<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 JUNE 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 June 30, 1998, 4,247,919 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 June 30, 1998 (Unaudited) 2
Consolidated Statements of Income for the Three and
Six Months Ended June 30, 1997 and 1998 3
(Unaudited)
Consolidated Statements of Comprehensive
Income for the Three and Six Months Ended
June 30, 1997 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 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 - 19
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</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 six month periods ended June
30, 1998, 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, June 30,
ASSETS 1997 1998
- ------ ------------------ ---------------
<S> <C> <C>
Cash and due from banks $ 28,443,103 $ 30,367,189
Federal funds sold 12,725,000 13,375,000
------------------ ---------------
Cash and cash equivalents 41,168,103 43,742,189
Certificates of deposit 101,768 104,132
Securities available for sale, at estimated fair value 102,333,878 100,374,268
Securities held to maturity; estimated
fair value of $57,372,000 in 1997 and $56,927,000 in 1998 57,009,136 56,573,545
Loans 287,003,467 289,600,299
Premises and equipment 13,812,631 14,204,611
Accrued interest receivable 4,210,406 4,119,348
Other assets 2,085,816 1,890,617
------------------ ---------------
Total assets $ 507,725,205 $ 510,609,009
================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities
- -----------
<S> <C> <C>
Deposits:
Non-interest-bearing demand $ 97,491,314 $ 101,384,313
Savings and interest-bearing demand 208,419,317 215,017,304
Club accounts 1,698,523 2,594,165
Time 122,252,678 113,608,374
Time of $100,000 and over 23,608,695 19,881,997
------------------ ---------------
Total deposits 453,470,527 452,486,153
Borrowed money 3,535,792 5,596,011
Other liabilities 2,056,637 1,805,992
------------------ ---------------
Total liabilities 459,062,956 459,888,156
------------------ ---------------
Commitments
Stockholders' Equity
- --------------------
<S> <C> <C>
Common stock (par value $2.50 per share)
Authorized shares 7,403,359; issued and outstanding
shares 4,239,861 in 1997 and 4,247,919 in 1998 10,599,653 10,619,798
Surplus 29,147,426 29,356,934
Undivided profits 6,849,079 8,558,998
Unrealized gain on securities available for sale, net 2,066,091 2,185,123
-------------------------------------
Total stockholders' equity 48,662,249 50,720,853
-------------------------------------
Total liabilities and stockholders' equity $ 507,775,205 $ 510,609,009
=====================================
</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 June 30, Six Months Ended June 30,
----------------------------- ----------------------------
1997 1998 1997 1998
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans and fees $ 5,730,980 $ 6,186,828 $ 11,482,546 $ 12,401,125
Federal funds sold 255,409 231,322 486,623 419,031
Securities:
U.S. Treasury 1,060,022 1,017,925 2,044,947 2,011,283
U.S. Government agencies 761,590 682,813 1,477,242 1,450,413
States and political subdivisions 299,420 396,278 570,462 760,473
Other 97,318 83,216 203,684 163,841
----------- ----------- ------------ -------------
Total interest income 8,204,739 8,598,382 16,265,504 17,206,166
----------- ----------- ------------ -------------
INTEREST EXPENSE:
Deposits 3,144,696 3,100,661 6,301,596 6,290,890
Borrowed money 27,162 42,418 68,273 79,385
----------- ----------- ------------ -------------
Total interest expense 3,171,858 3,143,079 6,369,869 6,370,275
----------- ----------- ------------ -------------
Net interest income 5,032,881 5,455,303 9,895,635 10,835,891
PROVISION FOR LOAN LOSSES 77,652 52,928 193,211 101,810
----------- ----------- ------------ -------------
Net interest income after provision
for loan losses 4,955,229 5,402,375 9,702,424 10,734,081
----------- ----------- ------------ -------------
OTHER INCOME:
Service charges on deposit accounts 597,172 596,035 1,198,867 1,183,899
Gain on disposition of securities 5,717 12,960 13,965 66,502
Other income 125,202 108,083 256,695 241,560
----------- ----------- ------------ -------------
Total other income 728,091 717,078 1,469,527 1,491,961
----------- ----------- ------------ -------------
OTHER EXPENSES:
Salaries and benefits 1,963,524 2,096,799 3,888,480 4,203,949
