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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(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, 2000.
[_] 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
250 Oak Ridge Road, Oak Ridge, New Jersey 07438
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(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. [ ]
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, 2001,is estimated to have been approximately $111,000,000. The
number of shares outstanding of the registrant's Common Stock, as of February 1,
2001, was 13,121,504.
DOCUMENTS INCORPORATED BY REFERENCE:
Lakeland Bancorp, Inc's., Proxy Statement for its 2001 Annual Meeting of
Shareholders (Part III).
LAKELAND BANCORP, INC.
Form 10-K Index
PART I
PAGE
Item 1. Business.......................................................... 2
Item 2. Properties........................................................ 11
Item 3. Legal Proceedings................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders............... 11
Item 4A. Executive Officers of the Registrant.............................. 11
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters.................................... 14
Item 6. Selected Financial Data........................................... 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 17
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.............................................. 32
Item 8. Financial Statements and Supplementary Data....................... 32
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......................... 62
PART III
Item 10. Directors of the Registrant....................................... 62
Item 11. Executive Compensation............................................ 62
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................. 62
Item 13. Certain Relationships and Related Transactions.................... 62
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................... 62
Signatures................................................................. 65
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,
2000, the Company had consolidated total assets, deposits, and stockholder's
equity of approximately $906.6 million, $800.8 million, and $78.6 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 19 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.
2
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. In the second quarter of 2000, LB
acquired NIA National Leasing Company. Since its acquisition, this company has
operated as a division of LB under the name Lakeland Bank Equipment Leasing
Division. This acquisition provides a solution to small and medium sized
companies who wish to choose leasing over other financial alternatives.
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, and safe deposit services. 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.
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.
3
Employees
At December 31, 2000, there were 376 persons employed by the Company.
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.
However, under federal law, federal savings banks which meet certain conditions
may branch de novo into a state, regardless of state law.
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
4
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.
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
- ------------------
The Gramm-Leach-Bliley Financial Modernization Act of 1999 became effective in
early 2000. The Modernization Act:
. allows 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;
. allows insurers and other financial services companies to acquire banks;
. removes various restrictions that currently apply to bank holding company
ownership of securities firms and mutual fund advisory companies; and
. establishes the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations.
The Federal Reserve Board also provided regulations on procedures which would be
used against financial holding companies that 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.
5
The Office of the Comptroller of the Currency has adopted rules to allow
national banks to form subsidiaries to 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 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.
The Modernization Act also modified 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
LB's 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 supervised by either
the Office of the Comptroller of the Currency, the Federal Reserve Board, or the
FDIC. These agencies
6
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 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.
7
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 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, 2000, the
Company's Tier 1 capital to risk-weighted assets ratio and total capital to
risk-weighted assets ratio were 13.58% and 14.84%, 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 8.47% at
December 31, 2000.
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".
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
8
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 "Regulatory Matters" 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".
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%
9
(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. As of
December 31, 2000, the Company, LB and NBSC met all regulatory requirements for
classification as "well capitalized" under the regulatory framework for
prompt corrective action.
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
- -----------------------------------------
FDIC insured banks are required to pay FDIC premiums based on the institution's
respective risk classification. Based on their risk classifications LB and NBSC
did not pay an FDIC premium in 2000. In addition, 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 2000, a
FICO premium of approximately two basis points was charged on BIF deposits.
Based on this premium, LB and NBSC paid FICO premiums of $102,000 and $50,000
respectively in 2000.
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.
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.
10
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 29 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 month-to-month lease which began on
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 Fairfield
office is under a lease, expiring February 28, 2002. 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 2000.
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.
Name and Age Officer of Position with the Company, its Subsidiary
The Company Banks, and Business Experience
Since
Roger Bosma 1999 President and Chief Executive Officer
Age 58 of 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)
11
Arthur L. Zande 1971 Vice President and Treasurer of the
Age 66 Company (June, 1999 - Present);
President and Chief Executive Officer,
LB (June, 1999 - Present); Executive
Vice President and Chief Executive
Officer of the Company and LB (prior
years - June, 1999)
Robert A. Vandenbergh 1999 Executive Vice President and Chief
Age 49 Lending 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 50 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
Age 49 Retail Officer of the Company (November,
1999 - Present); Director, Business
Development, Price Waterhouse 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 54 Operations Officer of the Company
(October, 1999 - Present); Executive
Vice President and Chief Financial
Officer, Metropolitan State Bank (prior
years - October, 1999)
12
Steven Schachtel 2000 President, Lakeland Band Equipment
Age 43 Leasing Division April 2000 - Present);
President, NIA National Leasing (prior
years - April 2000)
13
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, 2000, there were
3,841 shareholders of record of common stock. The following table sets forth the
range of the high and low daily closing prices of the common stock. Bloomberg
provides the information prior to February 22, 2000. Nasdaq provides information
fot periods after that date. Prices and dividends have been adjusted to reflect
the 5% stock dividend paid on November 15, 2000.
Dividends
Year ended December 31, 2000 High Low Declared
-----------------------------------------
First Quarter $10.30 $8.57 $ 0.071
Second Quarter 11.43 9.76 0.071
Third Quarter 11.31 10.48 0.071
Fourth Quarter 11.38 8.63 0.076
Dividends
Year ended December 31, 1999 High Low Declared (1)
-----------------------------------------
First Quarter $19.05 $15.24 $ 0.054
Second Quarter 16.90 14.76 0.054
Third Quarter 15.71 11.12 0.071
Fourth Quarter 13.33 9.89 0.071
(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.
14
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 $8.0 million was available for payment of dividends
from LB to the Company as of December 31, 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 $3.3 million was
available for the payment of dividends from NBSC to the Company as of December
31, 2000.
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."
15
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
(Not covered by Report of Independent Public Accountants)
2000 1999 1998 1997 1996
Year Ended December 31 (in thousands except per share data)
Interest income $58,213 $54,031 $51,871 $49,697 $45,160
Interest expense 21,720 20,241 19,876 19,250 17,545
------------------------------------------------------------------
Net interest income 36,493 33,790 31,995 30,447 27,615
Provision for possible loan losses 2,000 1,781 698 1,026 908
Noninterest income 8,263 6,292 5,998 6,142 5,227
Gain (loss) on sale of securities (529) 32 119 46 (4)
Noninterest expenses 27,527 30,219 25,033 23,749 21,789
------------------------------------------------------------------
Income before income taxes 14,700 8,114 12,381 11,860 10,141
Income tax provision 4,695 2,714 4,424 4,234 3,845
------------------------------------------------------------------
Net income $10,005 $5,400 $7,957 $7,626 $6,296
==================================================================
Per-Share Data
Weighted average shares outstanding:
Basic 13,250 13,295 13,270 13,162 12,687
Diluted 13,328 13,349 13,355 13,319 12,722
Earnings per share:
Basic $0.76 $0.41 $0.60 $0.58 $0.50
Diluted $0.75 $0.40 $0.60 $0.57 $0.49
Cash dividend per common share $0.29 $0.25 $0.20 $0.15 $0.13
Book value per common share $5.99 $5.44 $5.56 $5.14 $4.70
At December 31
Investment securities available for sale $187,880 $152,591 $165,282 $151,186 $136,618
Investment securities held to maturity 107,860 125,130 90,657 81,775 80,705
Loans, net of deferred fees 521,841 476,514 450,051 417,955 383,365
Total assets 906,612 830,170 803,024 741,175 674,899
Total deposits 800,762 736,739 711,811 651,901 598,564
Long-term debt 11,000 6,000 5,000 5,000 973
Total stockholders' equity 78,624 72,282 73,763 68,127 61,321
Performance ratios
Return on Average Assets 1.16% 0.65% 1.04% 1.07% 0.98%
Return on Average Equity 13.43% 7.64% 11.03% 11.73% 11.32%
Efficiency ratio 61.92% 75.25% 65.78% 63.74% 65.18%
Net Interest Margin 4.77% 4.56% 4.72% 4.78% 4.64%
Capital ratios
Tier 1 leverage ratio 8.47% 8.88% 9.35% 9.48% 9.64%
Total risk-based capital ratio 14.84% 16.66% 17.05% 17.99% 17.47%
16
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)
and the National Bank of Sussex County (NBSC)--are collectively referred to as
"the Banks." Metropolitan State Bank (Metropolitan) was merged into Lakeland on
January 28, 2000.
Statements Regarding Forward-Looking Information
The information disclosed in this document includes various forward-looking
statements that are made in reliance upon the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 with respect to credit quality
(including delinquency trends and the allowance for possible loan losses),
corporate objectives, and other financial and business matters. The words
"anticipates", "projects", "intends", "estimates", "expects", "believes",
"plans", "may", "will,", "should", "could", and other similar expressions are
intended to identify such forward-looking statements. The Company cautions that
these forward-looking statements are necessarily speculative and speak only as
of the date made, and are subject to numerous assumptions, risks and
uncertainties, all of which may change over time. Actual results could differ
materially from such forward-looking statements.
In addition to the factors disclosed by the Company elsewhere in this
document, the following factors, among others, could cause the Company's actual
results to differ materially and adversely from such forward-looking statements:
pricing pressures on loan and deposit products; competition; changes in economic
conditions nationally, regionally and in the Company's markets; the extent and
timing of actions of the Federal Reserve Board; changes in levels of market
interest rates; clients' acceptance of the Company's products and services;
credit risks of lending activities and competitive factors; and the extent and
timing of legislative and regulatory actions and reforms.
The above-listed risk factors are not necessarily exhaustive, particularly
as to possible future events, and new risk factors may emerge from time to time.
Certain events may occur that could cause the Company's actual results to be
materially different than those described in the Company's periodic filings with
the Securities and Exchange Commission. Any statements made by the Company that
are not historical facts should be considered to be forward-looking statements.
The Company is not obligated to update and does not undertake to update any of
its forward-looking statements made herein.
