<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 March 31, 2000
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.)
176 MOUNTAIN AVENUE
HACKETTSTOWN, 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 May 1, 2000, there were 2,533,889 shares outstanding of the
Company's Common tock.
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SKYLANDS FINANCIAL CORPORATION
CONDENSED, CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands except share data)
(unaudited)
March 31 December 31
2000 1999
---- ----
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS
Non-interest bearing $8,584 $7,040
Interest bearing 548 566
--------------- -------------
Total cash and cash equivalents 9,132 7,606
--------------- -------------
SECURITIES
Available for sale at market value 14,553 14,090
Held to maturity at amortized cost
(market value of $41,368 in 2000,
And $42,891 in 1999) 42,893 44,094
--------------- -------------
Total securities 57,446 58,184
--------------- -------------
LOANS 156,780 149,451
Less:
Unearned income (204) (199)
Allowance for possible loan losses (2,560) (2,390)
--------------- -------------
Net loans 154,016 146,862
--------------- -------------
PREMISES AND EQUIPMENT, NET 3,826 3,103
ACCRUED INTEREST RECEIVABLE 1,132 1,083
OTHER ASSETS 2,714 2,690
--------------- -------------
Total assets $228,266 $219,528
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Demand
Non-interest bearing $39,545 $41,326
Interest bearing 28,310 26,412
Savings 49,137 54,161
Time 90,234 76,201
--------------- -------------
Total deposits 207,226 198,100
Federal Funds Purchased 3,200 1,500
Other Borrowings 0 3,000
Accrued Expenses and other liabilities 1,426 1,096
--------------- -------------
Total liabilities 211,852 203,696
--------------- -------------
SHAREHOLDERS' EQUITY
Common Stock par value $2.50 per share;
10,000,000 shares authorized; 2,533,889
and 2,530,994 shares issued and outstanding
in 2000 and 1999, respectively. 6,335 6,328
Additional paid in capital 6,433 6,424
Retained Earnings 3,799 3,179
Accumulated other comprehensive loss (153) (99)
--------------- -------------
Total shareholders' equity 16,414 15,832
--------------- -------------
Total liabilities and shareholders' equity $228,266 $219,528
=============== =============
</TABLE>
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SKYLANDS FINANCIAL CORPORATION
CONDENSED, CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Unaudited)
(in thousands except share and per share data)
Three months
Ended March 31,
<S> <C> <C>
2000 1999
---- ----
INTEREST INCOME
Interest and fees on loans $3,472 $2,624
Interest on securities 928 832
Interest on federal funds sold 16 36
----------------- -------------
Total Interest Income 4,416 3,492
INTEREST EXPENSE 1,710 1,347
----------------- -------------
NET INTEREST INCOME 2,706 2,145
PROVISION FOR POSSIBLE LOAN LOSSES 150 112
----------------- -------------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 2,556 2,033
----------------- -------------
OTHER INCOME
Loss on sale of securities (1) 0
Other 270 236
----------------- -------------
Total Other Income 269 236
----------------- -------------
OTHER EXPENSES
Salaries and employee benefits 682 631
Occupancy expense 159 144
Equipment and furniture expense 57 50
Other operating expense 801 576
----------------- -------------
Total Other Expenses 1,699 1,401
----------------- -------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 1,126 868
PROVISION FOR INCOME TAXES 405 337
----------------- -------------
NET INCOME $721 $531
================= =============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 2,532,924 2,496,312
================= =============
Diluted 2,614,844 2,584,951
================= =============
BASIC EARNINGS PER SHARE $0.28 $0.21
================= =============
DILUTED EARNINGS PER SHARE $0.28 $0.21
================= =============
</TABLE>
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SKYLANDS FINANCIAL CORPORATION
CONDENSED, CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31, 2000
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Shareholders' Comprehensive
Stock Capital Earnings Loss Equity Income
---------- ------------ ----------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1999 $6,328 $6,424 $3,179 ($99) $15,832 $0
Net Income -Three Months
Ended March 31, 2000 --- --- 721 --- 721 721
Exercise of Stock Options 7 9 --- --- 16 ---
