Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

For the quarterly period ended                 March 31, 2003

OR

For the transition period from ____________ to _____________

Commission file number 33-27312

LAKELAND BANCORP, INC.

(Exact name of registrant as specified in its charter)

(973) 697-2000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

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  ¨

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest

practicable date.

As of March 31, 2003 there were 14,207,139 outstanding shares of Common Stock, no par value.

LAKELAND BANCORP, INC.

Form 10-Q Index

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements

1

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED INCOME STATEMENTS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

2

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

See accompanying notes to consolidated financial statements

3

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS—(UNAUDITED)

See accompanying notes to consolidated financial statements

4

Notes to Consolidated Financial Statements – (Unaudited)

Note 1.    Significant Accounting Policies

Basis of Presentation.

This quarterly report presents the consolidated financial statements of Lakeland Bancorp, Inc. (the Company) and its subsidiary, Lakeland Bank (Lakeland).

The Company’s financial statements reflect all adjustments and disclosures which management believes are necessary for a fair presentation of interim results. The results of operations for the quarter presented does not necessarily indicate the results that the Company will achieve for all of 2003. You should read these interim financial statements in conjunction with the consolidated financial statements and accompanying notes that are presented in the Lakeland Bancorp, Inc. Annual Report on Form 10-K for the year ended December 31, 2002.

The financial information in this quarterly report has been prepared in accordance with the Company’s customary accounting practices; these financial statements have not been audited. Certain information and footnote disclosures required under generally accepted accounting principles have been condensed or omitted, as permitted by rules and regulations of the Securities and Exchange Commission.

Stock-Based Compensation

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.

At March 31, 2003, the Company had four stock-based employee and director compensation plans, which are more fully described in the Company’s Annual Report on Form 10-K. The Company accounts for these plans under the recognition and measurement principles of APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Stock-based employee and director compensation costs are not reflected in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation (in thousands, except per share amounts).

5

Stock Options outstanding were 711,870 and 671,698 at March 31, 2003 and 2002, respectively. 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 2002: dividend rate of 2%, expected volatility of 35%, risk-free interest rate of 3.40% and expected lives of 7 years. The Company did not grant stock options for the three months ended March 31, 2003.

Note 2.    Statement of Cash Flow Information.

Basic earnings per share for a particular period of time is calculated by dividing net income by the weighted average number of common shares outstanding during that period.

Diluted earnings per share is calculated by dividing net income by the weighted average number of outstanding common shares and common share equivalents. The Company’s only outstanding “common share equivalents” are options to purchase its common stock.

All weighted average, actual shares and per share information has been adjusted retroactively for the effects of stock dividends.

The following schedule shows the Company’s earnings per share for the periods presented:

6

Note 4.    Investment Securities

Note 5.    Impaired Loans

The Company follows Statement of Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” (known as “SFAS No. 114”), and Statement of Accounting Standards No. 118, “Accounting by Creditors for Impairment of a Loan, Income Recognition and Disclosures.” SFAS No. 114 requires that certain impaired loans be measured based on the present value of expected future cash flows, discounted at the loan’s original effective interest rate.

The following table shows the Company’s recorded investment in impaired loans and the related valuation allowance calculated under SFAS No. 114 as of March 31, 2003 and 2002, and the average recorded investment in impaired loans during the three months preceding those dates:

7

Interest received on impaired loans ordinarily is recorded as interest income. However, if management is not reasonably certain that an impaired loan will be repaid in full, or if a specific timeframe to resolve full collection cannot yet be reasonably determined, all payments received are recorded as reductions of principal. The Company recognized interest on impaired loans of $155,000 in the first three months of 2003. Interest that would have accrued had the loans performed under original terms would have been $509,000 for the first three months of 2003.

Note 6.    New Accounting Pronouncements

The Company adopted FASB Interpretation 45 (FIN 45) Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others on January 1, 2003. FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company has financial and performance letters of credit. Financial letters of credit require the Company to make payment if the customer’s financial condition deteriorates, as defined in the agreements. Performance letters of credit require the Company to make payments if the customer fails to perform certain non-financial contractual obligations. The Company previously did not record a liability when guaranteeing obligations unless it became probable that the Company would have to perform under the guarantee. FIN 45 applies prospectively to guarantees the Company issues or modifies subsequent to December 31, 2002.

