<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________
TO _________________.
Commission File Number 33-27312
--------
Lakeland Bancorp, Inc.
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2953275
- --------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
250 Oak Ridge Road, Oak Ridge, New Jersey 07438-8906
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(201) 697-2000
- ----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of September 30, 1997, 3,561,694 common shares, $2.50 par value, were
outstanding.
<PAGE>
LAKELAND BANCORP, INC.
INDEX
Page
Number
------
Part I. Financial Information 1
Item 1. Financial Statements
Consolidated Statements of Condition as of
December 31, 1996 and September 30, 1997 (Unaudited) 2
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1996 and 1997 (Unaudited) 3
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1996 and 1997 (Unaudited) 4 - 5
Notes to Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 20
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
--------------------
Certain information and footnote disclosures required under generally
accepted accounting principles have been condensed or omitted from the following
consolidated financial statements pursuant to the rules and regulations of the
Securities and Exchange Commission. Lakeland Bancorp, Inc., ( the "registrant"
or the "Company") believes that the disclosures presented are adequate to assure
that the information presented is not misleading in any material respect. It is
suggested that the following consolidated financial statements be read in
conjunction with the year-end consolidated financial statements and notes
thereto included in the registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
The results of operations for the three and nine month periods ended
September 30, 1997, are not necessarily indicative of the results to be expected
for the entire fiscal year.
1.
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
------------- ------------
1996 1997
------------- ------------
ASSETS
- ------
<S> <C> <C>
Cash and due from banks $ 20,395,240 $ 20,736,571
Federal funds sold 2,750,000 3,500,000
------------- ------------
Cash and cash equivalents 23,145,240 24,236,571
Securities available for sale, at estimated fair value 68,550,491 78,913,726
Securities held to maturity; estimated fair value of
$48,668,000 in 1996 and $50,300,000 in 1997 48,408,044 49,973,474
Loans 222,949,524 230,355,223
Premises and equipment 9,798,976 11,363,643
Accrued interest receivable 3,485,531 3,391,022
Other assets 1,206,974 964,921
------------- ------------
Total assets $ 377,544,780 $399,198,580
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities
- -----------
Deposits:
Non-interest-bearing demand $ 67,346,528 $ 68,001,659
Savings and interest-bearing demand 161,746,887 168,535,485
Club accounts 1,917,278 3,219,631
Time 95,137,066 105,249,341
Time of $100,000 and over 13,935,937 12,898,310
------------- ------------
Total deposits 340,083,696 357,904,426
Other liabilities 641,729 1,024,343
------------- ------------
Total liabilities 340,725,425 358,928,769
------------- ------------
Commitments - -
Stockholders' equity
- --------------------
Common stock (par value $2.50 per share):
Authorized shares 7,050,819 in 1996 and 7,403,359 in 1997;
issued and outstanding shares 3,375,590 in
1996 and 3,561,694 in 1997 8,438,975 8,904,235
Surplus 19,190,852 23,640,710
Undivided profits 7,946,013 5,882,443
Unrealized gain on securities available for sale, net 1,243,515 1,842,423
------------- ------------
Total stockholders' equity 36,819,355 40,269,811
------------- ------------
Total liabilities and stockholders' equity $ 377,544,780 $399,198,580
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
2.
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------ -----------
1996 1997 1996 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans and fees $4,560,677 $4,828,030 $13,085,877 $14,310,877
Federal funds sold 77,275 137,258 401,743 524,996
Securities:
U.S Treasury 912,097 1,045,119 2,850,972 2,947,471
U.S. Government agencies 527,351 564,268 1,600,096 1,599,629
States and political subdivisions 200,716 227,544 603,458 628,021
Other 136,663 86,709 419,575 277,717
---------- ---------- ----------- -----------
Total interest income 6,414,779 6,888,928 18,961,721 20,288,711
---------- ---------- ----------- -----------
INTEREST EXPENSE:
Deposits 2,413,288 2,616,438 7,247,613 7,860,268
Borrowed money - - - 9,900
---------- ---------- ----------- -----------
Total interest expense 2,413,288 2,616,438 7,247,613 7,870,168
---------- ---------- ----------- -----------
Net interest income 4,001,491 4,272,490 11,714,108 12,418,543
PROVISION FOR LOAN LOSSES 50,096 43,813 169,091 157,024
---------- ---------- ----------- -----------
Net interest income after provision for loan losses 3,951,395 4,228,677 11,545,017 12,261,519
---------- ---------- ----------- -----------
OTHER INCOME:
Service charges on deposit accounts 452,331 499,823 1,313,836 1,497,329
Other income 85,875 77,031 265,901 293,248
Gains (losses) on sales and calls of securities available for sale 1,223 (4,649) 1,125 (5,453)
Gains (losses) on calls of securities held to maturity - (282) 325 (282)
---------- ---------- ----------- -----------
Total other income 539,429 571,923 1,581,187 1,784,842
---------- ---------- ----------- -----------
OTHER EXPENSES:
Salaries and benefits 1,375,983 1,499,629 4,114,036 4,572,290
Occupancy expense, net 285,239 329,419 874,888 965,083
Furniture and equipment 186,570 226,704 614,968 644,738
Other 565,619 670,068 1,621,436 1,939,745
---------- ---------- ----------- -----------
Total other expenses 2,413,411 2,725,820 7,225,328 8,121,856
---------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,077,413 2,074,780 5,900,876 5,924,505
INCOME TAXES 711,584 709,867 2,020,642 2,022,007
---------- ---------- ----------- -----------
NET INCOME $1,365,829 $1,364,913 $ 3,880,234 $ 3,902,498
========== ========== =========== ===========
Net income per common share $ 0.39 $ 0.38 $ 1.11 $ $1.10
========== ========== =========== ===========
Weighted average number of shares outstanding 3,517,123 3,560,872 3,503,985 3,555,003
========== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3.