Cash Dividends ($.04 per share) --- --- (101) --- (101) ---
Unrealized Loss on Securities
Available for Sale, Net of Taxes --- --- --- (54) (54) (54)
---------- ------------ ----------- -------------- --------------- ----------------
Balance March 31, 2000 $6,335 $6,433 $3,799 ($153) $16,414 $667
========== ============ =========== ============== =============== ================
Disclosure of Reclassification Amount:
Unrealized Holding Loss ($53)
Less: Reclassification Adjustments for
Losses Included in Net Income ( Net of Tax) (1)
----------------
Net Unrealized Loss on Securities ($54)
================
</TABLE>
<TABLE>
<CAPTION>
For the three months ended March 31, 1999
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Shareholders' Comprehensive
Stock Capital Earnings Income Equity Income
---------- ------------ ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998 $5,929 $4,998 $2,562 $130 $13,619 $0
Net Income -Three Months
Ended March 31, 1999 --- --- 531 --- 531 531
5% Stock Dividend 297 1,203 (1,500) --- --- ---
Exercise of Stock Options 20 18 --- --- 38 ---
Dividend Reinvestment Plan 5 16 21 ---
Cash Dividends ($.02 per share) and
Payments for Fractional Shares --- --- (50) --- (50) ---
Unrealized Gain on Securities
Available for Sale, Net of Taxes --- --- --- 6 6 6
---------- ------------ ------------ -------------- -------------- --------------
Balance March 31, 1999 $6,251 $6,235 $1,543 $136 $14,165 $537
========== ============ ============ ============== ============== ==============
Disclosure of Reclassification Amount:
Unrealized Holding Gains
Arising During Period $6
Less: Reclassification Adjustments for
Gains Included in Net Income( Net of Tax) 0
--------------
Net Unrealized Gain on Securities $6
==============
</TABLE>
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SKYLANDS FINANCIAL CORPORATION
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands)
(unaudited)
For the Three Months Ended March 31,
OPERATING ACTIVITIES 2000 1999
------------- -------------
<S> <C> <C>
Net Income: $721 $531
Adjustments to reconcile net income to net cash
Provided by(used in) operating
activities-
Provision for possible loan losses 150 112
Depreciation and amortization 111 101
(Gain) on sale of securities (1) 0
Premium amortization on securities, net 24 74
Decrease(increase) in accrued interest receivable (49) 2
Increase in other assets (23) 50
(Increase) decrease in federal funds purchased (1,300) 5,000
Increase in accrued expenses and other liabilities 330 435
------------- -------------
Net cash provided by (used
in)operating activities (37) 6,305
------------- -------------
INVESTING ACTIVITIES
Purchase of securities-
Available for sale (2,441) (978)
Held to maturity 0 (9,283)
Maturities of securities-
Available for sale 284 1,300
Held to maturity 1,286 2,924
Sales of securities available for sale 1,499 0
Capital expenditures (802) (161)
Net increase in loans (7,304) (5,724)
------------- -------------
Net cash used in investing activities (7,478) (11,922)
------------- -------------
FINANCING ACTIVITIES
Increase in deposits 9,126 5,836
Proceeds from the issuance of common stock, net 16 59
Cash dividends (101) (50)
------------- -------------
Net cash provided by financing activities 9,041 5,845
------------- -------------
Increase in cash and cash equivalents 1,526 228
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,606 7,459
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $9,132 $7,687
============= =============
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $1,753 $1,291
Income Taxes 75 20
============= =============
</TABLE>
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Notes to Condensed, 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, 1999. These notes are included in the Bank's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1999. The results
of the three-month period ended March 31, 2000 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.
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Note 3. MERGER
On February 23, 2000, the Company entered into a definitive Agreement
and Plan of Merger (the "Agreement") with Fulton Financial Corporation
("FFC"), under the terms of which the Company will be merged with and
into FFC (the "Merger"), and all of the outstanding shares of the
common stock of the Company will be converted into shares of the common
stock of FFC.