The maximum potential undiscounted amount of future payments of these letters of credit as of March 31, 2003 are $4.6 million and they expire through 2008. Amounts due under these letters of credit would be reduced by any proceeds that the Company would be able to obtain in liquidating the collateral for the loans, which varies depending on the customer.

In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin 51, Consolidated Financial Statements, for certain entities that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest (“variable interest entities”). Variable interest entities within the scope of FIN 46 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected returns, or both. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company is in process of determining what impact, if any, the adoption of the provisions of FIN 46 will have upon its financial condition or results of operations. The Company does not anticipate FIN 46 to have a material impact on the consolidated financial position or results of operations.

Note 7.    Commitments and Contingencies

Litigation

As described in filings that the Company has previously made with the SEC, Lakeland has various claims relating to portfolios of predominantly commercial leases that Lakeland purchased from Commercial Money Center, Inc. (“CMC”). CMC obtained surety bonds from three surety companies to guarantee each lessee’s performance. Relying on these surety bonds, Lakeland and other investors purchased the leases and CMC’s right to payment under the various surety bonds. CMC or a related entity, Commercial Servicing Corp. (“CSC”), continued to act as sub-servicer and, as such, was required to collect and forward payments to Lakeland on a monthly basis.

8

CMC or CSC failed to forward to Lakeland the required amounts due since late December 2001, and, accordingly, Lakeland demanded payment from the three surety companies in January 2002. While some additional payments were made to Lakeland during 2002, each of the three surety companies advised Lakeland at various dates during 2002 that no further payments would be made. Each surety company also reserved its rights to seek recoupment of the payments it had made.

Ultimately, Lakeland filed separate suits against the three surety companies seeking to enforce Lakeland’s rights under the various surety bonds. The complaints allege that each of the surety companies is liable for the payments due to Lakeland under the leases for which each surety company issued bonds and may not assert fraud as a defense to paying any claim under the bonds. Complaints were filed by the surety companies against Lakeland and other parties, alleging, among other things, that CMC fraudulently induced the surety companies to issue the surety bonds, and that the surety bonds are therefore void. Lakeland intends to vigorously defend these cases and believes that it has meritorious defenses to the claims raised by the sureties.

CMC and CSC filed for bankruptcy protection in May and June, 2002, respectively, in the United States Bankruptcy Court for the Southern District of Florida. The Florida Bankruptcy Court ordered that all collections by the servicers and sub-servicers under the leases be paid in escrow to the bankruptcy trustee pending final resolution of rights to those collections. On September 18, 2002, the bankruptcy action was transferred to the United States Bankruptcy Court for the Southern District of California.

On February 5, 2003, Lakeland and the Bankruptcy Trustee entered into a proposed settlement agreement, subject to California Bankruptcy Court approval, that was intended to settle and resolve all of the bankruptcy estate’s claims against Lakeland. On February 19, 2003, the Trustee filed a motion with the California Bankruptcy Court requesting approval of the settlement agreement. A hearing on the Trustee’s motion was initially scheduled for April 2, 2003.

Lakeland has been advised that prior to April 2, 2003, the Trustee engaged in negotiations with one of the sureties, which produced a competing offer. Although the Trustee was obligated under the terms of the proposed Lakeland settlement to present Lakeland’s agreement to the California Bankruptcy Court for approval, the Trustee also presented the competing offer to the Court and sought to defer any decision regarding Lakeland’s settlement agreement. On April 2, 2003, the California Bankruptcy Court declined to rule on Lakeland’s settlement agreement, establishing instead a schedule for the submission of court papers regarding the competing proposal and an evidentiary hearing currently scheduled to be held on June 4 and June 5, 2003. The competing proposal provides for a payment of $4,583,000 by the surety to the Bankruptcy Trustee and the funding by the surety of up to an additional $500,000, or more in the sole discretion of the surety, in attorneys’ fees for the Trustee to pursue avoidance claims against Lakeland and another bank. The competing proposal also provides that if the Bankruptcy Trustee recovers any amounts on its avoidance claims, the Trustee will first reimburse the surety for all amounts paid to the Trustee and thereafter the Trustee and the surety will share in any recoveries from Lakeland.

