<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-K/A2
(Amendment No. 2, amending Items 6-8)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31,1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to ______.
Commission File Number 33-27312
LAKELAND BANCORP, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-2953275
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
250 Oak Ridge Road
Oak Ridge, New Jersey 07438 (973-697-2000)
(Address and telephone number, including area code, of registrant's principal
executive office)
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
reporting 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 the 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]
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, 1999, is estimated to have been approximately $129,000,000.
The number of shares outstanding of the registrant's Common Stock, as of
February 1, 1999, was 8,511,588.
Documents incorporated by reference: None
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands except for per share and ratio information)
<S> <C> <C> <C> <C> <C>
Selected balance sheet
data:
Investment securi-
ties(1)............... $184,150 $159,343 $140,882 $143,507 $147,205
Short-term invest-
ments(2).............. 11,079 12,827 9,900 27,175 2,825
Loans.................. 311,493 291,145 268,546 232,064 219,520
Allowance for possible
loan losses........... 3,897 4,142 3,585 3,470 3,547
Total assets........... 548,557 507,725 457,717 437,079 401,768
Deposits............... 488,881 453,471 409,710 391,996 364,121
Stockholders' equity... $ 53,314 $ 48,662 $ 43,579 $ 38,600 $ 32,215
Selected operating data:
Interest income........ $ 34,935 $ 33,405 $ 30,731 $ 28,956 26,697
Interest expense....... 13,009 12,925 11,787 11,244 9,296
-------- -------- -------- -------- --------
Net interest income.... 21,926 20,480 18,944 17,712 17,401
Provision for loan
losses................ 698 1,026 908 357 571
-------- -------- -------- -------- --------
Net interest income
after provision for
loan losses........... 21,228 19,454 18,036 17,355 16,830
Other income........... 3,165 3,023 2,671 2,434 2,225
Other expenses......... 15,752 14,508 12,692 12,201 11,565
-------- -------- -------- -------- --------
Income before income
taxes................. 8,641 7,969 8,015 7,588 7,490
Income taxes........... 2,916 2,648 2,665 2,351 2,232
======== ======== ======== ======== ========
Net income............. $ 5,725 $ 5,321 $ 5,350 $ 5,237 $ 5,258
======== ======== ======== ======== ========
Weighted average com-
mon shares outstand-
ing(3)
Basic................ 8,493 8,405 8,304 8,187 8,010
Diluted.............. 8,493 8,435 8,337 8,220 8,014
Net income per common
share(3)
Basic................ $ 0.67 $ 0.63 $ 0.64 $ 0.64 $ 0.66
-------- -------- -------- -------- --------
Diluted.............. $ 0.67 $ 0.63 $ 0.64 $ 0.64 $ 0.66
-------- -------- -------- -------- --------
Other selected data:
Return on average as-
sets.................. 1.11% 1.10% 1.22% 1.28% 1.33%
Return on average
stockholders' equi-
ty.................... 11.28 11.46 13.15 14.91 17.27
Average stockholders'
equity to average as-
sets.................. 9.86 9.63 9.29 8.60 7.69
Net interest
spread................ 3.78 3.81 3.88 3.88 4.21
Net interest mar-
gin................... 4.62 4.61 4.68 4.64 4.73
Efficiency ratio(4).... 62.78 61.73 58.72 60.56 58.93
Cash dividend per
share(3).............. $ 0.29 $ 0.24 $ 0.21 $ 0.19 $ 0.15
Dividend payout ra-
tio................... 42.72% 37.36% 31.85% 30.04% 23.16%
Non-performing loans
to total loans........ 2.24 1.69 2.46 2.31 2.48
Non-performing assets
to total loans plus
other real estate..... 2.57 1.91 2.53 2.71 3.05
Allowance for possible
loan losses/non-per-
forming loans......... 55.89 83.91 54.22 64.62 65.24
Allowance for possible
loan losses/total
loans................. 1.25 1.42 1.34 1.49 1.62
Net charge-offs to av-
erage loans, net...... 0.32 0.17 0.32 0.19 0.23
</TABLE>
- --------
(1) Includes securities available for sale and held to maturity.
(2) Comprised of federal funds sold and certificates of deposit.
