<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, 1998.
[_] 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)
(973) 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, 1998, 8,487,238 common shares, $2.50 par value, were
outstanding.
<PAGE>
LAKELAND BANCORP, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
-------------
<S> <C> <C> <C>
Part I. Financial Information 1
Item 1. Financial Statements
Consolidated Statements of Condition as of
December 31, 1997 and September 30, 1998 (Unaudited) 2
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 1997 and 1998 3
(Unaudited)
Consolidated Statements of Comprehensive
Income for the Three and Nine Months Ended
September 30, 1997 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1998 5 - 6
(Unaudited)
Notes to Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 21
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
---------------------
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, 1997.
The results of operations for the three and nine month periods ended
September 30, 1998, are not necessarily indicative of the results to be expected
for the entire fiscal year.
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1997 1998
- ------
--------------- ---------------
<S> <C> <C>
Cash and due from banks $ 28,443,103 $ 27,182,174
Federal funds sold 12,725,000 15,175,000
-------------- ---------------
Cash and cash equivalents 41,168,103 42,357,174
Certificates of deposit 101,768 104,148
Securities available for sale, at estimated fair value 102,333,878 90,573,619
Securities held to maturity; estimated
fair value of $57,372,000 in 1997 and $67,426,399 in 1998 57,009,136 65,931,542
Loans 287,003,467 299,198,666
Premises and equipment 13,812,631 14,477,006
Accrued interest receivable 4,210,406 3,974,219
Other assets 2,085,816 1,662,351
------------- ------------
Total assets $ 507,725,205 $ 518,278,725
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest-bearing demand $ 97,491,314 $ 98,782,660
Savings and interest-bearing demand 208,419,317 214,763,471
Club accounts 1,698,523 3,287,935
Time 122,252,678 117,360,949
Time of $100,000 and over 23,608,695 25,230,069
------------- ------------
Total deposits 453,470,527 459,425,084
Borrowed money 3,535,792 4,714,668
Other liabilities 2,056,637 2,176,828
------------- ------------
Total liabilities 459,062,956 466,316,580
------------- ------------
Commitments - -
Stockholders' Equity
- --------------------
Common stock (par value $2.50 per share)
Authorized shares 7,403,359 in 1997 and 14,806,718 in 1998; issued
shares 4,239,861 in 1997 and 8,495,838 in 1998 10,599,653 21,239,595
Surplus 29,147,426 18,737,137
Undivided profits 6,849,079 9,517,414
Unrealized gain on securities available for sale, net 2,066,091 2,596,999
Treasury stock, at cost; 8,600 shares - (129,000)
------------- -------------
Total stockholders' equity 48,662,249 51,962,145
------------- -------------
Total liabilities and stockholders' equity $ 507,725,205 $ 518,278,725
============= =============
</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 September 30, Nine Months Ended September 30,
------------------------------------ ----------------------------------
1997 1998 1997 1998
---------------- ---------------- --------------- --------------
INTEREST INCOME:
<S> <C> <C> <C> <C>
Loans and fees $ 5,897,158 $ 6,279,884 $ 17,379,704 $ 18,681,009
Federal funds sold 233,292 276,049 719,915 695,080
Securities:
U.S. Treasury 1,112,964 976,309 3,157,911 2,987,592
U.S. Government agencies 827,826 685,150 2,305,068 2,135,563
States and political subdivisions 320,045 400,792 890,507 1,161,265
Other 93,435 115,359 297,119 279,200
---------- ---------- ----------- ----------
Total interest income 8,484,720 8,733,543 24,750,224 25,939,709
---------- ---------- ----------- ----------
INTEREST EXPENSE:
Deposits 3,210,319 3,183,696 9,511,915 9,474,586
Borrowed money 46,389 64,522 114,662 143,907
---------- ---------- ----------- ----------
Total interest expense 3,256,708 3,248,218 9,626,577 9,618,493
---------- ---------- ----------- ----------
Net interest income 5,228,012 5,485,325 15,123,647 16,321,216
PROVISION FOR LOAN LOSSES 97,813 62,584 291,024 164,394
---------- ---------- ----------- ----------
Net interest income after provision
for loan losses 5,130,199 5,422,741 14,832,623 16,156,822
---------- ---------- ----------- ----------
OTHER INCOME:
Service charges on deposit accounts 591,165 600,407 1,790,032 1,784,306
Gain on disposition of securities 18,680 38,469 32,645 104,971
Other income 106,970 148,939 363,665 390,499
---------- ---------- ----------- ----------
Total other income 716,815 787,815 2,186,342 2,279,776
----------- ---------- ----------- ----------
OTHER EXPENSES:
Salaries and benefits 1,945,985 2,127,684 5,834,465 6,331,633
Occupancy expense, net 376,734 397,181 1,107,249 1,173,986
Furniture and equipment 326,426 384,539 931,650 1,138,359
Other 874,015 919,365 2,517,747 3,070,878
----------- ---------- ----------- -----------
Total other expenses 3,523,160 3,828,769 10,391,111 11,714,856
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,323,854 2,381,787 6,627,854 6,721,742
INCOME TAXES 768,617 786,513 2,183,413 2,243,862
----------- ----------- ------------- ------------
NET INCOME $ 1,555,237 $ 1,595,274 $ 4,444,441 $ 4,477,880
=========== =========== ============ ============
Net income per common share:
Basic $ 0.19 $ 0.19 $ 0.53 $ 0.53
Diluted 0.18 0.19 0.53 0.53
============ =========== ============ ============
Weighted average number of shares outstanding:
Basic 8,399,710 8,492,036 8,387,878 8,492,004
Diluted 8,441,678 8,492,036 8,429,010 8,492,004
============ ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3.
