<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT
PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
------------------
Skylands Financial Corporation
(Exact name of company as specified in its charter)
New Jersey
(State or other jurisdiction of incorporation or organization)
22-3644018
(IRS Employer Identification No.)
24-26 CROSSROADS CENTER
INDEPENDENCE TOWNSHIP, NEW JERSEY 07840
(Address of principal office)
908-850-9010
(Company's telephone number, including area code)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Title of Class: Common Stock, par value $2.50 per share
Name of each exchange on which registered: NASDAQ
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 ( )
As of November 15, 1999, there were 2,527,520 shares outstanding of the
Company's Common Stock.
1
<PAGE> 2
SKYLANDS FINANCIAL CORPORATION
STATEMENTS OF CONDITION
September 30, 1999 and December 31, 1998
(in thousands except share data)
<TABLE>
<CAPTION>
September 30, December 31
1999 1998
------------- -----------
ASSETS (UNAUDITED)
<S> <C> <C>
CASH AND DUE FROM BANKS
Non-interest bearing $ 7,036 $ 4,367
Interest bearing 560 592
FEDERAL FUNDS SOLD 2,500 2,500
--------- ---------
Total cash and cash equivalents 10,096 7,459
--------- ---------
SECURITIES
Available for sale at market value 14,329 18,816
Held to maturity at amortized cost
(market value of $43,256 in 1999,
and $31,771 in 1998) 43,905 31,566
--------- ---------
Total securities 58,234 50,382
--------- ---------
LOANS 141,492 117,323
Less:
Unearned income (201) (182)
Allowance for possible loan losses (2,177) (1,873)
--------- ---------
Net loans 139,114 115,268
--------- ---------
PREMISES AND EQUIPMENT, NET 2,931 2,865
ACCRUED INTEREST RECEIVABLE 1,014 906
OTHER REAL ESTATE 105 105
OTHER ASSETS 2,840 2,550
--------- ---------
Total assets $ 214,334 $ 179,535
========= =========
LIABILITIES AND SHAREHOLDERS EQUITY
LIABILITIES
Deposits
Demand
Non-interest bearing $ 38,022 $ 30,234
Interest bearing 25,179 22,357
Savings 52,114 53,636
Time 79,857 59,032
--------- ---------
Total deposits 195,172 165,259
Other Borrowings 3,000 0
Accrued Expenses and other liabilities 1,063 657
--------- ---------
Total liabilities 199,235 165,916
--------- ---------
SHAREHOLDERS' EQUITY
Common Stock par value $2.50 per share
10,000,000 shares authorized; 2,507,520
and 2,490,004 shares issued and outstanding
in 1999 and 1998 respectively 6,269 5,929
Additional paid in capital 6,284 4,998
Retained Earnings 2,590 2,562
Accumulated other comprehensive income (Loss) (44) 130
--------- ---------
Total shareholders' equity 15,099 13,619
--------- ---------
Total liabilities and shareholders' equity $ 214,334 $ 179,535
========= =========
</TABLE>
2
<PAGE> 3
SKYLANDS FINANCIAL CORPORATION
STATEMENTS OF INCOME
(Unaudited)
(in thousands except share and per share data)
<TABLE>
<CAPTION>
Three months Nine months
Ended September Ended September
30, 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 3,028 $ 2,415 $ 8,410 $ 6,808
Interest on securities 911 770 2,622 2,290
Interest on federal funds sold 55 44 94 103
---------- ---------- ---------- ----------
Total Interest Income 3,994 3,229 11,126 9,201
INTEREST EXPENSE 1,513 1,345 4,242 3,800
---------- ---------- ---------- ----------
NET INTEREST INCOME 2,481 1,884 6,884 5,401
PROVISION FOR POSSIBLE LOAN LOSSES 296 75 606 250
---------- ---------- ---------- ----------
NET INTEREST INCOME
AFTER PROVISION
FOR POSSIBLE LOANS LOSSES 2,185 1,809 6,278 5,151
---------- ---------- ---------- ----------
OTHER INCOME:
Gain on sale of securities 1 24 47 56
Other 252 226 731 597
---------- ---------- ---------- ----------
Total Other Income 253 250 778 653
---------- ---------- ---------- ----------
OTHER EXPENSES:
Salaries and employee benefits 658 547 1,933 1,597
Occupancy expense 152 118 454 342
Equipment and furniture expense 49 38 151 108
Other operating expense 577 599 1,724 1,584
---------- ---------- ---------- ----------
Total Other Expenses 1,436 1,302 4,262 3,631
---------- ---------- ---------- ----------
INCOME BEFORE
PROVISION FOR
INCOME TAXES 1,002 757 2,794 2,173
PROVISION FOR INCOME TAXES 392 290 1,087 829
---------- ---------- ---------- ----------
NET INCOME $ 610 $ 467 $ 1,707 $ 1,344
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic 2,507,520 2,474,456 2,502,904 2,470,294
========== ========== ========== ==========
Diluted 2,580,435 2,607,821 2,588,921 2,614,686
========== ========== ========== ==========
BASIC EARNINGS PER SHARE $ 0.24 $ 0.19 $ 0.68 $ 0.54
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ 0.24 $ 0.18 $ 0.66 $ 0.51
========== ========== ========== ==========
</TABLE>
3
<PAGE> 4
SKYLANDS FINANCIAL CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
For the nine months ended September 30, 1999
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Total Comprehensive
Stock Capital Earnings Income (Loss) Equity Income