Financial Overview
The year ended December 31, 2000 represented a year of record earnings for
the Company as well as a year of growth. The year 2000 was the first full year
following the integration of NBSC and Metropolitan. During 2000, the Company
acquired a leasing company, acquired a branch, opened a new branch, and planned
the opening of three additional branches early in 2001.
In comparing 2000 earnings with results in 1999, merger-related and
restructuring charges in 1999 must be considered. 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 2000 was $10.0 million or $0.75 per diluted share. Return on
average assets was 1.16% and return on average equity was 13.43%. In 1999, net
income was $5.4 million including merger related charges or $0.40 per diluted
share. Return on Average Assets was 0.65% for 1999 and Return on Average Equity
was 7.64% for 1999.
Net income for 2000 was 22% higher than Core Earnings in 1999 of $8.2
million or $0.61 per diluted share. In 1999, Return on Average Assets was 0.99%
and Return on Average Equity was 11.58% excluding one time charges. For 1998,
net income including $324,000 in restructuring charges was $8.0 million or $0.60
per diluted share. Return on Average Assets in 1998 was 1.04% and Return on
Average Equity was 11.03%.
17
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
noninterest bearing deposits to fund or support interest-earning assets.
Net interest income for 2000 on a tax equivalent basis was $37.8 million,
representing an increase of $2.7 million or 7.7% from the $35.0 million earned
in 1999. Net interest income for 1998 on a tax equivalent basis was $32.9
million. Net interest income improved from 1999 to 2000 primarily because
earning assets increased by $24.6 million. Similarly, the increase in net
interest income in 1999 from 1998 resulted from an increase in earning assets of
$71.4 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.
INTEREST INCOME AND EXPENSE VOLUME/RATE ANALYSIS
(tax equivalent basis, in thousands)
2000 vs. 1999 1999 vs. 1998
------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in: Total Due to Change in: Total
------------------------- Increase ------------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------------------------------------------------------------------------------
Interest Income
Loans $2,600 $975 $3,575 $2,565 $(1,913) $652
Taxable investment securities 553 647 1,200 1,729 (342) 1,387
Tax-exempt investment securities (77) 151 74 1,148 (174) 974
Federal funds sold (959) 318 (641) (389) (123) (512)
------------------------------------------------------------------------------
Total interest income 2,117 2,091 4,208 5,053 (2,552) 2,501
------------------------------------------------------------------------------
Interest Expense
Savings deposits 38 54 92 123 (469) (346)
Interest bearing transaction accounts 83 37 120 683 (170) 513
Time deposits 234 914 1,148 678 (512) 166
Borrowings (9) 128 119 69 (37) 32
------------------------------------------------------------------------------
Total interest expense 346 1,133 1,479 1,553 (1,188) 365
------------------------------------------------------------------------------
NET INTEREST INCOME
(TAX EQUIVALENT BASIS) $1,771 $958 $2,729 $3,500 $(1,364) $2,136
==============================================================================
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
18
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.
CONSOLIDATED STATISTICS ON A TAX EQUIVALENT BASIS
---------------------------- ------------------------------ -------------------------------
2000 1999 1998
---------------------------- ------------------------------ -------------------------------
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
- ------------------------------------------------------------------ ------------------------------ -------------------------------
(dollars in thousands)
ASSETS
Interest earning assets:
Loans (A) $494,017 $40,853 8.27% $462,363 $37,278 8.06% $431,233 $36,626 8.49%
Taxable investment securities (B) 232,434 14,315 6.16% 223,223 13,115 5.88% 193,577 11,728 6.06%
Tax-exempt securities 54,590 3,637 6.66% 55,847 3,563 6.38% 37,594 2,589 6.89%
Federal funds sold 11,499 681 5.92% 26,519 1,322 4.99% 34,184 1,834 5.37%
- ------------------------------------------------------------------ ------------------------------ -------------------------------
Total interest earning assets 792,540 59,486 7.51% 767,952 55,278 7.20% 696,588 52,777 7.58%
Noninterest earning assets:
Allowance for possible loan losses (8,220) (8,040) (7,912)
Other assets 75,225 70,588 72,847
- ------------------------------------------------------------------ ------------------------------ -------------------------------
TOTAL ASSETS $859,545 $830,500 $761,523
- ------------------------------------------------------------------ ------------------------------ -------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings accounts $184,933 $4,278 2.31% $183,299 $4,186 2.28% $178,615 $4,532 2.54%
Interest bearing transaction
accounts 168,837 3,815 2.26% 165,146 3,695 2.24% 133,961 3,182 2.38%
Time deposits 234,478 12,643 5.39% 229,866 11,495 5.00% 213,007 11,329 5.32%
Borrowings 19,504 984 5.05% 19,700 865 4.39% 18,022 833 4.62%
- ------------------------------------------------------------------ ------------------------------ -------------------------------
Total interest bearing liabilities 607,752 21,720 3.57% 598,011 20,241 3.38% 543,605 19,876 3.66%
- ------------------------------------------------------------------ ------------------------------ -------------------------------
Noninterest bearing liabilities:
Demand deposits 170,991 156,725 140,781
Other liabilities 6,293 5,050 4,979
Stockholders' equity 74,509 70,714 72,158
- ------------------------------------------------------------------ ------------------------------ -------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $859,545 $830,500 $761,523
- ------------------------------------------------------------------ ------------------------------ -------------------------------
Net interest income (tax equivalent basis) 37,766 3.93% 35,037 3.81% 32,901 3.92%
Tax equivalent basis adjustment 1,273 1,247 906
- ------------------------------------------------------------------ ------------------------------ -------------------------------
NET INTEREST INCOME $36,493 $33,790 $31,995
- ------------------------------------------------------------------ ------------------------------ -------------------------------
Net interest margin (tax equivalent basis) (C) 4.77% 4.56% 4.72%
- ------------------------------------------------------------------ ------------------------------ -------------------------------
(A) Includes nonaccrual 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 $55.3
million in 1999 to $59.5 million in 2000, an increase of $4.2 million. The
increase in interest income in 2000 was due to a $24.6 million increase in
interest-earning assets and a 31 basis point increase in the yield on
interest-earning assets. The increase in yield reflected an increase in the
overall rate environment in 2000 and also reflected a more favorable mix in
earning assets. The increase in interest-earning assets was due to growth in the
loan and investment portfolios.
The increase in interest income from $52.8 million in 1998 to $55.3 million
in 1999 resulted from a $71.4 million increase in earning assets which was
partially offset by a 38 basis point decline in the yield on earning assets
caused by the decline in rates which occurred in 1998 and in the first half of
1999.
Total interest expense increased from $20.2 million in 1999 to $21.7
million in 2000 as a result of a $9.7 million increase in interest-bearing
liabilities and a 19 basis point increase in the Company's cost of funds. The
increase in the cost of funds resulted from the increase of the overall interest
rate environment in the year 2000 and from an increase in time deposits. Total
interest expense increased from $19.9 million in 1998 to $20.2 million in
19
1999 as a result of a $54.4 million increase in interest-bearing liabilities
partially offset by a 28 basis point decrease in the cost of funds.
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 4.77%, 4.56% and 4.72% for 2000, 1999 and 1998,
respectively. The increase in the net interest margin from 1999 to 2000 results
from higher rates earned on loans and investment securities which more than
offset higher rates paid on deposits. The loan yield increased 21 basis points,
the yield on taxable investment securities increased 28 basis points, and the
yield on the tax-exempt investment portfolio increased 28 basis points. The cost
of funds increased 19 basis points. The decrease in the net interest margin from
1998 to 1999 resulted from a 18 basis point decline in yields in the taxable
investment portfolio and a 43 basis point decline in the yield on the loan
portfolio.
The average cost of the Company's deposits was 2.73%, 2.64% and 2.86%, for
2000, 1999 and 1998, 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 $2.0 million in 2000, $1.8 million in
1999, and $698,000 in 1998. The increase in the provision from 1999 to 2000 was
due to management's evaluation of the loan portfolio. For more information, see
Financial Condition--Risk Elements below. Net charge-offs decreased from $2.1
million in 1999 to $778,000 in 2000. Net charge-offs as a percent of average
loans outstanding decreased from 0.45% in 1999 to 0.16% in 2000.
The 1999 provision for possible loan losses at $1.8 million increased from
$698,000 in 1998. The increase in the 1999 provision for possible loan losses
was due to an increase in net charge-offs from 1998 to 1999 and included a
$440,000 provision made to conform provisioning policies among subsidiary banks.
The ratio of net charge-offs to average loans outstanding was 0.23% in 1998.
Noninterest Income
Noninterest income increased $1.4 million or 22.3% to $7.7 million in 2000
from $6.3 million in 1999 and represented 17.5% of total income for 2000. Total
income includes net interest income plus noninterest income. The primary source
of this increase was $1.5 million in gains on sales of leases generated from the
Company's leasing division which was purchased early in second quarter 2000.
Also contributing to the increase in noninterest income were higher service
charges collected on deposit accounts. Commissions and fees increased from
$904,000 in 1999 to $1.2 million in 2000. The increase in commissions and fees
resulted primarily from an increase in loan fees and in commissions and fees on
investment services. Other income decreased from $1.2 million in 1999 to
$820,000 in 2000 as a result of decreases in gains on sales of loans.
Noninterest 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. Noninterest
income increased from 1998 to 1999 as a result of increased service fees
collected on deposit accounts and due to fees generated by the introduction of a
debit card at one of the Company's subsidiaries.
Noninterest Expense
Noninterest expenses in 2000 decreased $2.7 million or 8.9% over 1999.
Included in the 1999 expense is $3.5 million in merger related and restructuring
charges. Excluding merger related charges, noninterest expense increased from
$26.7 million to $27.5 million, an $829,000 or 3.1% increase. Salaries and
benefits, the largest component of noninterest expense, increased by $98,000 or
0.7%. Normal merit increases and costs related to the addition of the leasing
division were offset by decreased medical expenses and declines in staffing
related to the acquisitions of NBSC and Metropolitan as positions were
consolidated. Other expense categories increased in the aggregate by $731,000 or
6.2%. Other expenses increased due to increased costs of occupancy, furniture
20
and equipment related to the addition of new branches, costs related to the
leasing division and improvements in technology.