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,880,234 $ 3,902,498
Adjustments to reconcile net income to net cash provided by operating
activities:
Net amortization of premiums and discounts on securities 1,016,340 737,771
Amortization of unearned interest and deferred loan costs and fees 53,492 146,337
Depreciation and amortization of premises and equipment 605,548 628,797
Provision for loan losses 169,091 157,024
(Gain) loss on sales and calls of securities available for sale (1,125) 5,453
(Gain) loss from calls of securities held to maturity (325) 282
Gain on sale of student loans - (10,604)
Decrease in accrued interest receivable 69,791 94,509
Decrease in other assets 40,592 35,821
(Decrease) increase in other liabilities (34,850) 382,614
------------- -------------
Net cash provided by operating activities 5,798,788 6,080,502
------------- -------------
Cash flows from investing activities:
Proceeds from repayments and maturities on securities available for sale 17,711,465 17,179,120
Proceeds from sales of securities available for sale 4,017,037 5,039,622
Proceeds from calls of securities available for sale 2,999,902 4,499,196
Purchases of securities available for sale (16,490,374) (36,499,446)
Proceeds from repayments and maturities on securities held to maturity 10,211,193 9,707,511
Proceeds from calls of securities held to maturity 900,000 500,000
Purchases of securities held to maturity (12,867,750) (12,096,865)
Proceeds from sale of student loans - 2,309,124
Purchases of participation interests in loans - (2,854,877)
Net increase in loans receivable (27,362,683) (7,312,288)
Loan recoveries 21,830 63,416
Additions to premises and equipment (1,436,857) (1,871,464)
Purchase of real estate held for investment - (100,000)
Proceeds from sales of real estate owned 358,609 -
------------- -------------
Net cash (used in) investing activities (21,937,628) (21,436,951)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 2,756,102 17,820,730
Repayment of mortgage payable - (322,000)
Proceeds from sale of common stock 862,580 420,612
Cash dividends paid on common stock (1,274,387) (1,471,562)
------------ ------------
Net cash provided by financing activities 2,344,295 16,447,780
------------ ------------
Net (decrease) increase in cash and cash equivalents (13,794,545) 1,091,331
Cash and cash equivalents - beginning 33,773,253 23,145,240
------------ ------------
Cash and cash equivalents - ending $ 19,978,708 $24,236,571
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4.
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1997
-------------- -------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the nine month period for:
Income taxes (federal and state) $2,079,080 $1,950,502
Interest 7,264,367 7,681,409
Supplemental schedule of noncash investing and financing activities:
Unrealized (loss) gain on securities available for sale, net of deferred
income taxes $(369,029) $ 598,908
Charge off of loans receivable to allowance for loan losses 125,921 220,440
Transfer of loans receivable to real estate owned 103,220 96,169
Stock dividend - 4,494,506
Mortgage payable incurred in connection with purchase of premises - 322,000
</TABLE>
See accompanying notes to consolidated financial statements.
5.
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. BASIS OF PRESENTATION
- --------------------------
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and do not include information or
footnotes necessary for a complete presentation of financial condition, results
of operations, and cash flows in conformity with generally accepted accounting
principles. Reference is made to Lakeland Bancorp, Inc.'s (the "Corporation")
Annual Report on Form 10-K for the year ended December 31, 1996, for information
regarding the Corporation's audited financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the consolidated financial statements have
been included. The results of operations for the three and nine months ended
September 30, 1997, are not necessarily indicative of the results which may be
expected for the entire fiscal year.