-------- ---------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998 $ 5,929 $ 4,998 $ 2,562 $ 130 $ 13,619 $ 0
Net Income -Nine Months
Ended September 30, 1999 --- --- 1,707 --- 1,707 1,707
5% Stock Dividend 297 1,203 (1,500) --- --- ---
Exercise of Stock Options 26 22 --- --- 48 ---
Dividend Reinvestment Plan 17 61 --- --- 78 ---
Cash Dividends ($.07 per share) and
Payments for Fractional Shares --- --- (179) --- (179) ---
Unrealized Loss on Securities --- --- --- --- --- ---
Available for Sale, Net of Taxes --- --- --- (174) (174) (174)
-------- -------- -------- -------- -------- --------
Balance September 30, 1999 $ 6,269 $ 6,284 $ 2,590 ($ 44) $ 15,099 $ 1,533
======== ======== ======== ======== ======== ========
Disclosure of Reclassification Amount:
Unrealized Holding Loss ($ 203)
Less: Reclassification Adjustments for
Gains Included in Net Income (Net of Tax) 29
--------
Net Unrealized Loss on Securities ($ 174)
========
</TABLE>
For the nine months ended September 30, 1998
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Total Comprehensive
Stock Capital Earnings Income (Loss) Equity Income
-------- ---------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1997 $ 5,593 $ 3,514 $ 2,452 $ 135 $ 11,694 $ 0
Net Income -Nine Months
Ended September 30, 1998 --- --- 1,344 --- 1,344 1,344
5% Stock Dividend 278 1,298 (1,576) --- --- ---
Exercise of Stock Options 13 9 --- --- 22 ---
Dividend Reinvestment Plan 8 38 --- --- 46 ---
Cash Dividends ($.03 per share) and
Payments for Fractional Shares --- --- (74) --- (74) ---
Unrealized Gain on Securities
Available for Sale, Net of Taxes --- --- --- 43 43 43
-------- -------- -------- -------- -------- --------
Balance September 30, 1998 $ 5,892 $ 4,859 $ 2,146 $ 178 $ 13,075 $ 1,387
======== ======== ======== ======== ======== ========
Disclosure of Reclassification Amount:
Unrealized Holding Gains
Arising During Period $ 6
Less: Reclassification Adjustments for
Gains Included in Net Income (Net of Tax) 37
--------
Net Unrealized Gain on Securities $ 43
========
</TABLE>
4
<PAGE> 5
SKYLANDS FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the Nine Months Ended September 30,
<TABLE>
<CAPTION>
OPERATING ACTIVITIES 1999 1998
-------- --------
<S> <C> <C>
Net Income: $ 1,707 $ 1,344
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities
Provision for possible loan losses 606 250
Depreciation and amortization 101 231
(Gain) on sale of securities (47) (56)
Premium amortization on securities, net 169 232
Decrease (increase) in accrued interest receivable (108) 7
Increase in other assets (215) (77)
Increase in federal funds purchased 3,000 0
Increase in accrued expenses and other liabilities 406 397
-------- --------
Net cash provided by operating activities 5,619 2,328
-------- --------
INVESTING ACTIVITIES
Purchase of securities-
Available for sale (2,722) (4,747)
Held to maturity (19,757) (13,637)
Maturities of securities-
Available for sale 2,754 3,569
Held to maturity 7,281 7,367
Sales of securities available for sale 4,189 3,206
Capital expenditures (135) (388)
Net increase in loans (24,452) (18,564)
-------- --------
Net cash used in investing activities (32,842) (23,194)
-------- --------
FINANCING ACTIVITIES
Increase in deposits 29,913 20,213
Proceeds from the issuance of common stock, net 126 68
Cash dividends (179) (74)
-------- --------
Net cash provided by financing activities 29,860 20,207
Increase in cash and cash equivalents 2,637 (659)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,459 6,213
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,096 $ 5,554
======== ========
SUPPLEMENTAL
DISCLOSURES
Cash paid during the period for:
Interest $ 4,010 $ 3,794
Income Taxes 1,108 942
======== ========
</TABLE>
5
<PAGE> 6
Notes to Consolidated Financial Statements - (UNAUDITED)
NOTE 1. FORMATION OF HOLDING COMPANY.
At its Annual Meeting of Shareholders on April 20, 1999, a proposal to
form a one-bank holding company by adopting a Plan of Acquisition
whereby all of the stock of the Bank would be acquired by Skylands
Financial Corporation, a newly formed New Jersey corporation, was
approved by a two thirds majority of shareholders eligible to vote. The
Plan of Acquisition was executed on February 18, 1999 between the Bank
and Skylands Financial Corporation. As of August 9, 1999, all required
approvals were obtained from the relevant regulatory authorities (the
Securities and Exchange Commission, the New Jersey Department of
Banking and Insurance, NASDAQ and the Federal Reserve Bank). On
September 17, 1999 the Plan of Acquisition was consummated. All of the
then outstanding shares of the Bank were exchanged for an equal number
of shares of Skylands Financial Corporation common stock and Skylands
Financial Corporation acquired all of the outstanding shares of the
Bank. This exchange of shares has been accounted for as a
reorganization of entities under common control resulting in no changes
in the underlying amount of assets and liabilities.