Under the terms of the Agreement, shares of the Company's Common Stock
will be exchanged for shares of FFC Common Stock on the effective date
of the Merger, based on a conversion ratio of 0.819 shares of FFC
Common Stock for each share of the Company's Common Stock. Each holder
of an option to acquire the Company's Common Stock which is outstanding
on the effective date of the acquisition is to receive an option to
acquire shares of FFC Common Stock, with the number of shares subject
to such option and the exercise price adjusted to take the conversion
ratio into consideration. By separate Warrant Agreement and Warrant,
FFC has the right to acquire 625,000 shares of the Company's Common
Stock under certain conditions. The transaction will be accounted for
under the purchase method of accounting.
Consummation of the Agreement is subject to various conditions,
including, among others, (i) the approval of the Merger by the Federal
Reserve Board and the New Jersey Department of Banking and Insurance;
(ii) the approval of the Merger by the shareholders of the Company; and
(iii) the absence of any material adverse change in the financial
condition or operating results of the Company. The Company and FFC have
the right to terminate the Agreement based on a decline or an increase,
respectively, in the market value of FFC Common Stock as stipulated in
the terms of the Agreement. It is anticipated that the effective date
of the Merger will occur during the third quarter of 2000.
Note 4. INTEREST.
The line item for "Accrued expenses and other liabilities" includes
accrued interest expense of $355,000 at March 31, 2000 and $398,000 at
December 31, 1999.
Note 5. 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.
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Note 6. LOANS.
Loans outstanding by classifications at March 31, 2000 and December 31,
1999 are as follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
--------------- -------------------
<S> <C> <C>
Loans secured by real estate-
Construction mortgages $5,890,000 $6,338,000
Nonresidential properties 18,705,000 17,691,000
Residential properties 58,070,000 55,655,000
Commercial and industrial loans 67,709,000 63,713,000
Loans to individuals 6,406,000 6,054,000
--------------- -------------------
Total loans $156,780,000 $149,451,000
=============== ===================
</TABLE>
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 March 31, 2000 and December
31, 1999 impaired loans consisted of non-accrual loans and one loan
totaling $315,000 and $332,000 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 March 31, 2000 and December 31, 1999 the
Company's recorded investment in impaired loans and the related
valuation allowance are as follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Impaired Loans-
Valuation allowance required $1,626,000 $316,000 $1,817,000 $290,000
---------------- ------------ ------------- -----------
Total Impaired loans $1,626,000 $316,000 $1,817,000 $290,000
================ ============ ============= ===========
</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
March 31, 2000 and December 31, 1999 was $1,811,000 and $1,693,000,
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 residential
mortgage loans, credit card loans and consumer loans are collectively
evaluated for impairment.
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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>
March 31, 2000 December 31, 1999
-------------- ------------------
<S> <C> <C>
Balance, beginning of year $2,390,000 $1,873,000
Provision charged to expense 150,000 871,000
Loans charged off (6,000) (385,000)
Recoveries of loans previously
Charged off 26,000 31,000
------- ------
Balance, end of period $2,560,000 $2,390,000
=========== ==========
</TABLE>
Note 8. COMPREHENSIVE INCOME.
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 March 31, 2000
Unrealized losses on securities-
Unrealized holdings losses arising during period ($84,127) $31,127 ($53,000)
Less- Reclassification adjustments for
losses realized in net income (1,300) 300 (1,000)
--------------- ------------------- -------------
Other comprehensive loss ($85,427) $31,427 ($54,000)
=============== =================== =============
</TABLE>
<TABLE>
<CAPTION>
Before Net of
Tax Amount Tax Effect Tax Amount
---------- ---------- ----------
<S> <C> <C> <C>
Period ended March 31, 1999
Unrealized losses on securities-
Unrealized holdings gains arising during period $9,524 ($3,524) $6,000
Less- Reclassification adjustments for
Gains realized in net income 0 0 0
--------------- ------------------- -------------
Other comprehensive income $9,524 ($3,524) $6,000
=============== =================== =============
</TABLE>
Note 9. 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
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<PAGE> 10
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 expect implementation
of SFAS No. 133 as amended by SFAS No. 137 to have a material impact on
its financial statements.
Note 10. 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 Average Per Share
Income Shares Amount
------ ------ ------
<S> <C> <C> <C>
For the period ended March 31, 2000
Basic Earnings per share- Income available to
Common shareholders $721,000 2,532,924 $0.28
Effect of Dilutive Securities- Stock Options 0 81,920
----------------------------------------------------------------------------------------------
Diluted Earnings per share- Income available to
Common shareholders plus assumed
conversions $721,000 2,614,844 $0.28
==============================================================================================
For the period ended March 31, 1999
Basic Earnings per share- Income available to
Common shareholders $531,000 2,496,312 $0.21
Effect of Dilutive Securities- Stock Options 0 88,639
----------------------------------------------------------------------------------------------
Diluted Earnings per share- Income available to
Common shareholders plus assumed
conversions $531,000 2,584,951 $0.21
==============================================================================================
</TABLE>
All per share data for the period ended March 31, 1999 has been
restated to reflect the five percent stock dividend paid in April of
1999.
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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 filing 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 are located at 176 Mountain Avenue, Hackettstown,
Warren County, New Jersey 07840. The Company currently has seven branches. They
are located at Independence (the "Crossroads Branch"), 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.
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Results of Operations
For the three-month period ended March 31, 2000, the Bank recorded net
income of $721,000 as compared to net income of $531,000 for the three-month
period ended March 31, 1999. This represents an increase of $190,000 or 35.6%.
Basic net income per share for the three-month period ended March 31, 2000 was
$.28 per share versus $.21 per share for the period ended March 31, 1999,
representing an increase of $.07 per share or 33.3%.
Net interest income, which represents the difference between the
interest and fees earned on loans and investments and the cost of funds was
$2,706,000 for the three-month period ended March 31, 2000 versus $2,145,000
three-month period ended March 31, 1999. This represents an increase of $561,000
or 26.2% over the same period in 1999. 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 increased during
the period. It rose to 75.7% at March 31, 2000 from 75.4% and 71.9% at December
31, 1999 and March 31, 1999 respectively. The change in this ratio had a
positive impact on the Company's net interest income. Income and fees on loans
increased to $3,472,000 from $2,624,000 for the three-month periods ending March
31, 2000 and March 31, 1999, respectively. These results represented a dollar
increase of $848,000 and a percentage increase of 32.3% over the same period in
1999. The increase in interest income was moderated by an increase in interest
expense attributable both to the increase in the volume of average deposits and
by the increase in the rate of interest paid on deposits. Total interest expense
increased to $1,710,000 from $1,347,000 for the three-month periods ending March
31, 2000 and March 31, 1999, respectively. These results represented a dollar
increase of $363,000 and a percentage increase of 26.9% over the same period in
1999. The cost of funds increased to 3.28% for the three-month period ended
March 31, 2000 versus 3.15% for the three-month period ended March 31, 1999. Net
interest income was impacted favorably by the funding provided by the increase
of non-interest bearing deposits (checking accounts). At March 31, 2000 the year
to date average balance of checking accounts increased by $8,554,000 or 27.0%
from the average balances for the period ended March 31, 1999.
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 three months of 2000 by $170,000 to $2,560,000. This was
accomplished by virtue of a provision of $150,000 in the first three months of
2000 and net recoveries for the period of $20,000. The Company may continue to
make additional provisions to the ALLL in future months. See "Financial
Condition and Allowance for Possible Loan and Lease Losses" below.
Increases in Other Income for the first three months of 2000 versus the
same period in 1999 also contributed to the Company's net income. For the
three-month period ended March 31, 2000 other income, exclusive of securities
transactions, increased by $34,000 or 14.4% over the three-month period ended
March 31, 1999. Other Income consists
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<PAGE> 13
primarily of service charges on deposit accounts. The increases in Other Income,
less securities gains, are attributable primarily to the overall growth of the
Company. 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 months ending March 31, 2000
versus the same period in 1999. 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
Rockaway Branch in December 1998 and the ongoing, concerted effort to generate
new loan and deposit growth in the existing branches. The opening of the new
Main Office in Hackettstown in February 2000 did not materially impact the level
of Other Expenses in the first quarter of 2000. Total Other Expenses consist of
Personnel Expense, Occupancy Expense, Equipment and Furniture Expense and Other
Operating Expenses. These expenses increased by 21.3% or $298,000 for the
three-month period ended March 31, 2000, versus the same period in 1999. The
growth of the Company and of the loan portfolio in particular, necessitated
additions to staff to assure a consistently high level of customer service and
to properly manage the loan portfolio. All of these actions are necessary for
the continued growth of the Company and 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 $51,000 or
8.1% for the three-month period ended March 31, 2000. Occupancy Expense and
Equipment and Furniture Expense increased by $15,000 for the three-month period
ended March 31, 2000 versus the same period in 1999. Other Operating Expense
increased by $225,000 or 39.1% for the three-month period ending March 31, 2000.
Legal and accounting expenses increased by a combined amount of $128,000
primarily due to expenses associated with the merger, which was announced during
the quarter. There were also moving expenses of $12,000 associated with the move
in February to the Company's new administrative offices.
Financial Condition
Since the inception of Skylands Community Bank in 1990, the Company has
opened seven 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 March 31, 2000, total assets
had grown to $228,266,000 as compared to $219,528,000 at December 31, 1999 and
$191,352,000 at March 31, 1999. This represents an increase of $8,738,000 or
4.0% over December 31, 1999 and $36,914,000 or 19.3% over March 31, 1999. Total
deposits at March 31, 2000 were $207,226,000, which represented volume and
percentage growth over December 31, 1999 and March 31, 1999 of $9,126,000, or
4.6%, and $36,131,000, or 21.1%, respectively.
The Company's principal earning assets are its loans. Total loans at March
31, 2000 were $156,780,000, versus $149,451000 at December 31, 1999 and
$123,013,000 at March 31, 1999. These results represent increases of $7,329,000
or 4.9% and $33,767,000 or 27.5% when compared to the periods ending December
31, 1999 and March 31, 1999, respectively.
13
<PAGE> 14
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 March 31, 2000, December 31, 1999 and March 31, 1999, the Company had
non-accrual loans of $1,311,000, $1,485,000, and $1,063,000, respectively.
Non-performing assets also include the Company's holdings in Other Real
Estate Owned ("OREO"). At March 31, 2000 and December 31, 1999 the Company had
no OREO. At March 31, 1999, 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 three months of 2000 there was no expense related to OREO properties. In
the first three months of 1999 the Company incurred expenses related to OREO
properties of $1,000.
At March 31, 2000, impaired loans consisted of non-accrual loans and one
loan totaling $315,000 that was previously on non-performing status and which
had been renegotiated by the Company in the fourth quarter of 1996. At March 31,
2000 it was performing in accordance with the newly agreed upon terms. The total
amount of impaired loans at March 31, 2000, December 31, 1999 and March 31, 1999
were $1,626,000, $1,817,000 and $1,429,000, respectively.
Non-performing assets, excluding the renegotiated loan, which, at March 31,
2000 was performing, as a percentage of total assets were .57 % and were .84% of
total loans, respectively. At December 31, 1999, they were .68% of total assets
and .99% of total loans. At March 31, 1999, they were .61% of total assets and
.95% of total loans. Management believes that the volume of non-performing
assets and the ratios of non-performing assets remain within the Company's peer
group levels.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is established to provide for
potential losses in the Company's loan portfolio and off balance sheet risks,
such as unused lines of credit and letters of credit. As of March 31, 2000, the
Company had established as an allowance for loan and lease losses of $2,560,000,
as compared to an allowance of $2,390,000 as of December 31, 1999 and an
allowance of $1,972,000 as of March 31,
14
<PAGE> 15
1999. The increase in the allowance is primarily due to an increase in the
Company's total loan portfolio and for the reasons enumerated below. The Company
maintains an allowance for loan 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.
The loan portfolio is reviewed on a quarterly basis to determine the
adequacy of the ALLL. The level of the ALLL is based on the results of the
quarterly review. The methodology used to calculate the ALLL utilizes
percentages that are assigned to performing credits based upon loan types.
Specific reserve allocations are also assigned to loans that are internally
classified by management and which are placed on the Company's internal
watchlist. There are also other factors that management considers when
determining that a specific reserve is warranted.
The reserve percentage utilized to determine the adequacy of the
reserve by loan category for the general reserve is listed below:
<TABLE>
<CAPTION>
Reserve
Loan Category Percentage
------------- ----------
<S> <C>
Commercial Loans/Leases 1.50%
Commercial Mortgages 1.50%
Residential Mortgages .20%
Home Equity Loans .25%
Unsecured Loans (including Credit Cards) 5.00%
Auto Loans - Direct .50%
Auto Loans - Indirect 1.75%
</TABLE>
The reserve percentages are based upon various factors including but
not limited to the following:
1. Historical Loan Loss. The loan loss experience of the Company from its
inception in 1990 has been tracked to provide the historical sources of
risk in the portfolio.
2. Growth of the Loan Portfolio. The loan portfolio has experienced
significant growth. At March 31, 2000 gross loans totaled $156,780,000
versus $149,451,000 at December 31, 1999 and $123,013,000 at March 31,
1999. This represented increases of 4.9% and 27.5% over December 31,
1999 and March 31, 1999, respectively. There is inherent risk in the
portfolio associated with this rapid growth and the continuing
expansion of the portfolio. This is evidenced by the level of
non-accrual loans. While non-accrual loans decreased to $1,311,000 from
$1,485,000 at December 31, 1999, they have increased from $1,063,000 at
March 31, 1999. On a year to year basis this represents a 23.3%
increase in non-accrual loans. The increase in charged off loans is
also indicative of the rapid growth of the loan portfolio. While, for
the first quarter of 2000, there were net recoveries of $20,000, during
1999 net charge offs were $354,000 versus $166,000 reported in 1998. As
a percentage of average loans in 1999 and 1998, these amounts were .27%
and .16% respectively. These items are attributed to the growth of the
loan portfolio.
3. The Aging of the Loan Portfolio. As discussed in number 2 above, the
rapid growth of the loan portfolio does not provide an adequate amount
of time for the portfolio to
15
<PAGE> 16
age. The credit classifications assigned to a relatively new or young
portfolio are more subject to downward revisions until the financial
stability and a successful record of operations has been established by
the borrowers. The lack of aging required to determine credit quality
and ongoing performance, therefore, requires that adequate reserves be
maintained.
4. Concentration with Geographic Areas. There is significant concentration
in Northwest New Jersey and particularly in various towns and townships
within Morris, Sussex and Warren Counties. As the result of this
geographic concentration, a downturn in the local economy in the
Company's market area could have an adverse impact on credit quality.
5. New Products. The Company has recently introduced two new products to
the commercial loan customers. These new products are Commercial
Leasing and Business Manager Accounts (accounts receivable financing).
Due to the inherent nature of risk associated with these products,
additional reserve requirements are warranted.
6. Other Factors. The specific reserve allocations are determined on a
loan-by-loan analysis of non-performing, impaired and other special
mentioned loans. This analysis is inclusive of repayment ability
(according to original terms) and collateral evaluation. If the book
value of a loan is in excess of the underlying collateral and it cannot
be covered by expected cash flow, the excess amount is specifically
reserved or charged-off. The level of specific reserves has increased
with the increase in non-performing and impaired loan.