Occupancy expense, net 367,332 384,676 730,515 776,805
Furniture and equipment 310,287 375,243 605,224 753,820
Other 842,981 972,936 1,643,732 2,151,513
----------- ----------- ------------ -------------
Total other expenses 3,484,124 3,829,654 6,867,951 7,886,087
----------- ----------- ------------ -------------
INCOME BEFORE INCOME TAXES 2,199,196 2,289,799 4,304,000 4,339,955
INCOME TAXES 712,518 772,638 1,414,796 1,457,349
----------- ----------- ------------ -------------
NET INCOME $ 1,486,678 $ 1,517,161 $ 2,889.204 $ 2,882,606
=========== =========== ============ =============
Net income per common share:
Basic $ 0.35 $ 0.36 $ 0.69 $ 0.68
Diluted 0.35 0.36 0.69 0 68
=========== =========== ============ =============
Weighted average number of shares outstanding:
Basic 4,194 961 4,247,919 4,190,981 4,245,994
Diluted 4,215,456 4,247,919 4,211,338 4,245,994
=========== =========== ============ =============
</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 June 30, Six Months Ended June 30,
------------------------------- ------------------------------
1997 1998 1997 1998
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Net income $ 1,486,678 $ 1,517,161 $ 2,889,204 $ 2,882,606
------------ ------------ ------------ ------------
Other comprehensive income, net of income taxes:
Unrecognized holding gains (losses) on securities
available for sale, net of income taxes (benefit)
of $40,440, $(42,488), $105,000 and $119,502, 162,923
respectively 77,810 (65,828) 154,184
Less: Gains on dispositions of securities
available for sale, net of income taxes
of $l,894, $4,407, $4,698 and $22,611,
respectively (3,823) (8,553) (9,267) (43,891)
------------ ------------ ------------ ------------
Total other comprehensive income 73,987 (74.381) 144,917 119,032
------------ ------------ ------------ ------------
Comprehensive income $ 1,560,665 $ 1,442,780 $ 3,034,121 $ 3,001,638
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4.
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
1997 1998
-------------- ----------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,889,204 $ 2,882,606
Adjustments to reconcile net income to
net cash provided by operating activities
Net amortization and accretion 608,244 392,308
Depreciation and amortization of premises and equipment 461,012 530,865
Provision for loan losses 193,211 101,810
Gain on sales and calls of securities available for sale (13,965) (66,502)
Gain on sale of student loans (10,604) -
(Increase) decrease in accrued interest receivable (220,037) 91,058
(Increase) decrease in other assets (98,546) 38,639
Decrease in other liabilities (1,531,496) (250,645)
------------ ------------
Net cash provided by operating activities (2,277,023) 3,720,139
------------ ------------
Cash flows from investing activities
Net change in certificates of deposit - (2,364)
Proceeds from maturities of and
repayments on securities available for sale 17,395,120 21,454,566
Proceeds from sales of securities available for sale 4,108,000 10,636,000
Proceeds from calls of securities available for sale 3,499,196 2,000,000
Purchases of securities available for sale (37,580,697) (32,085,716)
Proceeds from maturities of and
repayments on securities held to maturity 7,390,511 10,125,000
Purchases of securities held to maturity (7,989,020) (9,826,234)
Net increase in loans receivable (7,263,785) (2,959,037)
Loan recoveries 31,750 242,097
Proceeds from sale of student loans 2,309,124
Additions to premises and equipment (1,540,026) (922,845)
Net (increase) decrease in real estate owned (277,000) 59,669
------------ ------------
Net cash (used in) investing activities (19,916,827) (1,278,864)
------------ ------------
Cash flows from financing activities
Net increase (decrease) in deposits 29,463,476 (984,374)
Net (decrease) increase in short-term borrowings (150,000) 2,060,219
Proceeds from sale of common stock 378,212 229,653
Cash dividends paid on common stock (979 933) (1,172,687)
------------ ------------
Net cash provided by financing activities 28,711,755 132,811
------------ ------------
Net increase in cash and cash equivalents 11,071,951 2,574,086
Cash and cash equivalents - beginning 33,450,240 41,168,103
------------ ------------
Cash and cash equivalents - ending $ 44,552,191 $ 43,742,189
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
5.
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1997 1998
------------ -----------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the three month period for:
Income taxes $ 1,284,782 $ 1,429,883
Interest 6,181,836 6,276,818
Supplemental schedule of noncash investing and financing
activities:
Unrealized gain on securities available
for sale, net of deferred income taxes 144,917 119,032
Charge off of loans receivable to allowance for loan losses 207,008 776,629
Mortgage payable incurred in
connection with purchase of premises 322,000 -
</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 six months ended
June 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 six months ended June 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 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 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
============ ============= ============ =============
June 30, 1998
-----------------------------------------------------------
Amortized Gross Unrealized Carrying
-------------------
Cost Gains Losses Value
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 30,434,503 $ 347,712 $ 922 $ 30,781,293
U.S. Government agencies 26,150,385 148,664 26,971 26,272,078
Mortgage-backed securities 4,006,017 34,384 26,718 4,013,683
States and political subdivisions 31,768,185 172,082 147,426 31,792,841
Other debt securities 2,849,588 4,343 27,071 2,826,860
Equity securities 1,503,182 3,184,331 - 4,687,513
------------ ------------- ------------ -------------
$ 96,711,860 $ 3,891,516 $ 229,108 $ 100,374,268
============ ============= ============ =============
The following is a summary of securities available for sale by maturity:
December 31, 1997 June 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 $ 19,098,885 $ 19,162,715
Due after one year
through five years 54,628,030 55,144,815 54,512,881 55,021,433
Due after five years
through ten years 8,748,426 8,915,401 11,586,003 11,551,265
Due after ten years 1,776,000 1,765,000 6,004,892 5,937,659
Mortgage-backed securities 5,524,062 5,541,211 4,006,017 4,013,683
Equity securities 1,503,182 4,300,229 1,503,182 4,687.513
------------ ------------- ------------ -------------
$ 98,887,393 $ 102,333,878 $ 96,711,860 $ 100,374,268
============ ============= ============ =============
</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
============= =========== =========================
June 30, 1998
-----------------------------------------------------
Amortized Gross Unrealized Estimated
------------------
Cost Gains Losses Fair Value
------------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 35,282,886 $ 322,030 $ 12,367 $ 35,592,549
U.S. Government agencies 12,351,557 52,454 42,444 12,361,567
Mortgage-backed securities 2,208,172 28,627 16,009 2,220,790
States and political subdivisions 4,683,853 33,514 1,427 4,715,940
Other debt securities 2,047,077 2,879 14,051 2,035,905
------------- ----------- ---------- -------------
$ 56,573,545 $ 439,504 $ 86,298 $ 56,926,751
============= =========== ========== =============
The following is a summary of securities held to maturity by maturity:
December 31, 1997 June 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 $ 11,091,663 $ 11,129,350
Due after one year
through five years 38,530,951 38,838,403 41,415,725 41,728,664
Due after five years
through ten years 2,317,626 2,314,162 1,557,985 1,537,966
Due after ten years 200,000 202,625 300,000 309,981
Mortgage-backed securities 2,399,608 2,397,541 2,208,172 2,220,790
------------- -------------- -------------- --------------
$ 57,009,136 $ 57,371,936 $ 56,573,545 $ 56,926,751
============= ============== ============== ==============
</TABLE>
9.
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. LOANS
- --------
December 31, June 30,
1997 1998
------------- -------------
Loans $ 291,359,074 $ 293,525,413
Less: Unearned income (213,267) (215,496)
Allowance for loan losses (4,142,340) (3,709,618)
------------- -------------
$ 287,003,467 $ 289,600,299
============= =============
A summary of the activity in the allowance for loan losses is as follows:
Six Months Ended
June 30,
--------------------------------
1997 1998
------------- -------------
Balance - beginning $ 3,585,238 $ 4,142,340
Provisions charged to operations 193,211 101,810
Loans charged off (207,008) (776,629)
Recoveries of loans previously
charged off 31,750 242,097
------------- -------------
Balance - ending $ 3,603,191 $ 3,709,618
============= =============
Impaired loans and related amounts recorded in the allowance for loan losses are
summarized as follows:
December 31, June 30,
1997 1998
------------- -------------
Recorded investment in impaired loans:
With recorded allowances $ 1,737,688 $ 1,677,374
Without recorded allowances 704,287 767,141
------------- -------------
Total impaired loans 2,441,975 2,444,515
Related allowance for loan losses 864,800 654,669
------------- -------------
Net impaired loans $ 1,577,175 $ 1,789,846
============= =============
The average recorded investment in impaired loans and the interest income
recognized on such loans follows:
Six Months Ended
June 30,
--------------------------------
1997 1998
------------- -------------
Average recorded investment $ 3,198,272 $ 2,448,251
Interest income recognized 51,535 53,761
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 second 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 $30,483 or 2.05%, to $1,517,161 for the second three
months of 1998 from $1,486,678 for the same period in 1997. Net income per
share increased $.01 or 2.9% to $.36. An increase of $422,422 in net interest
income and a decrease of $24,724 in the provision for loan losses more than
offset increases of $345,530 in other expenses and $60,120 in income tax
expense, and a decrease of $11,013 in other income.
The Company's annualized return on average assets and average stockholders'
equity for the second three months of 1998 were 1.19% and 12.02%, respectively,
compared to 1.24% and 13.13%, respectively, for the same period in 1997.
RESULTS OF OPERATIONS
Total interest income increased $393,643, or 4.80% to $8,598,382 for the
three months ended June 30, 1998, when compared to $8,204,739 for the same
period in 1997. The overall increase in this category was a result of an
increase of $455,848 or 7.95% in interest earned on the loan portfolio, which
was partially offset by decreases of $24,087 or 9.43% in interest earned on
federal funds sold and $38,118 or 1.72% in interest earned on the securities
portfolio.
The increase in interest income on loans was primarily attributable to an
increase in average balances of $21.2 million. The decrease in interest income
on investment securities was attributable to a 33 basis point decrease in yield,
which more than offset an increase in average balances of $4.1 million,
-11-
<PAGE>
(reflecting a $5.3 million decrease in the average volume of taxable securities,
which was more than offset by a $9.4 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.
The decrease in interest income on federal funds sold was attributable to a $1.7
million decrease in average balances.
Interest expense on deposits decreased $44,035 or 1.40% to $3,100,661 for
the second quarter of 1998 compared to $3,144,696 for the same period in 1997.
This decrease was primarily attributable to a 12 basis point decline in yield,
which offset an increase of $7.6 million in average balances of interest bearing
deposits (which partially funded the increases in loans and investment
securities). Total interest expense decreased $28,779 or .91%, reflecting the
aforementioned deposit factors along with a $15,256 increase in interest expense
on borrowed money.
Net interest income increased $422,422 or 8.39% to $5,455,303 for the
second three months of 1998 from $5,032,881 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) increased from 3.82% to
3.87%. While the average yield on earning assets decreased 7 basis points from
7.46% to 7.39%, the average rate paid on interest-bearing liabilities decreased
12 basis points from 3.64% to 3.52%.
The provision for loan losses decreased $24,724 or 31.84% to $52,928 for
the three months ended June 30, 1998, as compared with $77,652 for the same
prior year period. During the second quarter of 1998, the Company charged off
loans of $330,000 and recovered $13,000 in previously charged off loans compared
to $139,000 and $7,000, respectively, during the same period in 1997. The
$330,000 in charged-off loans in 1998 is primarily the result of the charging
off of three commercial loans, totalling $284,000, along with the charging off
of eight smaller balance loans, totalling $46,000. The allowance for loan losses
at June 30, 1998, was 1.26% of total loans, compared to 1.42% at December 31,
1997, and 1.32% at June 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 six months ending June 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>
SIX MONTHS ENDED
--------------------------------------------------------------------
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance of allowance at beginning
of period........................... $4,142 $3,585 $3,585 $3,470 $3,547 $3,455 $2,803
------ ------ ------ ------ ------ ------ ------
Charge-offs:
Commercial.......................... 489 175 466 554 119 339 67
Installment......................... 69 32 107 215 114 135 165
Mortgage............................ 219 0 26 80 394 138 65
------ ------ ------ ------ ------ ------ ------
Total charge-offs................ 777 207 599 849 627 612 297
------ ------ ------ ------ ------ ------ ------
Recoveries:
Commercial.......................... 215 11 20 25 128 69 13
Installment......................... 28 21 77 31 65 66 66
Mortgage............................ -- -- 33 -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total recoveries................. 243 32 130 56 193 135 79
------ ------ ------ ------ ------ ------ ------
Net charge-offs........................ 534 175 469 793 434 477 218
------ ------ ------ ------ ------ ------ ------
Provision for loan losses.............. 102 193 1,026 908 357 569 872
------ ------ ------ ------ ------ ------ ------
Balance of allowance at end of period.. $3,710 $3,603 $4,142 $3,585 $3,470 $3,547 $3,455
====== ====== ====== ====== ====== ====== ======
Ratio of net charge-offs to average
loans outstanding (annualized)...... .37% .13% .17% .32% .19% .23% .13%
Balance of allowance at end of period
as a percent of total loans......... 1.26% 1.32% 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 for impairment, while other larger-balance loans are independently
evaluated.
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.
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 collectibility of the loan balance.
-13-
<PAGE>
As of June 30, 1998, based on the above criteria, the Company classified
seven commercial loans, totalling $1,567,718, and five mortgage loans, totalling
$876,797, 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, $654,669 has been allocated to the
allowance for loan losses. Additionally, the Company has sixteen smaller balance
commercial loans, totalling $703,542, 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 June 30, 1998, and as of December 31 of
each of the last five years:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------- -------------------------------------------
1998 1997 1996 1995 1994 1993
-------- ------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans............... $2,677 $2,007 $1,845 $2,366 $2,658 $ 793
Past due loans.................. 1,575 1,400 2,200 679 1,039 3,075
Renegotiated loans.............. 1,488 1,529 2,567 2,325 1,740 2,366
------ ------ ------ ------ ------ ------
Total non-accrual, past due
and renegotiated loans 5,740 4,936 6,612 5,370 5,437 6,234
Other real estate owned......... 589 648 177 951 1,302 1,196
------ ------ ------ ------ ------ ------
Total........................ $6,329 $5,584 $6,789 $6,321 $6,739 $7,430
====== ====== ====== ====== ====== ======
</TABLE>
Included in the above schedule at June 30, 1998, are three non-accrual
commercial loans, totalling $652,666, two non-accrual mortgage loans, totalling
$484,695, one commercial loans past due over 90 days, totalling $230,000, and
six renegotiated loans, totalling $1,077,154, which represents all loans
categorized as impaired.
At June 30, 1998, non-accrual loans totaled $2,677,000, a decrease of
$273,000 compared to March 31, 1998. This net change is primarily the result of
the removal of one commercial loan and one mortgage loan from this category. Of
the total non-accrual loans at June 30, 1998, all are either in foreclosure, in
various stages of litigation, or on a repayment schedule. At June 30, 1998,
loans past due 90 days or more and still accruing totalled $1,575,000, a
decrease of $390,000 compared to March 31, 1998. This net change is primarily
the result of one renogotiated commercial loan, totalling $585,000, which was
previously 90 days past due brought current, along with two commercial loans,
totalling $217,000, being added to this category. At June 30, 1998, renegotiated
loans totalled $1,488,000, an increase of $575,000 compared to March 31, 1998.
This net change is primarily the result of the previously noted commercial loan,
totalling $585,000, which is a delinquent renegotiated loan brought current.
Other income decreased $11,013 or 1.51% to $717,078 for the second three
months of 1998 from $728,091 for the same period in 1997.
-14-
<PAGE>
Other expenses increased by $345,530 or 9.92% to $3,829,654 for the second
three months of 1998 from $3,484,124 for the same period in 1997. Salaries and
benefits increased by $133,275 or 6.79%. 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 $64,956 or
20.93%. Occupancy expense increased $17,344 or 4.72%. 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 $129,955 or 15.42%. This increase is due to
the increased size of the branch network and the Company's banking business.
Income tax expense increased $60,120 or 8.44% to $772,638 for the second
three months of 1998 from $712,518 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
SIX MONTH SUMMARY
The first six months of 1998 resulted in slightly decreased earnings for
the Company, when compared to the same period in 1997. Net income decreased
$6,598 or .23%, to $2,882,606 for the first six months of 1998 from $2,889,204
for the same period in 1997. Net income per share decreased $.01 or 1.4% to
$.68. Increases of $940,256 in net interest income and $22,434 in other income
and a decrease of $91,401 in the provision for loan losses were offset by
increases of $1,018,136 in other expenses and $42,553 in income tax expense.
The Company's annualized return on average assets and average stockholders'
equity for the first six months of 1998 were 1.14% and 11.57%, respectively,
compared to 1.24% and 12.93%, respectively, for the same period in 1997.
RESULTS OF OPERATIONS
Total interest income increased $940,662 or 5.78% to $17,206,166 for the
six months ended June 30, 1998, when compared to $16,265,504 for the same period
in 1997. The overall increase in this category was a result of increases of
$918,579 or 8.00% in interest earned on the loan portfolio and $89,675 or 2.09%
in interest earned on the securities portfolio, which offset a decrease of
$67,592 or 13.89% in interest earned on federal funds sold.
The increase in interest income on loans was attributable to an increase in
average balances of $22.4 million. The decrease in interest income on federal
funds sold was attributable to a decrease in average balances of $2.6 million,
which offset a 3 basis point increase in yield. The increase in interest income
on securities was attributable to a $8.3 million increase in average balances
which more than offset a 20 basis points decrease in yield.
Interest expense on deposits decreased $10,706 or .17% to $6,290,890 for
the first six months of 1998 compared to $6,301,596 for the same period in 1997.
This decrease is attributable to a 13 basis point decrease in yield, offset in
part by an increase of $12.3 million in average balances. Total interest expense
remained virtually the same at $6,370,275, reflecting the aforementioned deposit
factors along with a $11,112 increase in interest expense incurred in the first
six months of 1998 on borrowed money.
-16-
<PAGE>
Net interest income increased $940,256 or 9.50% to $10,835,891 for the
first six months of 1998 from $9,895,635 for the same period in 1997, primarily
as the result of increased balances of average net earning assets, along with an
8 basis point increase in net interest margin. The annualized net interest
margin increased from 3.80% to 3.88%. While the average yield on earning assets
decreased 5 basis points from 7.50% to 7.45%, the average rate paid on interest-
bearing liabilities decreased 13 basis points from 3.70% to 3.57%.
Other income increased $22,434 or 1.53% to $1,491,961 for the first six
months of 1998 from $1,469,527 for the same period in 1997. This was primarily
the result of increased gains on securities of $52,537 which more than offset
decreases of $14,968 or 1.25% on service charges on deposit accounts and $15,135
or 5.90% on other income.
Other expenses increased by $1,018,136 or 14.82% to $7,886,087 for the
first six months of 1998 from $6,867,951 for the same period in 1997. Salaries
and benefits increased by $315,469 or 8.11%. 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 $148,596 or
24.55%. Occupancy expense increased $46,290 or 6.34%. 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 $507,781 or 30.89%. $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 $165,000 or 10.02%. 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 $42,553 or 3.01% to $1,457,349 for the first
six months of 1998 from $1,414,796 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 $2.9 million or .57% from
$507.7 million at December 31, 1997, to $510.6 million at June 30, 1998.
A $2.6 million increase in cash and cash equivalents and a $2.6 million increase
in loans were partially offset by a $2.4 million decrease in the Company's
securities portfolios.
At June 30, 1998, the Company's securities portfolio of $156.9 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 $3,891,516 and $229,108, 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
June 30, 1998, is to increase stockholders' equity by $2,185,123. Securities
held to maturity continue to be carried at historical cost and, at June 30,
1998, contain unrealized gains and losses of $439,504 and $86,298, respectively.
For the entire securities portfolio, net unrealized gains were at $4,015,614 at
June 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 decreased $984,000 or .22% from December 31, 1997, to June
30, 1998. A $6.6 million increase in savings and interest-bearing demand
deposits and a $3.9 million increase in non-interest-bearing demand deposits
were more than offset by a $12.4 million decrease in time deposits. Time
deposits at June 30, 1998, represented 29.50% of total deposits as compared to
32.17% at December 31, 1997.
Stockholders' equity increased $2.1 million or 4.23% as net income of $2.9
million, $230,000 in proceeds of common stock sold via dividend reinvestments
and a $119,000 increase in the equity component related to available for sale
securities were partially offset by dividends paid to stockholders of $1.2
million.
Cash and cash equivalents increased by $2.6 million during the six months
ended June 30, 1998. Operating activities, principally the result of the
Company's net income, provided $3.7 million in net cash. Investing activities
used $1.3 million in net cash, primarily reflecting additions to premises and
equipment of $923,000. A $2.7 million use of funds for investment in the loan
portofolio was largely provided by $2.3 million in funds from the securities
portfolios. Financing activities, on the other hand, provided $133,000 in net
cash, reflecting an increase in short-term borrowings and proceeds from the sale
of common stock, offset by a decrease in deposits and a payment of cash
dividends.
-18-
<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 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 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
June 30, 1998.
AMOUNT RATIO
(In Thousands)
RISK-BASED CAPITAL RATIOS:
Actual Tier I Capital $48,536 16.84%
Tier I Capital minimum amount 11,526 4.00%
------- -----
Excess $37,010 12.84%
======= =====
Actual Combined Tier I and Tier II Capital $49,801 17.28%
Combined Tier I and Tier II Capital minimum
requirement 23,052 8.00%
------- -----
Excess $26,749 9.28%
======= =====
LEVERAGE RATIO:
Actual Tier I Capital to average first quarter
assets $48,536 9.45%
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 June
30, 1998.
-19-
<PAGE>
PART II OTHER INFORMATION
Item 1 Legal Proceedings Not Applicable
Item 2 Change in Securities Not Applicable
Item 3 Defaults Upon Senior Securities Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on May 13, 1998.
At that meeting, the four Board nominees were elected to the Board of
Directors. The following table shows, for each nominee, the number of
shares voted for such nominee, the shares for which authority was
withheld, abstentions, and broker non-votes:
AUTHORITY BROKER
FOR WITHHELD ABSTENTIONS NON-VOTES
--------- --------- ----------- ---------
JOHN W. FREDERICKS 3,473,155 19,812 7,089 9,318
JOSEPH P. O'DOWD 3,484,542 8,425 7,089 9,318
JOHN PIER, JR. 3,471,155 21,812 7,089 9,318
PAUL P. LUBERTAZZI 3,469,278 23,689 7,089 9,318
Item 5 Other Information Not Applicable
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 June 30, 1998: None
-20-
<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)
August 10, 1998
- ---------------
Date
-21-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 30,367
<INT-BEARING-DEPOSITS> 104
<FED-FUNDS-SOLD> 13,375
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 100,374
<INVESTMENTS-CARRYING> 56,574
<INVESTMENTS-MARKET> 56,927
<LOANS> 293,310
<ALLOWANCE> 3,710
<TOTAL-ASSETS> 510,609
<DEPOSITS> 452,486
<SHORT-TERM> 5,596
<LIABILITIES-OTHER> 1,806
<LONG-TERM> 0
0
0
<COMMON> 10,620
<OTHER-SE> 40,101
<TOTAL-LIABILITIES-AND-EQUITY> 510,609
<INTEREST-LOAN> 12,401
<INTEREST-INVEST> 4,386
<INTEREST-OTHER> 419
<INTEREST-TOTAL> 17,206
<INTEREST-DEPOSIT> 6,291
<INTEREST-EXPENSE> 6,370
<INTEREST-INCOME-NET> 10,836
<LOAN-LOSSES> 102
<SECURITIES-GAINS> 67
<EXPENSE-OTHER> 7,886
<INCOME-PRETAX> 4,340
<INCOME-PRE-EXTRAORDINARY> 2,883
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,883
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
<YIELD-ACTUAL> 7.45
<LOANS-NON> 2,677
<LOANS-PAST> 1,575
<LOANS-TROUBLED> 1,488
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,142
<CHARGE-OFFS> 777
<RECOVERIES> 243
<ALLOWANCE-CLOSE> 3,710
<ALLOWANCE-DOMESTIC> 3,710
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