Note 2. BASIS OF PRESENTATION
This quarterly report presents the consolidated financial statement of
the Skylands Financial Corporation and its subsidiary Skylands
Community Bank and Skylands Community Investment Company, Inc., a
subsidiary of Skylands Community Bank. The term "Company" refers to
Skylands Financial Corporation and Skylands Community Bank, (the
"Bank") as a consolidated entity. See "Note 1. FORMATION OF HOLDING
COMPANY." The Company is a one-bank holding company. All prior period
references and financial comparisons are to Skylands Community Bank and
its subsidiary, Skylands Community Investment Company, Inc. Unless
specifically stated to the contrary, these references will identify the
"Company."
The unaudited financial statements of the Company reflect all
adjustments, which, in the opinion of management, are necessary for a
fair statement of results for the interim period. Although the Company
believes that the financial statements are adequate to make the
information provided not be misleading, it is suggested that these
financial statements be read in conjunction with the Bank's audited
financial statements and notes thereto for the fiscal year ended
December 31, 1998. These notes are included in the Bank's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1998. The results
of the three-month and nine-month periods ended September 30, 1999 are
not necessarily indicative of the results for the full year.
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.
6
<PAGE> 7
Note 3. INTEREST.
The line item for "Accrued expenses and other liabilities" includes
accrued interest expense of $336,000 at September 30, 1999 and $104,000
at December 31, 1998.
Note 4. RELATED PARTY TRANSACTIONS.
In October 1997, the Company entered into a five-year sublease
agreement with RoNetco Supermarkets, Inc. for an in-store "Financial
Service Facility" at a supermarket in Byram, New Jersey which is
operated by RoNetco Supermarkets, Inc. The office opened in June of
1998. An officer and shareholder of RoNetco Supermarkets, Inc. is also
a director of the Company. Management believes that this transaction
was on substantially the same terms and conditions as those prevailing
at the time for comparable transactions with non-related parties.
Note 5. IMPAIRED LOANS.
A loan is considered impaired when it is probable that the Company will
be unable to collect all amounts due according to the original
contractual terms of the loan agreement. At September 30, 1999 and
December 31, 1998 impaired loans consisted of non-accrual loans and one
loan totaling $340,000 and $383,000 that was previously on
non-performing status which has been renegotiated by the Company and is
performing in accordance with the agreed upon terms. The loan has been
returned to a performing status. As of September 30, 1999 and December
31, 1998 the Company's recorded investment in impaired loans and the
related valuation allowance are as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
Recorded Valuation Recorded Valuation
(in thousands) Investment Allowance Investment Allowance
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Impaired Loans-
Valuation allowance required 1,656 232 1,342 166
No valuation allowance required 0 0 0 0
----- ----- ----- -----
Total Impaired loans 1,656 232 1,342 166
===== ===== ===== =====
</TABLE>
The valuation allowance is included in the allowance for possible loan
and lease losses in the accompanying statement of condition. The
average recorded investment in impaired loans for the periods ended
September 30, 1999 and December, 31, 1998 was $1,509,000 and $930,000,
respectively.
Accounting standards require 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. As a practical expedient,
impairment may be measured on the loan's observable market price or the
fair value of the collateral if the loan is collateral dependant. When
the measure of the impaired loan is less than the recorded investment
in the loan, the impairment is recorded through a valuation allowance.
Large groups of smaller-balance homogenous loans, such as
7
<PAGE> 8
residential mortgage loans, credit card loans and consumer loans are
collectively evaluated for impairment.
NOTE 6. COMPREHENSIVE INCOME.
During the first quarter of 1998, the Company implemented Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). The objective of SFAS No. 130 is to show
"comprehensive income' and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements.
Comprehensive income is the total of net income and all other
non-stockholder changes in equity. There are several types of
non-stockholder changes in equity, but the only one that is relevant
for the Company is unrealized holding gains/losses on securities
classified as available for sale. Transactions with stockholders, such
as proceeds from the sale of stock and the payment of dividends, are
not part of comprehensive income.
The tax effect of other comprehensive income is as follows:
<TABLE>
<CAPTION>
Before Net of
Tax Amount Tax Effect Tax Amount
---------- ---------- ----------
<S> <C> <C> <C>
Period ended September 30, 1999
Unrealized losses on securities-
Unrealized holdings losses arising during period ($327,000) $ 124,000 ($203,000)
Less- Reclassification adjustments for
gains realized in net income 47,000 (18,000) 29,000
--------- --------- ---------
Other comprehensive loss ($280,000) $ 106,000 ($174,000)
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Before Net of
Tax Amount Tax Effect Tax Amount
---------- ---------- ----------
<S> <C> <C> <C>
Period ended September 30, 1998
Unrealized losses on securities-
Unrealized holdings gains arising during period $ 9,000 ($ 3,000) $ 6,000
Less- Reclassification adjustments for
gains realized in net income 56,000 (19,000) 37,000
-------- -------- --------
Other comprehensive income $ 65,000 ($22,000) $ 43,000
======== ======== ========
</TABLE>
Note 7. ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES.