2. 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 October 30,
1996, the Corporation's Board of Directors authorized a 2% stock dividend, which
was distributed on December 10, 1996. On August 27, 1997, the Corporation's
Board of Directors authorized a 5% stock dividend which was distributed on
October 15, 1997. Per share amounts have been retroactively restated to give
effect to these stock dividends.
3. SECURITIES AVAILABLE FOR SALE
- ----------------------------------
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------
Amortized Gross Unrealized Carrying
------------------------
Cost Gains Losses Value
----------- ---------- ------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury $25,527,311 $ 194,284 $ 1,095 $25,720,500
U.S. Government agencies 20,803,314 78,340 48,685 20,832,969
States and political subdivisions 15,329,500 123,655 4,274 15,448,881
Other debt securities 3,606,461 17,706 2,168 3,621,999
Equity security 1,204,882 1,721,260 - 2,926,142
----------- ---------- ------- -----------
$66,471,468 $2,135,245 $56,222 $68,550,491
=========== ========== ======= ===========
<CAPTION>
September 30, 1997
-----------------------------------------------------
Amortized Gross Unrealized Carrying
------------------------
Cost Gains Losses Value
----------- ---------- ------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury $29,204,162 $ 315,603 $ - $29,519,765
U.S. Government agencies 23,215,787 105,411 15,897 23,305,301
States and political subdivisions 19,409,054 122,486 944 19,530,596
Other debt securities 2,799,509 14,978 164 2,814,323
Equity security 1,204,882 2,538,859 - 3,743,741
----------- ---------- ------- -----------
$75,833,394 $3,097,337 $17,005 $78,913,726
=========== ========== ======= ===========
</TABLE>
6.
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
3. SECURITIES AVAILABLE FOR SALE (Cont'd)
- ----------------------------------
The following is a summary of securities available for sale by maturity:
<TABLE>
<CAPTION>
December 31, 1996 September 30, 1997
--------------------------- ----------------------------
Amortized Carrying Amortized Carrying
Cost Value Cost Value
------------ ------------ ------------ ------------
<S> <C> <C> <C>
Due in one year or less $ 25,339,254 $ 25,433,405 $ 22,978,748 $ 23,097,901
Due after one year
through five years 39,892,332 40,155,944 50,402,137 50,824,332
Due after five years
through ten years 25,000 25,000 1,242,627 1,242,752
Due after ten years 10,000 10,000 5,000 5,000
Equity security 1,204,882 2,926,142 1,204,882 3,743,741
------------ ------------ ------------ ------------
$ 66,471,468 $ 68,550,491 $ 75,833,394 $ 78,913,726
============ ============ ============ ============
</TABLE>
4. SECURITIES HELD TO MATURITY
- ------------------------------
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------
Carrying Gross Unrealized Estimated
-------------------------
Value Gains Losses Fair Value
----------- ---------------- ------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury $32,725,897 $231,547 $52,819 $32,904,625
U.S. Government agencies 11,638,493 93,969 26,775 11,705,687
States and political subdivisions 1,218,945 6,709 - 1,225,654
Other debt securities 2,824,709 8,582 1,169 2,832,122
----------- ------------ ------- -----------
$48,408,044 $340,807 $80,763 $48,668,088
=========== ============ ======= ===========
<CAPTION>
September 30, 1997
----------------------------------------------------
Carrying Gross Unrealized Estimated
-------------------------
Value Gains Losses Fair Value
----------- ------------ ------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury $33,927,891 $279,722 $17,883 $34,189,730
U.S. Government agencies 11,138,686 60,991 12,568 11,187,109
States and political subdivisions 2,803,562 13,568 - 2,817,130
Other debt securities 2,103,335 2,907 707 2,105,535
----------- ------------ ------- -----------
$49,973,474 $357,188 $31,158 $50,299,504
=========== ============ ======= ===========
</TABLE>
7
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
4. SECURITIES HELD TO MATURITY (Cont'd)
- --------------------------------
The following is a summary of securities held to maturity by maturity:
<TABLE>
<CAPTION>
December 31, 1996 September 30, 1997
----------------- ------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 14,636,079 $14,628,059 $14,916,246 $15,001,508
Due after one year
through five years 33,571,965 33,837,966 34,857,228 35,096,221
Due after ten years 200,000 202,063 200,000 201,775
------------ ----------- ----------- -----------
$ 48,408,044 $48,668,088 $49,973,474 $50,299,504
============ =========== =========== ===========
</TABLE>
5. LOANS
- --------
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------- ------------
<S> <C> <C>
Loans $226,019,901 $233,506,505
Less: Unearned income (70,377) (151,282)
Allowance for loan losses (3,000,000) (3,000,000)
------------ ------------
$222,949,524 $230,355,223
============ ============
</TABLE>
A summary of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1997
---------- ----------
<S> <C> <C>
Balance - beginning $2,910,000 $3,000,000
Provisions charged to operations 169,091 157,024
Loans charged off (125,921) (220,440)
Recoveries of loans previously charged off 21,830 63,416
---------- ----------
Balance - ending $2,975,000 $3,000,000
========== ==========
</TABLE>
8.