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------- -----------------------------------
1997 1998 1997 1998
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 1,555,237 $ 1,595,274 $ 4,444,441 $ 4,477,880
--------------- ---------------- --------------- ---------------
Other comprehensive income, net of
income taxes:
Unrecognized holding gains on securities
available for sale, net of income taxes
of $334,906, $278,557, $439,906 and
$398,059 respectively 518,489 432,017 672,673 594,940
Less: Gains on dispositions of securities
available for sale, net of income taxes
of $6,170, $18,328, $10,868 and $40,939,
respectively (12,792) (20,141) (22,059) (64,032)
--------------- ---------------- --------------- ---------------
Total other comprehensive income 505,697 411,876 650,614 530,908
--------------- ---------------- --------------- ---------------
Comprehensive income $ 2,060,934 $ 2,007,150 $ 5,095,055 $ 5,008,788
=============== ================ =============== ===============
</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,
-----------------------------------
1997 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,444,441 $ 4,477,880
Adjustments to reconcile net income to
net cash provided by operating activities:
Net amortization and accretion 879,108 395,225
Depreciation and amortization of premises and equipment 711,797 818,539
Provision for loan losses 291,024 164,394
Gain on sales and calls of securities available for sale (32,927) (104,971)
Gain on calls of securities held to maturity 282 -
Gain on sale of student loans (10,604) -
Decrease in accrued interest receivable 58,509 236,187
(Increase) in other assets (55,800) (274,432)
Increase (decrease) in other liabilities 630,614 (77,090)
---------------- ----------------
Net cash provided by operating activities 6,916,444 5,635,732
---------------- ----------------
Cash flows from investing activities:
Net change in certificates of deposit - (2,380)
Proceeds from maturities of and
repayments on securities available for sale 24,614,120 30,107,400
Proceeds from sales of securities available for sale 11,664,622 17,743,000
Proceeds from calls of securities available for sale 4,499,196 3,000,000
Purchases of securities available for sale (59,906,446) (48,384,234)
Proceeds from maturities of and
repayments on securities held to maturity 13,618,511 12,860,315
Proceeds from calls of securities held to maturity 500,000 500,000
Purchases of securities held to maturity (12,346,865) (12,393,689)
Loan recoveries 92,385 261,729
Purchases of participation interests in loans (2,854,877) -
Proceeds from sale of student and participation loans 2,309,124 1,084,481
Net increase in loans receivable (11,724,257) (13,702,968)
Additions to premises and equipment (1,940,464) (1,482,914)
Net (increase) decrease in real estate owned (137,000) 538,058
---------------- ----------------
Net cash (used in) investing activities (31,611,951) (9,871,202)
---------------- ----------------
Cash flows from financing activities:
Net increase in deposits 30,158,730 5,954,557
Net increase in short-term borrowings 1,076,000 1,178,876
Repayment of mortgage payable (322,000) -
Proceeds from sale of common stock 420,612 229,653
Cash dividends paid on common stock (1,471,562) (1,809,545)
Purchases of treasury stock - (129,000)
---------------- ----------------
Net cash provided by financing activities 29,861,780 5,424,541
---------------- ----------------
Net increase in cash and cash equivalents 5,166,273 1,189,071
Cash and cash equivalents - beginning 33,450,240 41,168,103
---------------- ----------------
Cash and cash equivalents - ending $ 38,616,513 $ 42,357,174
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
5.
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1997 1998
---------------- ----------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the three month period for:
Income taxes $ 2,161,502 $ 2,156,383
Interest 9,388,239 9,643,611
Supplemental schedule of noncash investing and financing activities:
Unrealized gain on securities available
for sale, net of deferred income taxes 650,614 530,908
Transfer of securities available for sale to securities
held to maturity - 10,100,590
Charge off of loans receivable to allowance for loan losses 307,825 927,973
Mortgage payable incurred in
connection with purchase of premises 322,000 -
Common stock dividend 4,494,506 10,619,798
</TABLE>
See accompanying notes to consolidated financial statements.
