<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1995.
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD
FROM ______ TO ______.
Commission file number:
33-27312
LAKELAND BANCORP, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2953275
------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
250 OAK RIDGE ROAD, OAK RIDGE, NEW JERSEY 07438
----------------------------------------- ---------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (201)697-2000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
- -----------------------------
COMMON STOCK, $2.50 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
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The aggregate market value of the voting stock of the registrant held by non-
affiliates (for this purpose, persons and entities other than executive
officers, directors, and 5% or more shareholders) of the registrant, as of
February 15, 1996, is estimated to have been approximately $53,220,760.
The number of shares outstanding of the registrant's Common Stock, as of
February 15, 1996, was 3,264,224.
DOCUMENTS INCORPORATED BY REFERENCE:
Lakeland Bancorp, Inc., Proxy Statement dated April 12, 1996 (Part III).
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<PAGE>
LAKELAND BANCORP, INC.
Form 10-K Index
PART I
<TABLE>
<CAPTION> PAGE
<S> <C> <C>
Item 1. Business............................................. 4
Item 2. Properties...........................................12
Item 3. Legal Proceedings....................................12
Item 4. Submission of Matters to a Vote of Security Holders..12
Item 4A. Executive Officers of the Registrant.................12
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters..........................14
Item 6. Selected Financial Data..............................15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................16
Item 8. Financial Statements and Supplementary Data..........27
Item 9. Changes in and disagreements with Accountants
on Accounting and Financial Disclosure...............38
PART III
Item 10. Directors of the Registrant..........................38
Item 11. Executive Compensation...............................38
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................38
Item 13. Certain Relationships and Related Transactions.......39
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports
on Form 8-K..........................................39
Signatures.....................................................40
</TABLE>
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<PAGE>
PART I
-------
ITEM 1 - BUSINESS
GENERAL
-------
Lakeland Bancorp, Inc. (the "Company"), a New Jersey corporation, is a bank
holding company, registered with and supervised by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). The Company was organized
in March of 1989 and commenced operations on May 19, 1989, upon consummation of
the acquisition of all of the outstanding stock of Lakeland State Bank ("LSB" or
the "Bank"). The Company's primary business consists of managing and
supervising LSB. The principal source of income is dividends paid by LSB. At
December 31, 1995, the Company had total assets, deposits, and stockholder's
equity of approximately $360.7 million, $327.9 million, and $32.0 million,
respectively.
LSB was organized as Lakeland State Bank on May 19, 1969. LSB is a state
banking association, the deposits of which are insured by the Federal Deposit
Insurance Corporation ("FDIC"). LSB is not a member of the Federal Reserve
System. LSB is a full-service commercial bank offering a complete range of
consumer, commercial, and trust services. Its 12 branch offices are located in
the following three New Jersey counties: Morris, Passaic, and Sussex.
COMMERCIAL BANK SERVICES
The Bank offers a broad range of lending, depository, and related financial
services to individuals and small to medium sized businesses in its northern New
Jersey market area. In the lending area, these services include short and
medium term loans, lines of credit, letters of credit, inventory and accounts
receivable financing, real estate construction loans and mortgage loans.
Depository products include: demand deposits, savings accounts, and time
accounts. In addition, LSB offers collection, wire transfer, and night
depository services.
CONSUMER BANKING
The Bank also offers a broad range of consumer banking services, including
checking accounts, savings accounts, NOW accounts, money market accounts,
certificates of deposit, secured and unsecured loans, consumer installment
loans, mortgage loans, safe deposit services, and traveler's cheques. LSB also
provides discount brokerage services to its customers through a third party.
TRUST SERVICES
A variety of fiduciary services are available through a third party. These
include investment management, advisory services, and custodial functions for
individuals. The trust function also administers, in a fiduciary capacity,
pensions, personal trusts, and estates.
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SUPERVISION AND REGULATION
----------------------------
Lakeland Bancorp, Inc.
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The Company is a registered bank holding company under the Federal Bank Holding
Company Act of 1956, as amended (the "Holding Company Act"), and is required to
file with the Federal Reserve Board an annual report and such additional
information as the Federal Reserve Board may require pursuant to the Holding
Company Act. The Company is subject to examination by the Federal Reserve
Board.
The Holding Company Act limits the activities which may be engaged in by the
Company and its subsidiaries to those of banking, the ownership and acquisition
of assets and securities of banking organizations, and the management of banking
organizations, and to certain non-banking activities which the Federal Reserve
Board finds, by order or regulation, to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. The Federal
Reserve Board is empowered to differentiate between activities by a bank holding
company or a subsidiary thereof and activities commenced by acquisition of a
going concern.
With respect to the acquisition of banking organizations, the Company is
required to obtain the prior approval of the Federal Reserve Board before it
may, by merger, purchase or otherwise, directly or indirectly acquire all or
substantially all of the assets of any bank or bank holding company, if, after
such acquisition, it will own or control more than 5% of the voting shares of
such bank or bank holding company. The Holding Company Act does not permit the
Federal Reserve Board to approve the acquisition by the Company, or any
subsidiary, of any voting shares of, or interest in, or all or substantially all
of the assets of, any bank located outside the State of New Jersey, unless such
acquisition is specifically authorized by the laws of the state in which such
bank is located. Reciprocal legislation allowing interstate acquisitions has
been enacted by many States, including New Jersey.
With respect to non-banking activities, the Federal Reserve Board has by
regulation determined that several non-banking activities are closely related to
banking within the meaning of the Holding Company Act and thus may be performed
by bank holding companies. Although the Company's management periodically
reviews other avenues of business opportunities that are included in that
regulation, the Company has no present plans to engage in any of these
activities other than providing discount brokerage services through a third
party.
Subsidiary banks of a bank holding company are subject to certain restrictions
imposed by the Federal Reserve Act on any extension of credit to the bank
holding company or any of its subsidiaries, on investments in the stock or other
securities of such holding company or its subsidiaries, and on the acceptance of
such stocks or securities as collateral for loans. Moreover, subsidiaries of
bank holding companies are prohibited from engaging in certain tie-in
arrangements (with the holding company or any of its subsidiaries) in connection
with any extension of credit or lease or sale of property or furnishing of
services.
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<PAGE>
Lakeland State Bank
LSB is a state chartered banking association subject to supervision and
examination by the State of New Jersey and the FDIC. The regulations of the
State of New Jersey and FDIC govern most aspects of LSB's business, including
reserves against deposits, loans, investments, mergers and acquisitions,
borrowings, dividends, and location of branch offices. LSB is subject to
certain restrictions imposed by law on, among other things, (i) the maximum
amount of obligations of any one person or entity which may be outstanding at
any one time, (ii) investments in stock or other securities of the Company or
any subsidiary of the Company, and (iii) the taking of such stock or securities
as collateral for loans to any borrower.
Securities and Exchange Commission
The common stock of the Company is registered with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934 (the "1934 Act").
As a result of such registration, the Company and its officers, directors, and
major stockholders are obligated to file certain reports with the SEC.
Furthermore, the Company is subject to proxy and tender offer rules promulgated
pursuant to the 1934 Act.
Effect of Government Monetary Policies
The earnings of the Company are and will be affected by domestic economic
conditions and the monetary and fiscal policies of the United States Government
and its agencies.
The monetary policies of the Federal Reserve Board have had, and will likely
continue to have, an important impact on the operating results of commercial
banks through the Board's power to implement national monetary policy in order,
among other things, to curb inflation or combat a recession. The Federal
Reserve Board has a major effect upon the levels of bank loans, investments and
deposits through its open market operations in United States government
securities and through its regulation of, among other things, the discount rate
of borrowings of banks and the reserve requirements against bank deposits. It
is not possible to predict the nature and impact of future changes in monetary
fiscal policies.
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<PAGE>
FIRREA
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") restructured the regulation, supervision, and deposit insurance of
savings and loan associations and federal savings banks whose deposits were
formerly insured by the Federal Savings and Loan Insurance Corporation
("FSLIC"). FSLIC was replaced by the Savings Association Insurance Fund
("SAIF") administered by the FDIC. A separate fund, the Bank Insurance Fund
("BIF"), which was essentially a continuation of the FDIC's then existing fund,
was established for banks. For further information regarding assessments, see
"FDICIA".
FIRREA and the Crime Control Act of 1990 expanded the enforcement powers
available to federal banking regulators including providing greater flexibility
to impose enforcement actions, expanding the persons dealing with a bank who are
subject to enforcement actions, and increasing the potential civil and criminal
penalties.
Under FIRREA, failure to meet capital guidelines could subject a banking
institution to a variety of enforcement remedies available to federal regulatory
authorities, including the termination of deposit insurance by the FDIC.
Capital Adequacy Guidelines
The Federal Reserve Board has adopted Risk-Based Capital Guidelines. Their
guidelines establish minimum levels of capital and require capital adequacy to
be measured in part upon the degree of risk associated with certain assets.
Under these guidelines all banks and bank holding companies must have a core or
tier 1 capital-to-assets ratio of at least 4% and a total capital-to-assets
ratio of at least 8%. At December 31, 1995, the Company's Tier 1 capital to
risk-weighted assets ratio and total capital to risk-weighted assets ratio were
16.78% and 18.03%, respectively.
In addition, the Federal Reserve Board and the FDIC have approved leverage ratio
guidelines (Tier I capital to average quarterly assets, less goodwill) for bank
holding companies such as the Company and banks such as LSB. These guidelines
provide for a minimum leverage ratio of 3% for bank holding companies that meet
certain specified criteria, including that they have the highest regulatory
rating. All other holding companies will be required to maintain a leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. LSB
is subject to similar minimum leverage criteria. The Company's leverage ratio
was 8.85% at December 31, 1995.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), federal banking agencies have established certain additional minimum
levels of capital which accord with guidelines established under that Act. See
"FDICIA".
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<PAGE>
Dividend Restrictions
- ---------------------
The Company is a legal entity separate and distinct from the Bank. Virtually all
of the revenue of the Company available for payment of dividends on its capital
stock will result from amounts paid to the Company by the Bank. All such
dividends are subject to various limitations imposed by federal and state laws
and by regulations and policies adopted by federal and state regulatory
agencies. The Bank is required to obtain the approval of the FDIC for the
payment of dividends if the total of all dividends declared by the Board of
Directors of the Bank in any year will exceed the total of the Bank's net
profits (as defined and interpreted by regulation) for that year and the
retained net profits (as defined) for the preceding two years, less any required
transfer to surplus. Furthermore, under State law, the Bank may not pay
dividends unless, following the dividend payment, the capital stock of the bank
would be unimpaired and either (a) the Bank will have a surplus of not less than
50% of its capital stock, or, if not, (b) the payment of the dividend will not
reduce the surplus of the Bank.
If, in the opinion of the FDIC, a bank under its jurisdiction is engaged in or
is about to engage in an unsafe or unsound practice (which, depending on the
financial condition of the bank, could include the payment of dividends), the
FDIC may require, after notice and hearing, that such bank cease and desist from
such practice or, as a result of an unrelated practice, require the bank to
limit dividends in the future. The Federal Reserve Board has similar authority
with respect to bank holding companies. In addition, the Federal Reserve Board
and the FDIC have issued policy statements which provide that insured banks and
bank holding companies should generally only pay dividends out of current
operating earnings. Regulatory pressures to reclassify and charge-off loans and
to establish additional loan loss reserves can have the effect of reducing
current operating earnings and thus impacting an institution's ability to pay
dividends. Further, as described above, the regulatory authorities have
established guidelines with respect to the maintenance of appropriate levels of
capital by a bank or bank holding company under their jurisdiction. Compliance
with the standards set forth in such policy statements and guidelines could
limit the amount of dividends which the Company and the Bank may pay. Under
FDICIA, banking institutions which are deemed to be "undercapitalized" will, in
most instances, be prohibited from paying dividends. See "FDICIA". See the
"Dividend Limitation" Note of the Notes to Consolidated Financial Statements for
further information regarding dividends.
FDICIA
Enacted in December 1991, FDICIA substantially revised the bank regulatory
provisions of the Federal Deposit Insurance Act and several other federal
banking statutes. Among other things, FDICIA requires federal banking agencies
to broaden the scope of regulatory corrective action taken with respect to banks
that do not meet minimum capital requirements and to take such actions promptly
in order to minimize losses to the FDIC. Under FDICIA,
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<PAGE>
federal banking agencies were required to establish minimum levels
of capital (including both a leverage limit and a risk-based capital
requirement) and specify for each capital measure the levels at which depository
institutions will be considered "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" or "critically
undercapitalized". A depository institution will be deemed to be "well
capitalized" if it significantly exceeds the minimum level required by
regulation for each relevant capital measure, "adequately capitalized" if it
meets each such measure, "undercapitalized" if it fails to meet any such
measure, "significantly undercapitalized" if it is significantly below any such
measure and "critically undercapitalized" if it fails to meet any critical
capital level set forth in the regulations. An institution may be deemed to be
in a capitalization category that is lower than is indicated by its actual
capital position if it receives and unsatisfactory examination rating or is
deemed to be in an unsafe or unsound condition or to be engaging in unsafe or
unsound practices.
Under regulations adopted under these provisions, for an institution to be well
capitalized it must have a total risk-based capital ratio of at least 10%, a
Tier I risk-based capital ratio of at least 6% and a Tier I leverage ratio of at
least 5% and not be subject to any specific capital order or directive. For an
institution to be adequately capitalized it must have a total risk-based capital
ratio of at least 8%, a Tier I risk-based capital ratio of at least 4% and a
Tier I leverage ratio of at least 4% (or in some cases 3%). Under the
regulations, an institution will be deemed to be undercapitalized if the bank
has a total risk-based capital ratio that is less than 8%, a Tier I risk-based
capital ratio that is less than 4%, or a Tier I leverage ratio of less than 4%
(or in some cases 3%). An institution will be deemed to be significantly
undercapitalized if the bank has a total risk-based capital ratio that is less
than 6%, a Tier I risk-based capital ratio that is less than 3%, or a leverage
ratio that is less than 3% and will be deemed to be critically undercapitalized
if it has a ratio of tangible equity to total assets that is equal to or less
than 2%.
FDICIA generally prohibits an insured depository institution from paying
management fees to any person that controls the institution if it thereafter
would be undercapitalized. If an institution becomes undercapitalized, it will
be generally restricted from borrowing from the Federal Reserve, increasing its
average total assets, making any acquisitions, establishing any branches or
engaging in any new line of business. An undercapitalized institution must
submit an acceptable capital restoration plan to the appropriate federal banking
agency, which plan must, in the opinion of such agency, be based on realistic
assumptions and be "likely to succeed" in restoring the institution's capital.
In connection with the approval of such a plan, the holding company of the
institution must guarantee that the institution will comply with the plan,
subject to a limitation of liability equal to a portion of the institution's
assets. If an undercapitalized institution fails to submit an acceptable plan
or fails to implement such a plan, it will be treated as if it is significantly
undercapitalized.