Noninterest expense in 1999 increased $5.2 million or 20.7% over 1998.
Included in 1999 noninterest expense were $3.5 million in one-time merger
related charges related to the acquisitions of NBSC and Metropolitan. Salaries
and benefits increased by $1.4 million or 10.4% resulting from increased medical
claim expense, normal salary increases and the addition of new people to the
executive management team. Other expense categories increased in the aggregate
by $594,000 or 6.2% resulting from costs related to operating and disposing of
other real estate and from increases in telephone expenses and marketing
expense.
The efficiency ratio is calculated by dividing total noninterest expense by
total revenue. In 2000, the Company's efficiency ratio improved to 61.9% from
66.4% in 1999 (excluding merger-related charges) and 65.8% in 1998 due to cost
savings following the merger of Metropolitan and NBSC.
Income Taxes
The Company's effective income tax rate was 31.9%, 33.4% and 35.7%, in the
years ended December 31, 2000, 1999 and 1998, respectively. The Company's
effective tax rate dropped from 33.4% in 1999 to 31.9% in 2000 due to merger
related expenses recorded in 1999 which were not tax deductible.
Financial Condition
Total assets increased from $830.2 million on December 31, 1999 to $906.7
million on December 31, 2000, an increase of $76.5 million, or 9.2%, resulting
from growth in the loan portfolio and investment portfolio. Total assets at
year-end 1999 increased $27.2 million or 3.4% from year-end 1998.
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 $476.3 million on December 31, 1999 to $521.0
million on December 31, 2000, an increase of $44.7 million or 9.4%. The increase
in loans generally was in the consumer portfolio which increased from $106.9
million in 1999 to $137.8 million in 2000, an increase of $30.9 million or
28.9%. In 2000, the Company purchased approximately $20 million in consumer loan
portfolios which contributed to this increase. The real estate mortgage
portfolio also increased $11.5 million or 8.4%. In 1999, total loans increased
$26.2 million to $476.3 million as a result of mortgage growth generated by
Metropolitan which began offering mortgages for the first time.
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,
--------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------
(in thousands)
Commercial $222,222 $220,779 $215,439 $209,524 $199,461
Real estate--mortgage 148,178 136,687 116,181 87,099 76,864
Real estate--contruction 12,757 11,938 12,526 14,712 9,424
Home equity and consumer installment 137,850 106,878 105,910 106,799 97,550
--------------------------------------------------------
$521,007 $476,282 $450,056 $418,134 $383,299
========================================================
21
The following table shows the percentage distributions of loans by category
as of December 31 for each of the last five years.
December 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------
Commercial 42.7% 46.4% 47.9% 50.1% 52.0%
Real estate--mortgage 28.5% 28.7% 25.8% 20.8% 20.1%
Real estate--construction 2.4% 2.5% 2.8% 3.5% 2.5%
Home equity and consumer installment 26.4% 22.4% 23.5% 25.6% 25.4%
---------------------------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0%
===============================================================
At December 31, 2000, there were no concentrations of loans exceeding 10%
of total loans outstanding other than loans that are secured by real estate.
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, 2000, 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 $54,836 $67,991 $99,395 $ 222,222
Real Estate--construction 9,735 488 2,534 12,757
---------------------------------------------------
Total $64,571 $68,479 $101,929 $234,979
===================================================
Amount of such loans with:
Predetermined rates $22,191 $64,100 $ 87,870 $ 174,161
Floating or adjustable rates 42,380 4,379 14,059 60,818
---------------------------------------------------
Total $64,571 $68,479 $101,929 $234,979
===================================================
Risk Elements
Commercial loans are placed on a non-accrual status with all accrued
interest and unpaid interest reversed if (a) because of the deterioration in the
financial position of the borrower they are maintained on a cash basis (which
means payments are applied when and as received rather than on a regularly
scheduled basis), (b) payment in full of interest or principal is not expected,
or (c) principal and interest has been in default for a period of 90 days or
more unless the obligation is both well secured and in process of collection.
Residential mortgage loans are placed on non-accrual status at the time when
foreclosure proceedings are commenced except where there exists sufficient
collateral to cover the defaulted principal and interest payments, and
management's knowledge of the specific circumstances warrant continued accrual.
Consumer loans are generally charged off when principal and interest payments
are four months in arrears. Interest thereafter on such charged-off consumer
loans is taken into income when received.
The following schedule sets forth certain information regarding the
Company's non-accrual, past due and renegotiated loans and other real estate
owned as of December 31, for each of the last five years:
22
December 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------
(in thousands)
Non-performing loans:
Non-accrual loans (A) $2,564 $2,961 $3,281 $4,850 $5,695
Past due loans (B) 1,992 2,210 4,265 1,404 2,200
Renegotiated loans (C) --- 389 399 413 505
---------------------------------------------------------------
TOTAL NON-PERFORMING LOANS 4,556 5,560 7,945 6,667 8,400
Other real estate owned 442 418 1,989 1,758 1,313
---------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS $4,998 $5,978 $9,934 $8,425 $9,713
===============================================================
Nonperforming assets as a percent
of total assets 0.55% 0.72% 1.24% 1.14% 1.44%
===============================================================
(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 interest income during
the current period.
(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 if collection of
the debt is proceeding in due course and collection efforts are
reasonably expected to result in repayment of the debt or in its
restoration to a current status.
(C) The loan portfolio includes loans whose terms have been renegotiated
due to financial difficulties of borrowers. All such loans are
reviewed quarterly to determine if they are performing in accordance
with the renegotiated terms.
Non-accrual loans decreased $397,000 to $2.6 million at December 31, 2000,
from $3.0 million at December 31, 1999. All of these loans are in various stages
of litigation, foreclosure, or workout. Loans past due ninety days or more and
still accruing decreased $218,000 to $2.0 million at December 31, 2000, from
$2.2 million at December 31, 1999.
For 2000, 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, is approximately
$517,000. The amount of interest income actually recorded on those loans for
2000 was $446,000. The resultant income loss of $71,000 for 2000 compares to
losses of $138,000 and gains of $13,000 for 1999 and 1998, 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 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 commercial loans identified as impaired are
evaluated by an independent loan review consultant. The Company aggregates
consumer loans and residential mortgages 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
and 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.
23
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, 2000, based on the above criteria, the Company had
impaired loans totaling $4.5 million (including $2.5 million in non-accrual
loans). The impairment of these loans is based on the fair value of the
underlying collateral for these loans. Based upon such evaluation, $839,000 has
been allocated to the allowance for possible loan losses for impairment. At
December 31, 2000, the Company also had $4.8 million in loans that were rated
substandard that were not classified as non-performing or impaired.
There were no loans at December 31, 2000, other than those designated
non-performing, impaired or substandard, 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 non-accrual, past due or
renegotiated at a future date.
The following table sets forth for each of the five years ended December
31, 2000, 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,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------
(in thousands)
Balance of the allowance at the
beginning of the year $7,668 $7,984 $8,262 $7,558 $8,079
---------------------------------------------------------------
Loans charged off:
Commercial 1,046 1,670 1,134 561 1,384
Home Equity and consumer 221 182 476 202 402
Real estate--mortgage --- 571 57 15 161
---------------------------------------------------------------
Total loans charged off 1,267 2,423 1,667 778 1,947
---------------------------------------------------------------
Recoveries:
Commercial 359 228 581 262 353
Home Equity and consumer 127 88 95 157 150
Real estate--construction --- --- --- --- 13
Real estate--mortgage 3 10 15 37 2
---------------------------------------------------------------
Total Recoveries 489 326 691 456 518
---------------------------------------------------------------
Net charge-offs: 778 2,097 976 322 1,429
Provision for possible loan losses
charged to operations 2,000 1,781 698 1,026 908
---------------------------------------------------------------
Ending balance $8,890 $7,668 $7,984 $8,262 $7,558
===============================================================
Ratio of net charge-offs to average loans
oustanding 0.16% 0.45% 0.23% 0.08% 0.40%
Ratio of allowance at end of year as a
percentage of year-end total loans 1.70% 1.61% 1.77% 1.98% 1.97%
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:
24
. The establishment of reserve amounts for all specifically identified
criticized loans that have been designated as requiring attention by
the Company's external 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.
. The establishment of reserve amounts for the non-criticized loans in
each portfolio based upon the historical average loss experience for
these portfolios.
. An allocation for all off-balance sheet exposures.
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, 2000.
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,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------
(in thousands)
Commercial $7,240 $6,227 $5,888 $6,250 $5,621
Home Equity and consumer 965 899 993 1,010 1,056
Real estate--construction 54 54 54 114 61
Real estate--mortgage 631 488 1,049 888 820
---------------------------------------------------------------
$8,890 $7,668 $7,984 $8,262 $7,558
===============================================================
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,
--------------------------------------
2000 1999 1998
--------------------------------------
(in thousands)
U.S. Treasury and U.S. government agencies $124,599 $154,298 $139,026
Obligations of states and political subdivisions 49,187 57,568 49,096
Mortgage-backed securities 80,189 36,888 41,137
Equity securities 10,822 8,479 6,454
Other debt securities 30,943 20,488 20,226
--------------------------------------
$295,740 $277,721 $255,939
======================================
25
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, 2000:
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 $11,229 $46,065 $9,179 $2,650 $69,123
Yield 5.65% 6.19% 7.24% 6.60% 6.26%
Obligations of states and political
subdivisions
Amount 360 13,180 16,272 4,543 34,355
Yield 6.40% 6.14% 6.51% 6.44% 6.35%
Mortgage-backed securities
Amount 80 --- 2,288 51,209 53,577
Yield 4.75% ---% 7.41% 7.27% 7.27%
Other debt securities
Amount 1,251 13,885 1,964 2,903 20,003
Yield 5.21% 6.69% 7.89% 7.71% 6.86%
Other equity securities
Amount 10,822 --- --- --- 10,822
Yield 4.12% ---% ---% ---% 4.12%
---------------------------------------------------------------
Total securities
Amount $23,742 $73,130 $29,703 $61,305 $187,880
Yield 4.94% 6.27% 6.89% 7.20% 6.51%
===============================================================
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, 2000:
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 $17,620 $35,356 $2,500 --- $55,476
Yield 6.01% 5.82% 7.87% ---% 5.97%
Obligations of states and political
subdivisions
Amount 1,419 11,987 947 479 14,832
Yield 5.98% 6.27% 6.14% 5.25% 6.20%
Mortgage-backed securities
Amount 205 10,054 9,884 6,469 26,612
Yield 6.12% 6.23% 6.19% 6.92% 6.38%
Other debt securities
Amount 1,507 9,433 --- --- 10,940
Yield 5.82% 5.69% ---% ---% 5.71%
---------------------------------------------------------------
Total securities
Amount $20,751 $66,830 $13,331 $6,948 $107,860
Yield 5.99% 5.94% 6.50% 6.80% 6.08%
===============================================================
26
Deposits
Total deposits increased from $736.7 million on December 31, 1999 to $800.8
million on December 31, 2000, a growth of $64.1 million, or 8.7%. Total deposits
in 1999 increased $24.9 million or 3.5% from December 31, 1998.