6.
<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, 1997, 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, 1998, are not necessarily indicative of the results which may be
expected for the entire fiscal year.
Amounts previously reported by the Corporation in its consolidated statement of
condition as of December 31, 1997 and in its Consolidated Statement of Income
for the three and nine months ended September 30, 1997 have been retroactively
restated to include the accounts of Metropolitan State Bank ("Metropolitan")
which, on February 20, 1998, merged into the Corporation. Each share of
Metropolitan common stock outstanding was converted to 0.941 shares of
Corporation common stock, resulting in the issuance of 669,867 shares. The
merger was accounted for as a pooling of interests.
Effective January 1, 1998, the Corporation adopted Financial Accounting
Standards Board Statement of Financial Accounting Standards ("Statement") No.
130, "Reporting Comprehensive Income". Statement No. 130 requires the reporting
of comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting methodology that
includes disclosure of certain financial information that historically has not
been recognized in the calculation of net income. As required, the provisions
of Statement No. 130 have been retroactively applied to previously reported
periods. The application of Statement No. 130 had no material effect on the
Corporation's consolidated financial condition or operations.
2. NET INCOME PER COMMON SHARE
- --------------------------------
Basic net income per common share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted net
income per share is calculated by adjusting the weighted average number of
shares of common stock outstanding to include the effect of stock options, if
dilutive, using the treasury stock method.
On August 26, 1998, the Corporation's Board of Directors authorized a 100% stock
dividend, which was distributed on October 1, 1998. Per share amounts have been
retroactively restated to give effect to this stock dividend.
7.
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
3. SECURITIES AVAILABLE FOR SALE
- ----------------------------------
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------------------------
Amortized Gross Unrealized Carrying
-------------------------------
Cost Gains Losses Value
---------------- ---------------- ------------- ------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 30,425,405 $ 339,875 $ 352 $ 30,764,928
U.S. Government agencies 29,073,553 121,581 42,118 29,153,016
Mortgage-backed securities 5,524,062 34,772 17,623 5,541,211
States and political subdivisions 30,061,743 216,562 10,887 30,267,418
Other debt securities 2,299,448 7,628 - 2,307,076
Equity securities 1,503,182 2,797,047 - 4,300,229
---------------- ---------------- ------------- ------------------
$ 98,887,393 $ 3,517,465 $ 70,980 $ 102,333,878
================ ================ ============= =================
<CAPTION>
September 30, 1998
----------------------------------------------------------------------
Amortized Gross Unrealized Carrying
-------------------------------
Cost Gains Losses Value
---------------- ---------------- ------------- ------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 27,656,169 $ 785,996 $ - $ 28,442,165
U.S. Government agencies 14,356,196 120,154 9,002 14,467,348
Mortgage-backed securities 3,578,752 38,589 9,683 3,607,658
States and political subdivisions 33,243,482 543,446 3,104 33,783,824
Other debt securities 5,901,325 114,100 - 6,015,425
Equity securities 1,503,182 2,754,017 - 4,257,199
---------------- ---------------- ------------- ------------------
$ 86,239,106 $ 4,356,302 $ 21,789 $ 90,573,619
================ ================ ============= =================
<CAPTION>
The following is a summary of securities available for sale by maturity:
December 31, 1997 September 30, 1998
------------------------------------- ------------------------------------
Amortized Carrying Amortized Carrying
Cost Value Cost Value
----------------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 26,707,693 $ 26,667,222 $ 19,798,355 $ 19,915,923
Due after one year
through five years 54,628,030 55,144,815 42,075,180 43,155,639
Due after five years
through ten years 8,748,426 8,915,401 14,524,150 14,837,326
Due after ten years 1,776,000 1,765,000 4,759,487 4,799,874
Mortgage-backed securities 5,524,062 5,541,211 3,578,752 3,607,658
Equity securities 1,503,182 4,300,229 1,503,182 4,257,199
----------------- ------------------ ---------------- ------------------
$ 98,887,393 $ 102,333,878 $ 86,239,106 $ 90,573,619
================= ================== ================ =================
</TABLE>
8.