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<PAGE>
Under FDICIA, bank regulators are directed to require "significantly
undercapitalized" institutions, among other things, to restrict business
activities, raise capital through a sale of stock, merge with another
institution and/or take any other action which the agency determines would
better carry out the purposes of FDICIA.
Within 90 days after an institution is determined to be "critically
undercapitalized", the appropriate federal banking agency must, in most cases,
appoint a receiver or conservator for the institution or take such other action
as the agency determines would better achieve the purposes of FDICIA. In
general, "critically undercapitalized" institutions will be prohibited from
paying principal or interest on their subordinated debt and will be subject to
other substantial restrictions.
Under FDICIA, an institution that is not well capitalized is generally
prohibited from accepting brokered deposits. Undercapitalized institutions are
prohibited from offering interest rates on deposits significantly higher than
prevailing rates.
The provisions of FDICIA governing capital regulations became effective on
December 19, 1992. FDICIA directs that each federal banking agency prescribe
standards for depository institutions and depository institution holding
companies relating to internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, a maximum ratio of classified assets to capital, a minimum ratio of
market value to book value for publicly traded shares (if feasible) and such
other standards as the agency deems appropriate.
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Proposed Legislation
From time to time proposals are made in the United States Congress, the New
Jersey Legislature, and before various bank regulatory authorities which would
alter the powers of, and place restrictions on, different types of banking
organizations. It is impossible to predict the impact, if any, of potential
legislative trends on the business of the Company and its subsidiaries.
In accordance with federal law providing for deregulation of interest on all
deposits, banks and thrift organizations are now unrestricted by law or
regulation from paying interest at any rate on most time deposits. It is not
clear whether deregulation and other pending changes in certain aspects of the
banking industry will result in further increases in the cost of funds in
relation to prevailing lending rates.
Competition
LSB operates in a highly competitive market environment within northern New
Jersey. Three major multi-bank holding companies in addition to large
independent regional banks and several large multi-state thrift holding
companies operate within LSB's market area. These larger institutions have
substantially larger lending capacities and typically offer services which LSB
does not offer.
In recent years, the financial services industry has expanded rapidly as
barriers to competition within the industry have become less significant. Within
the banking field, banks must compete not only with other banks and traditional
financial institutions, but also with other business corporations that have
begun to deliver financial services.
Concentration
The Company and LSB are not dependent for deposits or exposed by loan
concentrations to a single customer or a small group of customers the loss of
any one or more of which would have a material adverse effect upon the financial
condition of the Company or LSB.
Employees
At December 31, 1995, there were 174 persons employed by the Company and LSB.
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ITEM 2 - PROPERTIES
The Company's principal offices are located at 250 Oak Ridge Road, Oak Ridge,
New Jersey.
LSB operates 12 banking locations located in Passaic, Morris, and Sussex
Counties, New Jersey. LSB's Wantage office is leased under a long term lease
expiring August 1, 1999. LSB's Rockaway office is under a long-term lease
expiring May 15, 2009. LSB's Newton office is under a lease expiring October 1,
2000. LSB's Wharton Office is under a lease, expiring August 22, 2005.
All other offices of LSB and the Company's principal office are owned by LSB and
are unencumbered.
ITEM 3 - LEGAL PROCEEDINGS
There are no significant pending legal proceedings involving the Company or LSB
other than those arising out of routine operations. Management does not
anticipate that the ultimate liability, if any, arising out of such litigation
will have a material effect on the financial condition or results of operations
of the Company and LSB on a consolidated basis.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the Company
during the fourth quarter of 1995.
ITEM 4A - EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name and age of each executive officer of the
Company and LSB. Each officer is appointed by the Company's Board of Directors.
Unless otherwise indicated, the persons named below have held the position
indicated for more than the past five years.
Officer of Position with the Company,
Name and Age LSB since LSB, and Business Experience
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Robert B. Nicholson 1969 Chairman of The Board
Age 67 of the Company since 1989; Chairman of
the Board, LSB; Chairman of the Board,
Eastern Propane Corp. (a fuel
distribution company)
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John W. Fredericks 1969 President of the Company since
Age 60 1989; President, LSB; President,
Fredericks Fuel and Heating
Service (a fuel distribution
company)
Arthur L. Zande 1971 Executive Vice President and
Age 61 CEO of the Company since 1989;
Executive Vice President
and CEO, LSB
William J. Eckhardt 1975 Vice President and Treasurer
Age 45 of the Company since 1994;
Vice President and Treasurer, LSB
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<PAGE>
PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $2.50 par value, is traded in the over the counter
market, although the Company does not regard that market to be an established
public trading market with respect to the Company's Common Stock. As of
December 31, 1995, there were 1,921 shareholders of record of Common Stock.
The market maker for the Common Stock is:
Ryan, Beck & Company
80 Main Street
West Orange, N.J. 07052
The following table indicates the quarterly high and low bid prices of the
Common Stock as provided by Ryan, Beck and Company and the cash dividends
declared per share of Common Stock (adjusted for subsequent stock dividends).
<TABLE>
<CAPTION>
Bid Dividends
Prices Declared
<S> <C> <C> <C>
High Low
Year ended December 31, 1994 ------- -------
First Quarter $11 7/8 $11 1/2 $.09
Second Quarter 12 3/8 11 3/8 .09
Third Quarter 13 5/8 11 7/8 .10
Fourth Quarter 14 1/4 13 5/8 .10
Year ended December 31, 1995
First Quarter $15 1/4 $14 1/4 $.12
Second Quarter 16 15 1/4 .12
Third Quarter 17 1/2 16 .12
Fourth Quarter 19 17 1/2 .13
</TABLE>
The prices listed above reflect inter-dealer prices, without retail mark-up,
mark-down, or commission, and may not necessarily represent actual transactions.
Dividends on the Company's Common Stock are within the discretion of the Board
of Directors of the Company and are dependent upon various factors, including
the future earnings and financial condition of the Company and the Bank and bank
regulatory policies. Federal and State laws and regulations contain restrictions
on the ability of the Company and the Bank to pay dividends.
State of New Jersey Banking laws specify that no dividend shall be paid by the
Bank on its capital stock unless, following the payment of each such dividend,
the capital stock of the Bank will be unimpaired and the Bank will have a
surplus of not less than 50% of its capital stock, or, if not, the payment of
such dividend will not reduce the surplus of the Bank. Capital guideline and
other regulatory requirements may further limit the Bank's and the Company's
ability to pay dividends.
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<PAGE>
<TABLE>
<CAPTION>
ITEM 6 SELECTED FINANCIAL DATA Lakeland Bancorp, Inc.
and Subsidiaries
=====================================================================================================================
AT DECEMBER 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected balance sheet data:
Investment securities (1)................................. $125,972 $129,303 $135,621 $124,178 $ 74,899
Short-term investments (2)................................ 17,325 1,300 12,200 22,100 6,100
Loans, net................................................ 187,812 172,197 145,957 119,000 102,663
Total assets.............................................. 360,661 333,588 320,593 293,600 202,486
Deposits.................................................. 327,942 307,121 297,301 272,903 183,425
Mortgage payable.......................................... - - - 2,988 3,000
Stockholders' equity...................................... 32,040 26,161 23,069 17,341 15,592
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(In Thousands Except for Per Share and Ratio Information)
Selected operating data:
Interest income........................................... $ 23,848 $ 22,184 $ 20,431 $ 18,395 $ 16,006
Interest expense.......................................... 9,114 7,607 7,822 8,562 8,303
-------- -------- -------- -------- --------
Net interest income....................................... 14,734 14,577 12,609 9,833 7,703
Provision for loan losses................................. 129 226 695 789 955
-------- -------- -------- -------- --------
Net interest income
after provision for loan losses......................... 14,605 14,351 11,914 9,044 6,748
Other income.............................................. 1,982 1,912 1,832 1,704 1,853
Other expenses............................................ 9,505 9,257 8,589 7,390 6,502
-------- -------- -------- -------- --------
Income before income taxes................................ 7,082 7,006 5,157 3,358 2,099
Income taxes.............................................. 2,286 2,175 1,509 848 377
-------- -------- -------- -------- --------
Net income................................................ $ 4,796 $ 4,831 $ 3,648 $ 2,510 $ 1,722
======== ======== ======== ======== ========
Weighted average common shares outstanding (3)............ 3,226 3,193 2,924 2,909 2,909
Net income per common share (3)........................... $1.49 $1.51 $1.25 $.86 $.59
Selected other data:
Return on average assets.................................. 1.42% 1.46% 1.22% 1.02% .91%
Return on average stockholders' equity.................... 16.62 19.29 19.45 15.45 11.40
Average stockholders'
equity to average assets................................ 8.55 7.59 6.25 6.58 8.02
Cash dividend per share (3)............................... $.49 $.38 $.31 $.26 $.25
Dividend payout ratio..................................... 32.79% 25.22% 24.85% 30.32% 42.63%
</TABLE>
(1) Includes securities available for sale and held to maturity.
(2) Comprised of federal funds sold.
(3) Per share figures are based on the weighted average number of shares
outstanding during the periods after giving retroactive effect to a 100%
stock dividend distributed on October 25, 1995, a 5% stock dividend
distributed on June 30, 1995, a 10% stock dividend distributed on June 10,
1994, a 6% stock dividend distributed on June 30, 1993, a 10% stock dividend
distributed on December 10, 1992, and a 3% stock dividend distributed on
April 10, 1992.
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ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF Lakeland Bancorp, Inc.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Subsidiaries
===============================================================================
FINANCIAL REVIEW
Lakeland Bancorp, Inc., (the "Company") reported net income of $4.8 million for
both the years ended December 31, 1995, and December 31, 1994. Net income per
share decreased $.02 or 1.32% to $1.49 per share for the year ended December 31,
1995 as compared to $1.51 per share for the year ended December 31, 1994. An
increased level of net interest-earning assets was largely offset by a decrease
in the Company's net interest spread. Net income in 1994 increased $1.2 million
compared to 1993; this increase was primarily attributable to an increased
volume of net earning assets together with an improvement in the Company's net
interest spread. As of December 31, 1995, the Company had total assets of $360.7
million, an increase of $27.1 million or 8.12% compared to $333.6 million at
December 31, 1994.
The Company's return on average assets and average stockholders' equity was
1.42% and 16.62%, respectively, for 1995, compared to 1.46% and 19.29%,
respectively, in 1994 and 1.22% and 19.45%, respectively, in 1993.
The Company's gross loan portfolio increased $15.6 million or 8.88% from $175.2
million at December 31, 1994 to $190.8 million at December 31, 1995. This
increase was reflected in commercial loan increases of $8.5 million, mortgage
loan increases of $5.0 million, and consumer installment loan increases of $2.1
million.
The investment portfolio, including both held to maturity and available for sale
securities, decreased $3.3 million or 2.58% from $129.3 million at December 31,
1994, to $126.0 million at December 31, 1995. A $9.4 million decrease in U.S.
Treasury securities was partially offset by a $6.7 million increase in U.S.
Government Agency securities. The decrease in the investment portfolio was used
to fund increases in the loan portfolio. The investment portfolio contains net
unrealized gains of $2.6 million at December 31, 1995, an improvement of $4.9
million over the net unrealized loss of $2.3 million in the portfolio at
December 31, 1994. Such improvement is attributable to lower market interest
rates and the resultant effect on security values.
Cash and cash equivalents increased $16.3 million, or 92.87%, to $33.8 million
at December 31, 1995 from $17.5 million at December 31, 1994, principally due to
an increase in deposits of $20.1 million, $14.2 million of which occurred in the
fourth quarter of 1995. This increase was primarily attributable to an increase
in non-interest bearing demand deposits and interest-bearing demand deposits of
$7.0 million and $5.7 million, respectively, during the fourth quarter.
Other assets decreased $1.34 million, or 50.71%, to $1.31 million at December
31, 1995, from $2.65 million at December 31, 1994, due primarily to decreases of
$1.16 million in deferred income tax assets, which was largely the result of
unrealized gains in the securities available for sale portfolio, and in other
real estate owned of $373,000.
INTEREST INCOME
Interest income (on a tax equivalent basis) increased $1.6 million or 7.00% to
$24.2 million in 1995. In 1994, interest income increased $1.7 million or 8.15%
to $22.6 million from $20.9 million in 1993.
The increase in 1995 was attributable to increases in both the volume of average
interest earning assets of $8.4 million or 2.73% and an increase of 31 basis
points in the average interest rates earned on those assets. Interest income on
loans increased $2.2 million, or 15.74%, to $15.9 million in 1995 from $13.7
million in 1994, due to increases in both average loan balances and average
yields. During 1995, average loans increased $19.3 million, comprised of
increases in the average volume of commercial loans of $9.6 million, mortgage
loans (including construction loans) of $7.2 million, and consumer installment
loans (including home equity and improvement loans) of $2.5 million. Along with
these increased average balances was an increase of 28 basis points in the
average yield on such loans.
Interest income on taxable investment securities decreased $584,000 or 8.20% to
$6.5 million in 1995 from $7.1 million in 1994 primarily due to a $9.9 million,
or 8.50%, decrease in the average balance of such securities. The average yield
on taxable investment securities remained little changed in 1995 at 6.14% as
compared to 6.12% in 1994.
Interest income on tax-exempt securities (on a tax equivalent basis) decreased
$229,000 or 16.32% to $1.2 million in 1995 from $1.4 million in 1994, due to
decreases in both average balance and yield.
Interest income on federal funds sold increased $230,000 or 70.55% to $556,000
in 1995 from $326,000 in 1994, due primarily to a 202 basis point increase in
yield, which resulted from higher short term market interest rates.
The increase in interest income in 1994 was attributable to an increase in the
volume of average interest earning assets of $28.4 million or 10.22% which more
than offset a decrease of 14 basis points in the average interest rates earned
on those assets. Interest income on loans increased $1.9 million or 16.14% to
$13.7 million in 1994 from $11.8 million in 1993 as a $29.7 million or 22.50%
increase in average loans more than offset a 46 basis point decline in loan
yield. During 1994 average loans increased $29.7 million, comprised of increases
in the average volume of consumer installment loans (including home equity and
improvement loans) of $13.7 million, commercial loans of $8.1 million, and
mortgage loans (including construction loans) of $7.9 million. Interest income
on securities, both taxable and non-taxable, declined $66,000 or 0.8% to $7.5
million in 1994 from $7.6 million in 1993, due to a decline in yield of 35 basis
points which was only partially offset by a $6.3 million or 4.8% increase in the
average balance of investment securities, which included both held to maturity
and available for sale securities. The increased volume was primarily reflected
in an increase in the average balance of taxable securities of $7.2 million.
INTEREST EXPENSE
Interest paid on deposits during 1995 increased $1.5 million or 19.68% to $9.1
million from $7.6 million in 1994. While the average volume of interest-bearing
deposits decreased $4.3 million during 1995, the average rate paid on those
deposits increased 65 basis points, due primarily to an increasing interest rate
environment which prevailed during the first half of 1995 and a migration of
deposits from savings accounts to higher cost time deposits. During 1995, the
average volume of time deposits increased $33.3 million, while the average rate
paid on time deposits increased by 138 basis points. The increase in the average
volume of interest-bearing time deposits was more than offset by a $29.9 million
decrease in the average volume of savings deposits and a $7.7 million decrease
in the average volume of interest-bearing demand deposits. Interest expense on
interest-bearing demand deposits and savings deposits declined primarily due to
the aforementioned volume declines as rates
- 16 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Lakeland Bancorp, Inc.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Subsidiaries
================================================================================
paid were little changed. The average rate paid on savings deposits increased 3
basis points, while the average rate paid on interest-bearing demand deposits
decreased 5 basis points.
Interest paid on deposits during 1994 decreased $153,000 or 1.97% to $7.6
million from $7.7 million in 1993. While the average volume of interest-bearing
deposits increased $16.8 million during 1994, the average rate paid on those
deposits decreased 28 basis points, due primarily to a declining interest rate
environment which prevailed during the first half of 1994. Interest expense on
interest-bearing demand deposits and savings deposits remained little changed in
1994 compared to 1993. The increase of $11.2 million in average savings
deposits, the largest component of interest-bearing deposits, was offset by a
decrease of 26 basis points in the average interest rate paid on those deposits.
Average interest-bearing demand deposits increased by $5.4 million. However, the
25 basis point reduction in the average rate paid on these deposits more than
offset the impact of the increased volume. Interest expense on time deposits
decreased $122,000 or 5.27% to $2.2 million in 1994 from $2.3 million in 1993
due largely to a 24 basis point decline in average rate paid as the average
balance remained little changed.
Total interest expense decreased $215,000 or 2.75%, reflecting the decreased
average interest rates paid together with the reduction of interest on "other
borrowings" as the Company paid its mortgage loan in full during the first
quarter of 1993.
NET INTEREST INCOME
Net interest income, typically the largest component of the Company's income, is
the difference between interest and fees earned on loans and other interest
earning assets, and interest paid on deposits and other funding sources.
The following table reflects the components of the Company's net interest
income, setting forth for the years presented herein, (1) average assets,
liabilities and stockholders' equity, (2) interest income earned on interest-
earning assets and interest expense paid on interest-bearing liabilities, (3)
average yields earned on interest-earning assets and average rates paid on
interest-bearing liabilities, (4) the Company's net interest spread (i.e., the
average yield on interest-earning assets less the average rate on interest-
bearing liabilities) and (5) the Company's net yield on interest-earning assets.
Rates are computed on a taxable equivalent basis.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
1995 1994 1993
----------------------------- ------------------------------- -------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ RATES AVERAGE INCOME/ RATES AVERAGE INCOME/ RATES
BALANCE EXPENSE EARNED/PAID BALANCE EXPENSE EARNED/PAID BALANCE EXPENSE EARNED/PAID
------- -------- ----------- ------- -------- ----------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans (A)........................ $181,013 $15,917 8.79% $161,684 $13,752 8.51% $131,984 $11,840 8.97%
Taxable Investment
securities (B)................. 106,483 6,535 6.14 116,397 7,119 6.12 109,215 7,003 6.41
Tax-exempt investment
securities (c)................. 17,996 1,174 6.52 20,048 1,403 7.00 20,968 1,585 7.56
Federal funds sold............... 9,462 556 5.88 8,446 326 3.86 15,981 469 2.93
-------- ------- -------- ------- -------- -------
Total interest-earning assets.. 314,954 24,182 7.68 306,575 22,600 7.37 278,148 20,897 7.51
------- ------- -------
Net-interest-earning assets:
Allowance for loan losses........ (3,062) (3,069) (2,663)
Other assets..................... 25,580 26,488 24,546
-------- -------- --------
Total assets.................... $337,472 $329,994 $300,031
======== ======== ========
Interest-bearing liabilities:
Interest-bearing demand
deposits........................ $ 53,128 1,071 2.02 $ 60,794 1,257 2.07 $ 55,390 1,287 2.32
Savings and club deposits........ 108,734 3,290 3.03 138,681 4,154 3.00 127,524 4,155 3.26
Time deposits.................... 88,169 4,740 5.38 54,884 2,193 4.00 54,596 2,315 4.24
Other borrowings................. 221 13 5.88 66 3 4.55 663 65 9.80
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities:................... 250,252 9,114 3.64 254,425 7,607 2.99 238,173 7,822 3.28
------- ------- -------
Non-interest-bearing liabilities:
Demand deposits.................. 56,840 49,609 42,212
Other liabilities................ 1,516 922 896
Stockholders' equity.............. 28,864 25,038 18,750
-------- -------- --------
Total liabilities and
stockholders' equity........... $337,472 $329,994 $300,031
======== ======== ========
Net interest income/net
interest spread (taxable
equivalent basis)............... $15,068 4.04% $14,993 4.38% $13,075 4.23%
======= =========== ======= =========== ======= ===========
Net yield on interest-earning
assets (taxable equivalent
basis) (D)....................... 4.78% 4.89% 4.70%
=========== =========== ===========
</TABLE>
CODE
(A) Includes non-accrual loans, the effect of which is to reduce the yield
earned on loans.
(B) Includes certificates of deposit and interest-bearing cash accounts.
(C) The taxable equivalent adjustments, which total $335,000, $416,000 and
$466,000 in 1995, 1994 and 1993, respectively, are based on a marginal tax
rate of 34% and the provisions of Section 291 of the Internal Revenue Code.
(D) Net interest income (taxable equivalent basis) divided by average interest-
earning assets.
- 17 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Lakeland Bancorp, Inc.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Subsidiaries
================================================================================
VOLUME/RATE ANALYSIS
The following table analyzes net interest income in terms of changes in the
volume of interest-earning assets and interest-bearing liabilities and changes
in yields and rates on a taxable equivalent basis. The table reflects the extent
to which changes in the Company's interest income and interest expense are
attributable to changes in volume (changes in volume multiplied by prior year
rate) and changes in rate (changes in rate multiplied by prior year volume).
Changes attributable to the combined impact of volume and rate have been
allocated proportionately to changes due to volume and changes due to rate.
<TABLE>
<CAPTION>
1995 VERSUS 1994 1994 VERSUS 1993
----------------------------------- -----------------------------------
(In Thousands)
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
--------------------- TOTAL --------------------- TOTAL
INCREASE INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
-------- --------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans............................. $1,698 $ 467 $2,165 $2,546 $(634) $1,912
Taxable investment securities..... (607) 23 (584) 444 (328) 116
Tax-exempt investment securities.. (137) (92) (229) (68) (114) (182)
Federal funds sold................ 46 184 230 (263) 120 (143)
-------- --------- -------- -------- --------- ----------
Total interest income........... 1,000 582 1,582 2,659 (956) 1,703
-------- --------- -------- -------- --------- ----------
Interest expense:
Interest-bearing demand deposits.. (157) (29) (186) 117 (147) (30)
Savings deposits.................. (905) 41 ( 864) 347 (348) (1)
Time deposits..................... 1,625 922 2,547 12 (134) (122)
Other borrowings.................. 9 1 10 (39) (23) (62)
-------- --------- -------- -------- --------- ----------
Total interest expense.......... 572 935 1,507 437 (652) (215)
-------- --------- -------- -------- --------- ----------
Net interest income................. $ 428 $(353) $ 75 $2,222 $(304) $1,918
======== ========= ======== ======== ========= ==========
</TABLE>
For the year ended 1995, net interest income on a tax equivalent basis increased
$75,000 to $15.1 million from $15.0 million in 1994. A $12.6 million increase in
the excess of average interest-earning assets over average interest-bearing
liabilities was offset by a 34 basis point decrease in the net interest spread
and a decrease of 11 basis points in the net yield on interest-earning assets.
For the year ended 1994, net interest income on a tax equivalent basis increased
$1.9 million or 14.67% to $15.0 million from $13.1 million in 1993. This
increase was primarily attributable to a $12.2 million increase in the excess of
average interest-earning assets over average interest-bearing liabilities,
together with an increase of 15 basis points in the net interest spread.
PROVISION FOR LOAN LOSSES
The allowance for loan losses is established to absorb the impact of losses
inherent in the loan portfolio. Additions to the allowance are made by means of
charges against current earnings and recoveries on loans previously charged to
the allowance. The level of the allowance is determined by the loan review
committee and Board of Directors after considering such elements as economic
conditions, risk exposure, adequacy of collateral, and such other factors as are
deemed to be relevant. The loan review committee assigns a specific reserve
allocation to each commercial loan in excess of $100,000 together with a general
percentage based on experience to commercial loans less than $100,000 and to all
real estate mortgage and consumer installment loans.
During 1995 the Company provided $129,000 to the allowance and had net charge-
offs of $219,000 for a $90,000 decrease to the allowance, leaving a balance of
$2.9 million. At December 31, 1994, the allowance stood at $3.0 million,
remaining the same as at December 31, 1993, as the Company provided $225,000 to
the allowance and had net charge-offs of $225,000. Based on its ongoing loan
review process, its collateral positions, and its loss and recovery experience,
the Company believes that its allowance for loan losses at December 31, 1995,
was adequate.
At December 31, 1995, the allowance for loan losses as a percentage of total
loans was 1.53%, as compared to 1.71% and 2.01% at December 31, 1994, and 1993,
respectively. The decrease in the allowance as a percentage of total loans is
the result of improvements in the local economy and local real estate market
which management believes have reduced the risk inherent in the loan portfolio.
At December 31, 1995, 1994, and 1993, such loans represented 0.84%, 1.17%, and
2.29%, respectively, of total loans. At December 31, 1995, the Company's
allowance balance of $2,910,000 significantly exceeded the balance of non-
accrual and 90 day delinquent and accruing loans of $1,604,000.
OTHER INCOME
Other (i.e., non-interest) income increased $70,000 or 3.68% to $2.0 million in
1995 from $1.9 million in 1994 and represented 7.68% of total income for 1995.
This increase was primarily attributable to a $53,000 or 3.47% increase on
service charges on deposits. The increase in service charges on deposits
reflected the higher deposit base.
Other income increased $80,000 or 4.38% to $1.9 million in 1994 from $1.8
million in 1993 and represented 7.94% of total income for 1994, as compared to
8.23% of total 1993 income. This increase was primarily attributable to $58,000
in proceeds received during 1994 from the Company's share of a split-dollar life
insurance policy on a deceased officer, along with a $68,000 or 4.60% increase
on service charges on deposits, which more than offset a $58,000 gain on sale of
bank premises recorded during 1993. The increase in service charges on deposits
reflected the higher deposit base.
- 18 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Lakeland Bancorp, Inc.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Subsidiaries
================================================================================
OTHER EXPENSES
Other (i.e., non-interest) expenses in 1995 increased $247,000 or 2.67% over
1994. Salaries and benefits, the largest component of other expenses, increased
$317,000 or 6.36%, due primarily to normal salary and benefit increases.
Occupancy and furniture and equipment expenses increased $27,000 or 1.44%,
primarily as the result of higher maintenance and depreciation costs on the
Company's twelve offices. Federal Deposit Insurance premium expense decreased
$312,000 or 47.02%, due to a reduction in the assessment rate from 23 basis
points of deposits to four basis points effective June 1, 1995.
Recently, the FDIC has voted to reduce the assessment schedule for the first
half of 1996 so that most institutions, including the Bank, will pay only the
statutory minimum semi-annual assessment of $1,000. 1996 results are expected to
be favorably impacted by this development.
Expenses other than the foregoing increased $215,000 or 12.52% to $1.9 million
in 1995 from $1.7 million in 1994. This was primarily attributable to increased
stationery and supplies, and postage costs, resulting from expanding operations,
and a $94,000 increase in miscellaneous losses due to two check frauds along
with thefts which occurred at two branch locations.
Other expenses in 1994 increased $668,000 or 7.78% over 1993. Salaries and
benefits increased $301,000 or 6.43%, due primarily to normal salary and benefit
increases. Occupancy and furniture and equipment expenses increased $166,000 or
9.59%, primarily as the result of higher maintenance and depreciation costs on
the Company's twelve offices. Federal Deposit Insurance increased $73,000 or
12.39%, reflecting increased deposit balances. Other elements increased an
aggregate 8.06% due to expanded operations and normal inflationary increases.
INCOME TAXES
The components of income taxes are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Current............................ $2,469,763 $2,372,072 $1,685,317
Deferred........................... (183,090) (196,789) (176,069)
---------- ---------- ----------
$2,286,673 $2,175,283 $1,509,248
========== ========== ==========
</TABLE>
The Company's effective income tax rate was 32.3%, 31.0%, and 29.3%, in the
years ended December 31, 1995, 1994, and 1993, respectively. The increasing
effective rate in 1995 and 1994 is the result of the reduced contribution of
income from tax-exempt investments.
LOANS
The following table sets forth the classification of the Company's loans by
major category as of December 31 for each of the last five years:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Commercial......................... $ 65,190 $ 56,730 $ 44,808 $ 39,152 $ 34,037
Real estate mortgage............... 83,688 78,551 68,995 60,855 52,792
Real estate construction........... 1,535 1,687 2,652 2,897 351
Home equity and
consumer installment............. 40,401 38,277 32,546 18,722 17,723
-------- -------- -------- -------- --------
Total Loans.................... 190,814 175,245 149,001 121,626 104,903
Less: Unearned income.............. 92 48 44 176 205
Allowance for loan losses...... 2,910 3,000 3,000 2,450 2,035
-------- -------- -------- -------- --------
Net loans.......................... $187,812 $172,197 $145,957 $119,000 $102,663
======== ======== ======== ======== ========
</TABLE>
The Company has not made loans to borrowers outside the United States.
Commercial loans at December 31, 1995 represented 34.1% of total loans as
compared to 32.4% at December 31, 1994. These loans are primarily to borrowers
within the Company's market area.
Real Estate loans increased $5.0 million from December 31, 1994, but declined to
44.7% of the total loan portfolio at December 31, 1995, from 45.8% at December
31, 1994. Of that $5.0 million increase, $4.1 million was attributable to
commercial mortgages and the balance was attributable to residential mortgages.
Home equity and consumer installment loans increased $2.1 million, representing
21.2% of total loans at December 31, 1995, as compared to 21.8% at December 31,
1994.
Rate sensitive loans of $28.1 million represented 14.7% of total loans at
December 31, 1995, as compared to $27.0 million or 15.4% of total loans at
December 31, 1994. These rate sensitive loans consist primarily of commercial
loans of $23.4 million and home equity loans of $4.7 million that will reprice
with changes in the prime lending rate.
- 19 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Lakeland Bancorp, Inc.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Subsidiaries
================================================================================
The following table sets forth certain categories of loans as of December 31,
1995 in terms of contractual maturity:
<TABLE>
<CAPTION>
WITHIN 1 TO 5 AFTER 5
1 YEAR YEARS YEARS TOTAL
-------- -------- ------- --------
<S> <C> <C> <C> <C>
(In Thousands)
Commercial................ $28,768 $34,989 $1,433 $65,190
Real estate construction.. 1,535 -- -- 1,535
------- ------- ------ -------
Total................... $30,303 $34,989 $1,433 $66,725
======= ======= ====== =======
</TABLE>
The following table sets forth the dollar amount of all commercial and real
estate construction loans due one year or more after December 31, l995, which
have pre-determined interest rates or adjustable interest rates:
<TABLE>
<CAPTION>
1 TO 5 AFTER 5
YEARS YEARS TOTAL
-------- ------- --------
<S> <C> <C> <C>
(In Thousands)
Loans with fixed rates....... $24,287 $ 388 $24,675
Loans with adjustable rates.. 10,702 1,045 11,747
------- ------ -------
Total...................... $34,989 $1,433 $36,422
======= ====== =======
</TABLE>
RISK ELEMENTS
Commercial loans are placed on a non-accrual status when principal or interest
are in default for a period of 90 days or more except where there exists
sufficient collateral to cover the defaulted principal and interest payments or
management's knowledge of the specific circumstances warrant continued accrual.
Real estate mortgage loans are placed on non-accrual status at the time when
foreclosure proceedings are commenced except where there exists sufficient
collateral to cover the defaulted principal and interest payments or
management's knowledge of the specific circumstances warrant continued accrual.
Installment loans are regularly charged off when principal and interest payments
are six months in arrears. Interest earned thereafter is taken into income when
received.
The following schedule sets forth certain information regarding the Company's
non-accrual, past due and renegotiated loans and other real estate owned as of
December 31 of each of the last five years:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Non-accrual loans (A).......... $1,545 $1,501 $ 483 $ 213 $1,124
Past due loans (B)............. 59 554 2,934 3,714 1,223
Renegotiated loans (C)......... 2,325 1,740 2,366 -- --
------ ------ ------ ------ ------
Total non-accrual, past due
and renegotiated loans...... 3,929 3,795 5,783 3,927 2,347
Other real estate owned........ 255 629 458 -- --
------ ------ ------ ------ ------
Total........................ $4,184 $4,424 $6,241 $3,927 $2,347
====== ====== ====== ====== ======
</TABLE>
(A) Generally represents loans as to which the payment of interest or principal
is in arrears for a period of more than 90 days. Current policy requires
that interest previously accrued on these loans and not yet paid be reversed
and charged against income during the current period. Interest earned
thereafter is only included in income to the extent that it is received in
cash.
(B) Represents loans as to which payments of interest or principal are
contractually past due 90 days or more but which are currently accruing
income at the contractually stated rates. A determination is made to
continue accruing income on such loans only when such loans are believed to
be fully collectible.
(C) At December 31, 1995, 1994 and 1993, the loan portfolio included loans whose
terms had been renegotiated due to financial difficulties of borrowers. All
such loans were performing in accordance with the renegotiated terms and in
management's view, do not present a significant risk of loss as of December
31, 1995.
Included in the above schedule are two non-accrual commercial loans totalling
$629,000, and six renegotiated loans totalling $1,763,000, which represents all
loans categorized as impaired. Therefore, SFAS 114 has no impact on the
comparability of data in the above credit risk table.
There were no loans at December 31, 1995, other than those included in the above
table, where the Company was aware of any credit conditions of any borrowers
that would indicate a strong possibility of the borrowers not complying with the
present terms and conditions of repayment and which may result in such loans
being included as a non-accrual, past due or renegotiated at a future date.
At December 31, 1995, there were no concentrations of loans exceeding 10% of
total loans outstanding. Loan concentrations are considered to exist when there
are amounts loaned to a multiple number of borrowers engaged in similar
activities which would cause them to be similarly impacted by economic or other
related conditions.
Non-accrual loans at December 31, 1995, increased $44,000 to $1,545,000 from
$1,501,000 at December 31, 1994. At December 31, 1995, non-accrual loans
consisted of one home equity loan, three mortgage loans, eleven commercial
loans, and three consumer loans. All of these loans are in various stages of
litigation, foreclosure, or workout.
Loans past due ninety days or more and still accruing decreased $495,000 to
$59,000 at December 31, 1995, from $554,000 at December 31, 1994.
For 1995, the gross interest income that would have been recorded, had the loans
classified at year-end as either non-accrual or renegotiated been performing in
conformance with their original loan terms, would have been approximately
$397,000. The amount of interest income actually recorded on those loans for
1995 was $193,000. The resultant income lost of $204,000 for
- 20 -
<PAGE>
Management's Discussion and Analysis of Lakeland Bancorp, Inc.
Financial Condition and Results of Operations and Subsidiaries
================================================================================
1995 compares to $162,000 and $99,000 for 1994 and 1993, respectively.
On January 1, 1995, the Company adopted SFAS 114 ("Accounting by Creditors for
Impairment of a Loan") and SFAS 118 ("Accounting by Creditors for Impairment of
a Loan -- Income Recognition and Disclosures") as required by generally accepted
accounting principles. In doing so, the Company has identified loans for which
the provisions of these pronouncements apply and has established criteria to
determine whether such loans are impaired. SFAS 114 provides that the provisions
of such Statement are not applicable to large groups of smaller-balance
homogeneous loans that are collectively evaluated for impairment. Accordingly,
management has determined that SFAS 114 and 118 do not apply to the following
groups of smaller-balance homogeneous loans:
CATEGORY INVESTMENT
Mortgage: Residential $350,000 or less
Mortgage: Non-Residential 200,000 or less
Commercial: Unsecured 75,000 or less
Commercial: Secured 200,000 or less
Consumer All loans
Home Equity 100,000 or less
A loan evaluated under SFAS 114 is deemed impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. An insignificant delay, which is defined as up to 90 days by the
Company, will not cause a loan to be classified as impaired. A loan is not
impaired during a period of delay in payment if the Company expects to collect
all amounts due, including interest accrued at the contractual interest rate for
the period of delay. Thus, a demand loan or other loan with no stated maturity
is not impaired if the Company expects to collect all amounts due, including
interest accrued at the contractual interest rate, during the period the loan is
outstanding. All loans identified as impaired are evaluated independently. The
Company does not aggregate such loans for evaluation purposes.
The Company's policy concerning non-accrual loans states that except as
described above, loans are placed on a non-accrual status when payments are 90
days delinquent or more. Therefore, a loan will be considered to be impaired,
when it is 90 days delinquent and it exceeds the balance guidelines for SFAS 114
non-applicability stated above. It is, therefore, possible for a loan to be on
non-accrual status and not be impaired if the balance falls within the above
stated guidelines.
SFAS 114 also requires that loans renegotiated, as part of a troubled debt
restructuring, be classified as impaired and measured for impairment by
discounting the total expected cash flow under the renegotiated terms at the
loan's original effective interest rate. This requirement applies only to loans
renegotiated on or after the effective date of SFAS 114.
Loans, or portions thereof, are charged-off when it is determined that a loss
has occurred. Until such time, an allowance for loan loss is maintained for
estimated losses. With regard to interest income recognition for payments
received on impaired loans, as well as all non-accrual loans, the Company
follows FDIC guidelines, which apply any payments to principal as long as there
is doubt as to the collectibility of the loan balance.
As of December 31, 1995, based on the above criteria, the Company classified
three commercial loans, including one renegotiated loan, totalling $772,000, and
five mortgage loans, including four renegotiated residential mortgage loans,
totalling $1,620,000, as impaired. The impairment of these loans is measured
using the present value of future cash flows for the five renegotiated loans and
is based on the fair value of the underlying collateral for the remaining three
commercial loans and one mortgage loan. Based upon such evaluation, $379,000 has
been allocated to the allowance for loan losses for impairment.
The following table sets forth for each of the five years ended December 31,
1995, the historical relationships among the amount of loans outstanding, the
allowance for loan losses, the provision for loan losses, the amount of loans
charged-off and the amount of loan recoveries:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance of allowance at beginning
of year............................... $3,000 $3,000 $2,450 $2,035 $1,400
------ ------ ------ ------ ------
Charge-offs:
Commercial............................ 114 234 57 256 267
Installment........................... 33 85 107 87 89
Mortgage.............................. 217 23 35 45 -
------ ------ ------ ------ ------
Total charge-offs.................... 364 342 199 388 356
------ ------ ------ ------ ------
Recoveries:
Commercial............................ 108 69 13 1 9
Installment........................... 37 48 41 13 27
------ ------ ------ ------ ------
Total recoveries..................... 145 117 54 14 36
------ ------ ------ ------ ------
Net charge-offs........................ 219 225 145 374 320
------ ------ ------ ------ ------
Provision for loan losses.............. 129 225 695 789 955
------ ------ ------ ------ ------
Balance of allowance at end of year.... $2,910 $3,000 $3,000 $2,450 $2,035
====== ====== ====== ====== ======
Ratio of net charge-offs to average
loans outstanding..................... .12% .14% .11% .34% .32%
Balance of allowance at end of year
as a percent of year end loans........ 1.53% 1.71% 2.01% 2.02% 1.94%
</TABLE>
- 21 -
<PAGE>
Management's Discussion and Analysis of Lakeland Bancorp, Inc.
Financial Condition and Results of Operations and Subsidiaries
================================================================================
The ratio of the allowance for loan losses to loans outstanding reflects
management's evaluation of the underlying credit risk inherent in the loan
portfolio. The determination of the appropriate level of the allowance for loan
losses is based on management's evaluation of the risk characteristics of the
loan portfolio considering such factors as the financial condition of the
borrowers, fair market value of collateral, past due and delinquency levels,
size and nature of the loan portfolio, general economic conditions, charge-off
experience and the level of non-performing loans.
The Company regards the majority of the allowance as a general allowance which
is available to absorb losses from all loans. However, for the purpose of
complying with disclosure requirements of the Commission, the table below
presents an allocation of the allowance among various loan categories and sets
forth the percentage of loans in each category to total loans. The allocation of
the allowance as shown in the table should neither be interpreted as an
indication of future charge-offs, nor as an indication that charge-offs in
future periods will necessarily occur in these amounts or in the indicated
proportions.
The following table sets forth the allocation of the allowance for loan losses
at the dates indicated by category of loans:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------------------------------------------------------------------------------
PERCENT /(1)/ PERCENT /(1)/ PERCENT /(1)/ PERCENT /(1)/ PERCENT /(1)/
OF OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.........................$1,517 34.2 $1,478 32.4 $1,450 30.1 $1,207 32.2 $1,060 32.5
Real estate mortgage............... 628 43.9 786 44.8 690 46.3 609 50.0 527 50.3
Real estate construction........... 31 .8 34 1.0 80 1.8 72 2.4 9 .3
Home equity and consumer
installment.................... 734 21.1 702 21.8 780 21.8 562 15.4 439 16.9
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
$2,910 100.0 $3,000 100.0 $3,000 100.0 $2,450 100.0 $2,035 100.0
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
(1) Represents the percentage of type of loan to total loans outstanding.
INVESTMENT SECURITIES
Commencing with fiscal 1994, the Company has classified its investment
securities into the available for sale and held to maturity categories pursuant
to Statement No. 115 of the Financial Accounting Standards Board "Accounting for
Certain Investments in Debt and Equity Securities" ("Statement No. 115"). For
information regarding Statement No. 115, See Notes to the Company's Consolidated
Financial Statements.
The following table sets forth the carrying value of the Company's investment
securities, both available for sale and held to maturity, as of December 31 for
each of the last three years. Securities available for sale are stated at
estimated fair value while securities held for maturity are stated at cost,
adjusted for amortization of premiums and accretion of discounts.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
U.S. Treasury....................... $ 65,668,659 $ 75,062,012 $ 80,929,508
U.S. Government agencies............ 32,396,287 25,713,558 27,873,938
States and political subdivisions... 17,717,473 19,453,266 20,662,858
Other debt securities............... 7,951,593 7,782,939 6,154,375
Equity security..................... 2,237,637 1,290,945 --
------------ ------------ ------------
Totals.......................... $125,971,649 $129,302,720 $135,620,679
============ ============ ============
</TABLE>
The following tables present the estimated fair values and unrealized gains and
losses on investment securities at December 31, 1995:
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------
GROSS UNREALIZED
AMORTIZED --------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- -------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury........................$35,579,991 $ 494,926 $ 24,573 $36,050,344
U.S. Government agencies............. 19,762,429 190,384 -- 19,952,813
States and political subdivisions.... 16,168,610 363,572 60,684 16,471,498
Other debt securities................ 4,485,032 39,005 38,830 4,485,207
Equity security...................... 1,204,882 1,032,755 -- 2,237,637
----------- ---------- -------- -----------
Totals...........................$77,200,944 $2,120,642 $124,087 $79,197,499
=========== ========== ======== ===========
</TABLE>
Proceeds from sales and calls of securities available for sale totalled
$5,086,032 and $1,499,840, respectively, during the year ended December 31,
1995. Gross gains of $16,774 and gross losses of $5,759 were realized on those
transactions.
- 22 -
<PAGE>
Management's Discussion and Analysis of Lakeland Bancorp, Inc.
Financial Condition and Results of Operations and Subsidiaries
================================================================================
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------
GROSS UNREALIZED
CARRYING ----------------- ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
----------- -------- ------ -----------
<S> <C> <C> <C> <C>
U.S. Treasury........................$29,618,315 $363,177 $ 461 $29,981,031
U.S. Government agencies............. 12,443,474 234,035 790 12,676,719
States and political subdivisions.... 1,245,975 35,815 2,720 1,279,070
Other................................ 3,466,386 15,384 2,261 3,479,509
----------- -------- ------ -----------
Totals...........................$46,774,150 $648,411 $6,232 $47,416,329
=========== ======== ====== ===========
</TABLE>
There were no sales of securities held to maturity during the year ended
December 31, 1995. Proceeds from a call of a security held to maturity during
the year ended December 31, 1995, totalled $100,000 and resulted in a gross gain
of $90.
Securities with a carrying value of approximately $17,869,000 at December 31,
1995, were pledged to secure public deposits and for other purposes required by
applicable law and regulations.
The following table sets forth the maturity distribution and weighted average
yields (calculated on the basis of the stated yields to maturity, considering
applicable premium or discount), on a fully taxable equivalent basis, of all
securities, both available for sale and held for maturity, as of December 31,
1995.
