan of Merger, made as of
December 8, 1999, between LB and MSB.
16.1 Letter re: Change in Accountant is incorporated by reference to
Exhibit 16 to the Registrant's Current Report on Form 8-K, filed with
the Commission on February 18, 1999.
21.1 Subsidiaries of Registrant.
23.1 Consent of Grant Thornton LLP Independent Certified Public
Accountants.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
-71-
99.1 Forward-looking Statement Information.
(b) Reports on Form 8-K
On October 12, 1999, the Company filed a Current Report on Form 8-K
with the SEC, which reported that on July 15, 1999, the Company
completed its acquisition of High Point Financial Corp. by merging
High Point into the Company. The 8-K contained historical
consolidated financial statements of the Company (as of December 31,
1998 and 1997 and for the three years ended December 31, 1998, 1997
and 1996) taking into account the merger.
-72-
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LAKELAND BANCORP, INC.
Dated: March 28, 2000 By /s/ Roger Bosma
--------------- -----------------------------
Roger Bosma
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
/s/ Roger Bosma
- ------------------------------- Director, Chief Executive
Roger Bosma Officer, and President
- ------------------------------- Director
Robert B. Nicholson
/s/ John W. Fredericks*
- ------------------------------- Director
John W. Fredericks
/s/ Bruce G. Bohuny*
- ------------------------------- Director
Bruce G. Bohuny
/s/ Mary Ann Deacon*
- ------------------------------- Director
Mary Ann Deacon
/s/ Mark J. Fredericks*
- ------------------------------- Director
Mark J. Fredericks
/s/ John Pier, Jr.*
- ------------------------------- Director
John Pier, Jr.
/s/ Paul P. Lubertazzi*
- ------------------------------- Director
Paul P. Lubertazzi
/s/ Joseph P. O'Dowd*
- ------------------------------- Director
Joseph P. O'Dowd
-73-
/s/ Arthur L. Zande*
- ------------------------------- Director
Arthur L. Zande
- ------------------------------- Director
Michael A. Dickerson
/s/ Charles L. Tice*
- ------------------------------- Director
Charles L. Tice
/s/ George H. Guptill, Jr.*
- ------------------------------- Director
George H. Guptill, Jr.
/s/ Joseph Hurley*
- ------------------------------- Executive Vice President and
Joseph Hurley Chief Financial Officer
/s/ Roger Bosma
*By:_____________________
Roger Bosma
Attorney-in-Fact
-74-