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
4. SECURITIES HELD TO MATURITY
- --------------------------------
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------------
Amortized Gross Unrealized Estimated
-----------------------------
Cost Gains Losses Fair Value
---------------- -------------- ------------- -----------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 34,488,508 $ 319,110 $ 8,865 $ 34,798,753
U.S. Government agencies 14,929,152 46,886 35,620 14,940,418
Mortgage-backed securities 2,399,608 32,602 34,669 2,397,541
States and political subdivisions 4,491,769 41,453 622 4,532,600
Other debt securities 700,099 2,625 100 702,624
---------------- -------------- ------------- -----------------
$ 57,009,136 $ 442,676 $ 79,876 $ 57,371,936
================ ============== ============= ================
<CAPTION>
September 30, 1998
-------------------------------------------------------------------
Amortized Gross Unrealized Estimated
-----------------------------
Cost Gains Losses Fair Value
---------------- -------------- ------------- -----------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 34,210,964 $ 856,042 $ - $ 35,067,006
U.S. Government agencies 21,951,064 516,408 31,587 22,435,885
Mortgage-backed securities 2,191,746 27,466 5,233 2,213,979
States and political subdivisions 4,517,903 80,082 17 4,597,968
Other debt securities 3,059,865 51,696 - 3,111,561
---------------- -------------- ------------- -----------------
$ 65,931,542 $ 1,531,694 $ 36,837 $ 67,426,399
================ ============== ============= ================
<CAPTION>
The following is a summary of securities held to maturity by maturity:
December 31, 1997 September 30, 1998
----------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Due in one year or less $ 13,560,951 $ 13,619,205 $ 11,904,954 $ 12,000,336
Due after one year
through five years 38,530,951 38,838,403 50,228,850 51,565,478
Due after five years
through ten years 2,317,626 2,314,162 1,305,992 1,336,882
Due after ten years 200,000 202,625 300,000 309,724
Mortgage-backed securities 2,399,608 2,397,541 2,191,746 2,213,979
----------------- ---------------- ----------------- ----------------
$ 57,009,136 $ 57,371,936 $ 65,931,542 $ 67,426,399
================= ================ ================= ===============
</TABLE>
9.
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. LOANS
- ---------
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------------ ------------------
<S> <C> <C>
Loans $ 291,359,074 $ 303,014,240
Less: Unearned income (213,267) (175,084)
Allowance for loan losses (4,142,340) (3,640,490)
------------------ ------------------
$ 287,003,467 $ 299,198,666
================== =================
A summary of the activity in the allowance for loan losses is as follows:
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
1997 1998
--------------- ---------------
<S> <C> <C>
Balance - beginning $ 3,585,238 $ 4,142,340
Provisions charged to operations 291,024 164,394
Loans charged off (307,825) (927,973)
Recoveries of loans previously charged off 92,385 261,729
--------------- ---------------
Balance - ending $ 3,660,822 $ 3,640,490
=============== ==============
Impaired loans and related amounts recorded in the allowance for loan losses are
summarized as follows:
<CAPTION>
December 31, September 30,
1997 1998
----------------- ---------------
<S> <C> <C>
Recorded investment in impaired loans:
With recorded allowances $ 1,737,688 $ 1,672,838
Without recorded allowances 704,287 1,576,423
----------------- ---------------
Total impaired loans 2,441,975 3,249,261
Related allowance for loan losses 864,800 654,114
----------------- ---------------
Net impaired loans $ 1,577,175 $ 2,595,147
================= ==============
The average recorded investment in impaired loans and the interest income
recognized on such loans were as follows:
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1997 1998
----------------- ---------------
<S> <C> <C>
Average recorded investment $ 3,198,272 $ 2,677,822
Interest income recognized 51,535 116,927
</TABLE>
10.
<PAGE>
PART I -- ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
--------
During the first quarter of 1998, Lakeland Bancorp, Inc. (the "Company")
consummated its acquisition of Metropolitan State Bank ("MSB"). The transaction
was accounted for as a pooling of interests. As a result, the Company's
financial statements have been retroactively adjusted to combine the Company's
accounts and MSB's accounts for all prior periods. See Notes to Consolidated
Financial Statements.
THREE MONTH SUMMARY
The third quarter of 1998 resulted in slightly increased earnings for
Lakeland Bancorp, Inc. (the "Company"), when compared to the same period in
1997. Net income increased $40,037 or 2.57%, to $1,595,274 for the three months
ended September 30, 1998, from $1,555,237 for the same period in 1997. Net
income per diluted share increased $.01 or 5.5% to $.19. Increases of $257,313
in net interest income and $71,000 in other income, and a decrease of $35,229 in
the provision for loan losses more than offset increases of $305,609 in other
expenses and $17,896 in income tax expense.
The Company's annualized return on average assets and average stockholders'
equity for the three months ended
September 30, 1998 were 1.23% and 12.62%, respectively, compared to 1.26%
and 13.33%, respectively, for the same period in 1997.