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. LOANS (Cont'd)
- ----------
Impaired loans and related amounts recorded in the allowance for loan losses are
summarized as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---------- ----------
<S> <C> <C>
Recorded investment in impaired loans:
With recorded allowances $2,513,216 $1,671,310
Without recorded allowances 457,320 554,522
---------- ----------
Total impaired loans 2,970,536 2,225,832
Related allowance for loan losses 684,655 618,428
---------- ----------
Net impaired loans $2,285,881 $1,607,404
========== ==========
</TABLE>
The average recorded investment in impaired loans and the interest income
recognized on such loans were as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------------
1996 1997
---------------------- ----------------
<S> <C> <C>
Average recorded investment $2,718,494 $2,607,031
Interest income recognized 90,798 92,661
</TABLE>
6. PENDING ACQUISITION
- --- -------------------
On September 16, 1997, the Corporation entered in an Agreement and Plan of
Merger (the "Merger Agreement") with Metropolitan State Bank ("MSB") pursuant to
which each outstanding share of MSB common stock will be converted into
Corporation Common Stock and MSB will become a wholly-owned subsidiary of the
Corporation. The exchange ratio will depend upon the market price of Corporation
common stock during a specified period prior to the closing; each share of MSB's
common stock (679,047 shares of MSB's common stock were outstanding as of
September 16, 1997) will be converted into a number of shares of Corporation
Common Stock ranging from 0.845 to 1.164 shares, depending on the actual
exchange ratio. As of September 30, 1997, MSB had total assets, deposits and
stockholders' equity of $94.4 million, $81.9 million and $7.4 million,
respectively. The merger provided for under the merger agreement (the "Merger")
is subject to regulatory approvals, the approval of MSB's shareholders and other
standard conditions. If consummated, the merger will be accounted for as a
pooling of interests.
9.
<PAGE>
PART I -- ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH SUMMARY
The third quarter of 1997 resulted in slightly decreased earnings for
Lakeland Bancorp, Inc. (the "Company"), when compared to the same period in
1996. Net income decreased $916, or .07%, to $1,364,913 for the third three
months of 1997 from $1,365,829 for the same period in 1996. Net income per
share decreased $.01. Increases of $270,999 in net interest income and $32,494
in other income along with decreases in the provision for loan losses of $6,283
and income tax expense of $1,717 were offset by an increase in other expenses of
$312,409.
The Company's annualized return on average assets and average stockholders'
equity for the third quarter of 1997 were 1.36% and 13.81%, respectively,
compared to 1.50% and 15.90%, respectively, for the same period in 1996.
RESULTS OF OPERATIONS
Total interest income increased $474,149, or 7.39% to $6,888,928 for the
three months ended September 30, 1997, when compared to $6,414,779 for the same
period in 1996. The overall increase in this category was a result of increases
of $267,353 or 5.86% in interest earned on the loan portfolio, $146,813 or 8.26%
in interest earned on the investment portfolio and $59,983 or 77.62% in interest
earned on federal funds sold.
The increase in interest income on loans was attributable to an increase in
average balances of $17.3 million, which was partially offset by a 19 basis
point decrease in yield. Of the $17.3 million increase in loans, commercial,
mortgage, and consumer loans increased $3.3 million, $7.6 million, and $6.4
million, respectively. The increase in interest income on the investment
portfolio was attributable to an increase in average balances of investment
securities (principally taxable) of $10.2 million. The increase in interest
income on federal funds sold was attributable to a $4.0 million increase in
average balances, along with a 28 basis point increase in yield.
Interest expense on deposits increased $203,150 or 8.42% to $2,616,438 for
the third quarter of 1997 compared to $2,413,288 for the same period in 1996.
This increase is attributable to an increase of $23.3 million in average
balances. The bulk of this increase involved time deposits (which increased on
average by $14.3 million) and savings and interest-bearing demand deposits
(which increased on average by $9.0 million).