(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 2 for 1 stock split effected in the
form of a 100% stock dividend distributed on October 1, 1998, a 5% stock
dividend distributed on October 15, 1997, a 2% stock dividend distributed
on December 10, 1996, a 2 for 1 stock split effected in the form of 100%
stock dividend distributed on October 25, 1995, and a 5% stock dividend
distributed on June 30, 1995.
(4) The efficiency ratio is non-interest expense as a percent of net interest
income plus non-interest income.
2
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Review. Lakeland reported net income of $5.7 million for the year
ended December 31, 1998, an increase of $404,633 or 7.61% compared to $5.3
million for the year ended December 31, 1997. Net income per share (basic and
diluted) increased $.04 to $.67 per share for the year ended December 31, 1998,
as compared to $.63 per share for the year ended December 31, 1997. 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
3
<PAGE>
income in 1997 decreased by $29,619 or .55% as compared to $5.35 million in
1996. As of December 31, 1998, Lakeland had total assets of $548.6 million, an
increase of $40.8 million or 8.04% compared to $507.7 million at December 31,
1997.
Lakeland's return on average assets and average stockholders' equity was
1.11% and 11.28%, respectively, for 1998, compared to 1.10% and 11.46%,
respectively, in 1997 and 1.22% and 13.15%, respectively, in 1996. The decline
in the return on average stockholders' equity since 1996 primarily reflects
increases in stockholders' equity resulting primarily from profitable
operations over this period along with increased capital generated by shares of
Lakeland common stock sold to existing shareholders pursuant to Lakeland's
dividend reinvestment program.
Lakeland's gross loan portfolio increased $20.3 million or 6.97% from $291.4
million at December 31, 1997, to $311.7 million at December 31, 1998. This
increase consisted of commercial loan increases of $6.4 million, mortgage
(including construction) loan increases of $14.3 million, and consumer
installment (including home equity and improvement)loan decreases of $389,000.
The investment portfolio, including both held to maturity and available for
sale securities, increased $24.8 million or 15.57% from $159.3 million at
December 31, 1997, to $184.1 million at December 31, 1998. The investment
portfolio contains net unrealized gains of $6.1 million at December 31, 1998,
an increase of $2.3 million from the net unrealized gain of $3.8 million in the
portfolio at December 31, 1997. Included in unrealized gains at December 31,
1998, and 1997 are $4.4 million and $2.8 million, respectively, related to
shares of High Point Financial Corp. common stock. Lakeland has a pending merger
agreement with High Point. Should the merger be consummated, the unrealized gain
on these High Point shares would be eliminated. Cash and cash equivalents
decreased $6.1 million, or 14.82% to $35.1 million at December 31, 1998, from
$41.2 million at December 31, 1997. This decrease was partially the result of a
$4.2 million reduction in cash and due from banks, which is due to a reserve
reduction strategy implemented in 1998. Cash and cash equivalents represented
6.4% and 8.1% of total assets at December 31, 1998, and 1997, respectively.
Total deposits increased $35.4 million or 7.81% from $453.5 million at
December 31, 1997, to $488.9 million at December 31, 1998. This increase
consisted of non-interest-bearing demand deposit increases of $9.6 million,
savings and interest-bearing demand deposit increases of $17.5 million, and
time deposit increases of $8.4 million.
Interest Income. Interest income increased $1.5 million or 4.58% to $34.9
million in 1998. In 1997, interest income increased $2.7 million or 8.70% to
$33.4 million from $30.7 million in 1996.
The increase in 1998 was attributable to an increase in average interest
earning assets of $29.8 million or 6.70%, partially offset by a 15 basis point
decline in average yield. Interest income on loans increased $1.6 million, or
6.68%, to $25.1 million in 1998 from $23.5 million in 1997, due to an increase
in average loan balances offset partially by a decrease in average yield.
During 1998 average loans increased $21.3 million. These increased average
balances were partially offset by an 8 basis point decrease in the average
yield on loans.
Interest income on taxable investment securities decreased $454,000 or 5.89%
to $7.3 million in 1998, due to a $1.7 million, or 1.33%, decrease in the
average balance of such securities, along with a 29 basis point decrease in
average yield.
Interest income on tax-exempt investment securities increased $342,000 or
27.49% to $1.6 million in 1998 from $1.2 million in 1997, due to an $8.4
million increase in the average balance outstanding, offset partially by a
decline in average yield of 12 basis points.
Interest income on federal funds sold increased $73,000 or 7.73% to $1
million in 1998 from $949,000 in 1997, due primarily to a $1.8 million increase
in the average balance outstanding, which was partially offset by an 11 basis
point decrease in average yield.
4
<PAGE>
The $2.7 million increase in interest income in 1997 was attributable to an
increase in average interest earning assets of $39.9 million or 9.85%. Interest
income on loans increased $2.1 million, or 9.60%, to $23.5 million in 1997 from
$21.4 million in 1996, due to an increase in average loan balances offset
partially by a decrease in average yield. During 1997 average loans increased
$28.4 million. These increased average balances were partially offset by a 15
basis point decrease in the average yield on loans.
Interest income on taxable investment securities increased $255,000 or 3.42%
to $7.7 million in 1997 from $7.5 million in 1996 due to a $4.0 million, or
3.30%, 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 6.14% in 1996.
Interest income on tax-exempt investment securities increased $153,000 or
14.02% to $1.2 million in 1997 from $1.1 million in 1996. A $4.0 million
increase in the average balance of such securities was partially offset by a 13
basis point decrease in average yield.
Interest income on federal funds sold increased $207,000 or 27.97% to
$949,000 in 1997 from $742,000 in 1996, due primarily to a $3.5 million
increase in average balance along with a 13 basis point increase in average
yield.
Interest Expense. The increase in Lakeland's earning asset base was funded
in part by increased deposits. Interest paid on deposits during 1998 increased
$52,000 or .41% to $12.81 million from $12.76 million in 1997, as a result of
increased average balances. While the average volume of interest-bearing
deposits increased $13.0 million or 3.75% during 1998, the average rate paid on
those deposits decreased by 12 basis points. Interest expense on time deposits
decreased $163,000 or 2.16% from $7.7 million in 1998 to $7.5 million in 1997.
During 1998, the average volume of time deposits decreased $729,000, and the
average rate paid on time deposits decreased by 8 basis points. Interest
expense on interest-bearing demand deposits increased $457,000 or 22.38%.
During 1998, the average volume of interest-bearing demand deposits increased
$13.2 million, or 15.33%, and the average rate paid on interest-bearing demand
deposits increased by 15 basis points from 2.37% during 1997 to 2.52% during
1998. Interest expense on savings and club deposits decreased by $242,000 or
8.04%. During 1998, the average volume of savings deposits increased by
$524,000, while the average rate paid on savings deposits decreased by 22 basis
points from 2.60% during 1997 to 2.38% during 1998. Total interest expense
increased $84,000 or .65%, reflecting the aforementioned factors affecting
deposits along with a $32,000 increase in interest expense on borrowed money.
Interest paid on deposits during 1997 increased $1.1 million or 9.88% to
$12.8 million from $11.6 million in 1996, as a result of increased average
balances. While the average volume of interest-bearing deposits increased $31.7
million or 10.08% during 1997, the average rate paid on those deposits remained
unchanged. During 1997 the average volume of time deposits increased $19.2
million, while the average rate paid on time deposits increased by 9 basis
points. During 1997 the average volume of interest-bearing demand deposits
increased $11.4 million or 15.25%, and the average rate paid on interest-
bearing demand deposits increased by 20 basis points from 2.17% during 1996 to
2.37% in 1997. Interest expense on savings deposits decreased by $416,000 or
12.15%. During 1997 the average volume of savings deposits increased by $1.1
million, while the average rate paid on savings deposits decreased by 39 basis
points from 2.99% during 1996 to 2.60% during 1997. Total interest expense
increased $1.1 million or 9.65%, reflecting the aforementioned factors
affecting deposits offset by a $10,000 decrease in interest expense on borrowed
money.
Net Interest Income. Net interest income, typically the largest component of
Lakeland'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.
5
<PAGE>
The following table reflects the components of Lakeland's net interest
income, setting forth for the years presented, (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) Lakeland's net interest spread (i.e., the average yield on
interest-earning assets less the average cost of interest-bearing liabilities,
and (5) Lakeland's net yield on interest-earning assets. Rates are not computed
on a taxable equivalent basis.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- --------------------------
Average Average Average
Interest Rates Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid Balance Expense Paid
-------- -------- ------- -------- -------- ------- -------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earnings
assets:
Loans(A)............... $296,081 $25,071 8.47% $274,733 $23,502 8.55% $246,355 $21,443 8.70%
Taxable investment
securities(B)......... 123,728 7,256 5.86 125,396 7,710 6.15 121,389 7,455 6.14
Tax-exempt investment
securities............ 35,353 1,586 4.49 27,002 1,244 4.61 22,994 1,091 4.74
Federal funds sold..... 19,276 1,022 5.30 17,526 949 5.41 14,044 742 5.28
-------- ------- -------- ------- -------- -------
Total interest-earning
assets................ 474,438 34,935 7.36 444,657 33,405 7.51 404,782 30,731 7.59
------- ------- -------
Non-interest-earning
assets:
Allowance for loan
losses................ (3,815) (3,663) (3,528)
Other assets........... 44,003 41,459 36,596
-------- -------- --------
Total assets........... $514,626 $482,453 $437,850
======== ======== ========
Interest-bearing
liabilities:
Interest-bearing demand
deposits.............. $ 99,313 2,499 2.52 $ 86,142 2,042 2.37 $ 74,741 1,619 2.17
Savings and club
deposits.............. 116,146 2,767 2.38 115,622 3,009 2.60 114,546 3,425 2.99
Time deposits.......... 143,530 7,547 5.26 144,259 7,710 5.34 125,056 6,569 5.25
Borrowings............. 3,959 196 4.95 3,263 164 5.03 3,750 174 4.64
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities........... 362,948 13,009 3.58 349,286 12,925 3.70 318,093 11,787 3.71
------- ------- -------
Non-interest-bearing
liabilities:
Demand deposits........ 98,076 84,619 76,780
Other liabilities...... 2,865 2,105 2,290
Stockholders' equity.... 50,737 46,443 40,687
-------- -------- --------
Total liabilities and
stockholders' equity.. $514,626 $482,453 $437,850
======== ======== ========
Net interest income/net
interest spread........ $21,926 3.78% $20,480 3.81% $18,944 3.88%
======= ===== ======= ==== ======= ====
Net yield on interest-
earning assets(C)...... 4.62% 4.61% 4.68%
===== ==== ====
</TABLE>
- --------
(A) Includes non-accrual loans, the effect of which is to reduce the yield
earned on loans, and deferred loan fees.
(B) Includes certificates of deposit and interest-bearing cash accounts.
(C) Net interest income divided by average interest-earning assets.
6
<PAGE>
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. The table reflects the extent to
which changes in Lakeland'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>
Year Ended December 31,
---------------------------------------------------
1998 vs. 1997 1997 vs. 1996
------------------------ -------------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
change in Total change in Total
------------- Increase ------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ----- --------- ------ ----- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans..................... $1,793 $(224) $1,569 $2,434 $(375) $2,059
Taxable investment
securities............... (100) (354) (454) 243 12 255
Tax-exempt investment
securities............... 375 (33) 342 184 (31) 153
Federal funds sold........ 93 (20) 73 188 19 207
------ ----- ------ ------ ----- ------
Total interest income.... 2,161 (631) 1,530 3,049 (375) 2,674
------ ----- ------ ------ ----- ------
Interest expense:
Interest-bearing demand
deposits................. 323 134 457 264 159 423
Savings and club
deposits................. 14 (256) (242) 32 (448) (416)
Time deposits............. (41) (122) (163) 1,026 115 1,141
Borrowings................ 35 (3) 32 (24) 14 (10)
------ ----- ------ ------ ----- ------
Total interest expense.... 331 (247) 84 1,298 (160) 1,138
------ ----- ------ ------ ----- ------
Net interest income........ $1,830 $(384) $1,446 $1,751 $(215) $1,536
====== ===== ====== ====== ===== ======
</TABLE>
For the year ended 1998, net interest income increased $1.4 million to $21.9
million from $20.5 million in 1997. This increase was attributable to an
increase in the volume of average net interest earning assets. A $16.1 million
increase in the excess of average interest-earning assets over average
interest-bearing liabilities was offset in part by a 3 basis point decrease in
the net interest spread. The net yield on interest-earning assets increased to
4.62% in 1998 from 4.61% in 1997. For the year ended 1997, net interest income
increased $1.5 million to $20.5 million from $18.9 million in 1996. This
increase was attributable to an increase in the volume of average net interest
earning assets. An $8.7 million increase in the excess of average interest-
earning assets over average interest-bearing liabilities was offset in part by
a 7 basis point decrease in both the net interest spread and 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 the Lakeland Board of Directors
after considering such elements as economic conditions, risk exposure, adequacy
of collateral, and such other relevant factors.