As of December 31, 2000, the aggregate amount of outstanding time deposits
issued in amounts of $100,000 or more, broken down by time remaining to
maturity, was as follows (in thousands):
Maturity
- ---------------
Within 3 months $29,009
Over 3 through 6 months 10,478
Over 6 through 12 months 15,907
Over 12 months 5,642
----------
Total $61,036
==========
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 2000, the Company
generated $64.0 million in funds in net deposit growth.
. Sales of securities and overnight funds. At year-end 2000, the Company
had $187.9 million in securities designated "available for sale" and
$6.6 million in overnight funds.
. Overnight credit lines. Lakeland and NBSC are members of the Federal
Home Loan Bank of New York (FHLB). One membership benefit is that
members can borrow overnight funds. Lakeland and NBSC have respective
credit lines of $57.1 million and $29.7 million at the FHLB. Lakeland
has overnight federal funds lines available for it to borrow up to
$11.5 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, 2000, the
Banks had outstanding loan origination commitments of $74.9 million. Time
deposits that mature in one year or less, at December 31, 2000, totaled $218.9
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
27
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.
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, 2000. 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
28
savings accounts will reprice or mature within five years. The table does not
assume any prepayment of fixed-rate loans.
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 After
December 31, 2000 months within 1 year within 5 years 5 Years Total
- ---------------------------- ---------------------------------------------------------------
Interest-earning assets: (in thousands)
Loans $91,854 $53,383 $170,642 $205,962 $521,841
Investment securities 26,371 57,417 170,573 41,379 295,740
Federal funds sold and interest
bearing cash accounts 6,685 --- --- --- 6,685
---------------------------------------------------------------
Total earning assets 124,910 110,800 341,215 247,341 824,266
===============================================================
Interest-bearing liabilities:
Deposits:
Interest bearing demand 8,660 25,981 138,564 --- 173,205
Savings accounts 11,393 34,180 136,720 --- 182,293
Time deposits 93,099 137,108 34,746 1,671 266,624
---------------------------------------------------------------
Total interest-bearing deposits 113,152 197,269 310,030 1,671 622,122
---------------------------------------------------------------
Borrowings:
Repurchase agreements 8,216 2,434 --- --- 10,650
Long-term debt --- 1,000 10,000 --- 11,000
---------------------------------------------------------------
Total borrowings 8,216 3,434 10,000 --- 21,650
---------------------------------------------------------------
Total liabilities 121,368 200,703 320,030 1,671 643,772
---------------------------------------------------------------
Interest rate sensitivity gap 3,542 (89,903) 21,185 245,670 180,494
===============================================================
Cumulative rate sensitivity gap $3,542 ($86,361) ($65,176) $180,494
====================================================
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, 2000 using current discount
rates, and an estimate of net interest income for 2001 assuming that both
interest rates and the Company's interest-sensitive assets and liabilities
remain at December 31, 2000 levels. The "rate shock" information in the table
shows estimates of net portfolio value at December 31, 2000 and net interest
income for 2001 assuming fluctuations or "rate shocks" of plus 100 and 200 basis
points and minus 100
29
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.
- -------------------------------------------------------------------------------------------------------
Net Portfolio Value at
December 31, 2000 Net interest income for 2001
- -------------------------------------------------------------------------------------------------------
Rate Scenario Percent
Change Percent Change
From Base From
Amount Case Amount Base Case
- -------------------------------------------------------------------------------------------------------
(dollars in thousands)
- -------------------------------------------------------------------------------------------------------
+200 basis point rate shock $108,864 (12.5%) $37,918 (1.9%)
+100 basis point rate shock 117,578 (5.5%) 38,317 (0.8%)
Base Case 124,468 0.0% 38,639 0.0%
- -100 basis point rate shock 128,051 2.9% 39,636 2.6%
- -200 basis point rate shock 126,903 1.9% 40,428 4.6%
Capital Resources
Stockholders' equity increased $6.3 million to $78.6 million at December
31, 2000, from $72.3 million at December 31, 1999, reflecting net income during
the year of $10.0 million, cash dividends to stockholders of $3.9 million, an
unrealized securities gain, net of deferred income taxes, of $2.1 million and
net proceeds from the exercise of stock options of $236,000.
Book value per share (total stockholders' equity divided by the number of
shares outstanding) increased from $5.44 on December 31, 1999 to $5.99 on
December 31, 2000 as a result of increased income and a reduction of the
unrealized loss on securities available for sale. Book value per share was $5.56
on December 31, 1998.
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 the Company 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.
30
The following table reflects capital ratios of the Company and its
subsidiaries as of December 31, 2000 and 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: 2000 1999 2000 1999 2000 1999
------------------------------------------------------------------------------
The Company 8.47% 8.88% 13.58% 15.40% 14.84% 16.66%
Lakeland Bank 8.35% 9.07% 12.66% 15.31% 13.87% 16.42%
NBSC 7.31% 7.84% 13.64% 15.23% 14.90% 16.50%
Metropolitan N/A 7.74% N/A 12.44% N/A 13.50%
"Well capitalized" institution under FDIC
Regulations 5.00% 5.00% 6.00% 6.00% 10.00% 10.00%
N/A - Metropolitan was merged into Lakeland on January 28, 2000.
Recent Accounting Pronouncements
In June 1998, the SFAS No. 133, ("SFAS 133") "Accounting for Derivative
Instruments and Hedging Activities" was amended in June, 1999 by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," and in June, 2000, by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
(collectively SFAS No. 133). SFAS No. 133 requires that entities recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Under SFAS No. 133 an
entity may designate a derivative as a hedge of exposure to either changes in:
(a) fair value of a recognized asset or liability or firm commitment, (b) cash
flows of a recognized or forecasted transaction, or (c) foreign currencies of a
net investment in foreign operations, firm commitments, available-for-sale
securities or a forecasted transaction. Depending upon the effectiveness of the
hedge and/or the transaction being hedged, any changes in the fair value of the
derivative instrument is either recognized in earnings in the current year,
deferred to future periods, or recognized in other comprehensive income. Changes
in the fair value of all derivative instruments not recognized as hedge
accounting are recognized in current year earnings. SFAS No. 133 is required for
all fiscal quarters or fiscal years beginning after June 15, 2000. The Company
adopted SFAS No. 133 effective January 1, 2001. No adjustment was required as a
result of the change in accounting principle.
Statement of Financial Accounting Standards No. 119 "Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments" ("SFAS
No. 119") requires disclosures about financial instruments, which are defined as
futures, forwards, swap and option contracts and other financial instruments
with similar characteristics. On balance sheet receivables and payables are
excluded from this definition. The Company did not hold any derivative financial
instruments as defined by SFAS No. 119 at December 31, 2000, 1999 or 1998.
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", which replaces SFAS No.125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 140 revises the standards for accounting for the securitizations and
other transfers of financial assets and collateral. This new standard also
requires certain disclosures, but carries over most of the provisions of SFAS
No. 125. SFAS No. 140 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001.
However, for recognition and reclassification of collateral and for disclosures
relating to securitizations transactions and collateral this statement is
effective for fiscal years ending after December 15, 2000 with earlier
application not allowed and is to be applied prospectively. The adoption of this
statement is not expected to have a material impact on the Company's
consolidated financial statements.
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
31
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 rate 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.