RESULTS OF OPERATIONS
Total interest income increased $248,823, or 2.93% to $8,733,543 for the
three months ended September 30, 1998, when compared to $8,484,720 for the same
period in 1997. The overall increase in this category was a result of increases
of $382,726 or 6.49% in interest earned on the loan portfolio, and $42,757 or
18.33% in interest earned on federal funds sold which were partially offset by
a decrease of $176,660 or 7.50% in interest earned on the securities portfolio.
-11-
<PAGE>
The increase in interest income on loans was primarily attributable to an
increase in average balances of $19.6 million. The increase in interest on
federal funds sold was due primarily to a $3.2 million increase in average
balances. The decrease in interest income on investment securities was
attributable to a 36 basis point decrease in yield, along with a $3.2 million
decrease in average balances (reflecting a $10.6 million decrease in the average
volume of taxable securities, which was partially offset by a $7.4 million
increase in the average volume of non-taxable securities). This decrease in
yield was due to the increased average volume of non-taxable securities, which
carry a lower pre-tax yield.
Interest expense on deposits decreased $26,623 or .83% to $3,183,696 for
the third quarter of 1998 compared to $3,210,319 for the same period in 1997.
This decrease was primarily attributable to a 9 basis point decline in yield,
which offset an increase of $5.3 million in average balances of interest bearing
deposits (which partially funded the increase in loans). Total interest expense
decreased $8,490 or .26%, reflecting the aforementioned factors affecting
deposits along with an $18,133 increase in interest expense on borrowed money.
Net interest income increased $257,313 or 4.92% to $5,485,325 for the three
months ended September 30, 1998, from $5,228,012 for the same period in 1997,
primarily as the result of increased balances of net earning assets. The
annualized net interest margin (the average yield on interest earning assets,
less the average cost of interest-bearing liabilities) decreased from 3.86% to
3.84%. While the average yield on earning assets decreased 11 basis points from
7.52% to 7.41%, the average rate paid on interest-bearing liabilities decreased
9 basis points from 3.66% to 3.57%.
The provision for loan losses decreased $35,229 or 36.02% to $62,584 for
the three months ended September 30, 1998, as compared with $97,813 for the same
prior year period. During the third quarter of 1998, the Company charged off
loans of $151,344 and recovered $19,632 in previously charged off loans compared
to $100,817 and $60,635, respectively, during the same period in 1997. The
$151,344 in charged-off loans in 1998 is primarily the result of the charging
off of fifteen smaller balance loans. The allowance for loan losses at
September 30, 1998, was 1.20% of total loans, compared to 1.42% at December 31,
1997, and 1.31% at September 30, 1997. 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.
-12-
<PAGE>
The following table sets forth for the nine months ending September 30,
1998 and 1997, and for each of the years in the five years ended December 31,
1997, 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
--------------------
September 30, YEAR ENDED DECEMBER 31,
-------------------- ---------------------------
1998 1997 1997 1996 1995 1994 1993
-------------------- ------------- ------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Balance of allowance at beginning
of period........................... $4,142 $3,585 $3,585 $3,470 $3,547 $3,455 $2,803
------ ------ ------ ------ ------ ------ ------
Charge-offs:
Commercial.......................... 526 203 466 554 119 339 67
Installment......................... 91 80 107 215 114 135 165
Mortgage............................ 311 25 26 80 394 138 65
------ ------ ------ ------ ------ ------ ------
Total charge-offs................ 928 308 599 849 627 612 297
------ ------ ------ ------ ------ ------ ------
Recoveries:
Commercial.......................... 219 22 20 25 128 69 13
Installment......................... 43 38 77 31 65 66 66
Mortgage............................ -- 33 33 -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total recoveries................. 262 93 130 56 193 135 79
------ ------ ------ ------ ------ ------ ------
Net charge-offs........................ 666 215 469 793 434 477 218
------ ------ ------ ------ ------ ------ ------
Provision for loan losses.............. 164 291 1,026 908 357 569 872
------ ------ ------ ------ ------ ------ ------
Balance of allowance at end of period.. $3,640 $3,661 $4,142 $3,585 $3,470 $3,547 $3,455
====== ====== ====== ====== ====== ====== ======
Ratio of net charge-offs to average
loans outstanding (annualized)...... .30% .10% .17% .32% .19% .23% .13%
Balance of allowance at end of period
as a percent of total loans......... 1.20% 1.31% 1.42% 1.33% 1.49% 1.68% 1.85%
</TABLE>
The Company has established criteria to identify loans which may be
impaired. Large groups of smaller-balance homogeneous loans are collectively
evaluated, while other larger-balance loans are independently evaluated. The
Company has established criteria to identify loans which may be impaired.
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, based upon impaired loan
evaluations, are included in the allowance for loan loss.
-13-
<PAGE>
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 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 collectability of the loan balance.