Net interest income increased $270,999 or 6.77% to $4,272,490 for the third
quarter of 1997 from $4,001,491 for the same period in 1996, primarily as a
result of increased balances of average net earning assets, which was partially
offset by a
-10-
<PAGE>
13 basis point decrease in net interest margin. The annualized net interest
margin (the average yield on interest-earning assets, less the average cost of
interest-bearing liabilities) decreased from 3.99% to 3.86%. The average yield
on earning assets decreased 14 basis points from 7.60% to 7.46% and the average
rate paid on interest-bearing liabilities decreased 1 basis point from 3.61% to
3.60%.
-11-
<PAGE>
The provision for loan losses decreased $6,283 to $43,813 for the three
months ended September 30, 1997, as compared to $50,096 for the same prior year
period. During the third quarter of 1997, the Company charged off loans of
$15,879 and recovered $47,066 in previously charged off loans, compared to
$32,259 and $7,163, respectively, during the same period in 1996. The allowance
for loan losses at September 30, 1997, was 1.28% of total loans, compared to
1.33% at December 31, 1996, and 1.37% at September 30, 1996. The Company
believes, based on management's ongoing review of loan quality, economic
conditions, loss experience, and loan growth, that the allowance for loan losses
is adequate. This statement represents a forward-looking statement. Actual
results could differ materially from this statement based upon a number of
conditions, including the financial viability of the Company's loan customers,
the value of the Company's collateral, and general economic conditions.
The following table sets forth for the nine months ended September 30, 1997
and 1996, and for each of the years in the five years ended December 31, 1996,
the historical relationships among the allowance for loan losses, the provision
for loan losses, the amount of loans charged-off and the amount of loan
recoveries:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------------------------ ------------------------
YEAR ENDED DECEMBER 31, September 30,
------------------------------------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance of allowance at beginning
of period........................... $2,035 $2,450 $3,000 $3,000 $2,910 $2,910 $3,000
------ ------ ------ ------ ------ ------ ------
Charge-offs:
Commercial.......................... 256 57 234 114 321 70 175
Installment......................... 87 107 85 33 85 33 45
Mortgage............................ 45 35 23 217 70 23 --
------ ------ ------ ------ ------ ------ ------
Total charge-offs................ 388 199 342 364 476 126 220
------ ------ ------ ------ ------ ------ ------
Recoveries:
Commercial.......................... 1 13 69 108 10 8 8
Installment......................... 13 41 48 37 22 14 22
Mortgage............................ -- -- -- -- -- -- 33
------ ------ ------ ------ ------ ------ ------
Total recoveries.................... 14 54 117 145 32 22 63
------ ------ ------ ------ ------ ------ ------
Net charge-offs........................ 374 145 225 219 444 104 157
------ ------ ------ ------ ------ ------ ------
Provision for loan losses.............. 789 695 225 129 534 169 157
------ ------ ------ ------ ------ ------ ------
Balance of allowance at end of period.. $2,450 $3,000 $3,000 $2,910 $3,000 $2,975 $3,000
====== ====== ====== ====== ====== ====== ======
Ratio of net charge-offs to average
loans outstanding (1)............... .34% .11% .14% .12% .22% .07% .09%
Balance of allowance at end of period
as a percent of loans............... 2.02% 2.01% 1.71% 1.53% 1.33% 1.37% 1.28%
</TABLE>
(1) annualized for the nine month periods ended September 30, 1997 and 1996.
-12-
<PAGE>
The Company has established criteria to identify loans which may be
impaired. Large groups of smaller-balance homogeneous loans are collectively
evaluated for impairment, while other larger-balance loans are independently
evaluated. Management has determined that the following are deemed 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 for impairment 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. Loan impairment is
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, if the loan is collateral dependent, the
fair value of the related collateral. Loan allowances required, based upon
impaired loan evaluations, are included in the allowance for loan losses.
The Company's policy concerning non-accrual loans states that loans,
without consideration as to loan balance, are placed on a non-accrual status
when payments are 90 days delinquent or more, unless the asset is both well
secured and in the process of collection. Due to the difference in measurement
criteria, the populations of non-accrual and impaired loans, while having many
common elements, will be different in the aggregate.
Loans, or portions thereof, are charged-off when it is determined that a
loss has occurred. Until such time, an allowance for loan losses 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 September 30, 1997, based on the above criteria, the Company
classified four commercial loans, totalling $767,935, and six mortgage loans,
totalling $1,457,897, as impaired. The impairment of these loans is measured
using the present value of future cash flows for the six classified loans, which
have been renegotiated, and is based on the fair value of the underlying
collateral for the remaining four loans. Based upon such evaluation of these
impaired loans, $618,428 has been allocated to the allowance for loan losses.