ITEM 7A - Quantitative and Qualitative Disclosures About Market Risks
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations"
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
32
Report of Independent Certified Public Accountants
--------------------------------------------------
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, 2000 and 1999, 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, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
January 18, 2001
33
Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Cash and due from banks $43,166 $31,386
Federal funds sold 6,625 8,956
- ----------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 49,791 40,342
Interest-bearing deposits with banks 60 216
Investment securities available for sale 187,880 152,591
Investment securities held to maturity; fair value of $107,311
in 2000 and $122,751 in 1999 107,860 125,130
Loans, net of deferred fees 521,841 476,514
Less: allowance for possible loan losses 8,890 7,668
- ----------------------------------------------------------------------------------------------------------------------
Net loans 512,951 468,846
Premises and equipment - net 24,396 21,897
Accrued interest receivable 6,247 5,979
Other assets 17,427 15,169
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $906,612 $830,170
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Deposits:
Noninterest bearing $178,640 $165,559
Savings and interest-bearing transaction accounts 355,498 355,845
Time deposits under $100 205,588 180,287
Time deposits $100 and over 61,036 35,048
- ----------------------------------------------------------------------------------------------------------------------
Total deposits 800,762 736,739
Securities sold under agreements to repurchase 10,650 10,489
Long-term debt 11,000 6,000
Other liabilities 5,576 4,660
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 827,988 757,888
- ----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies ---- ----
Stockholders' equity:
Common stock, no par value; authorized shares, 40,000,000; issued shares,
13,305,875 at December 31, 2000 and 1999; outstanding shares, 13,126,594 at
December 31, 2000 and 13,301,675 at December 31, 1999 77,857 71,330
Retained Earnings 3,035 3,548
Treasury stock, at cost, 179,281 shares in 2000 and 4,200 in 1999 (1,936) (67)
Accumulated other comprehensive loss (262) (2,381)
Loan for options exercised (70) (148)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 78,624 72,282
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $906,612 $830,170
======================================================================================================================
See accompanying notes to consolidated financial statements
34
Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED INCOME STATEMENTS
Years Ended December 31,
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
INTEREST INCOME
Loans and fees $40,853 $37,278 $36,626
Federal funds sold 681 1,322 1,834
Taxable investment securities 14,315 13,115 11,728
Tax exempt investment securities 2,364 2,316 1,683
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 58,213 54,031 51,871
- ----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 20,736 19,376 19,043
Securities sold under agreements to repurchase 699 563 531
Long-term debt 285 302 302
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 21,720 20,241 19,876
- ----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 36,493 33,790 31,995
Provision for possible loan losses 2,000 1,781 698
- ----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 34,493 32,009 31,297
NONINTEREST INCOME
Service charges on deposit accounts 4,784 4,214 3,991
Commissions and fees 1,192 904 912
Gain (loss) on the sales of securities (529) 32 119
Gain on sale of leases 1,467 --- ---
Other income 820 1,174 1,095
- ----------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME 7,734 6,324 6,117
- ----------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 14,996 14,898 13,503
Net occupancy expense 2,441 2,285 2,319
Furniture and equipment 2,870 2,346 2,352
Stationary, supplies and postage 1,344 1,296 1,400
Merger and restructuring charges --- 3,521 324
Other expenses 5,876 5,873 5,135
- ----------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSE 27,527 30,219 25,033
- ----------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 14,700 8,114 12,381
Provision for income taxes 4,695 2,714 4,424
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $10,005 $5,400 $7,957
======================================================================================================================
EARNINGS PER COMMON SHARE
Basic $0.76 $0.41 $0.60
- ----------------------------------------------------------------------------------------------------------------------
Diluted $0.75 $0.40 $0.60
- ----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
(in thousands)
NET INCOME $10,005 $5,400 $7,957
- ----------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME NET OF TAX:
Unrealized securities gains (losses) arising during period 1,788 (3,202) 358
Less: reclassification for gains included in Net Income (331) 20 71
- ----------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) 2,119 (3,222) 287
- ----------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $12,124 $2,178 $8,244
======================================================================================================================
See accompanying notes to consolidated financial statements
35
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, 1998 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 --- 3,548 (67) (2,381) (148) 72,282
Net Income 2000 --- --- --- 10,005 --- --- --- 10,005
Other comprehensive income,
net of tax --- --- --- --- --- 2,119 --- 2,119
Exercise of stock options --- (139) --- --- 375 --- --- 236
Stock dividends 633,613 6,666 --- (6,666) --- --- --- ---
Payment on loan issued for
options exercised --- --- --- --- --- --- 78 78
Cash dividend --- --- --- (3,852) --- --- --- (3,852)
Purchase of treasury stock --- --- --- --- (2,244) --- --- (2,244)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2000 13,305,875 $77,857 $0 $3,035 ($1,936) ($262) ($70) $78,624
==================================================================================================================================
See accompanying notes to consolidated financial statements
36
Lakeland Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2000 1999 1998
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES (in thousands)
Net income $10,005 $5,400 $7,957
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization (accretion) of premiums, discounts and
deferred loan fees and costs (132) 554 1,011
Depreciation 2,161 2,343 1,758
Amortization of intangible assets 142
Provision for loan losses 2,000 1,781 698
Provision for losses on other real estate --- 200 ---
(Gain) loss on sale of securities 529 (32) (119)
Deferred income tax (1,103) 347 19
(Increase) decrease in other assets 470 (839) (963)
(Decrease) increase in other liabilities 994 341 (4)
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,066 10,095 10,357
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing deposits with banks 156 (12) (102)
Proceeds from repayments on and maturity of securities:
Available for sale 22,421 27,401 57,081
Held for maturity 25,163 23,423 26,982
Proceeds from sales of securities available for sale 29,756 12,755 23,891
Purchase of securities:
Available for sale (85,324) (57,817) (105,296)
Held for maturity (7,576) (33,468) (26,181)
Net increase in loans (46,336) (37,174) (39,139)
Sales of loans and participation interest in loan 834 8,852 5,962
Purchase of leasing company (3,100) --- ---
Proceeds from dispositions of premises and equipment 14 --- 9
Capital expenditures (4,854) (3,574) (5,849)
Net (increase) decrease in other real estate owned (95) 1,429 258
- -------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (68,941) (58,185) (62,384)
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 64,023 24,928 59,910
Increase (decrease) in securities sold under agreements
to repurchase 161 2,379 (3,627)
Proceeds from long-term repurchase agreements 10,000 1,000 ---
Repayments of long-term debt principal (5,000) --- ---
Proceeds from common stock issuances --- --- 470
Purchase of treasury stock (2,244) (635) (782)
Exercise of stock options 236 269 290
Dividends paid (3,852) (3,314) (2,586)
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 63,324 24,627 53,675
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 9,449 (23,463) 1,648
Cash and cash equivalents, beginning of year 40,342 63,805 62,157
- -------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $49,791 $40,342 $63,805
=======================================================================================================
See accompanying notes to consolidated financial statements
37
Lakeland Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
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) and The National Bank of Sussex
County (NBSC) (collectively, the Banks). Metropolitan State Bank
(Metropolitan) was fully merged into Lakeland on January 28, 2000. The Banks
combine to generate commercial, mortgage and consumer loans and to receive
deposits from customers located primarily in Northern New Jersey. The Banks
also provide securities brokerage services, including mutual funds and
variable annuities. Lakeland operates under a state bank charter and
provides full banking services and, as a state bank, 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. 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 Banks fund
their loans primarily by offering time, savings and money market, and demand
deposit accounts to both commercial enterprises and individuals.
Additionally, the Banks originate residential mortgage loans, and service
such loans which are owned by other investors. Lakeland also has a leasing
division which provides equipment lease financing to small and medium sized
business clients.
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 accounting principles generally accepted in the United States of
America and predominant practices within the banking industry. The
consolidated financial statements include the accounts of the Company,
Lakeland, NBSC, Lakeland Investment Corp., NBSC Investment Company, and,
prior to January 28, 2000, 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.
38
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 establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
subsequent interim financial reports issued to shareholders. It also
establishes standards for related disclosure about products and services,
geographic areas, and major customers. The statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and assess performance. The statement also requires that
public enterprises report a measure of segment profit or loss, certain
specific revenue and expense items and segment assets. It also requires that
information be reported about revenues derived from the enterprises'
products or services, or about the countries in which the enterprises earn
revenues and hold assets, and about major customers, regardless of whether
that information is used in making operating decisions.
The Company has one reportable segment, "Community Banking." All of the
Company's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company supports the
others. For example, commercial lending is dependent upon the ability of the
Bank to fund itself with retail deposits and other borrowings and to manage
interest rate and credit risk. This situation is also similar for consumer
and residential mortgage lending. Accordingly, all significant operating
decisions are based upon analysis of the Company as one operating segment or
unit.
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
(loss) 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
39
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.
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, 2000 and 1999, the
Banks were servicing approximately $36.1 million and $39.7 million,
respectively, of loans for others.
The Company follows 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. In September 2000, SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", was issued and replaces SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 140 revises the standards for
accounting for the securitizations and other transfers of financial assets
and collateral. This new standard also requires certain disclosures, but
carries over most of the provisions of SFAS No. 125. SFAS No. 140 is
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The adoption
of this statement is not expected to have a material impact on the
Company's consolidated financial statements.
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of aggregate cost or estimated fair value. Gains and
losses on sales of loans are also accounted for in accordance with SFAS No.
134, "Accounting for Mortgage Securities Retained after the securitizations
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise". This new
statement requires that an entity engaged in mortgage banking activities
classify the retained mortgage-backed security or other interest, which
resulted from the securitizations of a mortgage loan held for sale, based
upon its ability and intent to sell or hold these investments.
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.
40
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, 2000 and 1999 were approximately $300,000 each
year.
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. All weighted average, actual shares or per share information in the
financial statements have been adjusted retroactively for the effect of
stock dividends.
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
$4.2 million, $2.8 million and $4.2 million in 2000, 1999 and 1998,
respectively. Cash paid for interest was $20.8 million, $20.3 million and
$19.8 million in 2000, 1999 and 1998, respectively.
2000 1999 1998
-------------------------------------
(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 326 457 772
Loans to facilitate the sale of other real estate owned --- 475 565
Transfer of premises to other real estate owned --- --- 272
41
Comprehensive Income
The Company follows the disclosure provisions of 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 recognized in
the calculation of net income.
December 31, 2000
----------------------------------------------
(in thousands)
Tax Net of
Before tax (expense) tax
amount benefit amount
---------- ------------- ------------
Unrealized gains (losses) on investment securities
Unrealized holding gains arising during the period $2,891 ($1,103) $1,788
Less: reclassification adjustment for losses
realized in net income (529) 198 (331)
------ ------- ------
Other comprehensive income, net $3,420 ($1,301) $2,119
====== ======= ======
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
======= ====== =======
Other Information
In June 1998, the SFAS No. 133, ("SFAS No. 133") "Accounting for Derivative
Instruments and Hedging Activities" was amended in June, 1999 by SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," and in June,
2000, by SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," (collectively SFAS No. 133). SFAS No. 133
requires that entities recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. Under SFAS No. 133 an entity may designate a
derivative as a hedge of exposure to either changes in: (a) fair value of a
recognized asset or liability or firm commitment, (b) cash flows of a
recognized or forecasted transaction, or (c) foreign currencies of a net
investment in foreign operations, firm commitments, available-for-sale
securities or a forecasted transaction. Depending upon the effectiveness of
the hedge and/or the transaction being hedged, any changes in the fair
value of the derivative instrument is either recognized in earnings in the
current year, deferred to future periods, or recognized in other
comprehensive income. Changes in the fair value of all derivative
instruments not recognized as hedge accounting are recognized in current
year earnings. SFAS No. 133 is required for all fiscal quarters or fiscal
years beginning after June 15, 2000. The Company adopted SFAS No. 133
effective January 1, 2001. No adjustment was required
42
as a result of the change in accounting principle.