As of September 30, 1998, based on the above criteria, the Company
classified eight commercial loans, totaling $2,419,473, and four mortgage loans,
totaling $829,788, as impaired. The impairment of these loans is measured using
the present value of future cash flows for six renegotiated loans and is based
on the fair value of the underlying collateral for the remaining six loans.
Based upon such evaluation of these impaired loans, $654,114 has been allocated
to the allowance for loan losses. Additionally, the Company has twelve smaller
balance commercial loans, totaling $512,334, on a non-accrual status. These
loans are considered to be within a homogeneous group of smaller-balance
commercial loans and, as such, are not specifically evaluated for impairment.
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, 1997) as of September 30, 1998, and as of December
31 of each of the last five years:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------- ---------------------------------
1998 1997 1996 1995 1994 1993
------ ------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans............... $2,595 $2,007 $1,845 $2,366 $2,658 $ 793
Past due loans.................. 3,258 1,400 2,200 679 1,039 3,075
Renegotiated loans.............. 897 1,529 2,567 2,325 1,740 2,366
------ ------ ------ ------ ------ ------
Total non-accrual, past due
and renegotiated loans 6,750 4,936 6,612 5,370 5,437 6,234
Other real estate owned......... 110 648 177 951 1,302 1,196
------ ------ ------ ------ ------ ------
Total........................ $6,860 $5,584 $6,789 $6,321 $6,739 $7,430
====== ====== ====== ====== ====== ======
</TABLE>
Included in the above schedule at September 30, 1998, are three non-accrual
commercial loans, totaling $648,966, one non-accrual mortgage loan, totaling
$442,029, three commercial loans past due over 90 days, totaling $1,669,308, and
five renegotiated loans, totaling $488,958, which represents all loans
categorized as impaired.
-14-
<PAGE>
At September 30, 1998, non-accrual loans totaled $2,595,000, a decrease of
$82,000 compared to June 30, 1998. Of the total non-accrual loans at September
30, 1998, all are either in foreclosure, in various stages of litigation, or on
a repayment schedule. At September 30, 1998, loans past due 90 days or more and
still accruing totaled $3,258,000, an increase of $1,683,000 compared to June
30, 1998. This net change is primarily the result of the addition of two
commercial loans, totaling $1,450,000, to this category. At September 30, 1998,
renegotiated loans totaled $897,000, a decrease of $591,000 compared to June 30,
1998. This net change is primarily the result of one of the previously noted
commercial loans, totaling $582,000, becoming past due over 90 days.
Other income increased $71,000 or 9.90% to $787,815 for the third three
months of 1998 from $716,815 for the same period in 1997.
Other expenses increased by $305,609 or 8.67% to $3,828,769 for the three
months ended September 30, 1998, from $3,523,160 for the same period in 1997.
Salaries and benefits increased by $181,699 or 9.34%. This was due to increased
staffing levels, partially due to additional branch offices being opened, along
with normal salary increases. Furniture and fixtures expense increased $58,113
or 17.80%. Occupancy expense increased $20,447 or 5.43%. Increases in both of
these expense categories resulted from expansions in the Company's branch
network and the addition of optical imaging equipment during 1997. Other
expenses increased in the aggregate $45,350 or 5.19%. This increase is due to
the increased size of the branch network and the Company's banking business.
Income tax expense increased $17,896 or 2.33% to $786,513 for the third
three months of 1998 from $768,617 for the same period in 1997. The increase in
income tax expense was due primarily to higher pre-tax earnings.
-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 1998 resulted in slightly increased earnings for
the Company, when compared to the same period in 1997. Net income increased
$33,439 or .75%, to $4,477,880 for the first nine months of 1998 from $4,444,441
for the same period in 1997. Net income per share remained the same at $.53.
Increases of $1,197,569 in net interest income and $93,434 in other income and a
decrease of $126,630 in the provision for loan losses were partially offset by
increases of $1,323,745 in other expenses and $60,449 in income tax expense.
The Company's annualized return on average assets and average stockholders'
equity for the first nine months of 1998 were 1.17% and 11.85%, respectively,
compared to 1.25% and 13.06%, respectively, for the same period in 1997.
RESULTS OF OPERATIONS
Total interest income increased $1,189,485 or 4.81% to $25,939,709 for the
nine months ended September 30, 1998, when compared to $24,750,224 for the same
period in 1997. The overall increase in this category was a result of an
increase of $1,301,305 or 7.49% in interest earned on the loan portfolio which
offset decreases of $86,985 or 1.31% in interest earned on the securities
portfolio, and $24,835 or 3.45% in interest earned on federal funds sold.
The increase in interest income on loans was attributable to an increase in
average balances of $21.5 million. The decrease in interest income on federal
funds sold was attributable to a decrease in average balances of $632,000. The
decrease in interest income on securities was attributable to a 17 basis points
decrease in yield, which more than offset a $4.5 million increase in average
balances.