Changes in the allowance for possible loan and lease losses are
summarized as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Balance, beginning of year $ 1,873,000 $ 1,374,000
Provision charged to expense 606,000 665,000
Loans charged off (309,000) (185,000)
Recoveries of loans previously
charged off 7,000 19,000
----------- -----------
Balance, end of period $ 2,177,000 $ 1,873,000
----------- -----------
</TABLE>
8
<PAGE> 9
Note 8. NEW FINANCIAL ACCOUNTING STANDARD.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, certain derivative instruments embedded in other
contracts, and hedging activities. In particular, SFAS No. 133
requires a reporting company to record every covered derivative
instrument on its balance sheet as either an asset or liability
measured at fair value. SFAS No. 137 amended the effective date of
SFAS No. 133 to be for all quarters of fiscal years beginning after
June 15, 2000. However, reporting companies may adopt it on a going
forward basis as of the start of any fiscal quarter. The Company does
not currently have any derivative instruments, therefore it does not
expect implementation of SFAS No. 133 as amended by SFAS No. 137
to have a material impact on its financial statements.
Note 9. EARNINGS PER SHARE.
BASIC EARNINGS PER SHARE is based on the weighted average number of
shares outstanding for the periods presented.
DILUTED EARNINGS PER SHARE is computed based on the weighted average
number of outstanding shares outstanding for the periods presented
adjusted for the effect of stock options and warrants outstanding, if
dilutive.
The following is a reconciliation of the calculation of year to date
basic and diluted earnings per share:
<TABLE>
<CAPTION>
Weighted Per
Average Share
Income Shares Amount
---------- ---------- ------
<S> <C> <C> <C>
For the period ended September 30, 1999-
Basic Earnings per share- Income available to
common shareholders $1,707,000 2,507,520 $0.68
Effect of Dilutive Securities- Stock Options 0 81,401
- ----------------------------------------------------------------------------------------------
Diluted Earnings per share- Income available to
common shareholders plus assumed conversions $1,707,000 2,588,921 $0.66
==============================================================================================
For the period ended September 30, 1998-
Basic Earnings per share- Income available to
common shareholders $1,344,000 2,502,904 $0.54
Effect of Dilutive Securities- Stock Options 0 111,782
- ----------------------------------------------------------------------------------------------
Diluted Earnings per share- Income available to
common shareholders plus assumed conversions $1,344,000 2,614,686 $0.51
==============================================================================================
</TABLE>
9
<PAGE> 10
All per share data has been restated to reflect the five percent stock
dividend paid in April of 1999.
Note 10. LOANS.
Loans outstanding by classifications at September 30, 1999 and December
31, 1998 are as follows:
<TABLE>
<CAPTION>
9/30/99 12/31/98
-------- --------
<S> <C> <C>
Loans secured by real estate-
Nonresidential properties $ 22,915 $ 22,860
Residential properties 51,726 40,117
Commercial and industrial loans 60,853 47,708
Loans to individuals 5,998 6,638
-------- --------
Total loans $141,492 $117,323
======== ========
</TABLE>
10
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-QSB contains certain forward-looking
statements within the meaning of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, including statements concerning the
Company's products, results of operations and prospects. These forward-looking
statements involve risk and uncertainties, including risk related to general
economic business conditions, among them the availability and cost of funds;
interest rate fluctuations; changes which could affect customer spending;
industry trends; the loss of major customers; and changes in demand for the
Company's products as detailed from time to time in the Company's filings with
the Securities and Exchange Commission and previously in the Bank's filings
with the Federal Deposit Insurance Corporation. Such statements are based on
Management's current expectations and are subject to a number of factors and
uncertainties, including those set forth above, which could cause actual
results to differ materially from those described in the forward-looking
statements.
Business
Skylands Financial Corporation is a one-bank holding company whose
principal asset is Skylands Community Bank. Skylands Community Bank (the "Bank")
is a commercial bank formed under the laws of New Jersey on May 17, 1989, and
which commenced operations on October 9, 1990. The Company's and the Bank's main
office and operations center is located at 24-26 Crossroads Center, Route 517,
Independence Township, Warren County, New Jersey 07840. The Company currently
has six branches. They are located at Netcong (the "Netcong Branch"), Succasunna
(the "Roxbury Branch"), Oxford (the "Oxford Branch"), Lake Hopatcong (the
"Jefferson Branch"), Stanhope (the "Byram Branch") and Rockaway (the "Rockaway
Branch"). As a full-service community bank, it is believed that the
establishment of these branch offices is an important step in the growth of the
Company and continues to advance the Company's strategy of growth and expansion
of its market area. These branches give the Company access to new markets, which
allow it to expand its deposit base and present new lending opportunities.
The Company engages in the general business of commercial banking and
offers traditional deposit services such as checking, savings and certificates
of deposit. For its commercial customers, the Company offers loans for
equipment, working capital needs and commercial real estate as well as New
Jersey Economic Development Authority and Small Business Administration loans.