Statement of Financial Accounting Standards No. 119 "Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments"
("SFAS No. 119") requires disclosures about financial instruments, which are
defined as futures, forwards, swap and option contracts and other financial
instruments with similar characteristics. On balance sheet receivables and
payables are excluded from this definition. The Company did not hold any
derivative financial instruments as defined by SFAS No. 119 at December 31,
2000, 1999 or 1998.
Goodwill
Goodwill resulting from the acquisition of NIA leasing in 2000 is being
amortized on a straight line basis over approximately 15 years and is
included in other assets. The unamortized balance at December 31, 2000
was $2.5 million. Amortization expense for the year ended December 31, 2000
was $131,000.
Reclassifications
Certain reclassifications have been made to the prior period financial
statements to conform to the 2000 presentation.
NOTE 2 - ACQUISITIONS
On April 4, 2000, Lakeland Bank purchased NIA National Leasing Inc. (NIA).
NIA leases equipment to small to medium size businesses. The transaction was
accounted for under the purchase method of accounting. Lakeland recorded
$2.6 million of goodwill to be amortized over 15 years. The results of
operations for the period April 4, 2000 through December 31, 2000 are
included in the Company's income. NIA was merged into Lakeland Bank and is a
division of Lakeland Bank.
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 4,368,708
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 follow:
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 703,466 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 follow:
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
===========================================================================================
43
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, 2000 December 31, 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands) (in thousands)
U.S. Treasury and
U.S. government agencies $69,412 $370 $(659) $69,123 $83,693 $92 $(1,798) $81,987
Mortgage-backed securities 53,014 607 (44) 53,577 12,330 54 (378) 12,006
Obligations of states and
political subdivisions 34,421 172 (238) 34,355 42,236 23 (1,426) 40,833
Other debt securities 20,617 209 (823) 20,003 9,683 --- (397) 9,286
Equity securities 10,778 44 --- 10,822 8,467 12 --- 8,479
- ----------------------------------------------------------------------------------------------------------------------------------
$188,242 $1,402 $(1,764) $187,880 $156,409 $181 $(3,999) $152,591
==================================================================================================================================
HELD TO MATURITY December 31, 2000 December 31, 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands) (in thousands)
U.S. Treasury and
U.S. government agencies $55,476 $286 $(142) $55,620 $72,311 $48 $(1,197) $71,162
Mortgage-backed securities 26,612 133 (210) 26,535 24,882 15 (522) 24,375
Obligations of states and
political subdivisions 14,832 58 (75) 14,815 16,735 12 (240) 16,507
Other debt securities 10,940 --- (599) 10,341 11,202 --- (495) 10,707
- ----------------------------------------------------------------------------------------------------------------------------------
$107,860 $477 $(1,026) $107,311 $125,130 $75 $(2,454) $122,751
==================================================================================================================================
44
The following table lists maturities of debt and equity securities at December
31, 2000 classified as available for sale and held to maturity:
December 31, 2000
- -------------------------------------------------------------------------------------------------------
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------
(in thousands)
Due in one year or less $12,873 $12,840 $20,546 $20,547
Due after one year through
five years 73,824 73,130 56,776 56,252
Due after five years through ten
years 27,259 27,415 3,447 3,495
Due after ten years 10,494 10,096 479 482
- -------------------------------------------------------------------------------------------------------
124,450 123,481 81,248 80,776
Mortgage-backed securities 53,014 53,577 26,612 26,535
Other investments 10,778 10,822 --- ---
- -------------------------------------------------------------------------------------------------------
Total securities $188,242 $187,880 $107,860 $107,311
=======================================================================================================
Year ended December 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
(in thousands)
Sales proceeds $29,756 $ 12,801 $ 23,891
Gross gains 54 38 143
Gross losses 582 6 24
Securities with a carrying value of approximately $29.5 million and $29.2
million at December 31, 2000 and 1999, respectively, were pledged to secure
public deposits and for other purposes required by applicable laws and
regulations.
NOTE 4 - LOANS
December 31,
2000 1999
- -------------------------------------------------------------------------------------------------------
(in thousands)
Commercial $222,222 $220,779
Real estate-mortgage 148,178 136,687
Real estate-construction 12,757 11,938
Home Equity and Consumer 137,850 106,878
- -------------------------------------------------------------------------------------------------------
Total loans 521,007 476,282
Less:deferred fees (costs) (834) (232)
- -------------------------------------------------------------------------------------------------------
Loans net of deferred fees (costs) $521,841 $476,514
=======================================================================================================
45
Changes in the allowance for possible loan losses are as follows:
Year ended December 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
(in thousands)
Balance at beginning of year $ 7,668 $ 7,984 $ 8,262
Provision for possible loan losses 2,000 1,781 698
Loans charged off (1,267) (2,423) (1,667)
Recoveries 489 326 691
--------- --------- ---------
Balance at end of year $ 8,890 $ 7,668 $ 7,984
========= ========= =========
The balance of impaired loans was $4.5 million and $4.3 million at December
31, 2000 and 1999, respectively. The Banks identify 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 $839,000, $511,000 and
$638,000 at December 31, 2000, 1999 and 1998, respectively. The average
recorded investment on impaired loans was $4.6 million, $4.3 million and
$5.9 million during 2000, 1999 and 1998, respectively, and the income
recognized, primarily on the cash basis, on impaired loans was $585,000,
$325,000 and $621,000 during 2000, 1999 and 1998, respectively. Interest
which would have been accrued on impaired loans during 2000, 1999 and 1998
was $517,000, $486,000 and $593,000, 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, non-accrual
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. Non-accrual 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,
---------------------------------
2000 1999 1998
---------------------------------
(In thousands)
Non-performing loans:
Non-accrual loans $2,564 $2,961 $3,281
Past due loans 90 days or more 1,992 2,210 4,265
Renegotiated loans --- 389 399
---------------------------------
$4,556 $5,560 $7,945
=================================
The impact of the above non-performing loans on interest income is as
follows:
December 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
(in thousands)
Interest income if performing in accordance
with original terms $ 517 $ 486 $ 593
Interest income actually recorded 446 348 606
--------- --------- ---------
$ 71 $ 138 $ (13)
========= ========= =========
46
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,
2000, were current as to principal and interest payments, and do not involve
more than normal risk of collectibility. At December 31, 2000, loans to
these related parties amounted to $14.2 million. An analysis of activity in
loans to related parties at December 31, 2000, resulted in new loans of $9.4
million and repayments of $11.8 million.
NOTE 5 - PREMISES AND EQUIPMENT
Estimated December 31,
useful lives 2000 1999
- ---------------------------------------------------------------------------------------------------
(in thousands)
Land $4,179 $4,178
Buildings and building improvements 10 to 50 years 17,507 13,795
Leasehold improvements 10 to 50 years 1,613 1,660
Furniture, fixtures and equipment 2 to 30 years 12,227 11,808
- ---------------------------------------------------------------------------------------------------
35,526 31,441
Less accumulated depreciation and amortization 11,130 9,544
- ---------------------------------------------------------------------------------------------------
$24,396 $21,897
===================================================================================================
NOTE 6 - DEPOSITS
At December 31, 2000, the schedule of maturities of certificates of deposit is
as follows (in thousands):
Year
- ----
2001 $218,872
2002 32,741
2003 8,347
2004 4,268
2005 724
Thereafter 1,672
-----------
$266,624
-----------
NOTE 7 - DEBT
Lines of Credit
As of December 31, 2000, Lakeland and NBSC had approved but unused borrowing
capacity with the Federal Home Loan Bank (FHLB), collateralized by FHLB
stock, of $57.1 million and $29.7 million, respectively. Borrowings under
this arrangement have an interest rate that fluctuates based on market
conditions and customer demand. As of December 31, 2000 and 1999, there were
no related outstanding borrowings.
47
Securities Sold Under Agreements to Repurchase
Borrowed money at December 31, 2000 and 1999 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 2000, 1999 and
1998. For purposes of the table, the average amount outstanding was
calculated based on a daily average.
2000 1999 1998
-----------------------------------------
(in thousands)
Balance at December 31 $ 10,650 $ 10,489 $ 8,110
Interest rate at December 31 5.09% 4.02% 3.52%
Maximum amount outstanding at any month-end during the year $ 26,513 $ 18,351 $ 18,019
Average amount outstanding during the year $ 13,350 $ 13,981 $ 13,021
Weighted average interest rate during the year 4.61% 3.70% 4.05%
Long-Term Debt
NBSC sold $10 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 5.77% and have a maturity date of November 8, 2010, subject
to the FHLB's option to convert this advance on November 6, 2002 and
quarterly thereafter. 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.
Lakeland 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.
NBSC sold $5 million in securities under an agreement to repurchase to the
FHLB . The securities had an interest rate of 5.98% and a maturity date of
August 20, 2002, subject to the FHLB's option to convert this advance on
August 20, 2000 and quarterly thereafter. The FHLB chose to convert this
advance on August 20, 2000 and NBSC repaid the advance and did not replace
the funding.
NOTE 8 - STOCKHOLDERS' EQUITY
In January 2001, the Company announced a stock repurchase program for the
purchase of up to 250,000 shares of the Company's outstanding common stock
over the next year.
In March 2000, the Company approved a stock repurchase plan of 210,000
shares of its common stock. During 2000, the Company purchased 206,781
shares of its outstanding common stock under the program at an average price
of $10.78 per share for an aggregate cost of $2.2 million.
On October 11, 2000, the Company's Board of Directors authorized a 5% stock
dividend, which was distributed on November 15, 2000.
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
48
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.