Interest expense on deposits decreased $37,329 or .39% to $9,474,586 for
the first nine months of 1998 compared to $9,511,915 for the same period in
1997. This decrease is attributable to a 12 basis point decrease in yield,
offset in part by an increase of $10.0 million in average balances. Total
interest expense remained relatively stable at $9,618,493, reflecting the
aforementioned factors, affecting deposits along with a $29,245 increase in
interest expense incurred in the first nine months of 1998 on borrowed money.
-16-
<PAGE>
Net interest income increased $1,197,569 or 7.92% to $16,321,216 for the
first nine months of 1998 from $15,123,647 for the same period in 1997,
primarily as the result of increased balances of average net earning assets,
along with a 5 basis point increase in net interest margin. The annualized net
interest margin increased from 3.81% to 3.86%. While the average yield on
earning assets decreased 7 basis points from 7.50% to 7.43%, the average rate
paid on interest-bearing liabilities decreased 12 basis points from 3.69% to
3.57%.
Other income increased $93,434 or 4.27% to $2,279,776 for the first nine
months of 1998 from $2,186,342 for the same period in 1997. This was primarily
the result of increased gains on securities of $72,326 and an increase of
$26,834 in other income which more than offset a decrease of $5,726 on service
charges on deposit accounts
Other expenses increased by $1,323,745 or 12.74% to $11,714,856 for the
first nine months of 1998 from $10,391,111 for the same period in 1997.
Salaries and benefits increased by $497,168 or 8.52%. This was due to increased
staffing levels, partially due to additional branch offices being opened, along
with normal salary increases. Furniture and fixtures expense increased $206,709
or 22.19%. Occupancy expense increased $66,737 or 6.03%. Increases in both of
these expense categories resulted from expansions in the Company's branch
network and the addition of optical imaging equipment during 1997. Other
expenses increased in the aggregate of $553,131 or 21.97%. $343,000 of this
increase represents acquisition expenses incurred by the Company with regard to
the acquisition of MSB. Exclusive of this acquisition expense, other expenses
increased approximately $210,000 or 8.35%. This increase is due to higher
expenses incurred due to the increased size of the branch network and the
Company's banking business.
Income tax expense increased $60,449 or 2.77% to $2,243,862 for the first
nine months of 1998 from $2,183,413 for the same period in 1997. The increase
in income tax expense was due primarily to higher pre-tax earnings.
-17-
<PAGE>
FINANCIAL CONDITION
The Company's total assets increased $10.6 million or 2.08% from $507.7
million at December 31, 1997, to $518.3 million at September 30, 1998. A $1.2
million increase in cash and cash equivalents and a $12.2 million increase in
loans, partially offset by a $2.8 million decrease in the Company's securities
portfolios, were funded by increases of $6.0 million and $1.2 million in
deposits and borrowed money, respectively, and net income.
At September 30, 1998, the Company's securities portfolio of $156.5 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 $4,356,302 and $21,789, 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, 1998, is to increase stockholders' equity by $2,596,999.
Securities held to maturity continue to be carried at historical cost and, at
September 30, 1998, contain unrealized gains and losses of $1,531,694 and
$36,837, respectively. For the entire securities portfolio, net unrealized gains
were at $5,829,370 at September 30, 1998, as compared with a $3,809,285 net
unrealized gain at December 31, 1997.
See notes 3 and 4 of the Notes to Consolidated Financial Statements.
Total deposits increased $5,954,557 or 1.31% from December 31, 1997, to
September 30, 1998. A $7.9 million increase in savings, club and interest-
bearing demand deposits and a $1.3 million increase in non-interest-bearing
demand deposits more than offset a $3.3 million decrease in time deposits. Time
deposits at September 30, 1998, represented 31.04% of total deposits as compared
to 32.17% at December 31, 1997.
Stockholders' equity increased $3.3 million or 6.78% as net income of $4.5
million, $230,000 in proceeds of common stock sold via dividend reinvestments
and a $531,000 increase in the equity component related to available for sale
securities were partially offset by dividends paid to stockholders of $1.8
million and $129,000 disbursed in the repurchase of 8,600 shares of Company
common stock.
-18-
<PAGE>
Cash and cash equivalents increased by $1.2 million during the nine months
ended September 30, 1998. Operating activities, principally the Company's net
income, provided $5.6 million in net cash. Investing activities used $9.9
million in net cash. A $12.4 million use of funds for investment in the loan
portfolio was partially provided by $3.4 million in funds from the securities
portfolios. Financing activities, on the other hand, provided $5.4 in net cash,
primarily reflecting increases in short-term borrowings and deposits, offset by
the payment of cash dividends.