Risks within the loan portfolio are analyzed on a continuous basis by
the Company's management. The results are reviewed quarterly with the Board of
Directors. A risk system, consisting of multiple grading categories, is utilized
as an analytical tool to assess risk and appropriate level of the ALLL. Along
with the risk system, management further evaluates risk characteristics of the
loan portfolio as described above. The factors contributing to the risks in the
loan portfolio are the current and anticipated economic conditions of the
overall economy, the economy of the Company's market area, the financial
condition of the borrower and past and expected loss experience. All of these
facts are considered by management and are recognized in establishing an
appropriate reserve. These estimates are reviewed at least quarterly, and as
adjustments become necessary, they are realized in the periods in which they
become known. Additions to the allowance are made by provisions charged to
expense. The allowance is reduced by net charge-offs (i.e., loans judged to be
uncollectable and charged against the reserve, less any recoveries on loans
previously charged off). Based on the results of the analysis performed by
management, the ALLL level of $2,560,000 at March 31, 2000 was deemed
appropriate.
Liquidity
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
16
<PAGE> 17
Home Loan Bank and has established a line of credit with the Federal Home Loan
Bank to further augment its liquidity.
Capital
A significant measure of the strength of a financial institution is its
capital base. The Company's regulators (primarily the FDIC and the Federal
Reserve Board) have classified and defined capital into the following
components: (1) Tier I capital, which includes tangible shareholders' equity for
common stock and qualifying preferred stock, and (2) Tier II capital, which
includes a portion of the allowance for loan losses, certain qualifying
long-term debt and preferred stock which does not qualify for Tier I capital.
These two classes of capital serve as the basis for two measures of capital
adequacy: risk-based capital adequacy and leverage ratios.
Risk based capital guidelines require banks and bank holding companies
to maintain certain minimum capital as a percent of risk adjusted assets, which
is total assets plus certain off balance sheet items that are adjusted for
pre-defined credit risk factors. Specifically, bank holding companies and banks
must maintain, at a minimum, Tier I capital as a percent of risk adjusted assets
of 4.0%, and combined Tier I and Tier II capital as a percent of risk adjusted
assets of 8.0%. As of March 31, 2000, the Company's Tier I capital ratio was
10.44% and its combined Tier I and Tier II capital ratio was 11.70%. As of March
31, 2000, the Bank's Tier I capital ratio was 10.46% and its combined Tier I and
Tier II capital ratio was 11.72%.
The leverage ratio is Tier I capital as a percent of tangible assets.
Leverage ratio requirements vary with the condition of the financial
institution. Regulators for the Company and the Bank require bank holding
companies and banks that meet the regulator's highest performance and
operational standards to maintain a minimum leverage ratio of 3.0%. Bank holding
companies and banks with higher levels of risk, and those that are experiencing
or anticipating significant growth must maintain higher minimum leverage ratios
that regulators prescribe and adjust during the ongoing regulatory process. The
Federal Reserve Board, which is Skylands Financial Corporation's regulator and
the FDIC, which is Skylands Community Bank's regulator, have not prescribed
minimum leverage ratio requirements for the Company or the Bank. As of March 31,
2000 the Company has a leverage ratio of 6.77% and the Bank has a leverage ratio
of 6.68%.
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 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 March 31, 2000, that the Company meets all capital adequacy
requirements to which it is subject.
17
<PAGE> 18
Shareholders equity increased by $582,000, or 3.7% to $16,414,000 at
March 31, 2000 from the December 31, 1999 level of $15,832,000. This increase
was attributable to net income of $721,000 and the exercise of stock options of
$16,000. These increases were partially offset by a decrease of $54,000 in the
unrealized loss on securities available for sale, quarterly cash dividends paid
totaling $.04 per share which amounted to $101,000.