NOTE 9 - INCOME TAXES
The components of income taxes are as follows:
Years Ended December 31,
2000 1999 1998
- ---------------------------------------------------------------------------------------------------
(in thousands)
Current $5,798 $2,367 $4,345
Deferred (benefit) (1,103) 347 79
- ---------------------------------------------------------------------------------------------------
Total provision for income taxes $4,695 $2,714 $4,424
===================================================================================================
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,
2000 1999 1998
Amount Amount Amount
- -----------------------------------------------------------------------------------------------
(in thousands)
Federal income tax, at statutory rates $4,998 $2,757 $4,209
Increase (deduction) in taxes resulting from:
Change in valuation allowance -- -- (214)
Non-taxable interest income (848) (797) (497)
State income tax, net of federal
income tax effect 272 243 566
Other-net 273 511 360
- -----------------------------------------------------------------------------------------------
Provision for income taxes $4,695 $2,714 $4,424
===============================================================================================
The net deferred tax asset consisted of the following:
December 31,
2000 1999
- --------------------------------------------------------------------------------------------
(in thousands)
Allowance for possible loan losses $3,526 $2,170
Valuation reserves for land held for sale and other
real estate 660 660
Non-accrued interest 405 398
Depreciation 212 61
Deferred compensation 756 658
Other, net 35 48
Unrealized losses on securities available for sale 100 1,437
-------- --------
Deferred tax asset 5,694 5,432
-------- --------
Deferred tax liabilities
Other 867 371
-------- --------
Deferred tax liabilities 867 371
-------- --------
Net deferred tax assets, included in other assets $4,827 $5,061
======== ========
49
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, 2000
--------------------------------------------
(in thousands except per share amounts)
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ----------
Basic earnings per share
Net income available to common shareholders $10,005 13,250 $0.76
Effect of dilutive securities
Stock options --- 78 (0.01)
------- ------ -----
Diluted earnings per share
Net income available to common shareholders
plus assumed conversions $10,005 13,328 $0.75
======= ====== =====
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 13,295 $0.41
Effect of dilutive securities
Stock options --- 54 (0.01)
------ ------ -----
Diluted earnings per share
Net income available to common shareholders
plus assumed conversions $5,400 13,349 $0.40
====== ====== =====
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 13,270 $ 0.60
Effect of dilutive securities
Stock options --- 85 ---
--------- ------ ------
Diluted earnings per share
Net income available to common shareholders
plus assumed conversions $ 7,957 13,355 $ 0.60
========= ====== ======
50
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 each of the years ended December
31, 2000 and 1999, and $200,000 for the year ended December 31, 1998.
Salary Continuation Agreements
NBSC entered into a salary continuation agreement during 1996 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
Metropolitan entered into an agreement in January 1997 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 2000, 1999 and 1998, $35,000,
$179,000 and $154,000, 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 $83,000 in
2000, $86,000 in 1999 and $76,000 in 1998.
Prior to its merger into Lakeland, Metropolitan had 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 and 1998. No
contributions were made in the year ended December 31, 2000.
Postretirement Health Care Benefits
In 2000, the Company instituted 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. Prior to 2000, NBSC provided post
retirement benefits to its eligible employees. All information prior to 2000
is for NBSC only.
51
The accumulated postretirement benefit obligations (APBO's) as of December
31, 2000 and 1999 were as follows:
in thousands) 2000 1999
- --------------------------------------------------------------------------------------------
Accumulated post retirement benefit obligation, January 1 $375 $184
Service cost 28 12
Interest Cost 31 15
Actuarial gain (loss) (40) 40
Estimated benefit payments (26) (9)
- --------------------------------------------------------------------------------------------
Total accumulated post retirement benefit obligation 368 242
Unrecognized net gain (loss) due to past experience different from
that assumed and effects of changes in assumptions made 26 133
Unamortized transition obligation (70) (111)
- --------------------------------------------------------------------------------------------
Accrued accumulated post retirement benefit obligation $324 $264
============================================================================================
Because the Company's postretirement benefit plan reduced the number of
employees eligible for postretirement benefits and reduced the time period
for which they would be eligible, a curtailment gain is being recognized in
2000.
The components of net periodic post retirement benefit cost are as follows:
(in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------
Service cost, benefits attributed to employee service during the year $28 $12 $8
Interest cost on APBO 31 15 12
Recognition of curtailment gain (24) --- ---
Amortization of prior service cost 47 --- ---
Amortization of transition obligation 6 8 8
Amortization of gains (15) (13) (18)
- -------------------------------------------------------------------------------------------------------
Net periodic postretirement cost $73 $22 $10
=======================================================================================================
The discount rate used to determine the Company's APBO for 2000 was 7.75%,
for 1999 was 7.25% and for 1998 was 6.75%. The rate of increase projected
for future compensation levels was 4.0%. The Company projected that the cost
of medical benefits would increase at the following rates: 8.0% in 2001
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 29.4% (24.4%)
Effect on the postretirement benefit obligation 29.2% (24.6%)
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.
52
NOTE 12 - DIRECTORS RETIREMENT PLAN
The Company provides a plan that any director who completes 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,
-------------------------------
2000 1999
------------ ------------
(in thousands)
Actuarial present value of benefit obligation
Vested $ 355 $ 276
Nonvested 7 4
------------ ------------
$ 362 $ 280
============ ============
Projected benefit obligation $ 416 $ 316
Unrecognized net gain (loss) 38 (23)
Unrecognized prior service cost being amortized over fifteen years (288) (178)
------------ ------------
Accrued plan cost included in other liabilities $ 166 $ 115
============ ============
Year ended December 31,
---------------------------------------------
2000 1999 1998
------------ ------------ -----------
(in thousands)
Net periodic plan cost included the following components:
Service cost $ 3 $ 1 $ 1
Interest cost 29 21 19
Amortization of prior service cost 29 16 16
------------ ------------ -----------
$ 61 $ 38 $ 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.
NOTE 13 - STOCK OPTION PLANS
Employee Incentive Stock Option Plans
In February 2000, the Company established the 2000 Equity Compensation
Program which authorizes the granting of incentive stock options and
supplemental stock options to employees of the Company which includes those
employees serving as officers and directors of the Company. The program also
provides for the automatic grant of stock options to independent directors
of the Company. The plan covers options to purchase up to 997,500 shares of
common stock of the Company.
During 2000, the Company granted supplemental options to purchase 288,750
shares of common stock to the non-employee directors of Lakeland Bancorp.
These are exercisable in five equal installments beginning on the date of
grant and continuing on the next four anniversaries of the date of grant.
During 2000, the Company granted options to purchase 202,105 shares of
common stock to key employees. The shares are exercisable in four equal
installments on the first, second, third and fourth anniversary of the date
of grant.
53
In addition to the 2000 Equity Compensation program, the Company has assumed
the outstanding options granted under three employee stock option plans
established by High Point (the High Point Plans). The 1997 plan covers
options to purchase up to 170,000 shares; the 1990 plan covers options to
purchase up to 63,000 shares; and the 1987 plan covers options to purchase
up to 63,068 shares. As of December 31, 2000, 68,980 options are outstanding
under the High Point Plans.
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. As of December
31, 2000, 20,680 options under the 1996 Director Stock Option Plan were
outstanding.
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.
2000 1999 1998
------- ------- -------
(in thousands, except per share data)
Net income As reported $10,005 $ 5,400 $ 7,957
Pro forma 9,891 5,335 7,924
Net income per common share - basic As reported $ 0.76 $ 0.41 $ 0.60
Pro forma 0.75 0.40 0.60
Net income per common share - diluted As reported $0.75 $ 0.40 $ 0.60
Pro forma 0.74 0.40 0.59
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 2000: dividend rate of 3%, expected
volatility of 28%, risk-free interest rate of 5.50%, and expected lives of 7
years. There were no options granted in 1998 or 1999.
A summary of the status of the Company's option plans as of December 31,
2000, 1999 and 1998 and the changes during the years ending on those dates
is represented below:
2000 1999 1998
-------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
Number of exercise Number of exercise Number of exercise
shares price shares price shares price
-------------------------------------------------------------------------
Outstanding beginning of year 86,730 $5.50 137,340 $5.53 224,280 $5.50
Granted 490,855 9.26 --- --- --- ---
Exercised (33,500) 7.04 (49,350) 5.48 (85,680) 5.36
Forfeited (4,200) 8.93 (1,260) 10.02 (1,260) 10.02
-------------------------------------------------------------------------
Outstanding end of year 539,885 $8.80 86,730 $5.50 137,340 $5.53
Options exercisable at year end 110,980 86,730 137,340
========== ========== ==========
Weighted average fair value of
options granted during the
year $ 2.90 $ --- $ ---
========== ========= =========
54
The following table summarizes information about options outstanding at
December 31, 2000:
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 2000 life (years) price 2000 price
------------------- ------------------ ---------------- -------------- ------------------ ------------
$ 5.50 66,460 6.67 $5.50 66,460 $5.50
8.93-10.25 473,425 9.33 9.27 44,520 8.99
------- ------
539,885 110,980
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 and is currently a member of the Company's
Board of Directors.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Lease Obligations
Rentals under long-term operating leases amounted to approximately $342,000,
$325,000 and $511,000 for the years ended December 31, 2000, 1999 and 1998,
respectively, including rent expense to related parties of $33,000 in 2000,
$58,000 in 1999, and $335,000 in 1998. At December 31, 2000, 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,
------------
2001 $465
2002 477
2003 444
2004 461
2005 474
Thereafter 2,393
------
$4,714
------
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, 2000, or any other contingent liability or commitment, will
materially affect the Company's consolidated financial position or results
of operations.
55
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,
---------------------------
2000 1999
---------------------------
(in thousands)
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit $ 74,920 $ 72,269
Standby letters of credit and financial guarantees written 5,191 3,855
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 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, 2000 and 1999 varies up to 100%.
The Banks grant loans primarily to customers in their immediately adjacent
suburban counties which include Bergen, Morris, Passaic, Sussex and Essex
counties in Northern New Jersey and surrounding areas. 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.