-13-
<PAGE>
The following schedule sets forth certain information regarding the
Company's non-accrual, past due and renegotiated loans and other real estate
owned (as such terms are defined in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996) as of September 30, 1997, and as of December
31 of each of the last five years:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- -------------------------------------------
1997 1996 1995 1994 1993 1992
------------- ------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans............... $1,740 $1,308 $1,545 $1,501 $ 483 $ 213
Past due loans.................. 708 1,456 59 554 2,934 3,714
Renegotiated loans.............. 1,538 2,567 2,325 1,740 2,366 --
------ ------ ------ ------ ------ ------
Total non-accrual, past due
and renegotiated loans 3,986 5,331 3,929 3,795 5,783 3,927
Other real estate owned......... 196 -- 255 629 458 --
------ ------ ------ ------ ------ ------
Total........................ $4,182 $5,331 $4,184 $4,424 $6,241 $3,927
====== ====== ====== ====== ====== ======
</TABLE>
Included in the above schedule at September 30, 1997, are one non-accrual
commercial loan and three non-accrual mortgage loans, totalling $1,126,647, and
six renegotiated loans (three of which are commercial loans and three of which
are mortgage loans), totalling $1,099,185, which represents all loans
categorized as impaired.
At September 30, 1997, non-accrual loans totaled $1,740,000, a decrease of
$10,000 compared to June 30, 1997. This net change is the result of the
addition of two commercial loans and the reduction of one mortgage loan in this
category. Of the total non-accrual loans at September 30, 1997, all are either
in foreclosure, in various stages of litigation, or on a repayment schedule. At
September 30, 1997, loans past due 90 days or more and still accruing totalled
$708,000, a decrease of $39,000 compared to June 30, 1997. This net change is
primarily the result of the deletion of four commercial loans in this category
offset in part by the addition of one mortgage loan and five commercial loans to
this category. At September 30, 1997, renegotiated loans totalled $1,538,000,
an increase of $148,000 compared to June 30, 1997. This net change is primarily
the result of the addition of three commercial loans to this category.
Other income increased $32,494 or 6.02% to $571,923 for the third quarter
of 1997 from $539,429 for the same period in 1996. $52,470 of this increase
represents fee income generated from an ATM surcharge, which was not initiated
until the fourth quarter of 1996.
Other expenses increased by $312,409 or 12.94% to $2,725,820 for the third
quarter of 1997 from $2,413,411 for the same period in 1996. Salaries and
benefits increased by $123,646 or 8.99%, due to increased staff levels,
partially due to an additional branch office being opened, and normal salary
increases. Occupancy expense increased $44,180 or 15.49%. Furniture and
fixtures expense increased $40,134 or 21.51%. The increase in the previous two
categories is primarily the result of branch expansion and renovations, as well
as the increased cost of maintaining the fourteen locations. Other expenses
increased $104,449 or 18.47%. Miscellaneous expenses increased $49,161 or
93.63% due primarily to the increased cost of operating new and existing
branches and increased deposit insurance cost. Postage
-14-
<PAGE>
expense increased $13,449 or 17.12% due to a change in postal rates and
increased volume. The remaining components of other expenses increased 9.63% in
the aggregate, reflecting the increased size of the Company.
Income tax expense decreased $1,717 or .24% to $709,867 for the third
quarter of 1997 from $711,584 for the same period in 1996.
-15-
<PAGE>
PART I -- ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NINE MONTH SUMMARY
The first nine months of 1997 resulted in slightly increased earnings for
the Company, when compared to the same period in 1996. Net income increased
$22,264, or .57%, to $3,902,498 for the first nine months of 1997 from
$3,880,234 for the same period in 1996. Net income per share decreased $.01 to
$1.10 in 1997 from $1.11 in 1996. Increases of $704,435 in net interest income
and $203,655 in other income were substantially offset by an increase of
$896,528 in other expenses.
The Company's annualized return on average assets and average stockholders'
equity for the first nine months of 1997 were 1.33% and 13.55%, respectively,
compared to 1.45% and 15.48%, respectively, for the same period in 1996.
RESULTS OF OPERATIONS
Total interest income increased $1,326,990, or 7.00% to $20,288,711 for the
nine months ended September 30, 1997, when compared to $18,961,721 for the same
period in 1996. The overall increase in this category was a result of increases
of $1,225,000 or 9.36% in interest earned on the loan portfolio and $123,253 or
30.68% in interest earned on federal funds sold, which offset a decrease of
$21,263 or .39% in interest earned on the securities portfolio.