The Company also bids for tax anticipation notes and bond anticipation notes. In
consumer lending, the Company offers personal, automobile, credit card, home
equity and home improvement loans and makes one-to-four family residential real
estate loans available for its customers. The Company believes it offers
competitive rates for its deposit and loan services, thereby enabling consumers
and business entities in its service areas to avail themselves of the Company's
credit and non-credit services.
11
<PAGE> 12
Regulatory approval was received by the Company to establish a branch on
Mountain Avenue in Hackettstown, NJ. The Company also plans to move its
administrative offices to this location. The premises are under construction and
should be ready for occupancy in the first quarter of 2000.
Results of Operations
For the three-month period ended September 30, 1999, the Bank recorded net
income of $610,000 as compared to net income of $467,000 for the three-month
period ended September 30, 1998. This represents an increase of $143,000 or
30.6%. Basic net income per share for the three-month period ended September 30,
1999 was $.24 per share versus $.19 per share for the period ended September 30,
1998, representing an increase of $.05 per share or 26.3%. For the nine months
ended September 30, 1999, the Bank recorded net income of $1,707,000 as compared
to $1,344,000 for the nine months ended September 30, 1998. This represents an
increase of $363,000 or 27.0%. Basic net income per share for the nine month
periods ended September 30, 1999 and September 30, 1998 was $.68 and $.54 per
share respectively, representing an increase of $.14 per share or 25.9%.
Net interest income, which represents the difference between the
interest and fees earned on loans and investments and the cost of funds was
$2,481,000 and $6,884,000 for the three and nine-month periods ended September
30, 1999. It was $1,884,000 and $5,401,000 for the three and nine-month periods
ended September 30, 1998. These results represent increases of $597,000 or 31.7%
and $1,483,000 or 27.5% over the same periods in 1998. The Bank has been able to
accomplish these changes due to increases in earning assets, primarily loans and
investments, which are funded by increases in deposits. The borrowing capacity
and liquidity resulting from membership in the Federal Home Loan Bank ("FHLB")
has also aided asset growth by providing an alternative source of funding to
deposits on a short term basis. The ratio of loans to deposits continued to
increase during the period. It rose to 72.5% from 71.0% and 70.3% at December
31, 1998 and September 30, 1998 respectively. The change in this ratio had a
positive impact on the Company's net interest income. Income and fees on loans
increased to $3,028,000 and $8,410,000 from $2,415,000 and $6,808,000 for the
three and nine month periods ending September 30, 1999 and September 30, 1998,
respectively. These results represented dollar increases of $613,000 and
$1,602,000, respectively and percentage increases of 25.4% and 23.5% over the
same periods in 1998. The increase in interest income was moderated by an
increase in interest expense primarily attributable to the increase in average
deposits. Total interest expense increased to $1,513,000 and $4,242,000 from
$1,345,000 and $3,800,000 for the three and nine month periods ending September
30, 1999 and September 30, 1998, respectively. These results represented dollar
increases of $168,000 and $442,000, respectively and percentage increases of
12.5% and 11.6%, respectively over the same periods in 1998. This increase in
interest expense, in turn, was moderated by a decline in the cost of funds to
3.11% for the nine month period ended September 30, 1999 versus 3.47% for the
nine month period ended September 30, 1998. Net interest income was also
impacted favorably by the funding provided by the increase of non-interest
bearing deposits (checking accounts). At September 30, 1999 the year to date
average balance of checking accounts increased by $6,665,000 or 22.9% from the
December 31, 1998 average balances.
12
<PAGE> 13
The Allowance for Possible Loan and Lease Losses ("ALLL") is established to
provide for potential losses in the Company's loan portfolio. The Company
maintains its ALLL at a level considered by management to be adequate to cover
the inherent risks of loan loss associated with its loan portfolio, although
actual losses may vary from current estimates. The Company increased its ALLL
during the first nine months of 1999 by $304,000 to $2,177,000. This was
accomplished by virtue of a provision of $606,000 in the first nine months of
1999 and net charge offs for the period of $302,000. The Company may continue to
make additional provisions to the ALLL in future months. See "Financial
Condition" below.
Increases in Other Income for the three-month and nine-month periods of
1999 versus the same period in 1998 also contributed to the Company's net
income. For the three-month period ended September 30, 1999, Other Income,
exclusive of securities transactions, increased by $26,000, or 11.5% over the
three-month period ended September 30, 1998. For the nine-month period ended
September 30, 1999 other income, exclusive of securities transactions, increased
by $134,000 or 22.4% over the nine-month period ended September 30, 1998. Other
Income consists primarily of service charges on deposit accounts. The increases
in Other Income, less securities gains, are attributable both to the overall
growth of the Company and the opening of the Byram and Rockaway Branches in
1998. It is expected that Other Income (Non-Interest Income) will continue to
make an important contribution to the Company's profitability.