<TABLE>
<CAPTION>
AFTER AFTER
1 YEAR 5 YEARS
WITHIN BUT WITHIN BUT WITHIN AFTER 10
1 YEAR 5 YEARS 10 YEARS YEARS TOTAL
------- ------- -------- ----- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities:
Book value...........................................$21,671 $43,997 $ -- $ -- $ 65,668
Yield................................................ 6.14% 6.22% -- -- 6.20%
Obligations of U.S. Government Agencies:
Book value........................................... 12,172 20,225 -- -- 32,397
Yield................................................ 6.94 6.44 -- -- 6.63
Obligations of States and Political Subdivisions:
Book value........................................... 6,812 10,866 25 15 17,718
Yield................................................ 6.69 6.19 9.66 9.66 6.40
Other securities:
Book value........................................... 2,486 5,265 -- 200 7,951
Yield................................................ 6.47 6.26 -- 8.65 6.32
------- ------- ----- ----- --------
Total book value..................................$43,141 $80,353 $ 25 $ 215 $123,734
======= ======= ===== ===== ========
Weighted average yield............................ 6.47% 6.27% 9.66% 8.59% 6.35%
======= ======= ===== ===== ========
</TABLE>
The following table sets forth the maturity distribution and weighted average
yields (calculated on the basis of the stated yields to maturity, considering
applicable premium or discount), on a fully taxable equivalent basis, of
securities available for sale as of December 31, 1995:
<TABLE>
<CAPTION>
AFTER AFTER
1 YEAR 5 YEARS
WITHIN BUT WITHIN BUT WITHIN AFTER 10
1 YEAR 5 YEARS 10 YEARS YEARS TOTAL
------- ------- -------- ----- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities:
Book value...........................................$13,337 $22,713 $ -- $ -- $36,050
Yield................................................ 5.88% 6.46% -- -- 6.25%
Obligations of U.S. Government Agencies:
Book value........................................... 8,367 11,586 -- -- 19,953
Yield................................................ 6.61 6.30 -- -- 6.43
Obligations of States and Political Subdivisions:
Book value........................................... 6,111 10,321 25 15 16,472
Yield................................................ 6.51 6.20 9.66 9.66 6.33
Other securities:
Book value........................................... 1,879 2,606 -- -- 4,485
Yield................................................ 6.74 6.34 -- -- 6.51
------- ------- ----- ----- -------
Total book value..................................$29,694 $47,226 $ 25 $ 15 $76,960
======= ======= ===== ===== =======
Weighted average yield............................ 6.27% 6.36% 9.66% 9.66% 6.33%
======= ======= ===== ===== =======
</TABLE>
- 23 -
<PAGE>
Management's Discussion and Analysis of Lakeland Bancorp, Inc.
Financial Condition and Results of Operations and Subsidiaries
================================================================================
The following table sets forth the maturity distribution and weighted average
yields (calculated on the basis of the stated yields to maturity, considering
applicable premium or discount), on a fully taxable equivalent basis, of
securities held for maturity as of December 31, l995:
<TABLE>
<CAPTION>
AFTER AFTER
1 YEAR 5 YEARS
WITHIN BUT WITHIN BUT WITHIN AFTER 10
1 YEAR 5 YEARS 10 YEARS YEARS TOTAL
------- ------- -------- ----- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities:
Book value...........................................$ 8,334 $21,284 $ -- $ -- $29,618
Yield................................................ 6.57% 5.97% -- -- 6.14%
Obligations of U.S. Government Agencies:
Book value........................................... 3,805 8,639 -- -- 12,444
Yield................................................ 7.70 6.62 -- -- 6.95
Obligations of States and Political Subdivisions:
Book value........................................... 701 545 -- -- 1,246
Yield................................................ 8.46 6.05 -- -- 7.41
Other securities:
Book value........................................... 607 2,659 -- 200 3,466
Yield................................................ 5.87 6.24 -- 8.65 6.13
------- ------- ------- ----- -------
Total book value..................................$13,447 $33,127 $ -- $ 200 $46,774
======= ======= ======= ===== =======
Weighted average yield............................ 6.96% 6.16% -- % 8.65% 6.39%
======= ======= ======= ===== =======
</TABLE>
For further information regarding the Company's investment securities, see Notes
to the Company's Consolidated Financial Statements.
DEPOSITS
The following table sets forth the average amounts of various types of deposits
for each of the three years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Non-interest-bearing demand deposits....$ 56,840 $ 49,609 $ 42,212
Interest-bearing demand deposits........ 53,128 60,794 55,390
Savings deposits........................ 108,734 138,681 127,524
Time deposits........................... 88,169 54,884 54,596
-------- -------- --------
Total...............................$306,871 $303,968 $279,722
======== ======== ========
</TABLE>
As of December 31, 1995, the aggregate amount of outstanding time deposits
issued in amounts of $100,000 or more, broken down by time remaining to
maturity, was as follows (In Thousands):
<TABLE>
<CAPTION>
<S> <C>
Three months or less.........................$ 8,515
Over three months through six months......... 1,835
Over six months through twelve months........ 1,689
Over twelve months........................... 2,040
-------
Total....................................$14,079
=======
</TABLE>
LIQUIDITY
The Company's primary sources of liquidity are deposits, asset maturities, and
funds provided from operations. At December 31, 1995, liquid assets, consisting
of cash and due from banks, federal funds sold and investment securities that
mature within one year, amounted to $76.9 million. The maturity schedule of the
investment portfolio, at carrying value, indicates that 34.7% of the debt
securities included in the portfolio mature within one year, and 99.81% mature
within five years. For additional information regarding the investment
portfolio, see Notes to Consolidated Financial Statements.
The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating activities, investing activities and financing activities.
These activities are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994
-------- --------
(In Thousands)
<S> <C> <C>
Cash and cash equivalents at beginning of period..........$ 17,511 $ 25,616
-------- --------
Operating Activities:
Net income............................................ 4,796 4,831
Adjustments to reconcile net income to net cash
provided by operating activities................... 3,006 3,047
-------- --------
Net cash provided by operating activities................. 7,802 7,878
Net cash used in investing activities..................... (11,444) (24,869)
Net cash provided by financing activities................. 19,904 8,886
-------- --------
Net increase (decrease) in cash and equivalents........... 16,262 (8,105)
-------- --------
Cash and cash equivalents at end of period................$ 33,773 $ 17,511
======== ========
</TABLE>
- 24 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Lakeland Bancorp, Inc.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Subsidiaries
==============================================================================
Cash and cash equivalents increased by $16.2 million during 1995. The bulk of
such increase resulted from Financing activities, which produced $19.9 million
in cash flow. Financing Activities consisted primarily of deposit inflows offset
in part by cash dividends.
Operating activities produced $7.8 million of cash flow, $4.8 million of which
was derived from net income. A total of $11.4 million was used in investing
activities during 1995. $15.7 million was invested in the loan portfolio, while
investment activity produced a net cash inflow of $5.0 million.
The Company anticipates that it will have sufficient funds available to meet its
current loan commitments and deposit maturities. At December 31, 1995, the
Company has outstanding loan origination commitments of $10.6 million. Time
deposits that mature in one year or less, at December 31, 1995, totalled $84.6
million. Management believes that a substantial portion of such deposits will
remain with the Company.
Closely related to the concept of liquidity is the concept of interest rate
sensitivity (i.e., the extent to which assets and liabilities are sensitive to
changes in interest rates). Interest rate sensitivity is often measured by the
extent to which mismatches or "gaps" occur in the repricing of assets and
liabilities within a given time period. Gap analysis is utilized to quantify
such mismatches. A "positive" gap results when the amount of earning assets
repricing within a given time period exceeds the amount of interest-bearing
liabilities repricing within that time period. A "negative" gap results when the
amount of interest-bearing liabilities repricing within a given time period
exceeds the amount of earning assets repricing within such time period.
In general, a financial institution with a positive gap in relevant time periods
will benefit from an increase in market interest rates and will experience
erosion in net interest income if such rates fall. Likewise, a financial
institution with a negative gap in relevant time periods will normally benefit
from a decrease in market interest rates and will be adversely affected by an
increase in rates. By maintaining a balanced interest rate sensitivity position,
where interest rate sensitive assets roughly equal interest sensitive
liabilities in relevant time periods, interest rate risk can be limited. At
December 31,1995, the Company had a negative interest gap at the one year or
less time period.
The following table sets forth the estimated maturity/repricing structure of the
Company's interest-earning assets and interest-bearing liabilities at December
31, 1995. Except as stated below, the amounts of assets or liabilities shown
which reprice or mature during a particular period were determined in accordance
with the contractual terms of each asset or liability. The table does not assume
any prepayment of fixed-rate loans. The Company has assumed that all interest-
bearing demand accounts will reprice or mature within three months and that all
savings accounts will reprice or mature within four to twelve months. The table
does not necessarily indicate the impact of general interest rate movements on
the Company's net interest income because the repricing of certain categories of
assets and liabilities, for example, prepayments of loans and withdraw of
deposits, is beyond the Company's control. As a result, certain assets and
liabilities indicated as repricing within a stated period may in fact reprice at
different times and at different rate levels.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------
MORE THAN
THREE MORE THAN
THREE MONTHS 1 YEAR
MONTHS THROUGH THROUGH MORE THAN
OR LESS ONE YEAR 5 YEARS 5 YEARS TOTAL
-------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
(Dollars In Thousands)
Interest-earning assets:
Loans /(1)/:
Adjustable and floating rate commercial..... $ 23,444 $ -- $ -- $ -- $ 23,444
Fixed rate commercial....................... 10,123 6,949 24,352 388 41,812
Real estate mortgage........................ 3,835 6,158 37,593 35,715 83,301
Real estate construction.................... 745 790 -- -- 1,535
Installment and other....................... 8,025 4,510 13,000 15,095 40,630
Investment securities......................... 11,535 33,844 80,353 240 125,972
Other investments /(2)/....................... 17,325 -- -- -- 17,325
-------- --------- -------- ------- --------
Total interest-earning asset............... 75,032 52,251 155,298 51,438 334,019
-------- --------- -------- ------- --------
Interest-bearing liabilities:
Deposits:
Savings and interest-bearing demand......... 58,411 106,463 -- -- 164,874
Time........................................ 47,795 36,775 15,908 -- 100,478
-------- --------- -------- ------- --------
Total interest-bearing liabilities......... 106,206 143,238 15,908 -- 265,352
-------- --------- -------- ------- --------
GAP during the period.......................... $(31,174) $ (90,987) $139,390 $51,438 $ 68,667
======== ========= ======== ======= ========
Cumulative GAP................................. $(31,174) $(122,161) $ 17,229 $68,667
======== ========= ======== =======
Interest-sensitive assets as a percent of
interest-sensitive liabilities (cumulative)... 70.65% 51.03% 106.49% 125.88%
Cumulative interest-sensitive assets as
a percent of total assets..................... 20.80 35.29 78.35 92.61
Ratio of GAP to total assets................... (8.64) (25.23) 38.65 14.26
Ratio to cumulative GAP to total assets........ (8.64) (33.87) 4.78 19.04
</TABLE>
(1) Loans are stated net of unearned income.
(2) Other investments consist of federal funds sold and interest-bearing
deposits in banks.
CAPITAL RESOURCES
Stockholders' equity increased $5.9 million to $32.0 million at December 31,
1995, from $26.2 million at December 31, 1994, reflecting net proceeds of
$657,000 from issuances of common stock, net income during the year of $4.8
million, dividends to stockholders of $1.6 million, and an unrealized gain, net
of deferred income taxes, on securities available for sale of $2.0 million.
- 25 -
<PAGE>
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF Lakeland Bancorp, Inc.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Subsidiaries
================================================================================
In March 1989, the FDIC adopted a risk-based capital policy statement which
imposed a minimum capital standard on insured banks. The minimum ratio of risk-
based capital to risk-weighted assets (including certain off-balance sheet
items, such as standby letters of credit) is now 8%. At least half of the total
capital is to be comprised of common stock equity and qualifying perpetual
preferred stock, less goodwill ("Tier I capital"). The remainder ("Tier II
capital") may consist of mandatory convertible debt securities, qualifying
subordinated debt, other preferred stock and a portion of the allowance for loan
losses. The Federal Reserve Board adopted a similar risk-based capital guideline
for the Company which is computed on a consolidated basis.
In addition, the bank regulators have adopted final minimum leverage ratio
guidelines (Tier I capital to average quarterly assets, less goodwill) for
financial institutions. These guidelines provide for a minimum leverage ratio of
3% for financial institutions that meet certain specified criteria, including
that they have the highest regulatory rating. All other holding companies will
be required to maintain a leverage ratio of 3% plus an additional cushion of at
least 100 to 200 basis points.
The following table reflects the Company's capital ratios as of December 31,
1995:
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIOS: AMOUNT RATIO
------- -------
<S> <C> <C>
Actual Tier I Capital...................................... $30,845 16.78%
Tier I Capital minimum amount.............................. 7,353 4.00
------- -------
Excess..................................................... $23,492 12.78%
======= =======
Actual Combined Tier I and Tier II Capital................. $33,150 18.03%
Combined Tier I and Tier II Capital minimum requirement.... 14,706 8.00
------- -------
Excess..................................................... $18,444 10.03%
======= =======
LEVERAGE RATIO:
Actual Tier I Capital to average fourth quarter assets..... $30,845 8.85%
Minimum leverage target*................................... * *
------- -------
Excess..................................................... $ * * %
======= =======
</TABLE>
* No formal minimum leverage target (other than the three percent floor
described above) has been established for the Company or the Bank as of December
31, 1995.
EFFECTS OF INFLATION
The impact of inflation, as it affects banks, differs substantially from the
impact on non-financial institutions. Banks have assets which are primarily
monetary in nature and which tend to move with inflation. This is especially
true for banks with a high percentage of rate sensitive interest earning assets
and interest bearing liabilities. A bank can further reduce the impact of
inflation with proper management of its rate sensitivity gap. This gap
represents the difference between interest sensitive assets and interest rate
sensitive liabilities. The Company attempts to structure its assets and
liabilities and manage its gap to protect against substantial changes in
interest rate scenarios, thus minimizing the potential effects of inflation.
- 26 -
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF CONDITION Lakeland Bancorp, Inc.
and Subsidiaries
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
ASSETS 1995 1994
------------ ------------
<S> <C> <C>
Cash and due from banks............................................... $ 16,448,253 $ 16,211,222
Federal funds sold.................................................... 17,325,000 1,300,000
------------ ------------
Cash and cash equivalents........................................... 33,773,253 17,511,222
Securities available for sale, at estimated fair value................ 79,197,499 84,430,286
Securities held to maturity, net; estimated fair value
of $47,416,000 in 1995 and $43,882,000 in 1994 ..................... 46,774,150 44,872,434
Loans, net............................................................ 187,812,123 172,196,797
Premises and equipment, net........................................... 8,170,123 8,261,801
Accrued interest receivable........................................... 3,626,861 3,663,145
Other assets.......................................................... 1,307,159 2,652,087
------------ ------------
Total assets........................................................ $360,661,168 $333,587,772
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
- -----------
Deposits:
Non-interest-bearing demand......................................... $ 62,590,393 $ 57,786,252
Savings and interest-bearing demand................................. 162,567,499 178,068,491
Club accounts....................................................... 2,306,027 4,382,874
Time................................................................ 86,398,671 57,324,563
Time of $100,000 and over........................................... 14,079,311 9,559,163
------------ ------------
Total deposits.................................................. 327,941,901 307,121,343
Other liabilities..................................................... 679,446 305,386
------------ ------------
Total liabilities................................................... 328,621,347 307,426,729
------------ ------------
Commitments........................................................... - -
STOCKHOLDERS' EQUITY
- --------------------
Common stock (par value $2.50 per share):
Authorized 6,912,568 shares in 1995 and 3,379,098 shares in 1994;
issued and outstanding 3,246,954 in 1995 and 1,527,131 in 1994 ..... 8,117,385 3,817,828
Surplus............................................................... 16,551,493 17,736,878
Undivided profits..................................................... 6,176,754 5,410,825
Unrealized gain (loss) on securities available for sale, net.......... 1,194,189 (804,488)
------------ ------------
Total stockholders' equity.......................................... 32,039,821 26,161,043
------------ ------------
Total liabilities and stockholders' equity.......................... $360,661,168 $333,587,772
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
- 27 -
<PAGE>
Lakeland Bancorp, Inc.