OTHER MATTERS
- -------------
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing software and operating systems can accommodate this date
value. Many existing software products were designed to accommodate only two-
digits. For example, "98" is stored on the system and represents 1998. The
Company has been identifying potential problems associated with the "Year 2000"
issue and has implemented a plan designated to ensure that all information
technology systems including hardware and software used in connection with the
Company's business will handle date related data in a manner which will provide
accurate results.
The Company has formed a committee of representatives from its various
areas to monitor this project. This committee has prepared a schedule of
vendors that supply the company with various products and services. This
listing of vendors was then put into priority order determining how critical the
vendor is to the continuance of the Company's daily operations. Finally, the
status as to the stage of completion of each vendor is charted. (The five
stages in the process are awareness, assessment, renovation, validation, and
implementation). It is expected that all vendors listed as "highest priority",
which the Company considers to be critical to daily operations, will have the
five stages completed by December 31, 1998. Other less mission critical vendors
will be completed in the first quarter of 1999. As part of this project, the
Company is also requiring its computer systems and software vendors to represent
that the products provided are or will be Year 2000 compliant and has planned a
program of testing for compliance.
The Company recognizes that any Year 2000 failure on the part of its
customers could result in additional expense or loss. In this regard, the
Company has sent a letter to its significant commercial borrowers to determine
their readiness for the Year 2000 and will monitor their responses.
Additionally, a
-19-
<PAGE>
brochure was sent to all demand deposit customers to make them aware of the Year
2000 issue and the Company's concern regarding the same. The Company will also
prepare contingency plans in the event there are any system interruptions. The
Company believes that its costs related to Year 2000 will be approximately
$75,000.
There can be no assurances; however, that the plan developed in the Year
2000 project or the performance by the Company's vendors will be effective to
remedy all potential problems. To the extent the Company's systems are not
fully Year 2000 compliant, there can be no assurance that potential systems
interruptions or the cost necessary to update software would not have a
materially adverse effect on the Company's business, financial condition,
results of operations and business prospects.
-20-
<PAGE>
CAPITAL RESOURCES
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 off
risk-based capital to risk-weighted assets (including certain -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 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 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 September
30, 1998.
AMOUNT RATIO
(In Thousands)
RISK-BASED CAPITAL RATIOS:
Actual Tier I Capital $49,365 16.47%
Tier I Capital minimum amount 11,992 4.00%
------- -----
Excess $37,373 12.47%
======= =====
Actual Combined Tier I and Tier II Capital $49,756 16.60%
Combined Tier I and Tier II Capital minimum
requirement 23,984 8.00%
------- -----
Excess $25,772 8.60%
======= =====
LEVERAGE RATIO:
Actual Tier I Capital to average third quarter
assets $49,365 9.53%
Minimum leverage target* * *
-------- -----
Excess $ * * %
======== =====
. 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, 1998.
-21-
<PAGE>
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Current Reports on Form 8-K Filed
During the Quarter
Ended September 30, 1998: None
-22-
<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)
Nov. 12, 1998
- -------------
Date
-23-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 27,182
<INT-BEARING-DEPOSITS> 104
<FED-FUNDS-SOLD> 15,175
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 90,574
<INVESTMENTS-CARRYING> 65,931
<INVESTMENTS-MARKET> 67,426
<LOANS> 302,839
<ALLOWANCE> 3,640
<TOTAL-ASSETS> 518,279
<DEPOSITS> 459,425
<SHORT-TERM> 4,715
<LIABILITIES-OTHER> 2,177
<LONG-TERM> 0
<COMMON> 21,240
0
0
<OTHER-SE> 30,722
<TOTAL-LIABILITIES-AND-EQUITY> 518,279
<INTEREST-LOAN> 18,681
<INTEREST-INVEST> 6,564
<INTEREST-OTHER> 695
<INTEREST-TOTAL> 25,940
<INTEREST-DEPOSIT> 9,475
<INTEREST-EXPENSE> 9,618
<INTEREST-INCOME-NET> 16,321
<LOAN-LOSSES> 164
<SECURITIES-GAINS> 105
<EXPENSE-OTHER> 11,715
<INCOME-PRETAX> 6,722
<INCOME-PRE-EXTRAORDINARY> 4,478
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,478
<EPS-PRIMARY> .53
<EPS-DILUTED> .53
<YIELD-ACTUAL> 7.41
<LOANS-NON> 2,595
<LOANS-PAST> 3,258
<LOANS-TROUBLED> 897
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,142
<CHARGE-OFFS> 928
<RECOVERIES> 262
<ALLOWANCE-CLOSE> 3,640
<ALLOWANCE-DOMESTIC> 3,640
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