Total Other Expenses increased for the three-month and nine-month periods
ending September 30, 1999 versus the same periods in 1998. This is primarily due
to the expenses associated with the significant growth of the Company's loan and
deposit portfolios and the total assets of the Company. This growth resulted
from the opening of the Byram Township and Rockaway Branches and an ongoing,
concerted effort to generate new loan and deposit growth in the existing
branches. Total Other Expenses consist of Personnel Expense, Occupancy Expense,
Equipment and Furniture Expense and Other Operating Expenses. These expenses
increased by 10.3% or $134,000 for the three-month period ended September 30,
1999, versus the same period in 1998. The increase for the nine-month period
ended September 30, 1999 was 17.4% or $631,000 for the nine-month period ended
September 30, 1999 versus the same period in 1998. The Byram and Rockaway
Branches, which opened in 1998, contributed to increases in all of the
categories of Other Expenses. In addition, the overall growth of the Company and
of the loan portfolio in particular, necessitated additions to staff to assure a
consistently high level of customer service, to properly manage the loan
portfolio. All of these actions, while necessary to the continued growth of the
Company have contributed to the expansion of the Company's franchise. They have
also have served to increase the level of salary and benefit expenses. Salaries
and Employee Benefits increased by $111,000 or 20.3% for the three-month period
ended September 30, 1999 and by $336,000 or 21.0% for the nine-month period
ended September 30, 1999. Occupancy Expense and Equipment and Furniture Expense
increased by $45,000 for the three-month period ended September 30, 1999 versus
the same period in 1998 and by $155,000 for the nine-month period ended
September 30, 1999. Other Operating Expense decreased by $22,000 or 3.7% for the
three-month period ending September 30, 1999 and increased by $140,000 or 8.8%
for the nine-month period ended September 30, 1999.
13
<PAGE> 14
Since the inception of Skylands Community Bank in 1990, the Company has
opened six additional branches as described in "Business" above. The expansion
of the Company's market area as a result of these branch openings has
contributed significantly to the increases the Company has experienced in assets
(primarily loans and investments) and deposits. At September 30, 1999, total
assets had grown to $214,334,000 as compared to $179,535,000 at December 31,
1998 and $169,079,000 at September 30, 1998. This represents an increase of
$34,799,000 or 19.4% over December 31, 1998 and $45,255,000 or 26.8% over
September 30, 1998. Total deposits at September 30, 1999 were $195,172,000,
which represented volume and percentage growth over December 31, 1998 and
September 30, 1998 of $29,913,000, or 18.1%, and $40,042,000, or 25.8%,
respectively.
The Company's principal earning assets are its loans. Total loans at
September 30, 1999 were $141,492,000, versus $117,323,000 at December 31, 1998
and $109,038,000 at September 30, 1998. These results represent increases of
$24,169,000 or 20.6% and $32,454,000 or 29.8% when compared to the periods
ending December 31, 1998 and September 30, 1998, respectively.
Inherent in the lending function is the risk of deterioration in the
borrowers' ability to repay their loans under the terms and conditions of the
original loan document. Non-performing assets include loans that are not
accruing interest (non-accruing loans) as a result of principal and/or interest
payments being in default for a period of ninety days or more. When a loan is
classified as non-accrual, interest accruals cease and all past due interest,
including interest applicable to prior years is reversed and charged against
current income. Until the loan becomes current, any payments received from the
borrower are applied to outstanding principal until such time as Management
determines that the financial condition of the borrower and others factors
pertinent to the credit merit recognition of such payments as interest income.
As of September 30, 1999, December 31, 1998 and September 30, 1998, the Company
had non-accrual loans of $1,316,000, $959,000, and $224,000, respectively.
Non-performing assets also include the Company's holdings in Other Real
Estate Owned ("OREO"). At September 30, 1999 and December 31, 1998 and September
30, 1998, the Company had one commercial property with an outstanding balance of
$105,000 in OREO. All amounts, when transferred to OREO, are done at the lesser
of the recorded loan balance or the fair market value of the property, net of
its related cost to sell. Any write-downs to the loan balance required at the
time the loan is transferred to OREO are recorded as a charge to the ALLL.
Write-downs resulting from declines in the fair market value of the property
subsequent to the initial transfer from loans are expensed and included in other
operating expenses. In addition, costs associated with maintaining OREO
properties, including utilities, taxes, general repairs and maintenance are
expensed as incurred. It is the Company's intent to dispose of the property as
expeditiously as possible at a value considered fair given current market
conditions and circumstances surrounding the sale. During the first nine months
of 1999, the Company incurred expenses related to OREO properties of $2,000
versus $25,000 for the first nine months of 1998.
Financial Condition
14
<PAGE> 15
At September 30, 1999, impaired loans consisted of non-accrual loans and
one loan totaling $340,000 that was previously on non-performing status and
which had been renegotiated by the Company in the fourth quarter of 1996. At
September 30, 1999 it was performing in accordance with the newly agreed upon
terms. The total amount of impaired loans at September 30, 1999, December 31,
1998 and September 30, 1998 were $1,656,000, $1,342,000 and $615,000,
respectively.
Non-performing assets, excluding the renegotiated loan, which, at September
30, 1999 was performing, as a percentage of total assets were .66 % and were
1.00% of total loans, respectively at September 30, 1999. At December 31, 1998,
they were .59% of total assets and .91% of total loans. At September 30, 1998,
they were .19% of total assets and .30% of total loans. Management believes that
despite the volume increases of non-performing assets, the ratios of
non-performing assets remains within the Company's peer group levels.