56
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, 2000 and 1999 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, 2000 and 1999 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.
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,
-----------------------------------------------------------
2000 1999
-----------------------------------------------------------
Carrying Estimated Carrying Estimated
Value fair value value fair value
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
Financial Assets:
Cash and cash equivalents $49,791 $49,791 $40,342 $40,342
Interest bearing deposits with banks 60 60 216 216
Investment securities available for sale 187,880 187,880 152,591 152,591
Investment securities held to maturity 107,860 107,311 125,130 122,751
Loans 521,007 521,654 476,282 470,384
Financial Liabilities:
Deposits $800,762 $800,296 $736,739 $737,353
Securities sold under agreements to repurchase 10,650 10,647 10,489 10,489
Long-term debt 11,000 11,200 6,000 6,000
Commitments:
Standby letters of credit -- 6 -- 15
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 $8.0 million was available for payment of
dividends from Lakeland to the Company as of December 31, 2000.
57
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 $3.3 million was available for the payment of dividends from
NBSC to the Company as of December 31, 2000.
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, 2000, that the Company and
the Banks met all capital adequacy requirements to which they are subject.
As of December 31, 2000, 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, 2000 and 1999, the Company and the Banks have the
following capital ratios:
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
-------------- ------------------------------------------ -------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- --------------------- ------------------- --------------------- --------------------
(dollars in thousands)
As of December 31, 2000
Total capital
(to risk-weighted
assets)
Company $82,395 14.84% (greater than$44,426 (greater than8.00% (greater than N/A (greater than N/A
Lakeland 54,288 13.87 or equal to)31,303 or equal to)8.00 or equal to)$39,129 or equal to)10.00%
NBSC 24,736 14.90 13,277 8.00 16,596 10.00
Tier I capital
(to risk-weighted
assets)
Company $75,430 13.58% (greater than$22,213 (greater than4.00% (greater than N/A (greater than N/A
Lakeland 49,555 12.66 or equal to)15,652 or equal to)4.00 or equal to)$23,478 or equal to) 6.00%
NBSC 22,636 13.64 6,639 4.00 9,958 6.00
Tier I capital
(to average assets)
Company $75,430 8.47% (greater than$35,617 (greater than4.00% (greater than N/A (greater than N/A
Lakeland 49,555 8.32 or equal to)23,824 or equal to)4.00 or equal to)$29,780 or equal to)5.00%
NBSC 22,636 7.31 12,382 4.00 15,478 5.00
58
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
-------------- ------------------------------------------ -------------------------------------------
Amount Ratio 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$38,773 (greater than8.00% (greater than N/A (greater than N/A
Lakeland 43,691 16.42 or equal to)21,286 or equat to)8.00 or equal to)$26,608 or equal to)10.00%
NBSC 23,769 16.50 11,525 8.00 14,407 10.00
Metropolitan 9,576 13.50 5,677 8.00 7,095 10.00
Tier I capital
(to risk-weighted
assets)
Company $74,663 15.40% (greater than$19,386 (greater than4.00% (greater than N/A (greater than N/A
Lakeland 40,734 15.31 or equal to)10,643 or equal to)4.00 or equal to)$15,965 or equal to) 6.00
Metropolitan 8,825 12.44 2,838 4.00 4,257 6.00
Tier I capital
(to average assets)
Company $74,663 8.88% (greater than$33,643 (greater than4.00% (greater than N/A (greater than N/A
Lakeland 40,734 9.07 or equal to)17,964 or equal to)4.00 or equal to)$22,455 or equal to)5.00%
NBSC 21,941 7.84 11,197 4.00 13,992 5.00
Metropolitan 8,825 7.74 4,560 4.00 5,701 5.00
NOTE 19 - 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,
2000 2000 2000 2000
----------------------------------------------------
(In Thousands, Except Per Share Amounts)
Total interest income $13,865 $14,023 $14,684 $15,641
Total interest expense 4,944 5,088 5,569 6,119
----------------------------------------------------
Net interest income 8,921 8,935 9,115 9,522
Provision for possible loan losses 500 500 500 500
Non-interest income 1,627 2,166 2,289 2,181
Loss on sale of securities (42) --- (21) (466)
Non-interest expense 6,366 6,991 7,172 6,998
----------------------------------------------------
Income before taxes 3,640 3,610 3,711 3,739
Income taxes 1,236 1,176 1,189 1,094
----------------------------------------------------
Net income $2,404 $2,434 $2,522 $2,645
====================================================
Earnings per share
Basic $0.18 $0.18 $0.19 $0.21
Diluted $0.18 $0.18 $0.19 $0.20
59
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 1,489 1,629 1,495 1,679
Gain on sale of securities 25 5 --- 2
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 $0.14 $0.16 $0.03 $0.08
Diluted $0.14 $0.16 $0.03 $0.07
NOTE 20 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY:
BALANCE SHEETS
December 31,
ASSETS 2000 1999
- -------------------------------------------------------------------
(in thousands)
Cash and due from banks $418 $130
Investment securities available for sale 443 18
Investment in bank subsidiary 75,359 69,111
Land held for sale 1,860 1,935
Other assets 759 1,303
- -------------------------------------------------------------------
TOTAL ASSETS $78,839 $72,497
===================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------
Other liabilities $215 $215
Stockholders' equity 78,624 72,282
- -------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $78,839 $72,497
===================================================================
60
INCOME STATEMENTS
Years Ended December 31,
INCOME 2000 1999 1998
- -------------------------------------------------------------------------------------------------------
(in thousands)
Dividends from subsidiary $6,221 $5,010 $2,650
Other income 3 41 11
- -------------------------------------------------------------------------------------------------------
TOTAL INCOME 6,224 5,051 2,661
- -------------------------------------------------------------------------------------------------------
EXPENSE
Noninterest expenses 502 1,662 396
- -------------------------------------------------------------------------------------------------------
TOTAL EXPENSE 502 1,662 396
- -------------------------------------------------------------------------------------------------------
Income before benefit for income taxes 5,722 3,389 2,265
Benefit for income taxes (214) (267) (120)
- -------------------------------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiaries 5,936 3,656 2,385
Equity in undistributed income of subsidiaries 4,069 1,744 5,572
- -------------------------------------------------------------------------------------------------------
NET INCOME $10,005 $5,400 $7,957
=======================================================================================================
STATEMENTS OF CASH FLOWS
Years Ended December 31,
2000 1999 1998
- -------------------------------------------------------------------------------------------------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $10,005 $5,400 $7,957
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
(Increase) decrease in other assets 530 (447) 44
Increase in other liabilities --- 171 199
Equity in undistributed income of subsidiaries (4,069) (1,744) (5,572)
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,466 3,380 2,628
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale and maturity of investment
securities available for sale (393) --- ---
Proceeds received from option on land held for sale 75 --- ---
- -------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (318) --- ---
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock --- --- 470
Cash dividends paid on common stock (3,852) (3,314) (2,586)
Purchase of treasury stock (2,244) (635) (782)
Exercise of stock options 236 269 290
- -------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (5,860) (3,680) (2,608)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 288 (300) 20
Cash and cash equivalents, beginning of year 130 430 410
- -------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $418 $130 $430
=======================================================================================================
61
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 2001
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 2001
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 2001
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 2001
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 Balance Sheet as of December 31, 2000 and 1999.
(ii) Consolidated Statements of Income for each of the three years in the
period ended December 31, 2000, 1999 and 1998.
(iii) Consolidated Statements of Changes in Stockholders' Equity for each of
the three years in the period ended December 31, 2000, 1999, and 1998.
(iv) Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 2000, 1999 and 1998.
62
(v) Notes to Consolidated Financial Statements
(vi) Report of Grant Thornton LLP
(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 Bank Directors' Deferred Compensation Plan.
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
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, is incorporated by reference to exhibit 10.6 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999.
10.7 Amended and Restated Agreement and Plan of Merger, made as
of December 8, 1999, between LB and MSB, is incorporated by
reference to Exhibit 10.7 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1999.
10.8 Change of Control Agreement dated March 1, 2001, among
Lakeland Bancorp, Inc., Lakeland Bank and Joseph F. Hurley.
10.9 Change of Control Agreement dated March 1, 2001, among
Lakeland Bancorp, Inc., Lakeland Bank and Robert A.
Vandenbergh.
10.10 Change of Control Agreement dated March 6, 2001, among
Lakeland Bancorp, Inc., Lakeland Bank and Louis E. Luddecke.
10.11 Change of Control Agreement dated March 7, 2001, among
Lakeland Bancorp, Inc., Lakeland Bank and jeffery J.
Buonforte.
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.
63
21.1 Subsidiaries of Registrant.
23.1 Consent of Grant Thornton LLP Independent Certified Public
Accountants.
24.1 Power of Attorney.
99.1 Forward-looking Statement Information.
(b) Reports on Form 8-K
No current reports on Form 8-K were filed by the Company
during the fourth quarter of 2000.
64
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 29, 2001 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
- --------- -------- ----
*
- ---------------------------- Director, Chief Executive
Roger Bosma Officer, and President
*
- ---------------------------- Director
Robert B. Nicholson
*
- ---------------------------- Director
John W. Fredericks
*
- ---------------------------- Director
Bruce G. Bohuny
*
- ---------------------------- Director
Mary Ann Deacon
*
- ---------------------------- Director
Mark J. Fredericks
*
- ---------------------------- Director
John Pier, Jr.
*
- ---------------------------- Director
Paul P. Lubertazzi
*
- ---------------------------- Director
Joseph P. O'Dowd
*
- ---------------------------- Director
Arthur L. Zande
*
- ---------------------------- Director
Michael A. Dickerson
*
- ---------------------------- Director
Charles L. Tice
*
- ---------------------------- Director
George H. Guptill, Jr.
*
- ---------------------------- Executive Vice President
Joseph F. Hurley and Chief Financial Officer
*By: /s/ Roger Bosma
-------------------------
Roger Bosma
Attorney-in-Fact