CONSOLIDATED STATEMENTS OF INCOME and Subsidiaries
==============================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans and fees........................ $15,917,445 $13,751,881 $11,840,208
Federal funds sold.................... 555,629 325,883 469,419
Investment securities:
U.S. Treasury....................... 4,313,807 4,877,085 4,657,154
U.S. Government agencies............ 1,686,565 1,782,778 1,972,254
State and political subdivisions.... 839,108 987,314 1,117,712
Other............................... 534,944 459,141 373,759
----------- ----------- -----------
Total interest income............. 23,847,498 22,184,082 20,430,506
----------- ----------- -----------
INTEREST EXPENSE:
Deposits.............................. 9,100,671 7,604,150 7,757,182
Borrowed money........................ 13,318 3,285 64,583
----------- ----------- -----------
Total interest expense.............. 9,113,989 7,607,435 7,821,765
----------- ----------- -----------
Net interest income................. 14,733,509 14,576,647 12,608,741
PROVISION FOR LOAN LOSSES.............. 128,706 225,436 694,769
----------- ----------- -----------
Net interest income after
provision for loan losses......... 14,604,803 14,351,211 11,913,972
----------- ----------- -----------
OTHER INCOME:
Service charges on deposit accounts... 1,592,363 1,538,894 1,471,274
Gain (loss) on sales
and calls of investment securities.. 11,105 5,749 (867)
Gain on sale of fixed assets.......... -- 13,165 58,385
Other................................. 379,255 354,625 303,418
----------- ----------- -----------
Total other income.................. 1,982,723 1,912,433 1,832,210
----------- ----------- -----------
OTHER EXPENSES:
Salaries and benefits................. 5,296,717 4,980,117 4,679,079
Occupancy expense, net................ 1,026,169 1,079,040 976,449
Furniture and equipment expense....... 894,065 814,007 750,956
Federal deposit insurance............. 351,704 663,860 590,656
Stationery, supplies and postage...... 586,037 457,295 412,361
Other................................. 1,349,981 1,263,336 1,179,861
----------- ----------- -----------
Total other expense................. 9,504,673 9,257,655 8,589,362
----------- ----------- -----------
INCOME BEFORE INCOME TAXES............. 7,082,853 7,005,989 5,156,820
INCOME TAXES........................... 2,286,673 2,175,283 1,509,248
----------- ----------- -----------
NET INCOME............................. $ 4,796,180 $ 4,830,706 $ 3,647,572
=========== =========== ===========
Net income per common share............ $1.49 $1.51 $1.25
===== ===== =====
Weighted average number
of common shares outstanding.......... 3,225,660 3,192,920 2,924,321
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 28 -
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES Lakeland Bancorp, Inc.
IN STOCKHOLDERS' EQUITY and Subsidiaries
=============================================================================================================================
UNREALIZED
GAIN
(LOSS) ON
SECURITIES TOTAL
NUMBER OF COMMON AVAILABLE UNDIVIDED STOCKHOLDERS'
SHARES STOCK FOR SALE, NET SURPLUS PROFITS EQUITY
--------- ---------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992...... 1,187,826 $2,969,565 $ -- $10,100,000 $ 4,271,816 $17,341,381
Net income...................... -- -- -- -- 3,647,572 3,647,572
Stock dividend.................. 71,269 178,172 -- 1,425,380 (1,603,552) --
Stock issuances................. 119,488 298,720 -- 2,688,135 -- 2,986,855
Cash dividend................... -- -- -- -- (906,568) (906,568)
Transfer to surplus............. -- -- -- 16,485 (16,485) --
--------- ---------- ---------- ----------- ----------- -----------
Balance, December 31, 1993...... 1,378,583 3,446,457 -- 14,230,000 5,392,783 23,069,240
Net income...................... -- -- -- -- 4,830,706 4,830,706
Unrealized loss, net
of deferred taxes, on
securities available
for sale...................... -- -- (804,488) -- -- (804,488)
Stock dividend.................. 138,248 345,621 -- 3,248,828 (3,594,449) --
Stock Issuances................. 10,300 25,750 -- 258,050 -- 283,800
Cash dividend................... -- -- -- -- (1,218,215) (1,218,215)
--------- ---------- ---------- ----------- ----------- -----------
Balance, December 31, 1994...... 1,527,131 3,817,828 (804,488) 17,736,878 5,410,825 26,161,043
Net income...................... -- -- -- -- 4,796,180 4,796,180
Unrealized gain,
net of deferred
taxes, on securities
available for sale............ -- -- 1,998,677 -- -- 1,998,677
Stock dividends................. 1,696,523 4,241,307 -- (1,783,835) (2,457,472) --
Stock issuances................. 23,300 58,250 -- 598,450 -- 656,700
Cash dividend................... -- -- -- -- (1,572,779) (1,572,779)
--------- ---------- ---------- ----------- ----------- -----------
Balance, December 31, 1995...... 3,246,954 $8,117,385 $1,194,189 $16,551,493 $ 6,176,754 $32,039,821
========= ========== ========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 29 -
<PAGE>
<TABLE>
<CAPTION>
Lakeland Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS and Subsidiaries
===============================================================================================================================
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 4,796,180 $ 4,830,706 $ 3,647,572
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premiums and discounts on investments........................ 1,683,931 2,234,497 1,957,468
Amortization of unearned interest and deferred loan fees and costs............... 70,321 46,163 (56,514)
Depreciation and amortization of premises and equipment.......................... 882,146 818,013 757,862
Provision for loan losses........................................................ 128,706 225,436 694,769
(Gain) loss on sales and calls of securities..................................... (11,105) (5,749) 867
Gain on sales of premises and equipment.......................................... -- (13,165) (58,385)
Gain on sales of other real estate owned......................................... -- (8,213) --
Deferred federal income tax (benefit)............................................ (183,090) (196,789) (176,069)
Decrease (increase) in accrued interest receivable............................... 36,284 14,550 (210,433)
Decrease (increase) in other assets.............................................. 24,329 (149,821) (533,038)
Increase (decrease) in other liabilities......................................... 374,060 82,082 (144,176)
------------ ------------ ------------
Net cash provided by operating activities...................................... 7,801,762 7,877,710 5,879,923
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayments on and maturities of securities available for sale...... 21,194,096 13,048,853 --
Proceeds from calls of securities available for sale............................. 1,499,840 300,000 --
Proceeds from sales of securities available for sale............................. 5,086,032 7,222,807 --
Purchases of securities available for sale....................................... (20,302,151) (15,303,244) --
Proceeds from repayments on and maturities of
investment securities held to maturity......................................... 10,654,284 9,809,084 13,440,756
Proceeds from sales of investment securities held to maturity................... -- -- 195,687
Proceeds from calls of investment securities held to maturity.................... 100,000 -- 1,000,640
Purchases of investment securities held to maturity.............................. (13,232,285) (12,333,305) (28,038,211)
Net increase in loans............................................................ (16,084,208) (26,847,513) (26,914,918)
Purchase of loans................................................................ (500,000) -- (735,000)
Sale of loans and participation interest in loan................................. 703,281 22,257 --
Loan recoveries.................................................................. 145,070 116,663 54,387
Proceeds from sales of premises and equipment.................................... -- 30,877 329,385
Additions to premises and equipment.............................................. (790,468) (969,442) (721,955)
Proceeds from sales of and payments on other real estate owned................... 82,299 34,502 --
------------ ------------ ------------
Net cash used in investing activities.......................................... (11,444,210) (24,868,461) (41,389,229)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits......................................................... 20,820,558 9,820,539 24,397,642
Repayments on mortgage payable................................................... -- -- (2,987,733)
Proceeds from common stock issuances............................................. 656,700 283,800 2,986,855
Cash dividends paid on common stock.............................................. (1,572,779) (1,218,215) (906,568)
------------ ------------ ------------
Net cash provided by financing activities...................................... 19,904,479 8,886,124 23,490,196
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents............................. 16,262,031 (8,104,627) (12,019,110)
Cash and cash equivalents - beginning............................................ 17,511,222 25,615,849 37,634,959
------------ ------------ ------------
Cash and cash equivalents - ending............................................... $ 33,773,253 $ 17,511,222 $ 25,615,849
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Transfer of securities held to maturity to securities available for sale....... $ -- $ 92,666,375 $ --
Unrealized gain (loss) net of deferred income taxes on
securities available for sale:
Upon initial application of Statement of Financial
Accounting Standards No. 115 on January 1, 1994.......................... -- 1,872,000 --
Subsequent changes.......................................................... 1,998,677 (2,676,488) --
Charge-off of loans receivable to allowance for loan losses.................... 363,776 342,099 199,156
Transfer of loans receivable to other real estate.............................. 70,254 291,833 457,711
Loan to facilitate the sale of other real estate............................... 148,750 94,500 --
Stock dividend................................................................. 2,457,472 3,594,449 1,603,552
Transfer of undivided profits to surplus....................................... -- -- 16,485
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes (federal and state).............................................. $ 2,543,672 $ 2,522,692 $ 1,767,435
Interest...................................................................... 8,778,774 7,559,032 7,934,181
</TABLE>
See accompanying notes to consolidated financial statements.
- 30 -
<PAGE>
Lakeland Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS and Subsidiaries
===============================================================================
ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation,
the Corporation's wholly owned Subsidiary, Lakeland State Bank (the "Bank") and
the Bank's wholly owned Subsidiary, Lakeland Investment Corporation ("LIC"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
BASIS OF CONSOLIDATED FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements of the Corporation have been prepared in
conformity with generally accepted accounting principles. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the statement of condition and revenues and expenses for the period.
Actual results could differ significantly from those estimates.
A material estimate that is particularly susceptible to significant changes
relates to the determination of the allowance for loan losses. Management
believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in economic
conditions in the market area.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments about information available to them at the time of their
examination.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from banks and federal funds
sold. Generally, federal funds sold are for one day periods.
SECURITIES
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("Statement") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" which is effective for fiscal years
beginning after December 15, 1993.
Statement No. 115 establishes standards of financial accounting and reporting
for investments in equity securities that have readily determinable fair values
and for all investments in debt securities. Those investments are required to be
classified into one of three categories: held-to-maturity, available-for-sale,
or trading.
Pursuant to Statement No. 115, investments in debt securities that the
enterprise has the positive intent and ability to hold to maturity are
classified as held-to-maturity securities and reported at amortized cost. Debt
and equity securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities and reported
at fair value, with unrealized holding gains and losses included in earnings.
Debt and equity securities not classified as trading securities nor as held-to-
maturity securities, shall be classified as available for sale securities and
reported at fair value, with unrealized holding gains or losses, net of deferred
income taxes, reported in a separate component of stockholders' equity.
The initial application of Statement No. 115, effective January 1, 1994,
resulted in the reclassification of securities totalling $92,666,000 to the
available for sale category and the recognition of an unrealized gain, net of
deferred income taxes, of $1,872,000 as a component of stockholders' equity.
Premiums and discounts on all securities are amortized/accreted using the
interest method. Interest and dividend income on securities, which includes
amortization of premiums and accretion of discounts, is recognized in the
consolidated financial statements when earned. The adjusted cost basis of an
identified security sold or called is used for determining security gains and
losses recognized in the consolidated statements of income.
LOANS
Loans are stated at the amount of unpaid principal less unearned income, which
includes unearned interest and net deferred loan origination fees, and the
allowance for loan losses. Interest on commercial, mortgage and simple interest
installment loans is recognized as income based on the loan principal
outstanding. Interest on discounted installment loans is credited to income
based on a method which approximates the actuarial method. Recognition of
interest on the accrual method is generally discontinued when factors indicate
that the collection of such amounts is doubtful. At the time a loan is placed on
a non-accrual status, previously accrued and uncollected interest is reversed
against interest income in the current period. Interest on such loans, if
appropriate, is recognized as income when payments are received. A loan is
returned to an accrual status when factors indicating doubtful collectibility no
longer exist.
LOAN ORIGINATION FEES
Loan origination fees and certain direct loan origination costs are deferred and
subsequently amortized as an adjustment of yield over the contractual lives of
the related loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered adequate to
absorb future losses. Management determines the adequacy of the allowance based
upon reviews of individual credits, recent loss experience, current economic
conditions, the risk characteristics of the various categories of loans and
other pertinent factors. Loans deemed uncollectible are charged to the
allowance. Provisions for loan losses and recoveries on loans previously charged
off are added to the allowance.
Effective January 1, 1995, the Company adopted FASB Statement Nos. 114,
"Accounting by Creditors for Impairment of a Loan" and 118, "Accounting by
Creditors for Impairment of a Loan--Income Recognition and Disclosures". The
provisions of these statements are applicable to all loans, uncollateralized as
well as collateralized, except large groups of smaller-balance homogeneous loans
that are collectively evaluated for impairment and loans that are measured at
fair value or at the lower of cost or fair value and to all loans that are
renegotiated in a troubled debt restructuring involving a modification of terms.
Statement No. 114 requires that impaired loans be measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent, except that
loans renegotiated as part of a troubled debt restructuring subsequent to the
adoption of Statement Nos. 114 and 118 must be measured for impairment by
discounting the total expected cash flow under the renegotiated terms at each
loan's original effective interest rate.
A loan evaluated for impairment pursuant to Statement No. 114 is deemed to be
impaired when, based on current information and events, it is probable that the
Bank will be unable to collect all amounts due according to the contractual
terms
- 31 -
<PAGE>
Notes to Consolidated Financial Statements Lakeland Bancorp, Inc.
and Subsidiaries
================================================================================
of the loan agreement. An insignificant payment delay, which is defined as up to
90 days by the Bank, will not cause a loan to be classified as impaired. A loan
is not impaired during a period of delay in payment if the Bank expects to
collect all amounts due, including interest accrued at the contractual interest
rate for the period of delay. Thus, a demand loan or other loan with no stated
maturity is not impaired if the Bank expects to collect all amounts due,
including interest accrued at the contractual interest rate, during the period
the loan is outstanding. All loans identified as impaired are evaluated
independently. The Bank does not aggregate such loans for evaluation purposes.