Concomitant with the increase in the Company's loan portfolio through
September 30, 1999, the Company's ALLL increased to $2,177,000 at September 30,
1999, which is 1.54% of total loans compared to ALLL of $1,873,000 at December
31, 1998 which was 1.60% of total loans. At September 30, 1998 ALLL of
$1,629,000 represented 1.49% of total loans. At September 30, 1999 the Company's
ALLL as a percentage of non-accrual and impaired loans was 131.4% versus 139.6%
at December 31, 1998 and 294.6% at September 30, 1998. The Company maintains an
allowance for possible loan and lease losses at a level considered by management
to be adequate to cover the inherent risks of loan loss associated with its loan
portfolio, although actual losses may vary from current estimates. At September
30, 1999 the Company's ALLL as a percentage of non-accrual loans and OREO was
153.2% versus 176.0% at December 31, 1998 and 495.1% at September 30, 1998.
Given the total level of loans and the amount of non-performing and
impaired loans at September 30, 1999, Management feels that the balance of the
ALLL is adequate based upon its monthly review and analysis which is presented
to and approved by the Board of Directors. Risks within the loan portfolio are
analyzed on a continuous basis by the Company's officers and the Company's Audit
Committee. A risk system, consisting of multiple grading categories, is utilized
as an analytical tool to assess risk and appropriate reserves. Along with the
risk system, management further evaluates risk characteristics of the loan
portfolio under current and anticipated economic conditions and considers such
factors as the financial condition of the borrower, past and expected loss
experience, and other factors management feels deserve recognition in
establishing an appropriate reserve. As adjustments to the ALLL become
necessary, they are realized in the periods in which they become known.
Additions to the allowance are made by provisions charged to expense and the
allowance is reduced by net charge-offs (i.e., loans judged to be uncollectible
and charged against the reserve, less any recoveries on such loans). As the loan
portfolio grows future provisions to the ALLL may be required. Future provisions
may also be required to the ALLL based on changes in economic conditions,
borrowers' ability to repay their obligations and other factors.
Management believes that the Company's current sources of funds, which are
primarily deposits, provide adequate liquidity for the current cash flow needs
of the Company. The primary cash flow needs of the Company result from increases
to the loan portfolio and decreases in the level of deposits. The Company is a
member of the Federal
15
<PAGE> 16
Home Loan Bank and has established a line of credit with the Federal Home Loan
Bank to further augment its liquidity.
A significant measure of the strength of a financial institution is its
capital base. The regulators of Skylands Community Bank (primarily the FDIC)
have defined and classified bank capital into the following components:
1. Tier I Capital, which includes tangible shareholders' equity and
qualifying preferred stock.
2. Tier II Capital, which includes a portion of the ALLL and preferred
stock which does not qualify for Tier I capital.
Skylands Community Bank is required by its regulators to maintain minimum
capital ratios. There are three primary capital ratios that banks must adhere
to:
1. The Tier I Capital to Risk Based Asset ratio.
2. The Total Capital to Risk Based Assets ratio.
3. The Leverage ratio.
The first two of these ratios require the Bank to maintain capital as a
percentage of its assets and certain off balance sheet items as adjusted for
pre-defined credit risk factors. The third ratio, the leverage ratio, measures
Tier I capital as a percentage of the three month average of tangible month end
assets. The following chart reflects the required capital ratios and the actual
ratios maintained by Skylands Community Bank at September 30, 1999:
<TABLE>
<CAPTION>
To Be Well
Capitalized
For Capital Under Prompt
Adequacy Corrective Action Actual Ratio at
Ratio Purposes Provisions Sept. 30,1999
----- ----------- ----------------- ---------------
<S> <C> <C> <C>
Tier I Capital to Risk Weighted Assets 4% 6% 10.49%
Total Capital to Risk Weighted Assets 8% 10% 11.74%
Leverage Ratio 4% 5% 6.53%
</TABLE>
The following chart reflects the required capital ratios and the actual
ratios maintained by Skylands Financial Corporation at September 30, 1999:
<TABLE>
<CAPTION>
To Be Well
Capitalized
For Capital Under Prompt
Adequacy Corrective Action Actual Ratio at
Ratio Purposes Provisions Sept. 30,1999
----- ----------- ----------------- ---------------
<S> <C> <C> <C>
Tier I Capital to Risk Weighted Assets 4% 6% 10.50%
Total Capital to Risk Weighted Assets 8% 10% 11.76%
Leverage Ratio 4% 5% 6.54%
</TABLE>
Failure to meet the minimum capital requirements listed above can initiate
certain mandatory, and possibly, additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company's and
the Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of the
Company's and the Bank's assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting
16
<PAGE> 17
practices. The Company's and the Bank's capital amounts and classifications are
also subject to quantitative judgements about components, risk weightings and
other factors. Management believes, as of September 30, 1999, that the Company
meets all capital adequacy requirements to which it is subject.
Shareholders equity increased by $1,480,000, or 10.9% to $15,099,000 at
September 30, 1999 from the December 31, 1998 level of $13,619,000. This
increase was attributable to net income of $1,707,000, the exercise of stock
options of $48,000 and $78,000 contributed by shareholders through the Dividend
Reinvestment Plan. These increases were partially offset by a decrease of
$174,000 in the unrealized loss on securities available for sale, quarterly cash
dividends paid totaling $.07 per share and cash payments for fractional shares
resulting from the 5% stock dividend paid in April of 1999 which amounted to
$179,000.