Lakeland intends to vigorously assert that its settlement agreement, and not the competing offer negotiated by the surety, should be approved by the California Bankruptcy Court, because it believes that the Lakeland settlement agreement will result in greater economic benefit and recovery to the creditors of the bankruptcy estate than the competing proposal. In addition, Lakeland believes that its settlement agreement will advance public policy in favor of settlements by resolving litigation, whereas the competing proposal, contrary to public policy, will create and perpetuate litigation. Lakeland also believes that the competing proposal is not in the best interests of the creditors. If the California Bankruptcy Court nevertheless approves the competing proposal, Lakeland intends to vigorously defend its interests in any litigation with the Trustee.

As of March 31, 2003, $16.0 million of the leases were on non-accrual.

Based on its examination of these matters and discussions with legal counsel, Lakeland continues to believe that it has substantial and meritorious positions and claims in the above matters. Lakeland intends to vigorously exercise all its rights and remedies to obtain the required payments.

From time to time, the Company and its subsidiaries are defendants in legal proceedings relating to their respective businesses. While the ultimate outcome of the above mentioned matter cannot be determined at this time, management does not believe that the outcome of any pending legal proceeding will materially affect the consolidated financial position of the Company, but could possibly be material to the results of operations of any one period.

9

PART I—ITEM 2

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

You should read this section in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

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 loan and lease 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; whether or not the Company ultimately receives payment of all amounts due from the lease portfolio as described in Note 6—Commitments and Contingencies in the Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q; changes in the conditions of the capital markets in general and in the capital markets for financial institutions in particular and the impact of the war in Iraq on such markets; the ability of the Company to integrate Community State Bank promptly into the Company’s overall business and plans if the pending merger with Community State Bank (and its CSB Financial Corp. holding company) is consummated; 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.

Significant Accounting Policies, Judgments and Estimates

The accounting and reporting policies of the Company and Lakeland 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, Lakeland Investment Corp., and Lakeland NJ Investment Corp. All intercompany balances and transactions have been eliminated.

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 loan and lease losses. The evaluation of the adequacy of the allowance for loan and lease 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.

10

The allowance for loan and lease losses is established through a provision for loan and lease losses charged to expense. Loan principal considered to be uncollectible by management is charged against the allowance for loan and lease losses. The allowance is an amount that management believes will be adequate to absorb 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 economic conditions which may affect the borrowers’ ability to pay. The evaluation also details historical losses by loan category, the resulting loss rates for which are projected at current loan total amounts. Loss estimates for specified problem loans are also detailed.

Interest income is accrued as earned on a simple interest basis. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. When a loan is placed on such non-accrual status, all accumulated accrued interest receivable applicable to periods prior to the current year is charged off to the allowance for loan and lease 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”. Impairment is measured 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.

The Company accounts for income taxes under the liability method of accounting for income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement and tax return purposes are allowance for loan and lease losses, deferred loan fees, deferred compensation and securities available for sale.

Results of Operations

(First three months of 2003 compared to first three months of 2002)

Net Income

Net income for the first three months of 2003 was $3.5 million, a 9% increase over the $3.2 million reported for the same period in 2002. Diluted earnings per share increased from $0.22 in first quarter 2002 to $0.25 in first quarter 2003. Return on Average Assets was 1.17% and Return on Average Equity was 15.84% for the first quarter 2003.

Net Interest Income

Net interest income on a tax equivalent basis for first quarter 2003 was $12.7 million, representing a $1.2 million or 10.2% increase from the $11.5 million earned in 2002. The increase in net interest income results from an increase in interest income due to an increase in average interest-earning assets outstanding along with a decrease in interest expense due to a declining rate environment as well as an increase in lower costing core deposits. The net interest margin decreased from 4.80% in first quarter 2002 to 4.49% in first quarter 2003.

Interest income on a tax equivalent basis increased from $15.9 million in first quarter 2002 to $16.6 million in 2003, an increase of $677,000 or 4.4%. Average earning assets increased $173.8 million or 17.9% from $971.0 million in first quarter 2002 to $1.14 billion in first quarter 2003. The impact of the increase in earning assets was offset by the impact of a decline in the yield on earning assets from 6.63% in first quarter 2002 to 5.87% in first quarter 2003, a 76 basis point decrease. The drop in the yield on earning assets can be attributed to the decline in the overall interest rate environment. Also contributing to the decline in the yield on earning assets was the placement on non-accrual of $16.0 million in pools of predominately commercial leases in 2002. As of March 31, 2002, only $6.9 million of these leases were on non-accrual. Interest that would have been accrued on the leases in the first three months of 2003 and 2002 was $381,000 and $204,000,

11

respectively. The effect of placing these leases on non-accrual was to decrease the yield on earning assets by 13 basis points in the first quarter of 2003 and 9 basis points in the first quarter of 2002.