The increase in interest income on loans was attributable to an increase in
average balances of $26.5 million, which more than offset a 32 basis point
decrease in yield. Of the $26.5 million increase, commercial, mortgage, and
consumer loans increased $6.1 million, $9.9 million, and $10.5 million,
respectively. The increase in interest income on federal funds sold was
attributable to an increase in average balances of $2.7 million along with a 14
basis point increase in yield. The slight decrease in interest income on
securities was attributable to a $1.9 million increase in average balances
(principally non-taxable investment securities), which was offset by a decline
of 11 basis points in yield.
Interest expense on deposits increased $612,655 or 8.45% to $7,860,268 for
the first nine months of 1997 compared to $7,247,613 for the same period in
1996. This increase is attributable to an increase of $24.9 million in average
balances. The bulk of this increase involved time deposits (which increased on
average by $15.4 million) and savings and interest-bearing demand deposits
(which increased on average by $9.5 million). Total interest expense increased
$622,555 or 8.59%, reflecting the aforementioned deposit factors along with
$9,900 in interest expense incurred in the first nine months of 1997 on borrowed
money.
-16-
<PAGE>
Net interest income increased $704,435 or 6.01% to $12,418,543 for the
first nine months of 1997 from $11,714,108 for the same period in 1996,
primarily as the result of increased balances of average net earning assets,
which more than offset a 14 basis point decrease in net interest margin. The
annualized net interest margin decreased from 3.93% to 3.79%. The average yield
on earning assets decreased 18 basis points from 7.62% to 7.44%, and the average
rate paid on interest-bearing liabilities decreased 4 basis points from 3.69% to
3.65%.
-17-
<PAGE>
Other income increased $203,655 or 12.88% to $1,784,842 for the first nine
months of 1997 from $1,581,187 for the same period in 1996. This was primarily
the result of an increase of $183,493 or 13.97% in service charges on deposits.
$154,876 of this increase represents fee income generated from an ATM surcharge,
which was not initiated until the fourth quarter in 1996.
Other expenses increased by $896,528 or 12.41% to $8,121,856 for the first
nine months of 1997 from $7,225,328 for the same period in 1996. Salaries and
benefits increased by $458,254 or 11.14%, due to increased staffing levels and
normal salary increases. Occupancy expense increased $90,195 or 10.31% and
furniture and fixture expenses increased $29,770 or 4.84%. These increases were
primarily the result of the increased cost of maintaining the fourteen locations
from which the Company operates. Other expenses increased $318,309 or 19.63%.
Sources of changes in this category included advertising expense, which
increased $22,503 or 16.05%; legal expense , which increased $43,034 or 75.58%;
and postage expense, which increased $53,881 or 24.52%. FDIC insurance expense
increased $29,548 from the statutory $1,500 minimum in 1996. Additionally,
$34,420 was credited to Miscellaneous Losses in 1996, which represents
recoveries received in 1996 from an insurance company on thefts that occurred in
1995. The remaining component of other expenses increased 9.76% in the
aggregate, reflecting the increased size of the Company.
Income tax expense increased $1,365 or .07% to $2,022,007 for the first
nine months of 1997 from $2,020,642 for the same period in 1996.
-18-
<PAGE>
FINANCIAL CONDITION
The Company's total assets increased $21.7 million or 5.74% from $377.5
million at December 31, 1996, to $399.2 million at September 30, 1997.
Increases of $11.9 million in the securities portfolio and $7.4 million in the
loan portfolio were funded primarily by a $17.8 million increase in deposits.
At September 30, 1997, the Company's securities portfolio of $128.9 million
is segregated into classifications of "available for sale" and "held to
maturity". As required, available for sale securities are carried at fair value.
Unrealized gains and losses of $3,097,337 and $17,005, respectively, contained
in the available for sale portfolio, have been recorded, net of deferred taxes,
as a separate component of stockholders' equity. The effect of such adjustment
at September 30, 1997, is to increase stockholders' equity by $1,842,423.
Securities held to maturity continue to be carried at historical cost and, at
September 30, 1997, contain unrealized gains and losses of $357,188 and $31,158,
respectively. For the entire securities portfolio, net unrealized gains stand at
$3,406,362 at September 30, 1997, as compared with a $2,339,067 net unrealized
gain at December 31, 1996. See notes 3 and 4 of the Notes to Consolidated
Financial Statements.
Total deposits increased $17.8 million or 5.24% from December 31, 1996, to
September 30, 1997. Non-interest-bearing demand, savings and interest-bearing
demand and time accounts increased $655,000, $8.1 million, and $9.1 million,
respectively, in the first nine months of 1997. Time deposits at September 30,
1997, represented 33.01% of total deposits as compared to 32.07% at December 31,
1996.