17
<PAGE> 18
Part II
Other Information
Item 1 - Legal Proceedings
Skylands Community Bank and its subsidiaries are party, in the
ordinary course of business, to litigation involving collection
matters, contract claims and other miscellaneous causes of action
arising from its business. Management does not consider that any such
proceedings depart from usual routine litigation and in its judgement,
neither the Company's consolidated financial position nor its results
of operations will be affected materially by any present proceedings.
Item 2 - Changes in the Rights of Securities Holders
None
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submissions of Matters to a Vote of Securities Holders
None
Item 5 - Other Information
Year 2000
The Company is aware of the issues associated with the programming
code in existing computer systems as the "Year 2000" approaches. The
Year 2000 problem is pervasive and complex as virtually every computer
operation may be affected in some way by the rollover of a two-digit
year value to 00. The issue is whether computer systems will properly
recognize date sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail.
The Company has formed a committee, which has identified the
areas that must be addressed. These areas include the impact of the
Year 2000 on the software and hardware used by the Company, the impact
of the year 2000 on the Company's borrowers, the impact of the year
2000 on the Company's operating environment and meeting unusual cash
withdrawals by the Company's depositors. The Committee has supervised
the testing of the computer hardware and software utilized by the
Company to asses its date sensitivity and ability to recognize the year
2000. Testing indicates that all software and hardware used by the
Company is Year 2000 compliant. The Committee has drawn up and
implemented contingency plans to address situations that could arise if
the Company's systems malfunction as a result of internal or external
causes. The contingency plans also include procedures to provide
additional liquidity in the event of unusual cash withdrawals by the
Company's depositors. The Year 2000 activities include
18
<PAGE> 19
programs to raise the awareness of the Company's borrowers of the
nature of the Year 2000 issue. The Company expects to incur costs of
less than $10,000 to meet Year 2000 issues. In the opinion of
Management, the impact of Year 2000 compliance will not be material.
The Company's Y2K Committee has sent questionnaires to all of
its primary vendors and service providers, inquiring as to the extent
such vendors and providers are addressing Y2K Issues. The Committee has
accepted a response of either a completed questionnaire, or the Y2K
disclosure of the respondent. As of this date, the Company is satisfied
with the efforts and level of awareness and preparedness the
respondents have exhibited, and the Company does not have a
relationship with a vendor at a level viewed by the Company as
unacceptable with respect to Y2K preparedness. The Company does
require, and has required since the beginning of 1999, potential
borrowers to maintain a satisfactory level of awareness and preparation
for Y2K issues.
As noted above, the Company has developed and implemented
contingency plans for numerous Y2K scenarios, including a contract for
a Disaster Recovery Processing Site, in the event of a complete failure
of the Company's operating system. The Company intends to transact
business from hard-copy account information, starting December 30,
1999, and continuing until the Company's Y2K Committee is satisfied
that the operating system is working properly. Such hard-copy
information would be available to the Disaster Recovery Processing
Site.
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits - The following Exhibit is being filed herewith:
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K - None
19
<PAGE> 20
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SKYLANDS INVESTMENT COMPANY
Date: November 15, 1999 /s/Michael Halpin
--------------------------
Michael Halpin
President &
Chief Executive Officer
Date: November 15, 1999 /s/ Edward W. Mahnken, Jr.
--------------------------
Edward W. Mahnken, Jr.
Vice President &
Principal Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,036,000
<INT-BEARING-DEPOSITS> 560,000
<FED-FUNDS-SOLD> 2,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,329,000
<INVESTMENTS-CARRYING> 43,905,000
<INVESTMENTS-MARKET> 43,256,000
<LOANS> 141,492,000
<ALLOWANCE> 2,177,000
<TOTAL-ASSETS> 214,334,000
<DEPOSITS> 195,172,000
<SHORT-TERM> 3,000,000
<LIABILITIES-OTHER> 1,063,000
<LONG-TERM> 0
0
0
<COMMON> 6,269,000
<OTHER-SE> 8,830,000
<TOTAL-LIABILITIES-AND-EQUITY> 214,334,000
<INTEREST-LOAN> 8,410,000
<INTEREST-INVEST> 2,716,000
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,126,000
<INTEREST-DEPOSIT> 4,142,000
<INTEREST-EXPENSE> 4,242,000
<INTEREST-INCOME-NET> 6,884,000
<LOAN-LOSSES> 606,000
<SECURITIES-GAINS> 47,000
<EXPENSE-OTHER> 3,531,000
<INCOME-PRETAX> 2,794,000
<INCOME-PRE-EXTRAORDINARY> 2,794,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,707,000
<EPS-BASIC> 0.68
<EPS-DILUTED> 0.66
<YIELD-ACTUAL> 4.93
<LOANS-NON> 1,316,000
<LOANS-PAST> 1,577,000
<LOANS-TROUBLED> 1,656,000
<LOANS-PROBLEM> 1,572,000
<ALLOWANCE-OPEN> 1,873,000
<CHARGE-OFFS> 309,000
<RECOVERIES> 7,000
<ALLOWANCE-CLOSE> 2,177,000
<ALLOWANCE-DOMESTIC> 2,177,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 158,500
</TABLE>