18
<PAGE> 19
Part II
Other Information
Item 1 - Legal Proceedings
Skylands Financial Corporation 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
Merger
On February 23, 2000, the Company entered into a definitive Agreement
and Plan of Merger (the "Agreement") with Fulton Financial Corporation
("FFC"), under the terms of which the Company will be merged with and
into FFC (the "Merger"), and all of the outstanding shares of the
common stock of the Company will be converted into shares of the common
stock of FFC.
Under the terms of the Agreement, shares of the Company's
Common Stock will be exchanged for shares of FFC Common Stock on the
effective date of the Merger, based on a conversion ratio of 0.819
shares of FFC Common Stock for each share of the Company's Common
Stock. Each holder of an option to acquire the Company's Common Stock
which is outstanding on the effective date of the acquisition is to
receive an option to acquire shares of FFC Common Stock, with the
number of shares subject to such option and the exercise price adjusted
to take the conversion ratio into consideration. By separate Warrant
Agreement and Warrant, FFC has the right to acquire 625,000 shares of
the Company's Common Stock under certain conditions. The transaction
will be accounted for under the purchase method of accounting.
Consummation of the Agreement is subject to various conditions,
including, among others, (i) the approval of the Merger by the Federal
Reserve Board and the
19
<PAGE> 20
New Jersey Department of Banking and Insurance; (ii) the approval of
the Merger by the shareholders of the Company; and (iii) the absence of
any material adverse change in the financial condition or operating
results of the Company. The Company and FFC have the right to terminate
the Agreement based on a decline or an increase, respectively, in the
market value of FFC Common Stock as stipulated in the terms of the
Agreement. It is anticipated that the effective date of the Merger will
occur during the third quarter of 2000.
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 -
On March 6, 2000 a Form 8-K, reporting the proposed merger of
Skylands Financial Corporation into Fulton Financial Corporation
was filed with the Securities and Exchange Commission.
20
<PAGE> 21
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: May 10, 2000 /s/Michael Halpin
---------------------------
Michael Halpin
President &
Chief Executive Officer
Date: May 10, 2000 /s/ Edward W. Mahnken, Jr.
---------------------------
Edward W. Mahnken, Jr.
Vice President &
Principal Financial Officer
21
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 8,564,000
<INT-BEARING-DEPOSITS> 548,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,553,000
<INVESTMENTS-CARRYING> 42,893,000
<INVESTMENTS-MARKET> 0
<LOANS> 156,780,000
<ALLOWANCE> 2,580,000
<TOTAL-ASSETS> 228,226,000
<DEPOSITS> 207,226,000
<SHORT-TERM> 3,200,000
<LIABILITIES-OTHER> 1,426,000
<LONG-TERM> 0
0
0
<COMMON> 6,335,000
<OTHER-SE> 10,079,000
<TOTAL-LIABILITIES-AND-EQUITY> 228,226,000
<INTEREST-LOAN> 3,472,000
<INTEREST-INVEST> 928,000
<INTEREST-OTHER> 16,000
<INTEREST-TOTAL> 4,416,000
<INTEREST-DEPOSIT> 1,635,000
<INTEREST-EXPENSE> 1,710,000
<INTEREST-INCOME-NET> 2,706,000
<LOAN-LOSSES> 150,000
<SECURITIES-GAINS> (1,000)
<EXPENSE-OTHER> 1,429,000
<INCOME-PRETAX> 1,126,000
<INCOME-PRE-EXTRAORDINARY> 1,126,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 721,000
<EPS-BASIC> 0.26
<EPS-DILUTED> 0.38
<YIELD-ACTUAL> 5.10
<LOANS-NON> 1,311,000
<LOANS-PAST> 665,000
<LOANS-TROUBLED> 1,626,000
<LOANS-PROBLEM> 1,361,000
<ALLOWANCE-OPEN> 2,390,000
<CHARGE-OFFS> 6,000
<RECOVERIES> 26,000
<ALLOWANCE-CLOSE> 2,560,000
<ALLOWANCE-DOMESTIC> 2,560,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 154,000
</TABLE>