Total interest expense decreased from $4.4 million in first quarter 2002 to $3.9 million in first quarter 2003, a decrease of $488,000. A $159.9 million increase in average interest bearing liabilities was offset by a 61 basis point decrease in the cost of funds to 1.71%. The cost of funds was influenced by a decline in rates as well as an increase in lower cost core deposits. Time deposits as a percent of total deposits decreased from 24% in first quarter of 2002 to 22% during the same period in 2003. Lower yielding savings and interest bearing demand accounts as a percent of deposits increased from 50% in first quarter 2002 to 55% in 2003.

Provision for Loan and Lease Losses

In determining the provision for loan and lease 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 loan and lease losses, and prevailing economic conditions.

The provision for loan and lease losses remained the same at $750,000 for the three months ended March 31, 2003 as it was for the same quarter last year. During the first quarter of 2003, the Company charged off loans of $698,000 and recovered $637,000 in previously charged off loans compared to $177,000 and $65,000, respectively, during the same period in 2002. For more information, see “Risk Elements” under “Financial Condition.”

Noninterest Income

Noninterest income, exclusive of gains on sales of securities sold, increased $163,000 to $2.3 million in first quarter 2003. The gains on securities sold totaled $265,000 in the first quarter of 2003 compared to $74,000 for the same period last year. Noninterest income, including gains on sales of securities, increased $354,000 to $2.6 million in first quarter 2003. Financial institutions typically disclose noninterest income excluding gains on securities sold (as well as noninterest income including gains on securities sold) in order to reflect that portion of noninterest income which such institutions can manage from quarter to quarter. Service charges on deposit accounts increased $98,000 or 7% to $1.5 million in first quarter 2003. Commissions and fees increased $83,000 or 18% to $539,000 in the same time period, primarily due to increased loan volumes. Other income decreased $18,000 to $264,000 in the first quarter of 2003 from $282,000 in the first quarter of 2002, due to a decline in gains on sales of leases resulting from the Company retaining a larger percentage of originated leases in the Company’s own portfolio compared to first quarter last year.

Noninterest Expense

Noninterest expense increased from $8.0 million in the first quarter of 2002 to $9.0 million in 2003, an increase of $993,000 or 12%. Salaries and employee benefits increased $305,000 from $4.7 million in the first quarter 2002 to $5.0 million in 2003 as a result of expansion of Lakeland’s branch network as well as normal salary and benefit increases. Net occupancy expense increased from $789,000 in first quarter 2002 to $925,000 in 2003 as a result of increased utility and snow removal costs incurred this past winter. Furniture and equipment expenses increased from $695,000 in the first quarter of 2002 to $814,000 as a result of increased expenses due to the continued expansion of the Company. Stationery, supplies and postage expense increased from $309,000 during first quarter 2002 to $330,000 in 2003, an increase of $21,000 or 7% mainly due to the increased size of the Company and an increase in postal rates in the second half of 2002. Other expenses increased from $1.5 million in first quarter 2002 to $1.9 million in first quarter 2003, an increase of $412,000. This increase is primarily due to increased legal costs associated with the litigation of the purchased pools of commercial leases, increased consulting costs relating to an operational efficiency review and increased marketing costs.

Financial Condition

The Company’s total assets increased $54.6 million or 5% from $1.207 billion at December 31, 2002, to $1.262 billion at March 31, 2003. Total deposits increased from $1.059 billion on December 31, 2002 to $1.118 billion on March 31, 2003, an increase of $59.0 million or 6%.

12

Loans

Loans increased from $718.7 million on December 31, 2002 to $726.1 million on March 31, 2003, an increase of $7.5 million, or 1.0%. The largest growth was seen in commercial and leasing loans which increased $9.8 million or 3% from $314.4 million at year-end to $324.1 million on March 31, 2003. Consumer and home equity loans showed a slight increase of $2.3 million or 1%, while residential mortgage loans decreased by $4.6 million or 3% to $165.5 million due to significant loan refinancing activity.

Risk Elements

The following schedule sets forth certain information regarding the Company’s non-accrual, past due and renegotiated loans and other real estate owned on the dates presented: