<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10K
(MARK ONE)
_
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997.
_
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
-
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ______ TO ______.
Commission file number:
33-27312
LAKELAND BANCORP, INC.
----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2953275
- ------------------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
250 OAK RIDGE ROAD, OAK RIDGE, NEW JERSEY 07438
- ------------------------------------------------- ------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (201)697-2000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
- ------------------------------
COMMON STOCK, $2.50 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
-
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<PAGE>
The aggregate market value of the voting stock of the registrant held by non-
affiliates (for this purpose, persons and entities other than executive
officers, directors, and 5% or more shareholders) of the registrant, as of
February 1, 1998, is estimated to have been approximately $84,000,000.
The number of shares outstanding of the registrant's Common Stock, as of
February 1, 1998, was 3,569,994.
DOCUMENTS INCORPORATED BY REFERENCE:
Lakeland Bancorp, Inc., Proxy Statement for 1998 Annual Meeting of Shareholders
(Part III).
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<PAGE>
LAKELAND BANCORP, INC.
Form 10-K Index
PART I
PAGE
Item 1. Business............................................. 4
Item 2. Properties...........................................13
Item 3. Legal Proceedings....................................13
Item 4. Submission of Matters to a Vote of Security Holders..13
Item 4A. Executive Officers of the Registrant.................13
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters..........................15
Item 6. Selected Financial Data..............................16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................17
Item 7A. Quantitative and Qualitative Disclosures
About Market Risks...................................30
Item 8. Financial Statements and Supplementary Data..........31
Item 9. Changes in and disagreements with Accountants
on Accounting and Financial Disclosure...............45
PART III
Item 10. Directors of the Registrant..........................45
Item 11. Executive Compensation...............................45
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................45
Item 13. Certain Relationships and Related Transactions.......45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K..........................................45
Signatures.....................................................47
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<PAGE>
PART I
-------
ITEM 1 - BUSINESS
GENERAL
-------
Lakeland Bancorp, Inc. (the "Company"), a New Jersey corporation, is a bank
holding company, registered with and supervised by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). The Company was organized
in March of 1989 and commenced operations on May 19, 1989, upon consummation of
the acquisition of all of the outstanding stock of Lakeland Bank, formerly named
Lakeland State Bank ("LB" or the "Bank"). The Company's primary business
consists of managing and supervising LB. The principal source of income is
dividends paid by LB. At December 31, 1997, the Company had consolidated total
assets, deposits, and stockholder's equity of approximately $411.5 million,
$369.0 million, and $41.4 million, respectively.
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
("Forward-Looking Statements"). Such statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected in such Forward-Looking Statements. Certain factors which could
materially affect such results and the future performance of the Company are
described in Exhibit 99.1 to this Annual Report on Form 10-K.
LB was organized as Lakeland State Bank on May 19, 1969. LB is a state banking
association, the deposits of which are insured by the Federal Deposit Insurance
Corporation ("FDIC"). LB is not a member of the Federal Reserve System. LB is
a full-service commercial bank offering a complete range of consumer,
commercial, and trust services. Its 13 branch offices are located in the
following three New Jersey counties: Morris, Passaic, and Sussex.
On September 16, 1997, the Company entered into an Agreement and Plan of
Reorganization with Metropolitan State Bank ("MSB"), which provided for the
merger (the "Merger") of a newly formed bank subsidiary of the company with and
into MSB. The parties entered into an Amended and Restated Agreement and Plan
of Reorganization, dated as of January 14, 1998 (the "Merger Agreement").
Pursuant to the Merger Agreement, MSB's shareholders are entitled to receive
0.941 shares of the Company's Common Stock in exchange for each share of MSB
Common Stock which they owned on the effective date of the Merger. The Merger
became effective as of the close of business on February 20, 1998. As of
September 30, 1997, MSB had total assets, deposits and stockholders' equity of
$94.4 million, $81.9 million and $7.4 million, respectively. As of December 31,
1997, costs incurred in regard to the acquisition totalled $155,000 and are
included in other assets. Such amount will be expensed.
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COMMERCIAL BANK SERVICES
The Bank offers a broad range of lending, depository, and related financial
services to individuals and small to medium sized businesses in its northern New
Jersey market area. In the lending area, these services include short and medium
term loans, lines of credit, letters of credit, inventory and accounts
receivable financing, real estate construction loans and mortgage loans.
Depository products include: demand deposits, savings accounts, and time
accounts. In addition, LB offers collection, wire transfer, and night depository
services.
CONSUMER BANKING
The Bank also offers a broad range of consumer banking services, including
checking accounts, savings accounts, NOW accounts, money market accounts,
certificates of deposit, secured and unsecured loans, consumer installment
loans, mortgage loans, safe deposit services, and traveler's cheques. LB also
provides discount brokerage services to its customers through a third party.
TRUST SERVICES
A variety of fiduciary services are available through a third party. These
include investment management, advisory services, and custodial functions for
individuals. The trust function also administers, in a fiduciary capacity,
pensions, personal trusts, and estates.
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SUPERVISION AND REGULATION
----------------------------
Lakeland Bancorp, Inc.
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The Company is a registered bank holding company under the Federal Bank Holding
Company Act of 1956, as amended (the "Holding Company Act"), and is required to
file with the Federal Reserve Board an annual report and such additional
information as the Federal Reserve Board may require pursuant to the Holding
Company Act. The Company is subject to examination by the Federal Reserve
Board.
The Holding Company Act limits the activities which may be engaged in by the
Company and its subsidiaries to those of banking, the ownership and acquisition
of assets and securities of banking organizations, and the management of banking
organizations, and to certain non-banking activities which the Federal Reserve
Board finds, by order or regulation, to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. The Federal
Reserve Board is empowered to differentiate between activities by a bank holding
company or a subsidiary thereof and activities commenced by acquisition of a
going concern.
With respect to the acquisition of banking organizations, the Company is
required to obtain the prior approval of the Federal Reserve Board before it
may, by merger, purchase or otherwise, directly or indirectly acquire all or
substantially all of the assets of any bank or bank holding company, if, after
such acquisition, it will own or control more than 5% of the voting shares of
such bank or bank holding company.
The Riegle-Neal Interstate Banking and Branching Efficiency Act (the "Interstate
Banking and Branching Act") permits bank holding companies to acquire banks in
states other than their home state, regardless of applicable state law. The
Interstate Banking and Branching Act also authorizes banks to merge across state
lines, thereby creating interstate branches. Under such legislation, each state
has the opportunity either to "opt out" of this provision, thereby prohibiting
interstate branching in such state, or to "opt in" prior to the June 1, 1997,
effective date of this legislation. Furthermore, a state may "opt in" with
respect to de novo branching, thereby permitting a bank to open new branches in
a state in which the bank does not already have a branch. Without de novo
branching, an out-of-state bank can enter the state only by acquiring an
existing bank. During 1996, New Jersey enacted legislation to opt-in with
respect to earlier interstate banking and branching and the entry into New
Jersey of foreign country banks. New Jersey did not authorize de novo branching
into the state.
With respect to non-banking activities, the Federal Reserve Board has by
regulation determined that several non-banking activities are closely related to
banking within the meaning of the Holding Company Act and thus may be performed
by bank holding companies. Although the Company's management periodically
reviews other avenues of business opportunities that are included in that
regulation, the Company has no present plans to engage in any of these
activities other than providing discount brokerage services through a third
party.
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Subsidiary banks of a bank holding company are subject to certain restrictions
imposed by the Federal Reserve Act on any extension of credit to the bank
holding company or any of its subsidiaries, on investments in the stock or other
securities of such holding company or its subsidiaries, and on the acceptance of
such stocks or securities as collateral for loans. Moreover, subsidiaries of
bank holding companies are prohibited from engaging in certain tie-in
arrangements (with the holding company or any of its subsidiaries) in connection
with any extension of credit or lease or sale of property or furnishing of
services.
The policy of the Federal Reserve Board provides that a bank holding company is
expected to act as a source of financial strength to its subsidiary banks and to
commit resources to support such subsidiary banks in circumstances in which it
might not do so absent such policy.
Lakeland Bank
- --------------
LB is a state chartered banking association subject to supervision and
examination by the Department of Banking of the State of New Jersey and the
FDIC. The regulations of the State of New Jersey and FDIC govern most aspects of
LB's business, including reserves against deposits, loans, investments, mergers
and acquisitions, borrowings, dividends, and location of branch offices. LB is
subject to certain restrictions imposed by law on, among other things, (i) the
maximum amount of obligations of any one person or entity which may be
outstanding at any one time, (ii) investments in stock or other securities of
the Company or any subsidiary of the Company, and (iii) the taking of such stock
or securities as collateral for loans to any borrower.
Under the Community Reinvestment Act ("CRA"), as implemented by FDIC
regulations, a state bank has a continuing and affirmative obligation consistent
with its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the FDIC, in connection with its
examination of a state non-member bank, to assess the bank's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications by such bank. Under the FDIC's CRA evaluation
system, the FDIC focuses on three tests: (i) a lending test, to evaluate the
institution's record of making loans in its service areas; (ii) an investment
test, to evaluate the institution's record of investing in community development
projects, affordable housing and programs benefiting low or moderate income
individuals and businesses; and (iii) a service test, to evaluate the
institution's delivery of services through its branches, ATMs and other offices.
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Securities and Exchange Commission
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The common stock of the Company is registered with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934 (the "1934 Act").
As a result of such registration, the Company and its officers, directors, and
major stockholders are obligated to file certain reports with the SEC.
Furthermore, the Company is subject to proxy and tender offer rules promulgated
pursuant to the 1934 Act.
Effect of Government Monetary Policies
- --------------------------------------
The earnings of the Company are and will be affected by domestic economic
conditions and the monetary and fiscal policies of the United States Government
and its agencies.
The monetary policies of the Federal Reserve Board have had, and will likely
continue to have, an important impact on the operating results of commercial
banks through the Board's power to implement national monetary policy in order,
among other things, to curb inflation or combat a recession. The Federal
Reserve Board has a major effect upon the levels of bank loans, investments and
deposits through its open market operations in United States government
securities and through its regulation of, among other things, the discount rate
of borrowings of banks and the reserve requirements against bank deposits. It
is not possible to predict the nature and impact of future changes in monetary
fiscal policies.
FIRREA
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") restructured the regulation, supervision, and deposit insurance of
savings and loan associations and federal savings banks whose deposits were
formerly insured by the Federal Savings and Loan Insurance Corporation
("FSLIC"). FSLIC was replaced by the Savings Association Insurance Fund
("SAIF") administered by the FDIC. A separate fund, the Bank Insurance Fund
("BIF"), which was essentially a continuation of the FDIC's then existing fund,
was established for banks.
FIRREA and the Crime Control Act of 1990 expanded the enforcement powers
available to federal banking regulators including providing greater flexibility
to impose enforcement actions, expanding the persons dealing with a bank who are
subject to enforcement actions, and increasing the potential civil and criminal
penalties.
Under FIRREA, failure to meet capital guidelines could subject a banking
institution to a variety of enforcement remedies available to federal regulatory
authorities, including the termination of deposit insurance by the FDIC.
Furthermore, under FIRREA, a depository institution insured by the FDIC can be
held liable for any loss incurred by, or reasonably expected to be incurred by,
the FDIC in connection with (i) the default of a commonly controlled FDIC-
insured depository institution or (ii) any assistance provided by the FDIC to a
commonly controlled FDIC-insured depository
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<PAGE>
institution in danger of default. FIRREA also imposes certain independent
appraisal requirements upon a bank's real estate lending activities and further
imposes certain loan-to-value restrictions on a bank's real estate lending
activities.
Capital Adequacy Guidelines
- ---------------------------
The Federal Reserve Board has adopted Risk-Based Capital Guidelines. Their
guidelines establish minimum levels of capital and require capital adequacy to
be measured in part upon the degree of risk associated with certain assets.
Under these guidelines all banks and bank holding companies must have a core or
tier 1 capital-to-risk-weighted-assets ratio of at least 4% and a total capital-
to-risk-weighted-assets ratio of at least 8%. At December 31, 1997, the
Company's Tier 1 capital to risk-weighted assets ratio and total capital to
risk-weighted assets ratio were 17.31% and 18.49%, respectively.
In addition, the Federal Reserve Board and the FDIC have approved leverage ratio
guidelines (Tier I capital to average quarterly assets, less goodwill) for bank
holding companies such as the Company and banks such as LB. 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. LB
is subject to similar minimum leverage criteria. The Company's leverage ratio
was 9.69% at December 31, 1997.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), federal banking agencies have established certain additional minimum
levels of capital which accord with guidelines established under that Act. See
"FDICIA".
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Dividend Restrictions
- ---------------------
The Company is a legal entity separate and distinct from the Bank. Virtually all
of the revenue of the Company available for payment of dividends on its capital
stock will result from amounts paid to the Company by the Bank. All such
dividends are subject to various limitations imposed by federal and state laws
and by regulations and policies adopted by federal and state regulatory
agencies. Under State law, the Bank may not pay dividends unless, following the
dividend payment, the capital stock of the bank would be unimpaired and either
(a) the Bank will have a surplus of not less than 50% of its capital stock, or,
if not, (b) the payment of the dividend will not reduce the surplus of the Bank.
If, in the opinion of the FDIC, a bank under its jurisdiction is engaged in or
is about to engage in an unsafe or unsound practice (which, depending on the
financial condition of the bank, could include the payment of dividends), the
FDIC may require, after notice and hearing, that such bank cease and desist from
such practice or, as a result of an unrelated practice, require the bank to
limit dividends in the future. The Federal Reserve Board has similar authority
with respect to bank holding companies. In addition, the Federal Reserve Board
and the FDIC have issued policy statements which provide that insured banks and
bank holding companies should generally only pay dividends out of current
operating earnings. Regulatory pressures to reclassify and charge-off loans and
to establish additional loan loss reserves can have the effect of reducing
current operating earnings and thus impacting an institution's ability to pay
dividends. Further, as described herein, the regulatory authorities have
established guidelines with respect to the maintenance of appropriate levels of
capital by a bank or bank holding company under their jurisdiction. Compliance
with the standards set forth in such policy statements and guidelines could
limit the amount of dividends which the Company and the Bank may pay. Under
FDICIA, banking institutions which are deemed to be "undercapitalized" will, in
most instances, be prohibited from paying dividends. See "FDICIA". See also the
"Dividend Limitation" Note of the Notes to Consolidated Financial Statements for
further information regarding dividends.
FDICIA
Enacted in December 1991, FDICIA substantially revised the bank regulatory
provisions of the Federal Deposit Insurance Act and several other federal
banking statutes. Among other things, FDICIA requires federal banking agencies
to broaden the scope of regulatory corrective action taken with respect to banks
that do not meet minimum capital requirements and to take such actions promptly
in order to minimize losses to the FDIC. Under FDICIA, federal banking agencies
were required to establish minimum levels of capital (including both a leverage
limit and a risk-based capital requirement) and specify for each capital measure
the levels at which depository institutions will be considered "well
capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" or "critically undercapitalized".
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<PAGE>
Under regulations adopted under these provisions, for an institution to be well
capitalized it must have a total risk-based capital ratio of at least 10%, a
Tier I risk-based capital ratio of at least 6% and a Tier I leverage ratio of at
least 5% and not be subject to any specific capital order or directive. For an
institution to be adequately capitalized it must have a total risk-based capital
ratio of at least 8%, a Tier I risk-based capital ratio of at least 4% and a
Tier I leverage ratio of at least 4% (or in some cases 3%). Under the
regulations, an institution will be deemed to be undercapitalized if the bank
has a total risk-based capital ratio that is less than 8%, a Tier I risk-based
capital ratio that is less than 4%, or a Tier I leverage ratio of less than 4%
(or in some cases 3%). An institution will be deemed to be significantly
undercapitalized if the bank has a total risk-based capital ratio that is less
than 6%, a Tier I risk-based capital ratio that is less than 3%, or a leverage
ratio that is less than 3% and will be deemed to be critically undercapitalized
if it has a ratio of tangible equity to total assets that is equal to or less
than 2%. An institution may be deemed to be in a capitalization category that is
lower than is indicated by its actual capital position if it receives an
unsatisfactory examination rating or is deemed to be in an unsafe or unsound
condition or to be engaging in unsafe or unsound practices.
In addition, FDICIA requires banking regulators to promulgate standards in a
number of other important areas to assure bank safety and soundness, including
internal controls, information systems and internal audit systems, credit
underwriting, asset growth, compensation, loan documentation and interest rate
exposure.
Proposed Legislation
- --------------------
From time to time proposals are made in the United States Congress, the New
Jersey Legislature, and before various bank regulatory authorities which would
alter the powers of, and place restrictions on, different types of banking
organizations. It is impossible to predict the impact, if any, of potential
legislative trends on the business of the Company and its subsidiaries.
In accordance with federal law providing for deregulation of interest on all
deposits, banks and thrift organizations are now unrestricted by law or
regulation from paying interest at any rate on most time deposits. It is not
clear whether deregulation and other pending changes in certain aspects of the
banking industry will result in further increases in the cost of funds in
relation to prevailing lending rates.
Competition
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LB operates in a highly competitive market environment within northern New
Jersey. Three major multi-bank holding companies in addition to several large
independent regional banks and several large multi-state thrift holding
companies operate within LSB's market area. These larger institutions have
substantially larger lending capacities and typically offer services which LB
does not offer.
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In recent years, the financial services industry has expanded rapidly as
barriers to competition within the industry have become less significant. Within
the banking field, banks must compete not only with other banks and traditional
financial institutions, but also with other business corporations that have
begun to deliver financial services.
Concentration
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The Company and LB are not dependent for deposits or exposed by loan
concentrations to a single customer or a small group of customers the loss of
any one or more of which would have a material adverse effect upon the financial
condition of the Company or LB.
Employees
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At December 31, 1997, there were 192 persons employed by the Company and LB.
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ITEM 2 - PROPERTIES
The Company's principal offices are located at 250 Oak Ridge Road, Oak Ridge,
New Jersey.
LB operates 13 banking locations located in Passaic, Morris, and Sussex
Counties, New Jersey. LB's Wantage office is leased under a long term lease
expiring August 1, 1999. LB's Rockaway office is under a long-term lease
expiring May 15, 2009. LB's Newton office is under a lease expiring October 1,
2000. LB's Wharton Office is under a lease, expiring August 22, 2005. For
information regarding all of the Company's rental obligations, see Notes to
Consolidated Financial Statements.
All other offices of LB and the Company's principal office are owned by LB and
are unencumbered.
ITEM 3 - LEGAL PROCEEDINGS
There are no significant pending legal proceedings involving the Company or LB
other than those arising out of routine operations. Management does not
anticipate that the ultimate liability, if any, arising out of the Company's
litigation will have a material effect on the financial condition or results of
operations of the Company and LSB on a consolidated basis.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the Company
during the fourth quarter of 1997.
ITEM 4A - EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name and age of each executive officer of the
Company and LB. Each officer is appointed by the Company's Board of Directors.
Unless otherwise indicated, the persons named below have held the position
indicated for more than the past five years.
Officer of Position with the Company,
Name and Age LB since LB, and Business Experience
- --------------------- ---------- ----------------------------
Robert B. Nicholson 1969 Chairman of The Board
Age 69 of the Company
and LB; Chairman
of the Board,
Eastern Propane
Corp. (a fuel
distribution
company)
John W. Fredericks 1969 President of the Company and
Age 62 LB; President,
Fredericks Fuel
and Heating
Service (a fuel
distribution
company)
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<PAGE>
Arthur L. Zande 1971 Executive Vice President and
Age 63 CEO of the Company and LB
William J. Eckhardt 1975 Vice President and Treasurer
Age 47 of the Company since 1994; Vice
President and Treasurer of LB
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<PAGE>
PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $2.50 par value, is traded in the over the counter
market, although the Company does not regard that market to be an established
public trading market with respect to the Company's Common Stock. As of December
31, 1997, there were 2,016 shareholders of record of Common Stock.
The market maker for the Common Stock is:
Ryan, Beck & Company
80 Main Street
West Orange, N.J. 07052
The following table indicates, for the quarterly periods indicated, the high and
low bid prices of the Common Stock as provided by Ryan, Beck and Company and the
cash dividends declared per share of Common Stock (adjusted for subsequent stock
dividends).
Bid Dividends
Prices Declared
Year ended December 31, 1996 High Low
------- -------
First Quarter $20 1/8 $17 3/4 $.122
Second Quarter 21 20 1/8 .122
Third Quarter 21 7/8 21 .122
Fourth Quarter 22 7/8 21 7/8 .124
Year ended December 31, 1997
First Quarter $24 $22 7/8 $.138
Second Quarter 24 3/4 23 3/8 .138
Third Quarter 25 3/4 24 3/4 .145
Fourth Quarter 28 1/2 25 3/4 .145
The prices listed above reflect inter-dealer prices, without retail mark-up,
mark-down, or commission, and may not necessarily represent actual transactions.
Dividends on the Company's Common Stock are within the discretion of the Board
of Directors of the Company and are dependent upon various factors, including
the future earnings and financial condition of the Company and the Bank and bank
regulatory policies. Federal and State laws and regulations contain restrictions
on the ability of the Company and the Bank to pay dividends.
State of New Jersey Banking laws specify that no dividend shall be paid by the
Bank on its capital stock unless, following the payment of each such dividend,
the capital stock of the Bank will be unimpaired and the Bank will have a
surplus of not less than 50% of its capital stock, or, if not, the payment of
such dividend will not reduce the surplus of the Bank. Under this limitation,
approximately $32.7 million was available for payment of dividends as of
December 31, 1997. Capital guideline and other regulatory requirements may
further limit the Bank's and the Company's ability to pay dividends.
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ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
------ ----- ------ ------- --------
(In Thousands)
Selected balance sheet data:
<S> <C> <C> <C> <C> <C>
Investment securities (1) $126,899 $116,959 $125,972 $129,303 $135,621
Short-term investments (2) 6,500 2,750 17,325 1,300 12,200
Loans, net 238,697 222,950 187,812 172,197 145,957
Total assets 411,481 377,545 360,661 333,588 320,593
Deposits 368,968 340,084 327,942 307,121 297,301
Stockholders' equity 41,426 36,819 32,040 26,161 23,069
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
-------------- --------- -------- --------- -----------
(In Thousands Except for Per Share and Ratio Information)
Selected operating data:
<S> <C> <C> <C> <C> <C>
Interest income $27,312 $25,475 $23,848 $22,184 $20,431
Interest expense 10,521 9,696 9,114 7,607 7,822
-------------- --------- -------- --------- -------
Net interest income 16,791 15,779 14,734 14,577 12,609
Provision for loan losses 439 534 129 226 695
-------------- --------- -------- --------- -------
Net interest income
after provision for loan losses 16,352 15,245 14,605 14,351 11,914
Other income 2,466 2,234 1,982 1,912 1,832
Other expenses 10,948 9,783 9,505 9,257 8,589
-------------- --------- -------- --------- -------
Income before income taxes 7,870 7,696 7,082 7,006 5,157
Income taxes 2,697 2,635 2,286 2,175 1,509
-------------- --------- -------- --------- -------
Net income $ 5,173 $ 5,061 $ 4,796 $ 4,831 $ 3,648
============== ========= ======== ========= =======
Weighted average common shares outstanding (3) 3,558 3,513 3,455 3,420 3,132
Basic net income per common share (3) $ 1.45 $ 1.44 $ 1.39 $ 1.41 $ 1.16
Other selected data:
Return on average assets 1.31% 1.40% 1.42% 1.46% 1.22%
Return on average stockholders' equity 13.17 14.86 16.62 19.29 19.45
Average stockholders' equity to average assets 9.92 9.41 8.55 7.59 6.25
Cash dividend per share (3) $ 0.56 $ 0.49 $ 0.46 $ 0.36 $ 0.29
Dividend payout ratio 38.43% 33.66% 32.79% 25.22% 24.85%
</TABLE>
(1) Includes securities available for sale and held to maturity.
(2) Comprised of federal funds sold.
(3) Weighted average common shares outstanding and per share figures
are based on the weighted average number of shares outstanding during
the periods after giving retroactive effect to a 5% stock dividend
distributed on October 15, 1997, a 2% stock dividend distributed on
December 10, 1996, a 100% stock dividend distributed on October 25,
1995, a 5% stock dividend distributed on June 30, 1995, and a 10%
stock dividend distributed on June 10, 1994.
16
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ITEM 7
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LAKELAND BANCORP, INC., and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- ---------------------------------------------------
FINANCIAL REVIEW
Lakeland Bancorp, Inc., (the "Company") reported net income of $5.2 million for
the year ended December 31, 1997, an increase of $111,785 or 2.21% compared to
$5.1 million for the year ended December 31, 1996. Net income per share (basic)
increased $.01 to $1.45 per share for the year ended December 31, 1997, as
compared to $1.44 per share for the year ended December 31, 1996. Increases in
net interest income, derived primarily from an average volume increase in the
loan portfolio, an increase in other income, and a decrease in the provision for
loan losses were partially offset by increases in other expenses and income tax
expense. Net income in 1996 was $5.1 million, an increase of $265,160 or 5.53%
compared to $4.8 million in 1995. As of December 31, 1997, the Company had total
assets of $411.5 million, an increase of $33.9 million or 8.98% compared to
$377.5 million at December 31, 1996.
The Company's return on average assets and average stockholders' equity was
1.31% and 13.17%, respectively, for 1997, compared to 1.40% and 14.86%,
respectively, in 1996 and 1.42% and 16.62%, respectively, in 1995. The decline
in the return on average stockholders' equity since 1995 reflects increases
in stockholders' equity resulting primarily from profitable table operations
over this period along with an increased capital generated by shares of Company
common stock sold to existing shareholders pursuant to the Company's dividend
reinvestment and optional cash purchase program. The Company's gross loan
portfolio increased $15.8 million or 7.00% from $226.0 million at December 31,
1996, to $241.8 million at December 31, 1997. This increase was reflected in
commercial loan increases of $8.2 million, mortgage loan increases of $6.1
million, and consumer installment loan increases of $1.5 million.
The investment portfolio, including both held to maturity and available for sale
securities, increased $9.9 million or 8.50% from $117.0 million at December 31,
1996, to $126.9 million at December 31, 1997. The investment portfolio contains
net unrealized gains of $3.7 million at December 31, 1997, an increase of $1.4
million from the net unrealized gain of $2.3 million in the portfolio at
December 31, 1996.
Cash and cash equivalents increased $6.3 million, or 21.28% to $29.4 million at
December 31, 1997, from $23.1 million at December 31, 1996. Such increase
resulted in an increase in federal funds sold of $3.7 million or 136.36% from
$2.8 million at December 31, 1996, to $6.5 million at December 31, 1997. Cash
and cash equivalents represent 7.1% and 6.1% of total assets at December 31,
1997, and 1996, respectively.
Premises and equipment increased $1.5 million or 15.56% to $11.3 million in
1997. This increase was due to the purchase of an imaging system used to
increase the efficiency of the Bank's servicing of depositor accounts and the
acquisition of properties, which have been and will be used to expand the
existing branch network.
INTEREST INCOME
Interest income (on a tax equivalent basis) increased $1.9 million or 7.22% to
$27.6 million in 1997. In 1996, interest income increased $1.5 million or 6.43%
to $25.7 million from $24.2 million in 1995.
The increase in 1997 was attributable to an increase in average
interest earning assets of $29.9 million or 8.88%, partially offset by a 12
basis point decline in average yield. Interest income on loans increased $1.5
million, or 8.68%, to $19.3 million in 1997 from $17.8 million in 1996, due to
an increase in average loan balances offset partially by a decrease in average
yield. During 1997, average loans increased $23.5 million, comprised of
increases in the average volume of commercial loans of $5.9 million, mortgage
loans (including construction loans) of $8.9 million, and consumer installment
loans (including home equity and improvement loans) of $8.7 million. These
increased average balances were partially offset by a 21 basis point decrease in
the average yield on such loans.
Interest income on taxable investment securities increased $40,000 or .62% to
$6.45 million in 1997, due to a $1.0 million, or 1.01%, increase in the average
balance of such securities. The average yield on taxable investment securities
remained little changed in 1997 at 6.15% as compared to 6.17% in 1996.
Interest income on tax-exempt securities (on a tax equivalent basis) increased
$90,000 or 8.56% to $1.14 million in 1997 from $1.05 million in 1996, due to a
$2.3 million increase in the average balance outstanding, offset partially by a
decline in average yield, on a tax-equivalent basis, of 24 basis points.
Interest income on federal funds sold increased $183,000 or 37.40% to $671,000
in 1997 from $488,000 in 1996, due primarily to a $3.0 million increase in the
average balance outstanding along with an 19 basis point increase in average
yield.
The $1.6 million increase in interest income in 1996 was attributable to an
increase in average interest earning assets of $21.2 million or 6.73%. Interest
income on loans increased $1.9 million, or 11.77%, to $17.8 million in 1996 from
$15.9 million in 1995, due to an increase in average loan balances offset
partially by a decrease in average yield. During 1996,
17
<PAGE>
- ---------------------------------------------------
LAKELAND BANCORP, INC., and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- ---------------------------------------------------
average loans increased $24.4 million, comprised of increases in the average
volume of commercial loans of $10.9 million, mortgage loans (including
construction loans) of $6.9 million, and consumer installment loans (including
home equity and improvement loans) of $6.6 million. These increased average
balances were partially offset by a 13 basis point decrease in the average yield
on such loans.
Interest income on taxable investment securities decreased $129,000 or 1.97% to
$6.4 million in 1996 from $6.5 million in 1995 due to a $2.7 million, or 2.54%,
decrease in the average balance of such securities. The average yield on taxable
investment securities remained little changed in 1996 at 6.17% as compared to
6.14% in 1995.
Interest income on tax-exempt securities (on a tax equivalent basis) decreased
$122,000 or 10.39% to $1.1 million in 1996 from $1.2 million in 1995, due
primarily to a 60 basis point decline in average yield.
Interest income on federal funds sold decreased $68,000 or 12.23% to $488,000 in
1996 from $556,000 in 1995, due primarily to a 57 basis point decrease in
average yield, which resulted from lower short term market interest rates.
INTEREST EXPENSE
Interest paid on deposits during 1997 increased $815,000 or 8.41% to $10.5
million from $9.7 million in 1996, as a result of increased average balances.
While the average volume of interest-bearing deposits increased $24.0 million or
9.07% during 1997, the average rate paid on those deposits decreased by 2 basis
points. Interest expense on time deposits increased $906,000 or 17.01% from $5.3
million in 1996 to $6.2 million in 1997. During 1997, the average volume of time
deposits increased $15.5 million, and the average rate paid on time deposits
increased by 8 basis points. Interest expense on interest-bearing demand
deposits increased $359,000 or 30.79%. During 1997, the average volume of
interest-bearing demand deposits increased $8.6 million, or 15.23%, and the
average rate paid on interest-bearing demand deposits increased by 28 basis
points from 2.05% during 1996 to 2.33% during 1997. Interest expense on savings
deposits decreased by $450,000 or 14.04%. During 1997, the average volume of
savings deposits decreased slightly by $195,000, while the average rate paid on
savings deposits decreased by 42 basis points from 3.03% during 1996 to 2.61%
during 1997.
Interest paid on deposits during 1996 increased $595,000 or 6.54% to $9.7
million from $9.1 million in 1995, as a result of increased average balances.
While the average volume of interest-bearing deposits increased $14.0 million or
5.61% during 1996, the average rate paid on those deposits increased by only 3
basis points. During 1996, the average volume of time deposits increased $13.3
million, while the average rate paid on time deposits decreased by 13 basis
points. Interest expense on interest-bearing demand deposits and savings
deposits remained virtually the same, as average volumes and average rates only
changed slightly.
NET INTEREST INCOME
Net interest income, typically the largest component of the Company's income, is
the difference between interest and fees earned on loans and other interest
earning assets, and interest paid on deposits and other funding sources.
18
<PAGE>
- ---------------------------------------------------
LAKELAND BANCORP, INC., and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- ---------------------------------------------------
The following table reflects the components of the Company's net interest
income, setting forth for the years presented herein, (1) average assets,
liabilities and stockholders' equity, (2) interest income earned on
interest-earning assets and interest expense paid on interest-bearing
liabilities, (3) average yields earned on interest-earning assets and average
rates paid on interest-bearing liabilities, (4) the Company's net interest
spread (i.e., the average yield on interest-earning assets less the average cost
of interest-bearing liabilities, and (5) the Company's net yield on
interest-earning assets. Rates are computed on a taxable equivalent basis.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
---------- --------- ------ --------- --------- ------
(Dollars in Thousands)
Interest-earnings assets:
<S> <C> <C> <C> <C> <C> <C>
Loans (A) $ 228,892 $ 19,334 8.45% $205,425 $ 17,790 8.66%
Taxable investment securities (B) 104,826 6,446 6.15 103,778 6,406 6.17
Tax-exempt investment securities (C) 20,095 1,142 5.68 17,770 1,052 5.92
Federal Funds sold 12,211 671 5.50 9,191 488 5.31
---------- --------- --------- ---------
Total interest-earning assets 366,024 27,593 7.54 336,164 25,736 7.66
--------- ---------
Non-interest-earning assets:
Allowance for loan losses (3,009) (2,945)
Other assets 33,040 28,698
---------- ---------
Total assets $ 396,055 $ 361,917
========== =========
Interest-bearing liabilities:
Interest-bearing demand deposits $ 65,394 1,525 2.33 $ 56,750 1,166 2.05
Savings and club deposits 105,622 2,754 2.61 105,817 3,204 3.03
Time deposits 116,996 6,232 5.33 101,494 5,326 5.25
Borrowings 111 10 9.01 -- -- --
---------- --------- --------- ---------
Total interest-bearing liabilities 288,123 10,521 3.65 264,061 9,696 3.67
Non-interest-bearing Liabilities:
Demand deposits 67,218 61,884
Other liabilities 1,435 1,904
Stockholders' equity 39,279 34,068
---------- ---------
Total liabilities and stockholders'
equity 396,055 $ 361,917
========== =========
Net interest income/net
interest spread (taxable equivalent basis) $ 17,072 3.89% $ 16,040 3.99%
========= ====== ========= ======
Net yield on interest-earning
assets (taxable equivalent Basis) (D) 4.66% 4.77%
====== ======
</TABLE>
1995
----------------------------------
Average
Interest Rates
Average Income/ Earned/
Balance Expense Paid
----------------------------------
Interest-earnings assets:
Loans (A) $ 181,013 $ 15,917 8.79%
Taxable investment securities (B) 106,483 6,535 6.14
Tax-exempt investment securities (C) 17,996 1,174 6.52
Federal Funds sold 9,462 556 5.88
--------- ---------
Total interest-earning assets 314,954 24,182 7.68
---------
Non-interest-earning assets:
Allowance for loan losses (3,062)
Other assets 25,580
---------
Total assets $ 337,472
=========
Interest-bearing liabilities:
Interest-bearing demand deposits $ 53,128 1,071 2.02
Savings and club deposits 108,734 3,290 3.03
Time deposits 88,169 4,740 5.38
Borrowings 221 13 5.88
--------- ---------
Total interest-bearing liabilities 250,252 9,114 3.64
---------
Non-interest-bearing Liabilities:
Demand deposits 56,840
Other liabilities 1,516
Stockholders' equity 28,864
Total liabilities and stockholders'
---------
equity $ 337,472
=========
Net interest income/net
interest spread (taxable equivalent basis) $ 15,068 4.04%
========= ======
Net yield on interest-earning
assets (taxable equivalent Basis) (D) 4.78%
======
CODE
(A) Includes non-accrual loans, the effect of which is to reduce the yield
earned on loans.
(B) Includes certificates of deposit and interest-bearing
cash accounts.
(C) The taxable equivalent adjustments, which total $281,000, $262,000 and
$335,000 in 1997, 1996, and 1995, respectively, are based on a marginal tax
rate of 34% and the provisions of section 291 of the Internal Revenue Code.
(D) Net interest income (taxable equivalent basis) divided by average
interest-earning assets.
19
<PAGE>
- ----------------------------------------------
LAKELAND BANCORP, INC., and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- ----------------------------------------------
Volume/Rate Analysis
The following table analyzes net interest income in terms of changes in the
volume of interest-earning assets and interest-bearing liabilities and changes
in yields and rates on a taxable equivalent basis. The table reflects the
extent to which changes in the Company's interest income and interest expense
are attributable to changes in volume (changes in volume multiplied by prior
year rate) and changes in rate(changes in rate multiplied by prior year volume).
Changes attributable to the combined impact of volume and rate have been
allocated proportionately to changes due to volume and changes due to rate.
<TABLE>
<CAPTION>
1997 Versus 1996 1996 Versus 1995
------------------------------- ---------------------------------
Increase Increase
(Decrease) Total (Decrease) Total
Due to change in Increase Due to change in Increase
--------------------- -------------------
Volume Rate (Decrease) Volume Rate (Decrease)
---------- ------- ---------- -------- ------ -----------
(In Thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C>
Loans $ 1,985 $ (441) $ 1,544 $ 2,112 $ (239) $ 1,873
Taxable investment securities 62 (22) 40 (162) 33 (129)
Tax-exempt investment securities 134 (44) 90 (15) (107) (122)
Federal funds sold 165 18 183 (16) (52) (68)
------- ------- ------ ------- ------ -------
Total interest income 2,346 (489) 1,857 1,919 (365) 1,554
------- ------- ------ ------- ------ -------
Interest expense:
Interest-bearing demand deposits 189 170 359 78 17 95
Savings and club deposits (6) (444) (450) (86) -- (86)
Time deposits 824 82 906 703 (117) 586
Borrowed money 10 -- 10 (13) -- (13)
------- ------ ---- ---- --- ---
Total interest expense 1,017 (192) 825 682 (100) 582
------- ------ ----- ------ ------ -----
Net interest income $ 1,329 $ (297) $ 1,032 $ 1,237 $ (265) $ 972
======= ====== ===== ====== ====== =====
</TABLE>
For the year ended 1997, net interest income on a tax equivalent basis
increased $1.1 million to $17.1 million from $16.0 million in 1996. This
increase was attributable to an increase in the volume of average net interest
earning assets. A $5.8 million increase in the excess of average
interest-earning assets over average interest-bearing liabilities was offset in
part by a 10 basis point decrease in the net interest spread and a decrease of
11 basis points in the net yield on interest-earning assets. For the year ended
1996, net interest income on a tax equivalent basis increased $972,000 to $16.0
million from $15.1 million in 1995. This increase was attributable to an
increase in the volume of average interest earning assets. A $7.4 million
increase in the excess of average interest-earning assets over average
interest-bearing liabilities was offset in part by a 5 basis point decrease in
the net interest spread and a decrease of 1 basis point in the net yield on
interest-earning assets.
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The allowance for loan losses is established to absorb the impact of losses
inherent in the loan portfolio. Additions to the allowance are made by means of
charges against current earnings and recoveries on loans previously charged to
the allowance. The level of the allowance is determined by the loan review
committee and Board of Directors after considering such elements as economic
conditions, risk exposure, adequacy of collateral, and such other factors as are
deemed to be relevant. The loan review committee assigns a specific reserve
allocation to each commercial loan in excess of $100,000 together with a general
percentage based on experience with respect to commercial loans less than
$100,000 and with respect to all real estate mortgage and consumer installment
loans. During 1997 the Company provided $439,000 to the allowance and had net
charge-offs of $439,000, leaving the balance of the allowance at $3.0 million.
At December 31, 1996, the allowance stood at $3.0 million, a $90,000 increase
from December 31, 1995, as the Company provided $534,000 to the allowance and
had net charge-offs of $444,000. Based on its ongoing loan review process, its
collateral positions, and its loss and recovery experience, the Company believes
that its allowance for loan losses at December 31, 1997, was adequate. The
immediately preceding sentence constitutes a forward-looking statement under the
Private Securities Litigation Reform Act of 1995. While it constitutes
management's reasoned judgement, actual results could differ from management's
determination, as a result of a variety of factors, such as economic distress
within the Company's primary marketing area and unanticipated financial
problems for the Company's significant borrowers. At December 31, 1997, the
allowance for loan losses as a percentage of total loans was 1.24%, as compared
to 1.33% and 1.53% at December 31, 1996, and 1995, respectively. At December 31,
1997, the Company's allowance balance of $3,000,000 exceeded the aggregate
balance of non-accrual and 90 day delinquent and accruing loans of $1,534,000.
20
<PAGE>
- -----------------------------------------------
LAKELAND BANCORP, INC., and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- -----------------------------------------------
OTHER INCOME
Other (i.e., non-interest) income increased $232,000 or 10.38% to $2.5 million
in 1997 from $2.2 million in 1996 and represented 8.28% of total income for
1997. This increase was primarily attributable to an increase in ATM fee income.
Other (i.e., non-interest) income increased $252,000 or 12.68% to $2.2 million
in 1996 from $2.0 million in 1995 and represented 8.06% of total income for
1996. This increase was primarily attributable to an increase in ATM fee income.
OTHER EXPENSES
Other (i.e., non-interest) expenses in 1997 increased $1.2 million or 11.90%
over 1996. Salaries and benefits, the largest component of other expenses,
increased by $656,000 or 12.02%, due to branch expansion and normal salary
increases. Occupancy expense increased $94,000 or 7.94%. Furniture and
fixtures increased $94,000 or 11.51%. 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 expense categories
increased in the aggregate by $321,000 or 13.77%. Significant sources of
changes in these expenses included FDIC Insurance expense, which increased
$40,000 to $42,000 in 1997 from the statutory minimum of $2,000 in 1996 and
miscellaneous losses, which increased $67,000 to $37,000 in 1997 from a credit
balance of $30,000 in 1996. Exclusive of FDIC insurance and miscellaneous
losses, other expenses increased $214,000 or 9.08%, reflecting increased
costs incurred as a result of the expansion of the branch network as well as the
Company's banking business. Other (i.e., non-interest) expenses in 1996
increased $279,000 or 2.93% over 1995. Salaries and benefits increased by
$160,000 or 3.02%. While salaries increased by $232,000 or 5.58% due to normal
salary increases, benefits expense decreased by $72,000 or 6.32%, as the
Company realized a cost reduction due to a change in health insurance plans.
Occupancy expense increased $153,000 or 14.94%. This was primarily the result of
an increase of $84,000 or 32.30% in building maintenance, which was the result
of higher costs associated with the harsh 1996 winter, as compared to the mild
winter in 1995. The decrease of $80,000 or 8.99% in furniture and fixtures
expense is primarily the result of furniture and fixtures in the
administration building becoming fully depreciated in March 1996. Other expense
categories increased, in the aggregate, $46,000 or 1.99%. Significant sources
of changes in these expenses included FDIC Insurance expense, which totalled the
statutory minimum of $2,000 in 1996 as compared to $352,000 in 1995, and other
real estate owned expense, which totalled $61,000 in 1996 as compared to no
expense in 1995 and was predominantly due to the payment of prior year real
estate taxes for a property which was maintained in other real estate owned.
Exclusive of FDIC insurance and other real estate owned expenses, other expenses
increased $335,000 or 17.3% due primarily to increased advertising, automatic
teller machine, postage, stationery and supplies expenses, reflecting
increased marketing efforts and the increased size of the branch network and the
Company's banking business.
INCOME TAXES
The components of income taxes are summarized as follows:
Year Ended December 31,
------------------------------------------
1997 1996 1995
------------ ------------- -------------
Current $ 2,718,026 $ 2,656,972 $ 2,469,763
Deferred (21,390) (22,662) (183,090)
------------ ------------- -------------
$ 2,696,636 $ 2,634,310 $ 2,286,673
============ ============= =============
The Company's effective income tax rate was 34.3%, 34.2%, and 32.3%, in the
years ended December 31, 1997, 1996, and 1995, respectively. The increasing
effective rate is the result of the relative reduced contribution of income from
tax-exempt investments.
LOANS
The following table sets forth the classification of the Company's loans by
major category as of December 31 for each of the last five years:
December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(In Thousands)
Commercial $ 83,706 $ 75,528 $ 65,190 $ 56,730 $ 44,808
Real estate
Mortgage 96,911 95,538 83,688 78,551 68,995
Real estate
construction 6,877 2,186 1,535 1,687 2,652
Home equity
and consumer
installment 54,339 52,768 40,401 38,277 32,546
--------- --------- --------- --------- ---------
Total Loans 241,833 226,020 190,814 175,245 149,001
Less: Unearned
income 136 70 92 48 44
Allowance for
loan losses 3,000 3,000 2,910 3,000 3,000
--------- --------- --------- --------- ---------
Net loans $238,697 $222,950 $187,812 $172,197 $145,957
========= ========= ========= ========= =========
The Company has not made loans to borrowers outside the United States.
Commercial loans increased $8.2 million from December 31, 1996, to December 31,
1997, representing 34.6% of total loans as compared to 33.4% at December 31,
1996. These loans are primarily to borrowers within the Company's market area.
21
<PAGE>
- ----------------------------------------------
LAKELAND BANCORP, INC., and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- ----------------------------------------------
Real estate loans increased $6.1 million from December 31,1996, but declined to
42.9% of the total loan portfolio at December 31, 1997, from 43.3% at December
31, 1996. The $6.1 million increase in real estate loans reflects a $6.7
million increase in residential mortgages and a $613,000 decrease in commercial
mortgages. Home equity and consumer installment loans increased $1.6 million,
representing 22.5% of total loans at December 31, 1997, as compared to 23.3% at
December 31, 1996.
Rate sensitive loans of $34.7 million represented 14.4% of total loans at
December 31, 1997, as compared to $34.1 million or 15.1% of total loans at
December 31, 1996. These rate sensitive loans consist primarily of commercial
loans of $30.6 million and home equity credit lines of $4.1 million that will
reprice with changes in the prime lending rate.
The following table sets forth certain categories of loans as of
December 31, l997 in terms of contractual maturity:
Within 1 to 5 After 5
1 Year Years Years Total
------- ------- ------ --------
(In Thousands)
Commercial $44,754 $33,790 $ 5,162 $83,706
Real estate
construction 6,877 - - 6,877
-------- --------- --------- --------
Total $51,631 $33,790 $ 5,162 $90,583
======== ========= ========= ========
The following table sets forth the dollar amount of all commercial and real
estate construction loans due one year or more after December 31, 1997, which
have pre-determined interest rates or adjustable interest rates:
1 to 5 After 5
Years Years Total
------- ------- ------
(In Thousands)
Loans with
fixed rates 29,557 $ 5,162 $34,719
Loans with
adjustable rates 4,233 - 4,233
--------- ------- --------
Total $33,790 $ 5,162 $38,952
========= ======= ========
Risk elements
Commercial loans are placed on a nonaccrual status when principal or interest is
in default for a period of ninety days or more except where there exists
sufficient collateral to cover the defaulted principal and interest payments or
management's knowledge of the specific circumstances warrant continued accrual.
Real estate mortgage loans are placed on nonaccrual status at the time when
foreclosure proceedings are commenced except where there exists sufficient
collateral to cover the defaulted principal and interest payments or
management's knowledge of the specific circumstances warrant continued accrual.
Installment loans are regularly charged off when principal and interest payments
are six months in arrears. Interest thereafter on such charged-off installment
loans is taken into income when received.
The following schedule sets forth certain information regarding the Company's
nonaccrual, past due and renegotiated loans and other real estate owned as of
December 31, for each of the last five years:
December 31,
-------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------
(In Thousands)
Non-accrual
loans (A) $1,236 $1,308 $1,545 $1,501 $ 483
Past due
loans (B) 298 1,456 59 554 2,934
Renegotiated
loans (C) 1,529 2,567 2,325 1,740 2,366
------- ------- ------- ------- -------
Total
non-accrual,
past due and
renegotiated
loans 3,063 5,331 3,929 3,795 5,783
Other real
estate owned 648 255 629 458
------- ------- ------- ------- -------
Total $3,711 $5,331 $4,184 $4,424 $6,241
======= ======= ======= ======= =======
(A) Generally represents loans as to which the payment of interest or principal
is in arrears for a period of more than ninety days. Current policy requires
that interest previously accrued on these loans and not yet paid be reversed and
charged against income during the current period. Interest earned thereafter is
only included in income to the extent that it is received in cash.
(B) Represents loans as to which payments of interest or principal are
contractually past due ninety days or more but which are currently accruing
income at the contractually stated rates. A determination is made to continue
accruing income on such loans only when such loans are believed to be fully
collectible.
(C) The loan portfolio includes loans whose terms have been renegotiated due to
financial difficulties of borrowers. All such loans were performing in
accordance with the renegotiated terms and, in management's view, do not present
a significant risk of loss as of December 31, 1997. There were no loans at
December 31, 1997, other than those included in the above table, where the
Company was aware of any credit conditions of any borrowers that would indicate
a strong possibility of the borrowers not complying with the present terms and
conditions of repayment and which may result in such loans being included as
nonaccrual, past due or renegotiated at a future date. At December 31, 1997,
there were no concentrations of loans exceeding 10% of total loans outstanding.
Loan concentrations are considered to exist when there are amounts loaned to a
multiple number of borrowers engaged in similar activities which would cause
them to be similarly impacted by economic or other related conditions.
22
<PAGE>
- -----------------------------------------------
LAKELAND BANCORP, INC., and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- -----------------------------------------------
Non-accrual loans at December 31, 1997, decreased $72,000 to $1,236,000 from
$1,308,000 at December 31, 1996. At December 31, 1997, non-accrual loans
consisted of five mortgage loans, seven commercial loans, and one consumer
loan. All of these loans are in various stages of litigation, foreclosure, or
workout. Loans past due ninety days or more and still accruing decreased $1.2
million to $298,000 at December 31, 1997, from $1.5 million at December 31,
1996. At December 31, 1997, loans past due ninety days or more and still
accruing consisted of three mortgage loans, two commercial loans, and five
consumer loans. For 1997, the gross interest income that would have been
recorded, had the loans classified at year-end as either non -accrual or
renegotiated been performing in conformance with their original loan terms,
would have been approximately $258,000. The amount of interest income actually
recorded on those loans for 1997 was $146,000. The resultant income lost of
$112,000 for 1997 compares to $148,000 and $204,000 for 1996 and 1995,
respectively. The Company has established a standardized process to establish
and assess the adequacy of the allowance for loan losses and to identify the
risks inherent in the loan portfolio. This process incorporates credit reviews
and considers factors such as concentrations of credit, economic, industry, and
real estate market conditions, delinquency trends, collateral coverage, and
portfolio composition. Specific allowances are maintained as needed for loans
specifically evaluated and classified as impaired. General allowances are
maintained with regard to the remainder of the portfolio and are calculated
based upon percentages assigned by management to various risk categories. Loans
specifically evaluated are 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 agreements. An
insignificant delay, which is defined as up to 90 days by the Company,
will not cause a loan to be classified as impaired. A loan is not impaired
during a period of delay in payment if the Company expects to collect all
amounts due, including interest accrued at the contractual interest rate for the
period of delay. Thus, a demand loan or other loan with no stated maturity is
not impaired if the Company expects to collect all amounts due, including
interest accrued at the contractual interest rate, during the period the loan is
outstanding. All loans identified as impaired are evaluated independently.
The Company does not aggregate such loans for evaluation purposes.
The Company's policy concerning non-accrual loans states that, except for loans
which are considered to be fully collectible by virtue of collateral held as
well as other relevant factors, loans are placed on a non-accrual status when
payments are 90 days delinquent or more. It is possible for a loan to be on non-
accrual status and not be classified as impaired if the balance of such loan is
relatively small and, therefore, that loan has not been specifically reviewed
for impairment. 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
December 31, 1997, based on the above criteria, the Company classified
four commercial loans, totalling $765,000, including three renegotiated loans,
and five mortgage loans, totalling $879,000, including three renegotiated
residential mortgage loans, as impaired. The impairment of these loans is
measured using the present value of future cash flows for the five renegotiated
loans and is based on the fair value of the underlying collateral for the
remaining three commercial loans and one mortgage loan. Based upon such
evaluation, $321,000 has been allocated to the allowance for loan losses for
impairment. The following table sets forth for each of the five years ended
December 31, 1997, the historical relationships among the amount of loans
outstanding, the allowance for loan losses, the provision for loan losses, the
amount of loans charged-off and the amount of loan recoveries:
Year Ended December 31,
---------------------------------------------
1997 1996 1995 1994 1993
----- ------- ------- ------- -------
(Dollars in Thousands)
Balance of allowance
at beginning of year 3,000 $2,910 $3,000 $3,000 $2,450
Charge-offs: ------- ------- ------- ------- -------
Commercial 438 321 114 234 57
Installment 72 85 33 85 107
Mortgage - 70 217 23 35
------- ------- ------- ------- -------
Total charge-offs 510 476 364 342 199
------- ------- ------- ------- -------
Recoveries:
Commercial 6 10 108 69 13
Installment 32 22 37 48 41
Mortgage 33 - - - -
------- ------- ------- ------- -------
Total recoveries 71 32 145 117 54
------- ------- ------- ------- -------
Net charge-offs 439 444 219 225 145
------- ------- ------- ------- -------
Provision for
loan losses 439 534 129 225 695
------- ------- ------- ------- -------
Balance of allowance
at end of year $3,000 $3,000 $2,910 $3,000 $3,000
======= ======= ======= ======= =======
Ratio of net
charge-offs
to average loans
outstanding 0.19% 0.22% 0.12% 0.14% 0.11%
Balance of allowance
at end of year as a
percentage of year
end loans 1.24% 1.33% 1.53% 1.71% 2.00%
The ratio of the allowance for loan losses to loans outstanding reflects
management's evaluation of the underlying credit risk inherent in the loan
portfolio. The determination of the appropriate level of the allowance for loan
losses is based on management's evaluation of the risk characteristics of the
loan portfolio considering such factors as the financial condition of the
borrowers, fair market value of collateral, past due and delinquency levels,
size and nature of the loan portfolio, general economic conditions, charge-off
experience and the level of non-performing loans.
23
<PAGE>
- -----------------------------------------------
LAKELAND BANCORP, INC., and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- -----------------------------------------------
The Company regards the majority of the allowance as a general allowance which
is available to absorb losses from all loans. However, for the purpose of
complying with disclosure requirements of the Securities and Exchange
Commission, the table below presents an allocation of the allowance among
various loan categories and sets forth the percentage of loans in each category
to total loans. The allocation of the allowance as shown in the table should
neither be interpreted as an indication of future charge-offs, nor as an
indication that charge-offs in future periods will necessarily occur in these
amounts or in the indicated proportions.
The following table sets forth the allocation of the allowance for loan losses
at the date indicated by category of loans.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------- ------------------- ------------------- -------------------
Percent (1) Percent (1) Percent (1) Percent (1) Percent (1)
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 1,534 34.6 $ 1,499 33.4 $ 1,517 34.2 $ 1,478 32.4 $ 1,450 30.1
Real estate mortgage 796 40.1 717 42.3 628 43.9 786 44.8 690 46.3
Real estate construction 97 2.8 44 1.0 31 0.8 34 1.0 80 1.8
Home equity and
consumer installment 573 22.5 740 23.3 734 21.1 702 21.8 780 21.8
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
$ 3,000 100.0 $ 3,000 100.0 $ 2,910 100.0 $ 3,000 100.0 $ 3,000 100.0
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
(1) Represents the percentage of type of loan to total loans outstanding.
INVESTMENT SECURITIES
The Company has classified its investment securities into the available for
sale and held to maturity categories pursuant to Statement No. 115 of the
Financial Accounting Standards Board "Accounting for Certain Investments in Debt
and Equity Securities" ('Statement No. 115'). For information regarding
Statement No. 115, See Notes to the Company's Consolidated Financial Statements.
The following table sets forth the carrying value of the Company's investment
securities, both available for sale and held to maturity, as of December 31 for
each of the last three years. Securities available for sale are stated at
estimated fair value while securities held for maturity are stated at cost,
adjusted for amortization of premiums and accretion of discounts.
December 31,
-------------------------------------
1997 1996 1995
-------------------------------------
(In Thousands)
U.S. Treasury $ 62,018 $ 58,447 $ 65,668
U.S. Government agencies 35,497 32,471 32,397
States and political subdivisions 22,375 16,668 17,718
Other debt securities 3,007 6,447 7,951
Equity security 4,002 2,926 2,238
---------- ------------ -----------
Totals $126,899 $116,959 $125,972
========== ============ ===========
The following tables present the estimated fair values and unrealized gains and
losses on investment securities at December 31, 1997:
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------
Amortized Gross Unrealized Estimated
---------------------
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury $ 27,678 $ 338 $ -- $ 28,016
U.S. Government agencies 22,675 113 18 22,770
States and political
subdivisions 18,822 134 1 18,955
Other debt securities 2,299 8 -- 2,307
Equity security 1,205 2,797 -- 4,002
---------- ---------- ---------- ----------
Totals $ 72,679 $ 3,390 $ 19 $ 76,050
========== ========== ========== ==========
</TABLE>
Proceeds from sales and calls of securities available for sale totalled
$5,040,000 and $5,501,000, respectively, during the year ended December 31,
1997. Gross gains of $4,295 and gross losses of $7,763 were realized on those
transactions .
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------
Carrying Gross Unrealized Estimated
---------------------
Value Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury $ 34,002 $ 319 $ 9 $ 34,312
U.S. Government
agencies 12,727 44 10 12,761
States and political
subdivisions 3,420 19 -- 3,439
Other debt securities 700 3 -- 703
---------- ---------- ---------- ----------
Totals $ 50,849 $ 385 $ 19 $ 51,215
========== ========== ========== ==========
</TABLE>
24
<PAGE>
LAKELAND BANCORP, INC., and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
There were no sales of securities held to maturity during the year ended
December 31, 1997. Proceeds from calls of securities held to maturity during the
year ended December 31, 1997, totalled $999,000 and resulted in a gross loss of
$538.
Securities available for sale with a carrying value of approximately $8,011,000
at December 31, 1997, were pledged to secure public deposits and for other
purposes required by applicable law and regulations.
The following table sets forth the maturity distribution and weighted average
yields (calculated on the basis of the stated yields to maturity, considering
applicable premium or discount), on a fully taxable equivalent basis, of all
debt securities, both available for sale and held to maturity, as of December
31, 1997.
After After
1 Year 5 Years
Within But Within But Within After 10
1 Year 5 Years 10 Years Years Total
------ ---------- ---------- --------- -----
(Dollars in Thousands)
U.S.Treasury
securities:
Book value $ 14,502 $ 47,516 $ -- $ -- $ 62,018
Yield 6.70% 6.25% --% --% 6.36%
Obligations of
U.S. Government
Agencies:
Book value $ 13,053 $ 22,444 $ -- $ -- $ 35,497
Yield 6.81% 6.20% --% --% 6.43%
Obligations of
States and
Political
Subdivisions:
Book value $ 4,901 $ 15,157 $ 2,312 $ 5 $ 22,375
Yield 5.80% 5.62% 5.93% 9.15% 5.69%
Other securities:
Book value $ 1,999 $ 808 $ -- $ 200 $ 3,007
Yield 6.17% 6.63% --% 6.66% 6.33%
---------- ---------- ---------- --------- --------
Total book
value $ 34,455 $ 85,925 $ 2,312 $ 205 $122,897
=========== ========== ========== ========= ========
Weighted
average yield 6.58% 6.13% 5.93% 6.72% 6.25%
=========== ========== ========== ========= =========
The following table sets forth the maturity distribution and weighted average
yields (calculated on the basis of the stated yields to maturity, considering
applicable premium or discount), on a fully taxable equivalent basis, of debt
securities available for sale as of December 31, 1997:
After After
1 Year 5 Years
Within But Within But Within After 10
1 Year 5 Years 10 Years Years Total
------ ---------- ---------- --------- -----
(Dollars in Thousands)
U.S.Treasury
securities:
Book value $ 7,576 $ 20,440 $ -- $ -- $ 28,016
Yield 6.50% 6.37% --% --% 6.40%
Obligations of
U.S. Government
Agencies:
Book value $ 8,045 $ 14,725 $ -- $ -- $ 22,770
Yield 6.61% 6.28% --% --% 6.40%
Obligations of
States and
Political
Subdivisions:
Book value $ 4,640 $ 12,619 $ 1,691 $ 5 $ 18,955
Yield 5.79% 5.64% 5.97% 9.15% 5.71%
Other securities:
Book value $ 1,499 $ 808 $ -- $ -- $ 2,307
Yield 6.32% 6.63% --% --% 6.43%
---------- ---------- ---------- ---------- --------
Total book
value $ 21,760 $ 48,592 $ 1,691 $ 5 $ 72,048
========== ========== ========== ========== ========
Weighted
average yield 6.38% 6.16% 5.97% 9.15% 6.22%
========== ========== ========== ========== =========
25
<PAGE>
LAKELAND BANCORP, INC., and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth the maturity distribution and weighted average
yields (calculated on the basis of the stated yields to maturity, considering
applicable premium or discount), on a fully taxable equivalent basis, of debt
securities held to maturity as of December 31, 1997:
After After
1 Year 5 Years
Within But Within But Within After 10
1 Year 5 Years 10 Years Years Total
------ ---------- ---------- --------- -----
(Dollars in Thousands)
U.S.Treasury
securities:
Book value $ 6,926 $ 27,076 $ -- $ -- $ 34,002
Yield 6.91% 6.16% --% --% 6.31%
Obligations of
U.S. Government
Agencies:
Book value $ 5,008 $ 7,719 $ -- $ -- $ 12,727
Yield 7.13% 6.05% --% --% 6.48%
Obligations of
States and
Political
Subdivisions:
Book value $ 261 $ 2,538 $ 621 $ -- $ 3,420
Yield 5.73% 5.52% 5.82% --% 5.62%
Other securities:
Book value $ 500 $ -- $ -- $ 200 $ 700
Yield 5.73% --% --% 6.66% 6.00%
-------- -------- -------- -------- --------
Total book
value $ 12,695 $ 37,333 $ 621 $ 200 $ 50,849
======== ======== ======== ======== ========
Weighted
average yield 6.93% 6.09% 5.82% 6.66% 6.30%
======== ======== ======== ======== ========
For further information regarding the Company's investment securities, see Notes
to the Company's Consolidated Financial Statements.
DEPOSITS
The following table sets forth the average amounts of various types of deposits
for each of the three years ended December 31:
1997 1996 1995
------ ------ ------
(In Thousands)
Non-interest-bearing
demand deposits $ 67,218 $ 61,884 $ 56,840
Interest-bearing
demand deposits 65,394 56,750 53,128
Savings deposits 105,622 105,817 108,734
Time deposits 116,996 101,494 88,169
--------- --------- ---------
Total $ 355,230 $ 325,945 $ 306,871
========= ========= =========
As of December 31, 1997, the aggregate amount of outstanding time deposits
issued in amounts of $100,000 or more, broken down by time remaining to
maturity, was as follows (in thousands):
Three months or less $ 4,724
Over three months through six months 4,118
Over six months through twelve months 2,126
Over twelve months 397
---------
Total $ 11,365
=========
LIQUIDITY
The Company's primary sources of liquidity are deposits, asset maturities, and
funds provided from operations. At December 31, 1997, liquid assets, consisting
of cash and due from banks, federal funds sold and investment securities that
mature within one year, amounted to $63.9 million. The maturity schedule of the
investment portfolio, at carrying value, indicates that 28.0% of the debt
securities included in the portfolio mature within one year, and 97.95% mature
within five years. For additional information regarding the investment
portfolio, see Notes to Consolidated Financial Statements.
The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating activities, investing activities and financing activities.
These activities are summarized below:
Year Ended
December 31,
1997 1996
---- ----
(In Thousands)
Cash and cash equivalents at
beginning of period $23,145 $33,773
------- -------
Operating activities:
Net income 5,173 5,061
Adjustments to reconcile net income
to net cash provided by operating
activities 2,492 2,549
------- -------
Net cash provided by operating
activities 7,665 7,610
Net cash used in investing activities (28,631) (30,049)
Net cash provided by financing
activities 27,223 11,811
------- -------
Net increase (decrease) in cash and
equivalents 6,257 (10,628)
------- -------
Cash and cash equivalents at
end of period $29,402 $23,145
======= =======
Cash and cash equivalents increased by $6.3 million during 1997. The bulk of
such increase resulted from financing activities, which provided $27.2 million
in cash flow, primarily due to deposit in flow of $28.9 million. Net cash of
$28.6 million was used in investing activities where $17.6 million was invested
in the loan portfolio, $9.6 million was invested in the investment portfolios,
and $2.4 million was invested in premises and equipment.
Operating activities produced $7.7 million of cash flow, $5.2 million of which
was derived from net income. The Company anticipates that it will have
sufficient funds available to meet its current loan commitments and deposit
maturities. At December 31, 1997, the Company has outstanding loan origination
commitments of $42.9 million. Time deposits that mature in one year or less, at
December 31, 1997, totalled $108.9 million. Management believes that a
substantial portion of such deposits will remain with the Company. The first
sentence in this paragraph constitutes a Forward Looking Statement under the
Private Securities Litigation Reform act of 1995. Actual results could differ
materially from anticipated results due to a variety of factors, including
uncertainties relating to general economic
26
<PAGE>
LAKELAND BANCORP, INC., and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
conditions; unanticipated decreases in deposits; changes in or failure to comply
with governmental regulations; and uncertainties relating to the analysis of the
Company's assessment of rate sensitive assets and rate sensitive liabilities and
relating to the extent to which market factors indicate that a financial
institution such as the Company should match such assets and liabilities.
Closely related to the concept of liquidity is the concept of interest rate
sensitivity (i.e., the extent to which assets and liabilities are sensitive to
changes in interest rates). Interest rate sensitivity is often measured by the
extent to which mismatches or "gaps" occur in the repricing of assets and
liabilities within a given time period. Gap analysis is utilized to quantify
such mismatches. A "positive" gap results when the amount of earning assets
repricing within a given time period exceeds the amount of interest bearing
liabilities repricing within that time period. A "negative" gap results when the
amount of interest bearing liabilities repricing within a given time period
exceeds the amount of earning assets repricing within such time period. In
general, a financial institution with a positive gap in relevant time periods
will benefit from an increase in market interest rates and will experience
erosion in net interest income if such rates fall. Likewise, a financial
institution with a negative gap in relevant time periods will normally benefit
from a decrease in market interest rates and will be adversely affected by an
increase in rates. By maintaining a balanced interest rate sensitivity position,
where interest rate sensitive assets roughly equal interest sensitive
liabilities in relevant time periods, interest rate risk can be limited.
The following table sets forth the estimated maturity/repricing structure of the
Company's interest-earning assets and interest-bearing liabilities at December
31, 1997. Except as stated below, the amounts of assets or liabilities shown
which reprice or mature during a particular period were determined in accordance
with the contractual terms of each asset or liability. The table does not assume
any prepayment of fixed-rate loans. The Company has assumed that all interest-
bearing demand accounts and savings accounts will reprice or mature within five
years. The table does not necessarily indicate the impact of general interest
rate movements on the Company's net interest income because the repricing of
certain categories of assets and liabilities, for example, prepayments of loans
and withdrawal of deposits, is beyond the Company's control. As a result,
certain assets and liabilities indicated as repricing within a stated period may
in fact reprice at different times and at different rate levels.
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------------------
More Than More Than
Three Three Months 1 Year More
Months Through Through Than
Or Less 1 Year 5 Years 5 Years Total
------- ---------- ----------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1)
Adjustable and floating rate commercial $ 30,576 $ -- $ -- $ -- $ 30,576
Fixed rate commercial 5,208 13,200 29,557 5,162 53,127
Real estate mortgage 2,300 9,540 39,028 45,623 96,491
Real estate construction 4,799 2,078 -- -- 6,877
Installment and other 7,185 7,837 27,123 12,481 54,626
Investment securities 17,360 21,097 85,925 2,517 126,899
Other investments (2) 7,344 -- -- -- 7,344
--------- --------- ----------- ---------- ---------
Total interest-earning assets 74,772 53,752 181,633 65,783 375,940
--------- --------- ----------- ---------- ---------
Interest-bearing liabilities:
Deposits:
Interest-bearing demand 6,970 18,784 46,311 -- 72,065
Savings 9,950 26,815 66,110 -- 102,875
Time 44,327 64,572 8,835 -- 117,734
--------- --------- ----------- ---------- ---------
Total interest-bearing liabilities 61,247 110,171 121,256 -- 292,674
--------- --------- ----------- ---------- ---------
GAP during the period $ 13,525 $ (56,419) $ 60,377 $ 65,783 $ 83,266
========= ========= =========== ========== =========
Cumulative GAP $ 13,525 $ (42,894) $ 17,483 $ 83,266
========= ========= =========== ==========
Interest-sensitive assets as a percent of
interest-sensitive liabilities (cumulative) 122.08% 74.98% 105.97% 128.45%
Cumulative interest-sensitive assets
as a percent of total assets 18.17 31.23 75.38 91.36
Ratio of GAP to total assets 3.29 (13.71) 14.67 15.99
Ratio of cumulative GAP to total assets 3.29 (10.42) 4.25 20.24
</TABLE>
(1) Loans are stated net of unearned income.
(2) Other investments consist of federal funds sold and interest-bearing
deposits in banks
27
<PAGE>
LAKELAND BANCORP, INC., and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DISCUSSION OF MARKET RISK
As a financial institution, the Company's primary component of market risk is
interest rate volatility. Fluctuations in interest rates will ultimately impact
the level of income and expense recorded on a large portion of the Bank's assets
and liabilities, and the market value of all interest-earning assets, other than
those which possess a short term to maturity. Based upon the company's nature of
operations, the Company is not subject to foreign currency exchange or commodity
price risk. The Company does not own any trading assets and does not have any
hedging transactions in place, such as interest rate swaps and caps.
The Bank's Board of Directors has adopted an Asset/Liability Policy designed to
stabilize net interest income and preserve capital over a broad range of
interest rate movements. This Policy outlines guidelines and ratios dealing
with, among others, liquidity, volatile liability dependence, investment
portfolio composition, loan portfolio composition, loan-to-deposit ratio and gap
analysis ratio. The Bank's performance as compared to the Asset/Liability Policy
is monitored by the Board of Directors. In addition, to effectively administer
the Asset/Liability Policy and to monitor exposure to fluctuations in interest
rates, the Bank maintains an Asset/Liability Committee, consisting of the Chief
Executive Officer, Treasurer, Controller and certain other senior officers. This
committee meets monthly to review the Bank's financial results and to develop
strategies to implement the Asset/Liability Policy and to respond to market
conditions.
The following discusses the three primary components in interest rate management
strategy:
ASSETS
The Company's largest asset component is the loan portfolio. The portfolio
consists of residential and commercial mortgage loans, commercial loans, and
consumer loans. The Bank's borrowers are concentrated in the Bank's trading area
in northern New Jersey and are subject to risks associated with the local
economy. In an attempt to diversify its lending activities, the Bank has
established guidelines for each lending category. Portfolio guidelines are 40%
outstanding in mortgage loans, 35% outstanding in commercial loans, and 25%
outstanding in consumer loans. Both fixed rate and variable rate products are
offered. As of December 31, 1997, approximately $34.7 million or 14% of the loan
portfolio were variable rate loans.
The Bank's investment portfolio provides a source of liquidity to support
funding needs. The portfolio is classified into "available for sale" and
"held to maturity" categories. The "available for sale" category, which totalled
$76.1 million at December 31, 1997, is available for liquidity needs when
necessary. The "held to maturity" category, which totalled $50.8 million at
December 31, 1997, is available for liquidity when bonds mature. Approximately
$34.5 million or 27% of the investment portfolio matures within one year and
approximately $120.4 million or 95% of the portfolio matures within five years.
U.S. Treasury and Agency securities with a normal maximum maturity of five years
represented approximately $97.9 million or 77% of the portfolio at December 31,
1997. Of the remaining $29.0 million of the investment securities portfolio,
approximately $22.4 million are invested in State, County, and Municipal
securities with a maximum maturity of eight years.
DEPOSIT LIABILITIES
The Bank, a traditional community-based commercial bank, is largely dependent
upon its base of competitively priced core deposits. Core deposits, which
consist of all deposits except certificates of deposit, provide stability on the
liability side of the balance sheet. The Bank has retained many loyal customers
over the years through a combination of quality service, convenience, and a
stable and experienced staff. Core deposits at December 31, 1997, were $251.2
million or 68% of total deposits. The balance of certificates of deposit at
December 31, 1997, was $117.7 million or 32% of total deposits. Of the $117.7
million outstanding, $108.9 million or 92% mature within one year.
WHOLESALE FUNDS
The Bank does not accept brokered deposits as a source of funds and has no plans
to do so in the future. In the event there is a short-term need for funds, the
Bank has established federal funds lines of credit with several of its
correspondent banks. However, the Bank has rarely utilized these borrowing
arrangements.
Depending on the existing interest rate environment, the Bank has various
alternatives to mitigate interest rate exposure. If the Bank is attempting to
reduce exposure to adverse consequences from rising interest rates, the strategy
might be to either make more variable-rate loans and fewer fixed-rate loans or
offer more competitive rates on long and medium-term certificates of deposit and
less competitive rates on short-term certificates of deposit. If the Bank is
attempting to reduce exposure to adverse consequences from falling interest
rates, the strategy might be to make fewer variable-rate loans and more
fixed-rate loans or offer more competitive rates on short term certificates of
deposit and less competitive rates on long-term certificates of deposits.
CAPITAL RESOURCES
Stockholders' equity increased $4.6 million to $41.4 million at December 31,
1997, from $36.8 million at December 31, 1996, reflecting net proceeds of
$649,000 from issuances of common stock, net income during the year of $5.2
million, dividends to stockholders of $2.0 million, and an unrealized gain, net
of deferred income taxes, on securities available for sale of $773,000.
28
<PAGE>
LAKELAND BANCORP, INC., and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The FDIC's risk-based capital policy statement imposes a minimum capital
standard on insured banks. The minimum ratio of risk-based capital to risk-
weighted assets (including certain off-balance sheet items, such as standby
letters of credit) is 8%. At least half of the total capital is to be comprised
of common stock equity and qualifying perpetual preferred stock, less goodwill
("Tier I capital"). The remainder ("Tier II capital") may consist of mandatory
convertible debt securities, qualifying subordinated debt, other preferred stock
and a portion of the allowance for loan losses. The Federal Reserve Board has
adopted a similar risk-based capital guideline for the Company which is computed
on a consolidated basis.
In addition, the bank regulators have adopted minimum leverage ratio guidelines
(Tier I capital to average quarterly assets, less goodwill) for financial
institutions. These guidelines provide for a minimum leverage ratio of 3% for
financial institutions that meet certain specified criteria, including that they
have the highest regulatory rating. All other holding companies are required to
maintain a leverage ratio of 3% plus an additional cushion of at least 100 to
200 basis points.
The following table reflects the Company's capital ratios as of December 31,
1997:
RISK-BASED CAPITAL RATIOS:
Amount Ratio
-------- ------
Actual Tier I Capital $ 39,410 17.30%
Tier I Capital minimum amount 9,113 4.00%
-------- ------
Excess $ 30,297 13.30%
======== ======
Actual Combined Tier I and
Tier II Capital $ 42,089 18.48%
Combined Tier I and Tier II
Capital minimum requirement 18,225 8.00%
-------- ------
Excess $ 23,863 10.48%
======== ======
LEVERAGE RATIO:
Actual Tier I Capital to average
fourth quarter assets $ 39,410 9.69%
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
December 31, 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(Statement 130). Statement 130 establishes standards for reporting and the
presentation of comprehensive income and its components in a full set of
general-purpose financial statements. Statement 130 is effective for both
interim and annual periods beginning after December 15, 1997, and is not
expected to have a material impact on the Company.
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (Statement 131). Statement 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. Statement 131 is effective for
financial periods beginning after December 15, 1997, and is not expected to have
a material impact on the Company.
IMPACT OF THE YEAR 2000 ISSUE
The "Year 2000 Issue" is the name given to the problems associated with many
computer systems and software products currently in use which accept only two
digit entries in the date code field. Upon the inception of the year 2000, those
date code fields will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. Any of the Company's computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activities.
The Company has initiated an assessment of its operations to determine steps
which should be taken to respond to the year 2000 issue. As part of this
assessment, the Company has initiated formal communications with all of its
significant suppliers to determine the extent to which the Company is vulnerable
to those third parties' failure to remediate their own Year 2000 Issue. Although
this assessment has not been completed, the Company believes that it will be
necessary to modify or replace portions of its software and hardware so that its
computer systems will properly utilize dates beyond December 31, 1999. In cases
where the Company has received written assurances of Year 2000 compliance from
suppliers, the Company plans on performing necessary testing of these systems to
test compliance.
29
<PAGE>
LAKELAND BANCORP, INC., and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company also plans on notifying certain significant borrowers to make sure
that such borrowers are aware of the Year 2000 Issue. The Company believes that
such notification will reduce potential credit risks which could be a product of
the Year 2000 situation. The Company's total Year 2000 project costs have yet to
be determined. However, based on the assessment which has been performed to
date, the Company does not believe that the projected costs will have a material
affect on the Company's consolidated year-end earnings or financial condition.
The Company's goal is to implement its plan by December 31, 1998, with any
necessary testing to be completed in 1999.
The Company's evaluation of the costs of the Year 2000 project and the
estimation of the date on which the Company seeks to complete the Year 2000
modifications are based on management's best estimates to date, which were
derived utilizing numerous assumptions of future events. The Company's
statements regarding such costs and compliance constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. Such
statements are subject to numerous uncertainties which could lead to actual
results being materially different than such statements. Such uncertainties
relate to the continued availability of certain technical resources, the
viability of third party modification plans, unanticipated technical
difficulties and other related factors.
EFFECTS OF INFLATION
The impact of inflation, as it affects banks, differs substantially from the
impact on non-financial institutions. Banks have assets which are primarily
monetary in nature and which tend to move with inflation. This is especially
true for banks with a high percentage of rate sensitive interest earning assets
and interest bearing liabilities. A bank can further reduce the impact of
inflation with proper management of its rate sensitivity gap. This gap
represents the difference between interest sensitive assets and interest rate
sensitive liabilities. The Company attempts to structure its assets and
liabilities and manage its gap to protect against substantial changes in
interest rate scenarios, thus minimizing the potential effects of inflation.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
See Management's Discussion and Analysis of Financial Condition and Results of
Operations -- "Discussion of Market Risk".
30
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LAKELAND BANCORP, INC., and Subsidiaries
INDEPENDENT AUDITOR'S REPORT
[Letterhead of RADICS & CO., LLC]
To the Board of Directors and Stockholders
Lakeland Bancorp, Inc.
We have audited the accompanying consolidated statements of condition of
Lakeland Bancorp, Inc. (the "Corporation") and Subsidiaries as of December 31,
1997 and 1996 and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the second
preceding paragraph present fairly, in all material respects, the financial
position of Lakeland Bancorp, Inc. and Subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Radics & Co., LLC
January 9, 1998
31
<PAGE>
LAKELAND BANCORP, INC., and Subsidiaries
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
----------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 22,901,611 $ 20,395,240
Federal funds sold 6,500,000 2,750,000
- ----------------------------------------------------------------------------
Cash and cash equivalents 29,401,611 23,145,240
Securities available for sale,
at estimated fair value 76,050,248 68,550,491
Securities held to maturity; estimated
fair value of $51,215,000 in 1997 and
$48,668,000 in 1996 50,848,520 48,408,044
Loans 238,697,196 222,949,524
Premises and equipment 11,324,066 9,798,976
Accrued interest and receivable 3,530,199 3,485,531
Other assets 1,628,660 1,206,974
- ----------------------------------------------------------------------------
Total assets $411,480,500 $377,544,780
============================================================================
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
- -----------
<S> <C> <C>
Deposits:
Non-interest bearing demand $ 76,293,882 $ 67,346,528
Savings and interest-bearing demand 173,258,632 161,746,887
Club accounts 1,680,968 1,917,278
Time 106,369,562 95,137,066
Time of $100,000 and over 11,364,504 13,935,937
- ----------------------------------------------------------------------------
Total deposits 368,967,548 340,083,696
Other liabilities 1,086,779 641,729
- ----------------------------------------------------------------------------
Total liabilities 370,054,327 340,725,425
- ----------------------------------------------------------------------------
Commitments --- ---
STOCKHOLDERS' EQUITY
- --------------------
Common stock (par value $2.50 per share)
Authorized shares 7,403,359 in 1997
and 7,050,819 in 1996; issued and
outstanding shares 3,569,994 in 1997
and 3,375,590 in 1996 8,924,985 8,438,975
Surplus 23,848,210 19,190,852
Undivided profits 6,636,624 7,946,013
Unrealized gain on securities available
for sale, net 2,016,354 1,243,515
- ----------------------------------------------------------------------------
Total stockholders' equity 41,426,173 36,819,355
- ----------------------------------------------------------------------------
Total liabilities and
stockholders' equity $411,480,500 $377,544,780
============================================================================
</TABLE>
See accompanying notes to consolidated financial statements
32
<PAGE>
LAKELAND BANCORP, INC. and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
----------------------------------------
INTEREST INCOME:
<S> <C> <C> <C>
Loans and fees $19,334,495 $17,790,093 $15,917,445
Federal funds sold 670,672 488,119 555,629
Investment securities:
U.S. Treasury 3,933,917 3,741,815 4,313,807
U.S. Government agencies 2,163,137 2,130,249 1,686,565
State and political subdivisions 860,870 789,740 839,108
Other 348,636 534,412 534,944
- -----------------------------------------------------------------------------------------------
Total interest income 27,311,727 25,474,428 23,847,498
- -----------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 10,511,351 9,695,746 9,100,671
Borrowed money 9,900 -- 13,318
- -----------------------------------------------------------------------------------------------
Total interest expense 10,521,251 9,695,746 9,113,989
- -----------------------------------------------------------------------------------------------
Net interest income 16,790,476 15,778,682 14,773,509
PROVISION FOR LOAN LOSSES 438,664 533,727 128,706
- -----------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 16,351,812 15,244,955 14,604,803
- -----------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges on deposit accounts 2,001,375 1,809,861 1,592,363
(Loss) gain on sales and calls of securities (4,006) 1,450 11,105
Other 468,728 422,913 379,255
- -----------------------------------------------------------------------------------------------
Total other income 2,466,097 2,234,224 1,982,723
- -----------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salaries and benefits 6,113,083 5,457,151 5,296,717
Occupancy, net 1,273,074 1,179,432 1,026,169
Furniture and equipment 907,306 813,648 894,065
Federal deposit insurance 42,063 2,000 351,704
Stationary, supplies and postage 732,140 660,004 586,037
Other 1,880,482 1,671,294 1,349,981
- -----------------------------------------------------------------------------------------------
Total other expenses 10,948,148 9,783,529 9,504,673
- -----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 7,869,761 7,695,650 7,082,853
INCOME TAXES 2,696,636 2,634,310 2,286,673
- -----------------------------------------------------------------------------------------------
NET INCOME 5,173,125 $ 5,061,340 $ 4,796,180
===============================================================================================
Net income per common share-basic $ 1.45 $ 1.44 $ 1.39
===============================================================================================
Weighted average number of common shares outstanding 3,557,781 3,513,088 3,454,682
===============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
33
<PAGE>
LAKELAND BANCORP, INC. and Subsidiaries
Consolidated Statements of Changes
in Stockholders' Equity
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on Securities Total
Number of Common Undivided Available Stockholders'
Shares Stock Surplus Profits For Sale, Net Equity
--------- ------ ------- -------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 1,527,131 $ 3,817,828 $ 17,736,878 $ 5,410,825 $ (804,488) $ 26,161,043
Net Income -- -- -- 4,796,180 -- 4,796,180
Unrealized gain, net
of deferred taxes,
on securities
available for sale -- -- -- -- 1,998,677 1,998,677
Stock dividend 1,696,523 4,241,307 (1,783,835) (2,457,472) -- --
Stock issuances 23,300 58,250 598,450 -- -- 656,700
Cash dividend -- -- -- (1,572,779) -- (1,572,779)
---------- ----------- ------------ ----------- ----------- ------------
Balance, December 31, 1995 3,246,954 8,117,385 16,551,493 6,176,754 1,194,189 32,039,821
Net Income -- -- -- 5,061,340 -- 5,061,340
Unrealized gain, net
of deferred taxes,
on securites
available for sale -- -- -- -- 49,326 49,326
Stock dividend 66,185 165,462 1,422,978 (1,588,440) -- --
Stock issuances 62,451 156,128 1,216,381 -- -- 1,372,509
Cash dividend -- -- -- (1,703,641) -- (1,703,641)
---------- ----------- ------------ ----------- ----------- ------------
Balance, December 31, 1996 3,375,590 8,438,975 19,190,852 7,946,013 1,243,515 36,819,355
Net income -- -- -- 5,173,125 -- 5,173,125
Unrealized gain, net
of deferred taxes,
on securities
available for sale -- -- -- -- 772,839 772,839
Stock dividend 169,604 424,010 4,070,496 (4,494,506) -- --
Stock issuances 24,800 62,000 586,862 -- -- 648,862
Cash dividend -- -- -- (1,988,008) -- (1,988,008)
---------- ----------- ------------ ----------- ----------- ------------
Balance, December 31, 1997 3,569,994 $ 8,924,985 $ 23,848,210 $ 6,636,624 $ 2,016,354 $ 41,426,173
========== =========== ============ =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
LAKELAND BANCORP, INC., and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1997 1996 1995
--------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,173,125 $ 5,061,340 $ 4,796,180
Adjustment to reconcile net income to net cash provided
by operating activities:
Net amortization of premiums, discounts and deferred loan
fees and costs 1,069,452 1,330,563 1,754,252
Depreciation and amortization of premises and equipment 875,607 800,932 822,146
Provision for loan losses 438,664 533,727 128,706
Loss (gain) on sales and calls of securities 4,006 (1,450) (11,105)
Gain on sale of student loans (10,604) -- --
Gain on disposition of premises and equipment -- (54,452) --
Loss on sales of other real estate owned 16,576 24,468 --
Deferred federal income tax (benefit) (21,390) (87,890) (183,090)
(Increase) decrease in accrued interest receivable (44,668) 141,330 36,284
(Increase) decrease in other assets (281,390) (100,455) 24,329
Increase (decrease) in other liabilities 445,050 (37,717) 374,060
------------- ------------- -------------
Net cash provided by operating activities 7,664,428 7,610,396 7,801,762
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayments on and maturities of securities
available for sale 21,321,000 21,513,182 21,194,096
Proceeds from calls of securities available for sale 5,501,181 3,000,000 1,499,840
Proceeds from sales of securities available for sale 5,039,622 4,017,037 5,086,032
Purchases of securities available for sale (38,608,721) (18,555,204) (20,302,151)
Proceeds from repayment on and maturities of securities
held to maturity 13,000,000 13,311,751 10,654,284
Proceeds from calls of securities held to maturity 999,462 900,000 100,000
Purchase of securities held to maturity (16,848,638) (16,406,358) (13,232,285)
Net increase in loans (17,633,902) (35,797,739) (16,084,208)
Purchase of loans (2,854,877) -- (500,000)
Sale of loans and participation interest in loan 3,378,045 -- 703,281
Loans recoveries 71,338 32,278 145,070
Proceeds from dispositions of premises and equipment -- 64,539 --
Additions to premises and equipment (2,078,697) (2,439,872) (790,468)
Proceeds from sales of and payments on other real estate owned 83,424 311,314 82,299
------------- ------------- -------------
Net cash used in investing activities (28,630,763) (30,049,072) (11,444,210)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 28,883,852 12,141,795 20,820,558
Repayment of mortgage payable (322,000) -- --
Proceeds from common stock issuances 648,862 1,372,509 656,700
Cash dividends paid on common stock (1,988,008) (1,703,641) (1,572,779)
------------- ------------- -------------
Net cash provided by financing activities 27,222,706 11,810,663 19,904,479
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 6,256,371 (10,628,013) 16,262,031
Cash and cash equivalents - beginning 23,145,240 33,773,253 17,511,222
------------- ------------- -------------
Cash and cash equivalents - ending $ 29,401,611 $ 23,145,240 $ 33,773,253
============= ============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized gain, net of deferred income taxes, on securities
available for sale $ 7,728,329 $ 49,326 $ 1,998,677
Charge-off of loans receivable to allowance for loan losses 510,002 476,005 363,776
Transfer of loans receivable to other real estate owned 771,169 80,394 70,254
Loans to facilitate the sale of other real estate owned 33,000 -- 148,750
Mortgage payable incurred in connection with purchase of premises 322,000 -- --
Stock dividend 4,494,506 1,588,440 2,457,472
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes (federal and state) $ 2,683,502 $ 2,836,080 $ 2,543,672
Interest 10,338,612 9,725,537 8,778,774
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
LAKELAND BANCORP, INC., and Subsidiaries
Notes to Consolidated Financial Statements
ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the Corporation,
the Corporation's wholly owned subsidiary, Lakeland Bank (the "Bank") and the
Bank's wholly owned subsidiary, Lakeland Investment Corporation ("LIC"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Basis of consolidated financial statement presentation
The consolidated financial statements of the Corporation have been prepared in
conformity with generally accepted accounting principles. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the statement of condition and revenues and expenses for the period then
ended. Actual results could differ significantly from those estimates.
A material estimate that is particularly susceptible to significant changes
relates to the determination of the allowance for loan losses. Management
believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in economic
conditions in the market area.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments about information available to them at the time of their
examination.
Cash and cash equivalents
Cash and cash equivalents include cash and due from banks and federal funds
sold. Generally, federal funds sold are for one-day periods.
Securities
Investments in debt securities that the Corporation has the positive intent and
ability to hold to maturity are classified as held to maturity securities and
reported at amortized cost. Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized holding gains and
losses included in earnings. Debt and equity securities not classified as
trading securities nor as held to maturity securities, are classified as
available for sale securities and reported at fair value, with unrealized
holding gains or losses, net of deferred income taxes, reported in a separate
component of stockholders' equity.
Premiums and discounts on all securities are amortized/accreted using the
interest method. Interest and dividend income on securities, which includes
amortization of premiums and accretion of discounts, is recognized in the
consolidated financial statements when earned. The adjusted cost basis of an
identified security sold or called is used for determining security gains or
losses recognized in the consolidated statements of income.
Loans
Loans are stated at the amount of unpaid principal less unearned income, which
includes unearned interest and net deferred loan origination fees, and the
allowance for loan losses. Interest on commercial, mortgage and simple interest
installment loans is recognized as income based on the loan principal
outstanding. Interest on discounted installment loans is credited to income
based on a method which approximates the actuarial method. Recognition of
interest on the accrual method is generally discontinued when factors indicate
that the collection of such amounts is doubtful. At the time a loan is placed on
non-accrual status, previously accrued and uncollected interest is reversed
against interest income in the current period. Interest on such loans, if
appropriate, is recognized as income when payments are received. A loan is
returned to an accrual status when factors indicating doubtful collectibility no
longer exist.
Loan origination fees
Loan origination fees and certain direct loan origination costs are deferred and
subsequently amortized as an adjustment of yield over the contractual lives of
the related loans.
Allowance for loan losses
The allowance for loan losses is maintained at a level considered adequate to
absorb future losses. Management determines the adequacy of the allowance based
upon reviews of individual credits, recent loss experience, current economic
conditions, the risk characteristics of the various categories of loans and
other pertinent factors. Loans deemed uncollectible are charged to the
allowance. Provisions for loan losses and recoveries on loans previously charged
off are added to the allowance.
Loans are deemed to be impaired when, based on current information and events,
it is probable that the Bank will be unable to collect all amounts due according
to the contractual terms of the loan agreement. An insignificant payment delay,
which is defined as up to 90 days by the Bank, will not cause a loan to be
classified as impaired. A loan is not impaired during a period of delay in
payment if the Bank expects to collect all amounts due, including interest
accrued at the contractual interest rate for the period of delay. Thus, a demand
loan or other loan with no stated maturity is not impaired if the Bank expects
to collect all amounts due, including interest accrued at the contractual
interest rate, during the period the loan is outstanding. Impaired loans are
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. All loans identified as impaired are evaluated
independently. The Bank does not aggregate such loans for evaluation purposes.
36
<PAGE>
LAKELAND BANCORP, INC., and Subsidiaries
Notes to Consolidated Fifinancial Statements
Payments received on impaired loans are applied to principal, accrued interest
receivable and interest income, in that order.
Concentration of risk
The Bank's lending activity is concentrated in loans secured by real estate
located in the State of New Jersey.
Premises and equipment
Land is carried at cost. Buildings, building improvements, furniture, fixtures
and equipment and leasehold improvements are carried at cost less accumulated
depreciation and amortization. Depreciation and amortization charges are
computed on the straight-line method over the following estimated useful lives:
Buildings and building improvements 10 to 50 years
Furniture, fixtures and equipment 2 to 30 years
Leasehold improvements Shorter of useful
life or term of lease
Significant renewals and betterments are charged to the premises and equipment
account. Maintenance and repairs are charged to expense in the years incurred.
Rental income is netted against occupancy expense in the consolidated statements
of income.
Income taxes
The Corporation uses the accrual basis of accounting for financial and income
tax reporting. Provisions for income taxes in the consolidated financial
statements differ from the amounts reflected in the Corporation's income tax
returns due to temporary differences in the reporting of certain items,
primarily depreciation and the provision for loan losses, for financial
reporting and income tax reporting purposes. The income tax provisions shown in
the consolidated financial statements relate to items of income and expense in
those statements irrespective of temporary differences for income tax return
purposes. The tax effect of these temporary differences is accounted for as
deferred income taxes applicable to future years.
The Corporation and its subsidiaries file separate state income tax returns and
a consolidated federal income tax return with the amount of income tax expense
or benefit computed and allocated on a separate return basis.
Net income per common share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". SFAS 128 specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock, or potential common stock. This statement simplifies the standard
for computing EPS previously found in Accounting Principles Board Opinion No.
15. It replaces the presentation of primary EPS with basic EPS and the
presentation of fully diluted EPS with diluted EPS. Basic EPS is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods,
and requires the restatement of all prior-period EPS data presented. The
adoption of SFAS 128 did not have a material impact on consolidated financial
condition or results of operations.
Basic net income per share of common stock is calculated based on the weighted
average number of shares of common stock outstanding during the period. Diluted
net income per share is not presented as the Corporation has a simple capital
structure with only one class of common stock outstanding. On October 30, 1996,
the Corporation's Board of Directors authorized a 2% stock dividend, which was
distributed on December 10, 1996. On August 27, 1997, the Corporation's Board of
Directors authorized a 5% stock dividend, which was distributed on October 15,
1997. Basic net income per common share has been retroactively restated to give
effect to the stock dividends.
Interest-rate risk
The Corporation, through the Bank, is principally engaged in the business of
attracting deposits from the general public and using these deposits, together
with borrowings and other funds, to make loans secured by real estate and, to a
lesser extent, commercial and consumer loans. Additionally, such funds are
utilized to purchase investment securities. The potential for interest-rate risk
exists as a result of the differences in the duration of the Corporation's
interest-sensitive liabilities compared to its interest-sensitive assets. In a
changing interest rate environment, liabilities will reprice at different speeds
and to different degrees than assets, thereby impacting net interest income. For
this reason, management regularly monitors the maturity structure of the
Corporation's assets and liabilities in order to measure its level of
interest-rate risk and plan for future volatility.
Reclassication
Certain amounts for the years ended December 31, 1996 and 1995 have been
reclassified to conform to the current year's presentation.
37
<PAGE>
LAKELAND BANCORP, INC., and Subsidiaries
Notes to Consolidated Financial Statements
PENDING ACQUISITION
On September 16, 1997, the Corporation entered in an Agreement and Plan of
Merger (the "Merger Agreement") with Metropolitan State Bank ("MSB") pursuant to
which each outstanding share of MSB common stock will be converted into
Corporation Common Stock and MSB will become a wholly-owned subsidiary of the
Corporation. Pursuant to that agreement, each share of MSB's common stock
(679,047 shares of MSB's common stock were outstanding as of September 30, 1997)
will be converted into 0.941 shares of Corporation Common Stock. As of September
30, 1997, MSB had total assets, deposits and stockholders' equity of $94.4
million, $81.9 million and $7.4 million, respectively. The merger is subject to
regulatory approval, the approval of MSB's shareholders and other standard
conditions. If consummated, the merger will be accounted for as a pooling of
interests. As of December 31, 1997, costs incurred in regard to the pending
acquisition totalled $155,000 and are included in other assets. Such amount will
be expensed upon either consummation or termination of the Merger Agreement.
SECURITIES AVAILABLE FOR SALE
December 31, 1997
-------------------------------------------------
Amortized Gross Unrealized Carrying
----------------
Cost Gains Losses Value
----------- ------------ -------- -----------
U.S. Treasury $27,677,710 $ 337,744 -- $28,015,454
U.S. Government
agencies 22,674,739 112,681 17,118 22,770,302
States and political
subdivisions 18,822,344 133,711 568 18,955,487
Other debt securities 2,299,448 7,688 -- 2,307,076
Equity security 1,204,882 2,797,047 -- 4,001,929
----------- ------------ -------- -----------
$72,679,123 $ 3,388,811 $ 17,686 $76,050,248
=========== ============ ======== ===========
December 31, 1996
-----------------------------------------------------
Amortized Gross Unrealized Carrying
----------------
Cost Gains Losses Value
----------- ------------ ---------- -----------
U.S. Treasury $25,527,311 $ 194,284 $ 1,095 $25,720,500
U.S. Government
agencies 20,803,314 78,340 48,685 20,832,969
States and political
subdivisions 15,329,500 123,655 4,274 15,448,881
Other debt securities 3,606,461 17,706 2,168 3,621,999
Equity security 1,204,882 1,721,260 -- 2,926,142
----------- ------------ ---------- -----------
$66,471,468 $ 2,135,245 $ 56,222 $68,550,491
=========== ============ ========== ===========
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1997 1996
------------------------ --------------------------
Amortized Carrying Amortized Carrying
Cost Value Cost Value
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Due in one year
or less $21,697,693 $21,760,222 $25,339,254 $25,433,405
Due after one year
through five years 48,102,030 48,591,815 39,892,332 40,155,944
Due after five years
through ten years 1,669,518 1,691,282 25,000 25,000
Due after ten years 5,000 5,000 10,000 10,000
Equity security 1,204,882 4,001,929 1,204,882 2,926,142
------------ ----------- ------------ -----------
$72,679,123 $76,050,248 $66,471,468 $68,550,491
============ =========== ============ ===========
</TABLE>
Proceeds from sales and calls of securities available for sale totalled
$5,039,622 and $5,501,181, respectively, during the year ended December 31,
1997. Gross gains of $4,295 and gross losses of $7,763 were realized on those
transactions. Proceeds from sales and calls of securities available for sale
totalled $4,017,037 and $3,000,000, respectively, during the year ended December
31, 1996. Gross gains of $3,075 and $1,950 were realized on those transactions.
Proceeds from sales and call of securities available for sale totalled
$5,086,032 and $1,499,840, respectively, during the year ended December 31,
1995. Gross gains of $16,774 and gross losses of $5,759 were realized on those
transactions.
Securities with a carrying value of approximately $8,011,000 and
$7,104,000 at December 31, 1997 and 1996, respectively, were pledged to secure
public deposits and for other purposes required by applicable laws and
regulations.
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 $34,001,678 $ 319,040 $ 8,865 $34,311,852
U.S. Government
agencies 12,726,882 43,886 9,620 12,761,148
States and political
subdivisions 3,419,861 19,604 -- 3,439,465
Other 700,099 2,625 99 702,624
--------------- --------------- ------- ---------------
$50,848,520 $ 385,155 $ 18,585 $51,215,090
=============== =============== ======== ===============
</TABLE>
38
<PAGE>
LAKELAND BANCORP, INC., and Subsidiaries
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------
Amortized Gross Unrealized Estimated
-------------------
Cost Gains Losses Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury $32,725,897 $ 231,547 $ 52,819 $32,904,625
U.S. Government
agencies 11,638,493 93,969 26,775 11,705,687
States and political
subdivisions 1,218,945 6,709 -- 1,225,654
Other 2,824,709 8,582 1,169 2,832,122
----------- ----------- ----------- -----------
$48,408,044 $ 340,807 $ 80,763 $48,668,088
=========== =========== =========== ===========
<CAPTION>
December 31,
-----------------------------------------------------
1997 1996
------------------------- --------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Due in one year or less $12,694,951 $12,749,205 $14,636,079 $14,628,059
Due after one year through
five years 37,332,951 37,636,403 33,571,965 33,837,966
Due after five years
through ten years 620,618 626,857 -- --
Due after ten years 200,000 202,625 200,000 202,063
----------- ------------ ------------ -----------
$50,848,520 $51,215,090 $48,408,044 $48,668,088
=========== ============ ============ ===========
</TABLE>
There were no sales of securities held to maturity during the years ended
December 31, 1997, 1996 and 1995. Proceeds from calls of securities held to
maturity during the years ended December 31, 1997, 1996 and 1995 totalled
$999,462, $900,000 and $100,000, respectively, and resulted in a gross loss of
$538 in 1997 and gross gains of $325 and $90, respectively, in 1996 and 1995.
LOANS
December 31,
---------------------------
1997 1996
------------ ------------
Commercial $ 83,706,467 $ 75,527,719
Construction 6,876,611 2,186,190
Mortgage 96,910,708 95,538,215
Home equity and
improvement 41,656,784 42,141,007
Consumer installment 12,682,298 10,626,770
------------ ------------
241,832,868 226,019,901
------------ ------------
Less: Unearned income 135,672 70,377
Allowance for loan losses 3,000,000 3,000,000
------------ ------------
3,135,672 3,070,377
------------ ------------
$238,697,196 $222,949,524
============ ============
At December 31, 1997, 1996 and 1995, loans serviced by the Bank for the benefit
of others totalled approximately $1,669,000, $849,000 and $886,000,
respectively.
Non-performing loans consist of nonaccrual and renegotiated loans. Nonaccrual
loans are those on which income under the accrual method has been discontinued
with subsequent interest payments credited to interest income when received, or
if ultimate collectibility of principal is in doubt, applied as principal
reductions. Renegotiated loans are loans whose contractual interest rates have
been reduced or where other significant modifications have been made due to
borrowers' financial difficulties. Interest on these loans is either accrued or
credited directly to interest income. Non-performing loans were as follows (in
thousands):
December 31,
------------------------
1997 1996 1995
------ ------ ------
Nonaccrual $1,236 $1,308 $1,545
Renegotiated 1,529 2,567 2,325
------ ------ ------
$2,765 $3,875 $3,870
====== ====== ======
The impact of non-performing loans on interest income is as follows (in
thousands):
Year Ended December 31,
-----------------------
1997 1996 1995
------ ----- --------
Interest income if performing
in accordance with original
terms $258 $367 $397
Interest income actually
recorded 146 219 193
------ ----- --------
Interest income lost $112 $148 $204
====== ===== ========
The Bank has entered into lending transactions in the ordinary course of
business with directors, executive officers, principal stockholders and
affiliates of such persons on the same terms as those prevailing for comparable
transactions with other borrowers. These loans, at December 31, 1997, were
current as to principal and interest payments, and do not involve more than
normal risk of collectibility. A summary of lending activity with respect to
such persons who had borrowings of $60,000 or more, is as follows:
Year Ended December 31,
----------------------------
1997 1996
------------ ------------
Balance - beginning $ 11,969,414 $ 10,991,775
Loans originated 9,739,524 8,339,438
Repayments (7,107,884) (7,361,799)
Other changes 71,304 --
------------ ------------
Balance - ending $ 14,672,358 $ 11,969,414
============ ============
ALLOWANCE FOR LOAN LOSSES
Year Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
Balance - beginning $ 3,000,000 $ 2,910,000 $ 3,000,000
Provision for loan losses 438,664 533,727 128,706
Loans charged off (510,002) (476,005) (363,776)
Recoveries 71,338 32,278 145,070
----------- ----------- -----------
Balance - ending $ 3,000,000 $ 3,000,000 $ 2,910,000
=========== =========== ===========
39
<PAGE>
LAKELAND BANCORP, INC., and Subsidiaries
Notes to Consolidated Financial Statements
Impaired loans and related amounts recorded in the allowance for loan losses are
summarized as follows:
December 31,
-----------------------
1997 1996
---------- ----------
Recorded investment in impaired loans:
With recorded allowances $1,094,688 $2,513,216
Without recorded allowances 704,287 457,320
---------- ----------
Total impaired loans 1,798,975 2,970,536
Related allowance for loan losses 320,800 684,655
---------- ----------
Net impaired loans $1,478,175 $2,285,881
========== ==========
For the years ended December 31, 1997, 1996 and 1995, the average recorded
investment in impaired loans totalled $2,466,000, $2,757,000, and $1,678,000,
respectively. Interest income recognized on such loans during the time each was
impaired totalled $163,000, $129,000, and $60,000, respectively, of which
$5,000, $-0- and $-0-, respectively, was recorded on the cash basis.
PREMISES AND EQUIPMENT
December 31,
-------------------------
1997 1996
----------- ------------
Land $ 2,499,008 $ 2,663,710
Buildings and building improvements 6,963,843 5,693,629
Leasehold improvements 890,655 890,655
Furniture, fixtures and equipment 4,636,794 3,636,544
----------- ------------
14,990,300 12,884,538
Less accumulated depreciation
and amortization 3,666,234 3,085,562
----------- ------------
$11,324,066 $ 9,798,976
=========== ============
Included in premises and equipment at December 31, 1997 and 1996 is $1,348,000
and $1,432,000, respectively, related to properties purchased during the years
then ended which have not yet been placed in service. Management intends to use
such properties for future expansion of the Bank's branch network. Additionally,
at December 31, 1997, premises and equipment included a property having a
carrying value of $274,000 and which is no longer in the Bank's future expansion
plans. The ultimate disposition of this property is not expected to result in
any loss.
INCOME TAXES
Income tax assets and liabilities are reflected in the consolidated statements
of condition under the captions "other assets" and "other liabilities", as
applicable, and are summarized as follows:
December 31,
----------------------
1997 1996
--------- ---------
Prepaid state $ 444,000 $ 394,401
Current federal refundable 31,928 116,051
Deferred federal and state
(liability) asset (154,539) 343,334
--------- ---------
$ 321,389 $ 853,786
========= =========
The tax effects of existing temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:
December 31,
--------------------------
1997 1996
----------- ------------
Deferred tax assets:
Allowance for loan and real estate
losses in excess of tax reserves $ 1,023,723 $ 1,018,377
Non-accrued interest 80,280 90,497
Depreciation 40,720 27,012
Deferred loan fees 46,059 44,153
Other 20,516 10,200
----------- ------------
1,211,298 1,190,239
----------- ------------
Deferred tax liabilities:
Unrealized gain on securities
available for sale 1,354,771 835,508
Other 11,066 11,397
----------- ------------
1,365,837 846,905
----------- ------------
Net deferred tax (liabilities) assets $ (154,539) $ 343,334
=========== ============
The components of income taxes are summarized as follows:
Year Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
Current $ 2,718,026 $ 2,722,200 $ 2,469,763
Deferred (21,390) (87,890) (183,090)
----------- ----------- -----------
$ 2,696,636 $ 2,634,310 $ 2,286,673
=========== =========== ===========
The following table presents a reconciliation between the reported income taxes
and the income taxes that would have been computed by applying the normal
federal income tax rate of 34% to income before income taxes:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1997 1996 1995
------------------------- --------------------------- ---------------------
Amount Percent Amount Percent Amount Percent
----------- ------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Federal income
tax $ 2,675,719 34.00 $2,616,521 34.00 $ 2,408,170 34.00
Add (deduct)
effect of:
Non-taxable
interest
income (256,395) (3.26) (236,139) (3.07) (252,248) (3.56)
State income tax,
net of
federal income
tax effect 270,910 3.44 251,690 3.27 200,084 2.82
Other items, net 6,402 0.09 2,238 0.03 (69,333) (0.98)
----------- ------- ----------- -------- ----------- --------
$ 2,696,636 34.27 $ 2,634,310 34.23 $ 2,286,673 32.28
=========== ======= =========== ======== =========== ========
</TABLE>
40
<PAGE>
LAKELAND BANCORP, INC., and Subsidiaries
Notes to Consolidated Financial Statements
PROFIT SHARING PLAN
The Bank has a profit sharing plan for all its eligible employees. The plan
meets the requirements of the Employee Retirement Income Security Act of 1974.
The Bank's annual contribution to the plan is determined by the Board of
Directors with the maximum amount being the maximum tax deduction permitted for
that year under the Internal Revenue Code. Annual contributions are allocated to
participants on a point basis with accumulated benefits payable at retirement
or, at the discretion of the plan committee, upon termination of employment. The
cost of the plan charged to expense for each of the years ended December 31,
1997, 1996 and 1995 was approximately $200,000.
DIRECTORS RETIREMENT PLAN
The Board of Directors of the Corporation adopted a plan, effective January 1,
1996, which provides that any director having attained age 72 (75 for directors
active as of the date of plan inception) and having completed fifteen years of
service may retire and continue to be paid for a period of ten years at a rate
of $5,000, $7,500 or $10,000 per annum, depending upon years of credited
service. This plan is unfunded. The following tables present the status of the
plan and the components of net periodic plan cost for the year then ended:
December 31,
----------------------
1997 1996
--------- ---------
Actuarial present value of benefit obligation:
Vested $ 259,519 $ 253,027
Nonvested 9,165 567
--------- ---------
$ 268,684 $ 253,594
========= =========
Projected benefits obligation $ 285,330 $ 258,857
Unrecognized net loss (15,939) --
Unrecognized prior service cost
being amortized over fifteen years (208,896) (224,532)
--------- ---------
Accrued plan cost included in other liabilities $ 60,495 $ 34,325
========= =========
Year ended December 31,
----------------------
1997 1996
------------ --------
Net periodic plan cost included the
following components:
Service cost $ 1,868 $ 1,754
Interest cost 18,666 16,935
Amortization of prior service cost 15,636 15,636
------------ --------
Net periodic plan cost included in other expenses $36,170 $34,325
============ ========
A discount rate of 7% was assumed in the plan valuation. As the benefit amount
is not dependent upon compensation levels, a rate of increase in compensation
assumption was not utilized in the plan valuation.
COMMITMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
financial statements. The contract or notional amounts of those instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments. The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the contractual
notional amount of those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet
instruments. The Bank had commitments to extend credit as follows (in
thousands):
December 31,
-----------------
1997 1996
------- -------
Commitments to originate loans:
Commercial $ 4,367 $ 4,887
Mortgage 3,019 1,359
Consumer including home equity 1,054 818
Construction loans in process 2,831 1,140
Unused amounts under approved lines
of credit:
Commercial 25,693 22,466
Home Equity 4,889 4,990
Unsecured consumer 1,090 1,144
------- -------
$42,943 $36,804
======= =======
The commitments to originate loans and amounts to be funded under construction
loans in process are predominantly for loans which will carry fixed interest
rates. Amounts drawn on the unused home equity and commercial lines of credit
are predominantly assessed interest at rates which fluctuate with the prime
rate, while amounts drawn on the unused unsecured consumer lines are assessed
interest at 14.9%.
Commitments under standby letters of credit aggregated approximately $2,528,000
at December 31, 1997, of which $1,567,000 and $961,000 expire in 1998 and 1999,
respectively. Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property, plant, and equipment, residential real
estate and income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee
41
<PAGE>
LAKELAND BANCORP, INC., and Subsidiaries
Notes to Consolidated Financial Statements
the performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Bank holds collateral supporting
those commitments for which collateral is deemed necessary.
Rentals under long-term operating leases amounted to approximately $166,000,
$151,000, and $123,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. At December 31, 1997, the minimum commitments, which include
rental, real estate tax and other related amounts, under all noncancellable
leases with remaining terms of more than one year and expiring through 2008 are
as follows:
December 31, Amount
------------ ----------
1998 $317,000
1999 323,000
2000 205,000
2001 206,000
2002 206,000
Thereafter 669,000
----------
$1,926,000
==========
The Corporation and its subsidiaries are also subject to litigation which arises
primarily in the ordinary course of business. In the opinion of management, the
ultimate disposition of such litigation should not have a material adverse
effect on the consolidated financial position or results of operations of the
Corporation.
DIVIDEND LIMITATION
A limitation exists on the ability of the Bank to pay dividends to the
Corporation. State of New Jersey Banking laws specify that no dividend shall be
paid by the Bank on its capital stock unless, following the payment of each such
dividend, the capital stock of the Bank will be unimpaired and the Bank will
have a surplus of not less than 50% of its capital stock, or, if not, the
payment of such dividend will not reduce the surplus of the Bank. Under this
limitation, approximately $32.7 million was available for payment of dividends
as of December 31, 1997.
LAKELAND BANCORP, INC. (PARENT COMPANY ONLY)
Condensed financial statements of the Corporation (Parent company only) follow:
STATEMENTS OF CONDITION
December 31,
-------------------------
1997 1996
----------- -----------
Assets
Cash and due from banks $ 270,493 $ 214,124
Securities available for sale 4,001,929 2,926,142
Investment in subsidiaries 37,327,793 33,747,019
Other assets 950,022 623,801
----------- -----------
Total assets $42,550,237 $37,511,086
=========== ===========
Liabilities:
Deferred income taxes $ 1,124,063 $ 691,731
Stockholders' equity 41,426,174 36,819,355
----------- -----------
Total liabilities and stockholders' equity $42,550,237 $37,511,086
=========== ===========
STATEMENTS OF INCOME
Year Ended December 31,
----------------------------------------
1997 1996 1995
----------- ----------- ------------
Dividends from subsidiary bank $ 1,720,707 $ 568,021 $ 1,347,131
Other expenses 67 3,493 40
----------- ----------- ------------
Income before income tax
(benefit) expenses 1,720,670 564,528 1,347,091
Income tax (benefit) expenses (1,096) 44 112
----------- ----------- ------------
Income before undistributed
earnings of subsidiaries 1,721,736 564,484 1,346,979
Equity in undistributed earnings
of subsidiaries 3,451,389 4,496,856 3,449,201
----------- ----------- ------------
Net income $ 5,173,125 $ 5,061,340 $ 4,796,180
=========== =========== ============
42
<PAGE>
LAKELAND BANCORP, INC., and Subsidiaries
Notes to Consolidated Financial Statements
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------ ------------ ------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,173,125 $ 5,061,340 $ 4,796,180
Adjustments to reconcile net
income to net cash provided
by operating activities:
(Increase) in other assets (326,221) (178,135) (280,211)
Equity in undistributed
earnings of subsidiaries (3,451,389) (4,496,856) (3,449,201)
------------ ------------ ------------
Net cash provided by
operating activities 1,395,515 386,349 1,066,768
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuances of
common stock 648,862 1,372,509 656,700
Cash dividends paid on
common stock (1,988,008) (1,703,641) (1,572,779)
------------ ------------ ------------
Net cash (used in)
financing activities (1,339,146) (331,132) (916,079)
------------ ------------ ------------
Net increase in cash
and cash equivalents 56,369 55,217 150,689
Cash and cash
equivalents - beginning 214,124 158,907 8,218
------------ ------------ ------------
Cash and cash
equivalents - ending $ 270,493 $ 214,124 $ 158,907
============ ============ ============
</TABLE>
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than a forced or liquidation sale. Significant estimations were used
for the purposes of this disclosure. Estimated fair values have been determined
using the best available data and estimation methodology suitable for each
category of financial instruments. For those loans and deposits with floating
interest rates, it is presumed that estimated fair values generally approximate
their recorded book balances. The estimation methodologies used and the
estimated fair values and carrying values of the financial instruments are set
forth below:
CASH AND CASH EQUIVALENTS AND ACCRUED INTEREST RECEIVABLE
The carrying amounts for cash and cash equivalents and accrued interest
receivable approximate fair value.
SECURITIES
The fair values for securities are based on quoted market prices or dealer
prices, if available. If quoted market prices or dealer prices are not
available, fair value is estimated using quoted market prices or dealer prices
for similar securities.
LOANS
The fair value of loans is estimated by discounting the future cash flows, using
the current rates at which similar loans with similar remaining maturities would
be made to borrowers with similar credit ratings.
DEPOSITS
For demand, savings and club accounts, fair value is the carrying amount
reported in the consolidated financial statements. For fixed-maturity
certificates of deposit, fair value is estimated using the rates currently
offered for deposits of similar remaining maturities.
COMMITMENTS
The fair values of commitments to extend credit and standby letters of credit
are estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan commitments, fair
value also considers the difference between current levels of interest rates and
the committed rates. The fair value of guarantees and letters of credit is based
on fees currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the counterparties at
the reporting date.
The carrying values and estimated fair values of the Corporation's financial
instruments are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1997 1996
------------ ------------ ----------- -------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash
equivalents $ 29,402 $ 29,402 $ 23,145 $ 23,145
Securities available
for sale 76,050 76,050 68,550 68,550
Securities held
to maturity 50,849 51,215 48,408 48,668
Loans 238,697 241,270 222,950 225,714
Accrued interest
receivable 3,530 3,530 3,486 3,486
FINANCIAL LIABILITIES
Deposits 368,968 369,316 340,084 340,358
COMMITMENTS
Loan origination 11,271 11,271 8,204 8,204
Unused lines of credit 31,672 31,672 28,600 28,600
Standby letters of credit 2,528 2,528 1,585 1,585
</TABLE>
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or
43
<PAGE>
LAKELAND BANCORP, INC., and Subsidiaries
Notes to Consolidated Financial Statements
discount that could result from offering for sale at one time the entire
holdings of a particular financial instrument. Because no established secondary
market exists for a significant portion of the financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of the financial instruments,
and other factors. These estimates are subjective in nature, involve
uncertainties and matters of judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates. In
addition, fair value estimates are based on existing on-and-off balance sheet
financial instruments without attempting to estimate the value of anticipated
future business, and exclude the value of assets and liabilities that are not
considered financial instruments. Other significant assets and liabilities that
are not considered financial assets and liabilities include premises and
equipment, other assets and other liabilities. In addition, the income tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of the estimates.
Finally, reasonable comparability between financial institutions may
not be likely due to the wide range of permitted valuation techniques and
numerous estimates which must be made given the absence of active secondary
markets for many of the financial instruments. This lack of uniform evaluation
methodologies introduces a greater degree of subjectivity to these estimated
fair values.
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended
---------- ---------- ---------- ----------
March 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total interest income $6,685,127 $6,714,656 $6,888,928 $7,023,016
Total interest expense 2,658,576 2,595,154 2,616,438 2,651,083
---------- ---------- ---------- ----------
Net interest income 4,026,551 4,119,502 4,272,490 4,371,933
Provision for loan losses 80,559 32,652 43,813 281,640
Other income 613,079 599,840 571,923 681,255
Other expenses 2,661,304 2,734,732 2,725,820 2,826,292
Income taxes 654,519 657,621 709,867 674,629
---------- ---------- ---------- ----------
Net income $1,243,248 1,294,337 1,364,913 1,270,627
========== ========== ========== ==========
Net income per
share - basic $0.35 $0.36 $0.38 $0.36
===== ===== ===== =====
Weighted average
number of
common shares
outstanding 3,545,585 3,555,978 3,560,872 3,566,024
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
---------- ---------- ---------- ----------
March 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total interest income $6,201,915 $6,345,027 $6,414,779 $6,512,707
Total interest expense 2,429,198 2,405,127 2,413,288 2,448,133
---------- ---------- ---------- ----------
Net interest income 3,772,717 3,939,900 4,001,491 4,064,574
Provision for loan losses 35,087 83,908 50,096 364,636
Other income 502,996 538,762 539,429 653,037
Other expenses 2,392,233 2,419,684 2,413,411 2,558,201
Income taxes 632,219 676,839 711,584 613,668
---------- ---------- ---------- ----------
Net income $1,216,174 $1,298,231 $1,365,829 $1,181,106
========== ========== ========== ==========
Net income per
share-basic $0.35 $0.37 $0.39 $0.33
===== ===== ===== =====
Weighted average
number of
common shares
outstanding 3,490,433 3,504,254 3,517,123 3,540,395
========== ========== ========== ==========
</TABLE>
Net Income per common share and weighted average number of common shares
outstanding for the quarters ended June 30, 1997 and prior have been restated to
give retroactive effect to subsequent stock dividends.
IMPACT OF RECENT ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income". SFAS
130 requires that all items that are components of "comprehensive income" be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income is defined as the "change in
equity [net assets] of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources. It includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners". Companies will be required to (a) classify
items of other comprehensive income by their nature in the financial statements
and (b ) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997 and requires reclassification of
prior periods presented. As the requirements of SFAS 130 are disclosure-related,
its implementation will have no impact on the Corporation's consolidated
financial condition or results of operations.
44
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
---------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company responds to this Item by incorporating by reference the material
responsive to this Item in the Company's definitive proxy statement for its 1998
Annual Meeting of Shareholders.
ITEM 11 - EXECUTIVE COMPENSATION
The Company responds to this Item by incorporating by reference the material
responsive to this Item in the Company's definitive proxy statement for its 1998
Annual Meeting of Shareholders.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Company responds to this Item by incorporating by reference the material
responsive to this Item in the Company's definitive proxy statement for its 1998
Annual Meeting of Shareholders.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company responds to this Item by incorporating by reference the material
responsive to this Item in the Company's definitive proxy statement for its 1998
Annual Meeting of Shareholders.
PART IV
--------
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. The following portions of the Company's consolidated financial
statements are set forth in Item 8 of this Annual Report.
(i) Consolidated Statements of Condition as of December 31, 1997 and
1996.
(ii) Consolidated Statements of Income for each of the three years ended
December 31, 1997, 1996 and 1995.
(iii) Consolidated Statements of Changes in Stockholders' Equity for each
of the three years ended December 31, 1997, 1996, and 1995.
(iv) Consolidated Statements of Cash Flows for each of the three years
ended December 31, 1997, 1996 and 1995.
(v) Notes to Consolidated Financial Statements
(vi) Report of Radics & Co., LLC
45
<PAGE>
(a) 2. Financial Statement Schedules
All financial statement schedules are omitted as the information, if applicable,
is presented in the consolidated financial statements or notes thereto.
(a) 3. Exhibits
3.1 Certificate of Incorporation of Lakeland Bancorp, Inc., incorporated
herein by reference to Exhibit 4.1 to the Registration Statement on
Form S-2 filed by the Company with the Commission on August 23, 1993.
3.2 By Laws of Lakeland Bancorp, Inc. are incorporated herein by
reference to Exhibit 4.2 to the Registration Statement on Form S-3
filed by the Company with the Commission on March 30, 1990.
10.1 Amended and Restated Agreement and Plan of Reorganization, dated as
of January 14, 1998, by and between Lakeland Bancorp, Inc. and
Metropolitan State Bank is incorporated by reference to Appendix A to
the Proxy Statement-- Prospectus, dated January 15, 1998, contained
in Lakeland's Registration Statement on Form S-4 (No. 333-42851).
10.2 Director Retirement Plan
22.1 Subsidiaries of Registrant
23.1 Consent of Radics & Co., LLC Independent Certified Public Accountants
27.1 Financial Data Schedule
99.1 Forward-looking Statement Information
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three
months ended December 31, 1997.
- 46 -
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LAKELAND BANCORP, INC.
Dated: March 25, 1998 By /s/ Arthur L. Zande
_______________ ___________________________
Arthur L. Zande
Executive Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
/s/ Robert B. Nicholson 3/25/98
_________________________ Director ___________
(Robert B. Nicholson)
/s/ John W. Fredericks 3/25/98
_________________________ Director ___________
(John W. Fredericks)
/s/ Bruce G. Bohuny 3/25/98
_________________________ Director ___________
(Bruce G. Bohuny)
/s/ Mary Ann Deacon 3/25/98
_________________________ Director ___________
(Mary Ann Deacon)
/s/ Mark J. Fredericks 3/25/98
_________________________ Director ___________
(Mark J. Fredericks)
/s/ John Pier, Jr. 3/25/98
_________________________ Director ___________
(John Pier, Jr.)
/s/ Paul P. Lubertazzi 3/25/98
_________________________ Director ___________
(Paul P. Lubertazzi)
/s/ Joseph P. O'Dowd 3/25/98
_________________________ Director ___________
(Joseph P. O'Dowd)
/s/ Arthur L. Zande
_________________________ Executive Vice President 3/25/98
(Arthur L. Zande) and Director (Chief ___________
Executive Officer)
/s/ William J. Eckhardt
_________________________ Vice President and 3/25/98
(William J. Eckhardt) Treasurer (Chief Financial ___________
and Accounting Officer)
- 47 -
<PAGE>
EXHIBIT 10.2
APPROVED BY THE
BOARD OF DIRECTORS -- MARCH 13, 1996
LAKELAND STATE BANK
DIRECTORS' DEFERRED COMPENSATION PLAN
<PAGE>
TABLE OF CONTENTS
ARTICLE I -- PURPOSE AND SCOPE........................................ 1
1.1. ESTABLISHMENT.............................................. 1
1.2. PURPOSE.................................................... 1
1.3. APPLICATION................................................ 1
1.4. SCOPE...................................................... 1
ARTICLE II -- PARTICIPATION........................................... 2
2.1. ELIGIBILITY FOR PARTICIPATION.............................. 2
2.2. DURATION OF PARTICIPATION.................................. 2
ARTICLE III -- BENEFITS............................................... 3
3.1. ELIGIBILITY TO RECEIVE BENEFITS............................ 3
3.2. AMOUNT OF BENEFIT.......................................... 3
3.3. NORMAL RETIREMENT DATE..................................... 3
3.4. VESTING.................................................... 4
ARTICLE IV -- PAYMENT OF BENEFITS..................................... 5
4.1. COMMENCEMENT OF BENEFITS................................... 5
4.2. ALIENATION OF BENEFITS PROHIBITED.......................... 5
4.3. INCAPACITY................................................. 5
ARTICLE V -- GENERAL PROVISIONS....................................... 6
5.1. FUNDING.................................................... 6
5.2. RIGHT TO AMEND, SUSPEND OR TERMINATE....................... 6
5.3. EFFECT OF TERMINATION...................................... 6
5.4. RIGHTS TO BENEFITS......................................... 6
5.5. ADMINISTRATION OF THE PLAN................................. 6
5.6. CONSTRUCTION............................................... 7
5.7. TITLES..................................................... 7
5.8. IMPOSSIBILITY OF ACTION.................................... 7
5.9. SEPARABILITY............................................... 7
5.10. AUTHORIZED OFFICERS........................................ 7
5.11. CERTAIN RIGHTS AND LIMITATIONS............................. 7
ii
<PAGE>
ARTICLE I -- PURPOSE AND SCOPE
1.1. ESTABLISHMENT
Lakeland State Bank (hereinafter referred to as the "Bank") hereby
establishes effective as of January 1, 1996, an unfunded Deferred
Compensation Plan for its eligible Directors and their beneficiaries as
described herein which shall be known as the "Lakeland State Bank
Director Deferred Compensation Plan" (hereinafter referred to as the
"Plan")
1.2. PURPOSE
The purpose of this Plan is to defer compensation of the Directors of the
Bank. All capitalized terms in the Plan shall have meaning ascribed to them
under the Plan, as the context of the Plan may require.
1.3. APPLICATION OF THE PLAN
The terms of the Plan are applicable only to eligible Directors who are in
the employ of the Bank on or after January 1, 1996. Any Director who
retired or whose relationship as director with the Bank was otherwise
terminated prior to such date shall not be eligible to participate in the
Plan.
1.4. SCOPE
This plan is designed to provide Directors of the bank deferred
compensation. Nothing herein contained, and no action taken pursuant to the
provisions of this Plan, shall create or be construed to create a fiduciary
relationship between the Bank and any Director of the Bank, their
surviving spouse or dependents, their estate or their beneficiaries or any
other person.
Any reserves or liabilities set up on the Bank's books of account with
respect to any benefits to be paid under this plan shall continue for all
purposes to be a part of the general funds or assets of the Bank. To the
extent that any person acquires right to receive payments from the Bank
under this Plan, such right shall be no greater than the right of any
unsecured general creditor of the Bank.
<PAGE>
ARTICLE II -- PARTICIPATION
2.1. ELIGIBILITY FOR PARTICIPATION
Directors of the Bank who have fifteen or more years of service shall be
eligible to participate in the Plan. The Board of Directors of the Bank
shall, in their sole and absolute discretion, determine who is eligible to
participate in the Plan. Decisions of the Board of Directors shall be
conclusive and binding on all persons.
2.2. DURATION OF PARTICIPATION
A Director who becomes a Participant shall continue to be a Participant
until the later of termination as a Director with the Bank or the date he
or she is no longer entitled to benefits under the Plan .
2
<PAGE>
ARTICLE III -- DEFERRED COMPENSATION
3.1 ELIGIBILITY TO RECEIVE DEFERRED COMPENSATION
The Bank shall pay deferred compensation with respect to each:
(a) Retired Participant (including Participants who terminated for
reasons other than retirement and who have commenced receipt
of their Vested benefit in the Deferred Compensation Plan):
(b) Surviving spouse receiving a Pre-Retirement Survivor deferred
compensation under this Plan;
(c) Spouse of a deceased Retired Participant receiving deferred
compensation under this Plan in accordance with the form of
payment in effect for such Participant;
whose amount of deferred compensation, determined in accordance with
Section 3.2, is greater than $0. Such deferred compensation shall be
paid directly to such Participant, or to the Participant's Surviving
Spouse from the general assets of the Bank.
3.2. AMOUNT OF DEFERRED COMPENSATION
The amount of the deferred compensation shall be as follows:
A participant entitled to payment in accordance with Section 3.1(a) shall
receive his deferred compensation in monthly, quarterly, or annual payments
at the discretion of the Director, payable for ten (10) years. Should death
occur prior to ten (10) years of payments, the balance of payments shall be
payable to the Director's spouse.
. $10,000 per year for 25 or more years of service as a Director.
. $ 7,500 per year for 20, but less than 25, years of service as a
Director.
. $ 5,000 per year for 15, but less than 20, years of service as a
Director.
. $ 0 for less than 15 years of service.
3.3. NORMAL RETIREMENT DATE
The Normal Retirement Date for a Director shall be the first of the month
following the Director's term of office, during which term the Director
shall have reached the age of 75 for existing Directors and 72 for
subsequent Directors.
3
<PAGE>
3.4. VESTING
Each Director shall, upon the completion of 15 or more years of service,
be vested in deferred compensation as outlined in Section 3.2, payable
beginning the month following his/her termination as a Director. In the
event of the death of a Vested Director prior to the commencement of
payment of deferred compensation, such deferred compensation shall be
payable to the Director's spouse as if he retired on the date of his
death.
4
<PAGE>
ARTICLE IV -- PAYMENT OF DEFERRED COMPENSATION
4.1. COMMENCEMENT OF PAYMENTS
The Deferred Compensation shall become payable to an eligible Director
as of his Normal Retirement Date.
4.2. ALIENATION OF DEFERRED COMPENSATION PROHIBITED
No deferred compensation payable at any time under the Plan shall be
subject in any manner to alienation, anticipation, sale, transfer,
assignment, pledge, attachment or encumbrance of any kind, except as
required by law. Neither shall any deferred compensation payable at any
time under the Plan be subject in any manner to the debts or liabilities
of any person entitled to such benefit, nor shall the Bank be required
to make any payments toward such debts or liabilities.
4.3. INCAPACITY
In the event that any deferred compensation hereunder is, or becomes,
payable to a minor or to a person under legal disability, or to a person
not judicially declared incompetent but who by reason of illness or
mental or physical disability is, in the opinion of the Bank, incapable
of personally receiving and giving valid receipt of such payment, then,
unless and until claim therefor shall have been made by a duly appointed
guardian or other legal representative of such person, the Bank may
provide for such payment or any part thereof be made to any person or
institution then contributing toward or providing for the care and
maintenance of such person. Any such payment shall be a payment for such
person and a complete discharge of the liability of the Bank therefor.
5
<PAGE>
ARTICLE V -- GENERAL PROVISIONS
5.1. FUNDING
The Deferred Compensation Plan is intended as an unfunded plan. The Bank
intends to establish appropriate reserves on its books of account in
accordance with generally accepted accounting principles. In addition,
the Bank may establish a Trust to hold assets of the Bank as a reserve
for the discharge of the Bank's obligation to Participants. In that
event, such reserves shall be, for all purposes, part of the general
funds of the Bank and no Participant, eligible spouse or other person
claiming a right under the Deferred Compensation Plan shall have any
interest, right or title to such reserves.
5.2. RIGHT TO AMEND, SUSPEND OR TERMINATE
The Bank reserves the right at any time and from time to time to amend,
suspend or terminate the Deferred Compensation Plan by action of the
Board of Directors without the consent of any Participant, eligible
beneficiary or other person claiming a right under the Plan. No
amendment of the Plan shall reduce the benefits of any Participant below
the amount which he or she has accrued as of the date of termination.
5.3. EFFECT OF TERMINATION
In the event that the Plan is terminated, benefits accrued by eligible
Participants shall vest. There shall be no further accrual of benefits
after the date of Plan termination.
5.4. RIGHTS TO BENEFITS
No person shall have any right to a benefit under the Plan except as
such benefit has accrued to him or her in accordance with the terms of
the Plan, and then such right shall be no greater than the rights of any
unsecured general creditor of the Bank. Notwithstanding any other
provisions of this Plan, if a Director shall be terminated for reason of
acts of fraud, dishonesty, larceny, misappropriation or embezzlement
committed against the Bank, all of such Director's rights to benefits
under this Deferred Compensation Plan shall be forfeited.
5.5. ADMINISTRATION OF THE DEFERRED COMPENSATION PLAN
The Bank may establish a Committee to administer the Plan. Except as
otherwise specifically provided in the Plan, the Committee shall be the
administrator of the Plan. The Committee shall have full authority to
determine all questions arising in connection with the Plan including
its interpretation, may adopt procedural rules and may employ and rely
on such legal counsel, consultants, accountants and agents as it may
deem advisable to assist in the administration of the Plan. Decisions of
the Committee shall be conclusive and binding on all persons.
6
<PAGE>
5.6. CONSTRUCTION
The provisions of the Plan shall be construed, administered and enforced
according to the laws of the State of New Jersey.
5.7. TITLES
The titles of the Articles and Sections herein are included for
convenience of reference only and shall not be construed as a part of
the Plan, or have any effect on the meaning of the provisions hereof.
Unless the context requires otherwise, the singular shall include the
plural; the masculine gender shall include the feminine and vice versa;
and such words as "herein", "hereinafter"," hereof" and "hereunder"
shall refer to this instrument as a whole and not merely to the
subdivision in which such words appear.
5.8. IMPOSSIBILITY OF ACTION
In case it becomes impossible for any fiduciary to perform any act under
this Plan, that act shall be performed which in the judgment of such
fiduciary will most nearly carry out the intent and purposes of this
Plan. All parties concerned shall be bound by any such acts performed
under such conditions.
5.9. SEPARABILITY
In any term or provision of this Plan as presently in effect or an
amended from time to time, or the application thereof to any payments or
circumstances, shall to any extent be invalid or unenforceable, the
remainder of the Plan, and the application of such term or provision to
payments or circumstances other than those as to which it is invalid or
unenforceable, shall not be affected thereby, and each term or provision
of the Plan shall be valid and enforced to the fullest extent permitted
by law.
5.10. AUTHORIZED OFFICERS
Whenever the Bank under the terms of the Plan is permitted or required
to do or to perform any act or matter or thing, it shall be done and
performed by the duly authorized officer of the Bank or his designee.
5.11. CERTAIN RIGHTS AND LIMITATIONS
The establishment of the Plan shall not be construed as conferring any
legal rights upon any Director or other person for a continuation of
employment, nor shall it interfere with the rights of the Bank to
terminate any Director and to treat him or her without regard to the
effect that such treatment might have upon that Director's participation
in the Plan.
7
<PAGE>
EXHIBIT 22.1
LAKELAND BANCORP, INC.
SUBSIDIARIES OF THE REGISTRANT
NAME JURISDICTION OF INCORPORATION
---- -----------------------------
Lakeland Bank New Jersey chartered bank
Lakeland Investment Corporation Delaware
Metropolitan State Bank New Jersey chartered bank
M.S.B. Investment, Inc. New Jersey
- -
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference into the previously
filed Registration Statement on Form S-3 (No. 33-34099) of Lakeland Bancorp,
Inc. (the "Company") of our report dated January 9, 1998, included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
/s/ Radics & Company, LLC
Radics & Company, LLC
- ---------------------
Pine Brook, New Jersey
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 22,902
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 76,050
<INVESTMENTS-CARRYING> 50,849
<INVESTMENTS-MARKET> 51,215
<LOANS> 238,697
<ALLOWANCE> 3,000
<TOTAL-ASSETS> 411,481
<DEPOSITS> 368,968
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,087
<LONG-TERM> 0
8,925
0
<COMMON> 0
<OTHER-SE> 32,501
<TOTAL-LIABILITIES-AND-EQUITY> 411,481
<INTEREST-LOAN> 19,334
<INTEREST-INVEST> 7,307
<INTEREST-OTHER> 671
<INTEREST-TOTAL> 27,312
<INTEREST-DEPOSIT> 10,511
<INTEREST-EXPENSE> 10,521
<INTEREST-INCOME-NET> 16,790
<LOAN-LOSSES> 439
<SECURITIES-GAINS> (4)
<EXPENSE-OTHER> 10,948
<INCOME-PRETAX> 7,870
<INCOME-PRE-EXTRAORDINARY> 5,173
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,173
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.45
<YIELD-ACTUAL> 7.54
<LOANS-NON> 1,236
<LOANS-PAST> 298
<LOANS-TROUBLED> 1,529
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,000
<CHARGE-OFFS> 510
<RECOVERIES> 71
<ALLOWANCE-CLOSE> 3,000
<ALLOWANCE-DOMESTIC> 3,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1 LAKELAND BANCORP, INC. (THE "COMPANY")
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for "forward-looking statements" (as defined in the Act). The
Annual Report on Form 10-K to which this Exhibit is attached, the Company's
Annual Report to Shareholders, any Quarterly Report on Form 10-Q prepared by the
Company, any Current Report on Form 8-K prepared by the Company and any other
written or oral statements made by or on behalf of the Company may include
forward-looking statements which reflect the Company's current view (as of the
date of such forward-looking statement is made) with respect to future events,
prospects, projections, financial performance or other matters. These forward-
looking statements are subject to certain uncertainties and other factors that
could cause actual results to differ materially from those made, implied or
projected in such statements. These uncertainties and other factors include,
but are not limited to, the following: uncertainties relating to general
economic conditions; uncertainties relating to the determination of the
Company's provision for loan losses and allowance for loan losses (as described
under the caption "Management's discussion and Analysis of Financial Condition
and Results of Operations -- Provision for Loan Losses" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Loans -- Risk Elements" in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997); uncertainties relating to the analysis of the
Company's assessment of rate sensitive assets and rate sensitive liabilities and
relating to the extent to which market factors indicate that a financial
institution such as the Company should match such assets and liabilities (as
described under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Provision for Loan Losses" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity" in the Company's Annual Report on From 10-K for the
year ended December 31, 1997); the impact of competition among financial
institutions and between financial institutions and other sources of credit; the
ability of the Company to integrate Metropolitan State Bank, which was acquired
by the Company on February 20, 1998; the impact of off-balance sheet obligations
(as described in the Notes to the Company's consolidated Financial Statements
included within the Company's Annual Report on Form 10-K for the year ended
December 31, 1997); changes to the presentation of financial results and
condition resulting from adoption of new accounting principles or upon the
advice of the Company's independent auditors or the staff of various regulatory
agencies; unanticipated demands upon the Company's liquidity; and unanticipated
failure on malfunction of the Company's information systems; changes in, or
failure to comply with governmental regulations; the costs and other effects of
administrative and legal proceedings; the continued financial viability of the
Company's borrowers; the continued financial viability of the issuers of
securities within the Company's investment portfolio; labor and employment
benefit costs; and other factors referenced in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, or other filings or written or
- -
<PAGE>
oral statements made by or on behalf of the Company. The words "believe",
"expect", "anticipate", "project" and similar expressions identify "forward-
looking statements", which speak only as of the date that the statement is made.
The Company undertakes no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events or
otherwise.
- -