Stockholders' equity increased $3.5 million or 9.37% as net income of $3.9
million, $421,000 in proceeds of common stock sold via dividend reinvestments
and a $599,000 increase in the equity component related to available for sale
securities were partially offset by dividends paid to stockholders of
$1,472,000.
Cash and cash equivalents increased by $1.1 million during the nine months
ended September 30, 1997. Operating activities (principally as a result of the
Company's net income and the adding back of certain non-cash charges) provided
$6.1 million in net cash and financing activities (reflecting the net increase
in deposits and proceeds from the issuance of common stock, offset by cash
dividends and a mortgage repayment) provided $16.4 million in net cash.
Investing activities, on the other hand, utilized $21.4 million in net cash,
primarily reflecting the above-mentioned increases in the Company's loan and
securities portfolios and $1.9 million in additions to premises and equipment.
-19-
<PAGE>
CAPITAL RESOURCES
The FDIC has established risk-based capital rules which impose a minimum
capital standard on insured banks. The minimum ratio of risk-based capital to
risk-weighted assets (including certain off-balance sheet items, such as standby
letters of credit) is 8%. At least half of the total capital is to be comprised
of common stock equity and qualifying perpetual preferred stock, less goodwill
("Tier I capital"). The remainder ("Tier II capital") may consist of mandatory
convertible debt securities, qualifying subordinated debt, other preferred stock
and a portion of the allowance for loan losses. The Federal Reserve Board has
adopted a similar risk-based capital guideline for the Company which is computed
on a consolidated basis.
In addition, the Federal Reserve Board has established leverage ratio
guidelines (Tier I capital to average quarterly assets, less goodwill) for bank
holding companies. 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 are
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 September
30, 1997.
<TABLE>
<CAPTION>
AMOUNT RATIO
(In Thousands)
<S> <C> <C>
RISK-BASED CAPITAL RATIOS:
Actual Tier I Capital $38,427 17.41%
Tier I Capital minimum amount 8,828 4.00%
------- -----
Excess $29,599 13.41%
======= =====
Actual Combined Tier I and Tier II Capital $40,809 18.49%
Combined Tier I and Tier II Capital minimum
requirement 17,656 8.00%
------- -----
Excess $23,153 10.49%
======= =====
LEVERAGE RATIO:
Actual Tier I Capital to average third quarter
assets $38,427 9.56%
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
September 30, 1997.
-20-
<PAGE>
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Agreement and Plan of Merger, dated September 16, 1997,
between the Company and Metropolitan State Bank is incorporated by
reference to exhibit 99.2 to the Company's Current Report on Form
8-K, dated September 22, 1997.
27.1 Financial Data Schedule
(b) Current Reports on Form 8-K Filed
During The Quarter Ended September 30, 1997: On September 22, 1997,
the Company filed a Current Report on Form 8-K, disclosing
(pursuant to Item 5) its pending acquisition of Metropolitan State
Bank. See Note 6 of the Notes to the Company's consolidated
Financial Statements.
-21-
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
---------------------------------
(Registrant)
/s/ Arthur L. Zande
---------------------------------
Arthur L. Zande
Executive Vice President
(Chief Executive Officer)
/s/ William J. Eckhardt
---------------------------------
William J. Eckhardt
Vice President and Treasurer
(Chief Financial Officer)
November 7, 1997
- -----------------
Date
-22-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 24,737
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 78,914
<INVESTMENTS-CARRYING> 49,973
<INVESTMENTS-MARKET> 50,300
<LOANS> 230,355
<ALLOWANCE> 3,000
<TOTAL-ASSETS> 399,199
<DEPOSITS> 357,904
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,024
<LONG-TERM> 0
0
0
<COMMON> 8,904
<OTHER-SE> 31,366
<TOTAL-LIABILITIES-AND-EQUITY> 399,199
<INTEREST-LOAN> 14,311
<INTEREST-INVEST> 5,453
<INTEREST-OTHER> 525
<INTEREST-TOTAL> 20,289
<INTEREST-DEPOSIT> 7,860
<INTEREST-EXPENSE> 7,870
<INTEREST-INCOME-NET> 12,419
<LOAN-LOSSES> 157
<SECURITIES-GAINS> (6)
<EXPENSE-OTHER> 8,122
<INCOME-PRETAX> 5,925
<INCOME-PRE-EXTRAORDINARY> 3,902
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,902
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.10
<YIELD-ACTUAL> 7.44
<LOANS-NON> 1,740
<LOANS-PAST> 708
<LOANS-TROUBLED> 1,538
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,000
<CHARGE-OFFS> 221
<RECOVERIES> 64
<ALLOWANCE-CLOSE> 3,000
<ALLOWANCE-DOMESTIC> 3,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