Payments received on impaired loans are applied to principal, accrued interest
receivable and interest income, in that order.
CONCENTRATION OF RISK
The Bank's lending activity is concentrated in loans secured by real estate
located in the State of New Jersey.
PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, furniture, fixtures and equipment, and
leasehold improvements are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization charges are computed on the
straight-line method over the following estimated useful lives:
Buildings and building improvements 10 to 50 years
Furniture, fixtures and equipment 2 to 30 years
Leasehold improvements Shorter of useful life or term of lease
Significant renewals and betterments are charged to the premises and equipment
account. Maintenance and repairs are charged to expense in the year incurred.
Rental income is netted against occupancy expense in the consolidated statements
of income.
INCOME TAXES
The Corporation uses the accrual basis of accounting for financial and income
tax reporting. Provision for income taxes in the consolidated financial
statements differs from the amounts reflected in the Corporation's income tax
returns due to temporary differences in reporting certain items, primarily
depreciation and the provision for loan losses. The income tax provision shown
in the consolidated financial statements relates to items of income and expense
in those statements irrespective of temporary variances for income tax return
purposes. The tax effect of these temporary variances is accounted for as
deferred federal income taxes applicable to future years.
NET INCOME PER COMMON SHARE
Net income per share of common stock is calculated based on the weighted average
number of shares of common stock outstanding during the period. On May 11, 1994,
the Corporation's Board of Directors authorized a 10% stock dividend, which was
distributed on June 10, 1994. On May 24, 1995, the Corporation's Board of
Directors authorized a 5% stock dividend, which was distributed on June 30,
1995. On September 13, 1995, the Corporation's Board of Directors authorized a
100% stock dividend, which was distributed on October 25, 1995. Net income per
common share has been retroactively restated to give effect to the stock
dividends.
INTEREST-RATE RISK
The Corporation, through the Bank, is principally engaged in the business of
attracting deposits from the general public and using these deposits, together
with borrowings and other funds, to make loans secured by real estate and, to a
lesser extent, commercial and consumer loans. Additionally, such funds are
utilized to purchase investment securities. The potential for interest-rate risk
exists as a result of the shorter duration of the Corporation's interest-
sensitive liabilities compared to the generally longer duration of interest-
sensitive assets. In a rising rate environment, liabilities will reprice faster
than assets, thereby reducing the market value of long-term assets and net
interest income. For this reason, management regularly monitors the maturity
structure of the Corporation's assets and liabilities in order to measure its
level of interest-rate risk and plan for future volatility.
RECLASSIFICATION
Certain amounts for the years ended December 31, 1994 and 1993 have been
reclassified to conform to the current year's presentation.
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------------ CARRYING
COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury.................. $35,579,991 $ 494,926 $ 24,573 $36,050,344
U.S. Government
agencies.................... 19,762,429 190,384 -- 19,952,813
States and political
subdivisions................ 16,168,610 363,572 60,684 16,471,498
Other debt securities.......... 4,485,032 39,005 38,830 4,485,207
Equity security................ 1,204,882 1,032,755 -- 2,237,637
----------- ----------- ----------- -----------
$77,200,944 $ 2,120,642 $ 124,087 $79,197,499
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------------ CARRYING
COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury.................. $47,139,986 $ 20,158 $ 964,019 $46,196,125
U.S. Government
agencies.................... 16,262,173 19,915 341,838 15,940,250
States and political
subdivisions................ 17,424,791 101,042 141,648 17,384,185
Other debt securities.......... 3,743,470 -- 124,689 3,618,781
Equity security................ 1,204,882 86,063 -- 1,290,945
----------- ----------- ----------- -----------
$85,775,302 $ 227,178 $ 1,572,194 $84,430,286
=========== =========== =========== ===========
</TABLE>
A summary of securities by maturity follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1995 1994
------------------------ ------------------------
AMORTIZED CARRYING AMORTIZED CARRYING
COST VALUE COST VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less........ $29,443,072 $29,693,695 $23,261,973 $23,169,207
Due after one year
through five years.......... 46,512,990 47,226,167 61,263,447 59,925,134
Due after five years
through ten years........... 25,000 25,000 25,000 25,000
Due after ten years............ 15,000 15,000 20,000 20,000
Equity security................ 1,204,882 2,237,637 1,204,882 1,290,945
----------- ----------- ----------- -----------
$77,200,944 $79,197,499 $85,775,302 $84,430,286
=========== =========== =========== ===========
</TABLE>
Proceeds from sales and calls of securities available for sale totalled
$5,086,032 and $1,499,840, respectively, during the year ended December 31,
1995. Gross gains of $16,774 and gross losses of $5,759 were realized on those
transactions. Proceeds from sales and calls of securities available for sale
totalled $7,222,807 and $300,000, respectively, during the year ended December
31, 1994. Gross gains of $10,467 and gross losses of $4,718 were realized on
those transactions.
- 32 -
<PAGE>
Notes to Consolidated Financial Statements Lakeland Bancorp, Inc.
and Subsidiaries
================================================================================
Securities with a carrying value of approximately $17,869,000 and $17,357,000 at
December 31, 1995 and 1994, respectively, were pledged to secure public deposits
and for other purposes required by applicable law and regulations.
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------
GROSS UNREALIZED
CARRYING ------------------------ ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury.................. $29,618,315 $ 363,177 $ 461 $29,981,031
U.S. Government
agencies.................... 12,443,474 234,035 790 12,676,719
States and political
subdivisions................ 1,245,975 35,815 2,720 1,279,070
Other.......................... 3,466,386 15,384 2,261 3,479,509
----------- ----------- ----------- -----------
Totals...................... $46,774,150 $ 648,411 $ 6,232 $47,416,329
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------------------------------
GROSS UNREALIZED
CARRYING ------------------------ ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury.................. $28,865,887 $ 24,715 $ 759,758 $28,130,844
U.S. Government
agencies.................... 9,773,308 22,239 132,766 9,662,781
States and political
subdivisions................ 2,069,081 32,689 -- 2,101,770
Other.......................... 4,164,158 2,063 179,799 3,986,422
----------- ----------- ----------- -----------
Totals...................... $44,872,434 $ 81,706 $ 1,072,323 $43,881,817
=========== =========== =========== ===========
</TABLE>
A summary of securities by maturity follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1995 1994
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less........ $13,447,140 $13,582,192 $10,717,115 $10,748,417
Due after one year
through five years.......... 33,127,010 33,632,199 33,955,319 32,931,337
Due after ten years............ 200,000 201,938 200,000 202,063
----------- ----------- ----------- -----------
$46,774,150 $47,416,329 $44,872,434 $43,881,817
=========== =========== =========== ===========
</TABLE>
There were no sales of securities held to maturity during the years ended
December 31, 1995 and 1994. Proceeds from a call of a security held to maturity
during the year ended December 31, 1995 totalled $100,000 and resulted in a
gross gain of $90. Proceeds from the sale of a security and from calls of
securities during the year ended December 31, 1993 totalled $195,687 and
$1,000,640, respectively. Gross gains of $3,446 and a gross loss of $4,313 were
recognized on these transactions.
LOANS, NET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Commercial........................... $ 65,190,372 $ 56,729,959
Construction......................... 1,534,682 1,686,662
Mortgage............................. 83,688,515 78,550,791
Home equity and improvement.......... 27,841,445 25,492,907
Consumer installment................. 12,559,074 12,784,094
------------ ------------
190,814,088 175,244,413
------------ ------------
Less: Unearned income................ 91,965 47,616
Allowance for loan losses.... 2,910,000 3,000,000
------------ ------------
3,001,965 3,047,616
------------ ------------
$187,812,123 $172,196,797
============ ============
</TABLE>
At December 31, 1995, 1994 and 1993, loans serviced by the Bank for the benefit
of others totalled approximately $886,000, $641,000 and $694,000, respectively.
Non-performing loans consist of non-accrual and renegotiated loans. Non-accrual
loans are those on which income under the accrual method has been discontinued
with subsequent interest payments credited to interest income when received, or
if ultimate collectibility of principal is in doubt, applied as principal
reductions. Renegotiated loans are loans whose contractual interest rates have
been reduced or where other significant modifications have been made due to
borrowers' financial difficulties. Interest on these loans is either accrued or
credited directly to interest income. Non-performing loans were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Non-accrual................................................ $1,545 $1,501 $ 483
Renegotiated............................................... 2,325 1,740 2,366
------ ------ ------
$3,870 $3,241 $2,849
====== ====== ======
</TABLE>
The impact of non-performing loans on interest income is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Interest income if performing in accordance
with original terms...................................... $ 397 $ 341 $ 296
Interest income actually recorded......................... 193 179 197
------ ------ ------
Interest income lost...................................... $ 204 $ 162 $ 99
====== ====== ======
</TABLE>
The Bank has entered into lending transactions in the ordinary course of
business with directors, executive officers and their affiliates on the same
terms as those prevailing for comparable transactions with other borrowers.
These loans, at December 31, 1995, were current as to principal and interest
payments, and do not involve more than normal risk of collectibility. A summary
of unpaid balances of loans outstanding with respect to directors, officers and
principal stockholders and affiliates of such persons who had borrowings of
$60,000 or more, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
Balance - beginning................................... $10,629,002 $ 6,513,705
Loans originated...................................... 7,869,057 9,853,716
Repayments............................................ (7,589,679) (5,598,514)
Other changes......................................... 83,395 (139,905)
----------- -----------
Balance - ending...................................... $10,991,775 $10,629,002
=========== ===========
</TABLE>
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Balance - beginning....................... $3,000,000 $3,000,000 $2,450,000
Provision for loan losses................. 128,706 225,436 694,769
Loans charged off......................... (363,776) (342,099) (199,156)
Recoveries................................ 145,070 116,663 54,387
---------- ---------- ----------
Balance - ending.......................... $2,910,000 $3,000,000 $3,000,000
========== ========== ==========
</TABLE>
- 33 -
<PAGE>
Notes to Consolidated Financial Statements Lakeland Bancorp, Inc.
and Subsidiaries
================================================================================
Impaired loans and related amounts recorded in the allowance for loan losses at
December 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
Recorded investment in impaired loans:
<S> <C>
With recorded allowances.............. $1,920,196
Without recorded allowances........... 472,098
----------
Total impaired loans............ 2,392,294
Related allowance for loan losses......... 378,528
----------
Net impaired loans.............. $2,013,766
==========
</TABLE>
For the year ended December 31, 1995, the average recorded investment in
impaired loans totalled $1,678,000. Interest income recognized on such loans
during the time each was impaired totalled $60,000, none of which was recorded
on the cash-basis.
PREMISES AND EQUIPMENT, NET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Land.............................................. $ 1,061,508 $ 1,070,508
Buildings......................................... 5,693,629 5,689,954
Leasehold improvements............................ 663,439 662,064
Furniture, fixtures and equipment................. 4,317,201 3,755,348
----------- -----------
11,735,777 11,177,874
Less accumulated depreciation and amortization.... 3,565,654 2,916,073
----------- -----------
$ 8,170,123 $ 8,261,801
=========== ===========
</TABLE>
INCOME TAXES
Income tax assets are reflected in the consolidated statements of condition
under the caption "other assets" and are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- ----------
<S> <C> <C>
Prepaid state.................. $404,000 $ 290,000
Current federal................ 85 45,912
Deferred federal and state..... 288,586 1,448,390
-------- ----------
$692,671 $1,784,302
======== ==========
</TABLE>
The tax effects of existing temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan and real estate losses in excess
of tax reserves.......................................... $ 993,123 $1,030,067
Unrealized loss on securities available for sale.......... -- 540,528
Non-accrued interest...................................... 92,262 52,365
Other..................................................... 33,159 --
---------- ----------
1,118,544 1,622,960
---------- ----------
Deferred tax liabilities:
Unrealized gain on securities
available for sale....................................... 802,366 --
Depreciation.............................................. 17,650 161,262
Other..................................................... 9,942 13,308
---------- ----------
829,958 174,570
---------- ----------
Net deferred tax assets.................................... $ 288,586 $1,448,390
========== ==========
</TABLE>
The components of income taxes are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Current...................... $2,469,763 $2,372,072 $1,685,317
Deferred..................... (183,090) (196,789) (176,069)
---------- ---------- ----------
$2,286,673 $2,175,283 $1,509,248
========== ========== ==========
</TABLE>
The following table presents a reconciliation between the reported income taxes
and the income taxes that would have been computed by applying the normal
federal income tax rate of 34% to income before income taxes:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1995 1994 1993
--------------------- -------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Federal income
tax................. $2,408,170 34.00 $2,382,036 34.00 $1,753,319 34.00
Add (deduct)
effect of:
Non-taxable
interest in-
come, net........... (252,248) (3.56) (304,261) (4.34) (342,851) (6.65)
State income
tax, net of
federal income
tax effect.......... 200,084 2.82 54,595 .78 91,781 1.78
Other items, net.... (69,333) (.98) 42,913 .61 6,999 .14
---------- ----- ---------- ----- ---------- ------
$2,286,673 32.28 $2,175,283 31.05 $1,509,248 29.27
========== ===== ========== ===== ========== =====
</TABLE>
PROFIT SHARING PLAN
The Bank has a profit sharing plan for the employees and their beneficiaries.
The plan meets the requirements of the Employee Retirement Income Security Act
of 1974. The Bank's annual contribution to the plan is determined by the Board
of Directors with the maximum amount being the maximum tax deduction permitted
for that year under the Internal Revenue Code. Annual contributions are
allocated to participants on a point basis with accumulated benefits payable at
retirement or, at the discretion of the plan committee, upon termination of
employment. The cost of the plan charged to expense for the years ended December
31, 1995, 1994 and 1993 was approximately $200,000, $200,000 and $150,000,
respectively.
COMMITMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
financial statements. The contract or notional amounts of those instruments
reflect the extent of involvement the Corporation has in particular classes of
financial instruments. The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the contractual
notional amount of those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet
instruments.
- 34 -
<PAGE>
Lakeland Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS and Subsidiaries
=============================================================================
At December 31, 1995, the Bank had commitments to extend credit aggregating
approximately $10,649,000 all of which were at fixed rates ranging from 6.00%
to 10.00%.
Additionally, the Bank, at December 31, l995, was committed for approximately
$28,907,000 of unused lines of credit, including $5,212,000 related to a home
equity line of credit program, $1,167,000 related to an unsecured line of credit
program, and $22,528,000 related to commercial lines of credit. Amounts drawn on
the unused home equity and commercial lines of credit are predominantly assessed
interest at rates which fluctuate with the prime rate, while amounts drawn on
the unused unsecured lines are assessed interest at 14.9%.
Commitments under standby letters of credit aggregated approximately $1,658,000
at December 31, 1995, of which $1,535,000 and $123,000 expire in 1996 and 1997,
respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property, plant, and equipment, and income-
producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank holds collateral supporting those commitments for which collateral is
deemed necessary.
Rentals under long-term operating leases amounted to approximately $123,000,
$122,000 and $106,000 for 1995, 1994 and 1993, respectively. At December 31,
1995, the minimum commitments, which include rental, real estate tax and other
related amounts, under all noncancellable leases with remaining terms of more
than one year and expiring through 2008 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AMOUNT
------------ ----------
<S> <C>
1996 $236,457
1997 236,457
1998 236,457
1999 161,434
2000 140,314
Thereafter 941,485
----------
$1,952,604
==========
</TABLE>
The Corporation and its subsidiaries are also subject to litigation which arises
primarily in the ordinary course of business. In the opinion of management, the
ultimate disposition of such litigation should not have a material adverse
effect on the financial position of the Corporation.
DIVIDEND LIMITATION
A limitation exists on the ability of the Bank to pay dividends to the
Corporation. State of New Jersey Banking laws specify that no dividend shall be
paid by the Bank on its capital stock unless, following the payment of each such
dividend, the capital stock of the Bank will be unimpaired and the Bank will
have a surplus of not less that 50% of its capital stock, or, if not, the
payment of such dividend will not reduce the surplus of the Bank. Under this
limitation, approximately $25,367,000 was available for payments of dividends as
of December 31, 1995.
LAKELAND BANCORP, INC. (PARENT COMPANY ONLY)
Condensed financial statements of the Corporation (Parent Company only) follow:
<TABLE>
<CAPTION>
STATEMENTS OF CONDITION
-----------------------
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Assets:
Cash and due from banks...................... $ 158,907 $ 8,218
Securities available for sale................ 2,237,638 1,290,945
Investment in subsidiaries................... 29,612,649 24,731,012
Other assets................................. 445,666 165,455
----------- -----------
Total assets................................ $32,454,860 $26,195,630
=========== ===========
Liabilities:
Deferred income taxes........................ $ 415,039 $ 34,587
Stockholders' equity.......................... 32,039,821 26,161,043
----------- -----------
Total liabilities and stockholders' equity.. $32,454,860 $26,195,630
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
--------------------
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Dividends from subsidiary bank.......... $1,347,131 $2,203,344 $ 865,177
Other expenses.......................... 40 40 --
---------- ---------- ----------
Income before income tax benefit........ 1,347,091 2,203,304 865,177
Income tax expense (benefit)............ 112 (8) (11)
---------- ---------- ----------
Income before undistributed earnings of
subsidiaries.......................... 1,346,979 2,203,312 865,188
Equity in undistributed earnings of
subsidiaries.......................... 3,449,201 2,627,394 2,782,384
---------- ---------- ----------
Net income.............................. $4,796,180 $4,830,706 $3,647,572
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ 4,796,180 $ 4,830,706 $ 3,647,572
Adjustments to reconcile net income to net
cash provided by operating activities:
(Increase) In other assets............. (280,211) (125,508) (19,041)
Equity in undistributed earnings
of subsidiaries................... (3,449,201) (2,627,394) (2,782,384)
----------- ----------- -----------
Net cash provided by operating
activities................. 1,066,768 2,077,804 846,147
----------- ----------- -----------
Cash flows from investing activities:
Purchase of securities available for sale. -- (1,204,882) --
Investment in subsidiary.................. -- -- (2,859,631)
----------- ----------- -----------
Net cash (used in)
investing activities............... -- (1,204,882) (2,859,631)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuances of common stock... 656,700 283,800 2,986,855
Cash dividends paid on common stock....... (1,572,779) (1,218,215) (906,568)
----------- ----------- -----------
Net cash (used in)
provided by financing activities... (916,079) (934,415) 2,080,287
----------- ----------- -----------
Net Increase (decrease) in cash and
cash equivalents.......................... 150,689 (61,493) 66,803
Cash and cash equivalents -- beginning....... 8,218 69,711 2,908
----------- ----------- -----------
Cash and cash equivalents -- ending.......... $ 158,907 $ 8,218 $ 69,711
=========== =========== ===========
</TABLE>
- 35 -
<PAGE>
Lakeland Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS and Subsidiaries
==============================================================================
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than a forced or liquidation sale. Significant estimations were used for
the purposes of this disclosure. Estimated fair values have been determined
using the best available data and estimation methodology suitable for each
category of financial instruments. For those loans and deposits with floating
interest rates, it is presumed that estimated fair values generally approximate
their recorded book balances. The estimation methodologies used and the
estimated fair values and carrying values of the financial instruments are set
forth below:
CASH AND CASH EQUIVALENTS AND ACCRUED INTEREST RECEIVABLE
The carrying amounts for cash and cash equivalents and accrued interest
receivable approximate fair value.
SECURITIES
The fair values for securities are based on quoted market prices or dealer
prices, if available. If quoted market prices or dealer prices are not
available, fair value is estimated using quoted market prices or dealer prices
for similar securities.
LOANS
The fair value of loans is estimated by discounting the future cash flows, using
the current rates at which similar loans with similar remaining maturities would
be made to borrowers with similar credit ratings.
DEPOSITS
For demand, savings and club accounts, fair value is the carrying amount
reported in the consolidated financial statements. For fixed-maturity
certificates of deposit, fair value is estimated using the rates currently
offered for deposits of similar remaining maturities.
COMMITMENTS
The fair values of commitments to extend credit, standby letters of credit and
financial guarantees written are estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For fixed-
rate loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The fair value of guarantees
and letters of credit is based on fees currently charged for similar agreements
or on the estimated cost to terminate them or otherwise settle the obligations
with the counterparties at the reporting date.
The carrying values and estimated fair values of the Corporation's financial
instruments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1995 1994
--------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
FINANCIAL ASSETS --------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents......... $ 33,773 $ 33,773 $ 17,511 $ 17,511
Securities available for sale..... 79,197 79,197 84,430 84,430
Securities held to maturity....... 46,774 47,416 44,872 43,882
Loans............................. 187,812 190,904 172,197 172,651
Accrued interest receivable....... 3,627 3,627 3,663 3,663
FINANCIAL LIABILITIES
Deposits.......................... 327,942 328,383 307,121 306,813
COMMITMENTS
Loan origination.................. 10,649 10,649 5,249 5,249
Unused lines of credit............ 28,907 28,907 24,316 24,316
Standby letters of credit......... 1,658 1,658 2,322 2,322
</TABLE>
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the entire holdings of a particular financial instrument.
Because no market value exists for a significant portion of the financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature, involve uncertainties and matters of judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
In addition, fair value estimates are based on existing on-and-off balance sheet
financial instruments without attempting to estimate the value of anticipated
future business, and exclude the value of assets and liabilities that are not
considered financial instruments. Other significant assets and liabilities that
are not considered financial assets and liabilities include premises and
equipment and other real estate owned. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in any
of the estimates.
Finally, reasonable comparability between financial institutions may not be
likely due to the wide range of permitted valuation techniques and numerous
estimates which must be made given the absence of active secondary markets for
many of the financial instruments. This lack of uniform valuation methodologies
introduces a greater degree of subjectivity to these estimated fair values.
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED
-----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total interest income................ $5,696,857 $5,892,022 $6,039,183 $6,219,436
Total interest expense............... 2,012,598 2,282,770 2,389,330 2,429,291
---------- ---------- ---------- ----------
Net interest income.................. 3,684,259 3,609,252 3,649,853 3,790,145
Provision for loan losses............ 34,116 (25,336) 98,685 21,241
Other income......................... 485,941 463,120 466,121 567,541
Other expenses....................... 2,467,738 2,420,840 2,180,180 2,435,915
Income taxes......................... 481,101 560,147 612,996 632,429
---------- ---------- ---------- ----------
Net income........................... $1,187,245 $1,116,721 $1,224,113 $1,268,101
========== ========== ========== ==========
Net income per common share.......... $.37 $.35 $.38 $.39
==== ==== ==== ====
Weighted average number of
common shares outstanding......... 3,211,801 3,221,292 3,229,542 3,240,003
========== ========== ========== ==========
QUARTER ENDED
-----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1994 1994 1994 1994
---------- ---------- ---------- ----------
Total interest income................ $5,284,113 $5,493,267 $5,702,460 $5,704,242
Total interest expense............... 1,840,813 1,896,759 1,942,816 1,927,047
---------- ---------- ---------- ----------
Net interest income.................. 3,443,300 3,596,508 3,759,644 3,777,195
Provision for loan losses............ 28,666 35,419 41,678 119,673
Other income......................... 428,538 444,068 484,263 555,564
Other expenses....................... 2,108,874 2,345,928 2,410,743 2,392,110
Income taxes......................... 537,369 479,292 552,796 605,826
---------- ---------- ---------- ----------
Net income........................... $1,196,929 $1,179,937 $1,238,690 $1,215,150
========== ========== ========== ==========
Net income per common share.......... $.37 $.37 $.39 $.38
==== ==== ==== ====
Weighted average number of
common shares outstanding......... 3,184,526 3,186,057 3,195,127 3,205,971
========== ========== ========== ==========
</TABLE>
Net income per common share and weighted average number of common shares
outstanding for the quarters ended September 30, 1995 and prior have been
restated to give retroactive effect to subsequent stock dividends.
- 36 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lakeland Bancorp, Inc.
and Subsidiaries
===============================================================================
IMPACT OF RECENT ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed of." Statement No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. Statement No. 121 does not apply to financial instruments, long-
term customer relationships of a financial institution (i.e. core deposit
intangibles), mortgage and other servicing rights, or deferred tax assets.
Statement No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In such cases, an impairment loss is to be recognized if
the carrying value of such asset exceeds its fair value. In regard to long-lived
assets to be disposed of either through sales or abandonment, such assets are to
be carried the lower of cost or fair value less costs to sell. Statement No. 121
is effective for fiscal years beginning after December 15, 1995 and restatement
of previously issued financial statements is not permitted. Statement No. 121,
when adopted, is not expected to have a material adverse effect on the
Corporation's consolidated financial condition or results of operations.
In June 1995, the FASB issued Statement No. 122, "Accounting for Mortgage
Servicing Rights." Statement No. 122 amends FASB Statement No. 65, "Accounting
for Certain Mortgage Banking Activities," to require that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans for
others, however those servicing rights were acquired, should such loans be sold
or securitized and the related mortgage servicing rights retained. The servicing
rights are to be recorded based upon an allocation of the total investment in
related loans to the relative fair values of the loans and the separated
servicing rights retained, providing it is practical to estimate those fair
values. Statement No. 122 is effective prospectively in fiscal years beginning
after December 15, 1995 and early application is encouraged. Retroactive
capitalization of mortgage servicing rights retained in transactions in which a
mortgage banking enterprise originates mortgage loans and sells or securitizes
those loans before the adoption of this statement is prohibited. Statement No.
122, when adopted, is not expected to have a material adverse effect on the
Corporation's consolidated financial condition or results of operations.
In October 1995, FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation." Statement No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans. Those plans include all
arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the employer's stock. Statement No. 123 defines a
fair value based method of accounting for an employee stock option or similar
equity instrument and encourages all entities to adopt that method of accounting
for all their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation costs for those plans using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Entities electing to continue the
use of the accounting method under Opinion 25 must make pro forma disclosures of
net income and, if presented, earnings per share, as if the fair value based
method of accounting defined in Statement No. 123 had been applied. Statement
No. 123 is effective for transactions entered into during fiscal years that
begin after December 15, 1995. Statement No. 123, when adopted, is not expected
to have a material adverse effect on the Corporation's consolidated financial
condition or results of operations.
- 37 -
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
---------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company responds to this Item by incorporating by reference the material
responsive to this Item in the Company's definitive proxy statement for its 1996
Annual Meeting of Shareholders.
ITEM 11 - EXECUTIVE COMPENSATION
The Company responds to this Item by incorporating by reference the material
responsive to this Item in the Company's definitive proxy statement for its 1996
Annual Meeting of Shareholders.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Company responds to this Item by incorporating by reference the material
responsive to this Item in the Company's definitive proxy statement for its 1996
Annual Meeting of Shareholders.
- 38 -
<PAGE>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company responds to this Item by incorporating by reference the material
responsive to this Item in the Company's definitive proxy statement for its 1996
Annual Meeting of Shareholders.
PART IV
--------
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. The following portions of the Company's consolidated financial
statements are setforth in Item 8 of this Annual Report.
(i) Consolidated Statements of Condition as of December 31, 1995 and 1994.
(ii) Consolidated Statements of Income for each of three years ended
December 31, 1995, 1994 and 1993.
(iii) Consolidated Statements of Changes in Stockholders' Equity for each of
the three years ended December 31, 1995, 1994, and 1993.
(iv) Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1995, 1994 and 1993.
(v) Notes to Consolidated Financial Statements
(vi) Report of Radics & Co., LLC
(a) 2. Financial Statement Schedules
All financial statement schedules are omitted as the information, if applicable,
is presented in the consolidated financial statements or notes thereto.
(a) 3. Exhibits
3.1 Certificate of Incorporation of Lakeland Bancorp, Inc., incorporated
herein by reference to Exhibit 4.1 to the Registration Statement on
Form S-2 filed by the Company with the Commission on August 23, 1993.
3.2 By Laws of Lakeland Bancorp, Inc. are incorporated herein by reference
to Exhibit 4.2 to the Registration Statement on Form S-3 filed by the
Company with the Commission on March 30, 1990.
22.1 Subsidiaries of Registrant incorporated herein by reference to Exhibit
22.1 of the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
23.1 Consent of Radics & Co., LLC Independent Certified Public Accountants
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three months
ended December 31, 1995.
- 39 -
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LAKELAND BANCORP, INC.
March 13, 1996 /s/ Arthur L. Zande
Dated:_________________ By ___________________________
Arthur L. Zande
Executive Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
/s/ Robert B. Nicholson
_________________________ Director March 13, 1996
(Robert B. Nicholson)
/s/ John W. Fredericks
_________________________ Director March 13, 1996
(John W. Fredericks)
/s/ Bruce G. Bohuny
_________________________ Director March 13, 1996
(Bruce G. Bohuny)
/s/ Mary Ann Deacon
_________________________ Director March 13, 1996
(Mary Ann Deacon)
/s/ Mark J. Fredericks
_________________________ Director March 13, 1996
(Mark J. Fredericks)
/s/ John Pier, Jr.
_________________________ Director March 13, 1996
(John Pier, Jr.)
/s/ Albert S. Riggs
_________________________ Director March 13, 1996
(Albert S. Riggs)
/s/ Arthur L. Zande
_________________________ Executive Vice President March 13, 1996
(Arthur L. Zande) and Director (Chief
Executive Officer)
/s/ William J. Eckhardt
_________________________ Vice President and March 13, 1996
(William J. Eckhardt) Treasurer (Chief Financial
and Accounting Officer)
- 40 -
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference into the previously filed
Registration Statement on Form S-3 (No. 33-34099) of Lakeland Bancorp, Inc. (the
"Company") of our report dated January 10, 1996, included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
/s/ Radics & Co., LLC
Radics & Co., LLC
- ---------------------
Pine Brook, New Jersey
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