On a quarterly basis, the loan review committee reviews a portion of the
commercial loans and commercial mortgages in excess of $300,000 for asset
quality and future, anticipated collectibility of each loan. Within the
calendar year, all loans $300,000 and over are reviewed. Based on this review,
a classification is determined for each loan. The various classifications range
from the "highest" (loans with outstanding quality), to "solid," "special
mention," "substandard," "doubtful," and "loss." Each of these classifications
is then assigned a reserve percentage. These percentages range from .25% for
the "highest" quality loans to percentages such as 50% for "doubtful" or 100%
for "loss." Once each loan is reviewed and assigned this
7
<PAGE>
reserve percentage, the percentage is multiplied by the outstanding loan
balance, and then the total for all the loans over $300,000 is totaled.
Loans delinquent over 90 days or loans which have been placed on a non-
accrual status are independently reviewed regardless of loan balance. Depending
on the collectibility of the loan along with the collateral maintained, a
specific reserve is maintained for these loans.
Loans under $300,000, which are not reviewed, are also assigned a reserve
percentage. Non-reviewed commercial loans and mortgage loans are assigned a
percentage of .25% and consumer credit, home equity, and overdraft checking
loans are assigned a percentage of .75%. A percentage of .25% is also assigned
to letters of credit and unused commitments. The amount of the calculation of
reserves necessary for the loans under $300,000 is added to those over
$300,000, along with the specific reserves for delinquent and non-accrual
loans, to arrive at an overall reserve total.
Once this process is completed, this calculation is then reported to the
Lakeland Board of Directors. The Board then determines the amount that should
be maintained as adequate in the Reserve for Loan Losses. The amount that is
maintained in the Reserve for Loan Losses consists of the amount calculated in
the loan review process plus an amount which is kept as an excess reserve for
unanticipated losses, which are always inherent in the loan portfolio.
The Lakeland Board of Directors reviews actual experience as compared to the
estimates arrived at by the process described above. From time to time, the
Board may direct management to adjust this process or the percentages used (to
the extent allowable by GAAP and applicable regulations) to better reflect
actual loan loss experience.
At December 31, 1998, the allowance stood at $3,897,000, a $245,000 decrease
from December 31, 1997, as Lakeland provided $698,000 to the allowance and had
net charge-offs of $943,000. Of the $698,000 increase in the provision,
$534,000 was provided for in the fourth quarter of 1998 as Lakeland charged-off
five commercial loans at year-end as well as increased the allowance. At
December 31, 1997, the allowance stood at $4,142,000, a $557,000 increase from
December 31, 1996, as Lakeland provided $1,026,000 to the allowance and had net
charge-offs of $469,000. $735,000 of the total provided was done in the fourth
quarter, as Metropolitan State Bank charged-off loans at year-end as well as
provided for anticipated charge-offs prior to its acquisition by Lakeland.
Based on its ongoing loan review process, its collateral positions, and its
loss and recovery experience, Lakeland believes that its allowance for loan
losses at December 31, 1998, 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 judgment, actual
results could differ from management's determination, as a result of a variety
of factors, such as economic distress within Lakeland's primary marketing area
and unanticipated financial problems for Lakeland's significant borrowers.
At December 31, 1998, the allowance for loan losses as a percentage of total
loans was 1.25%, as compared to 1.42% and 1.34% at December 31, 1997, and 1996,
respectively.
Other Income. Other (i.e., non-interest) income increased $143,000 or 4.72%
to $3.2 million in 1998 from $3.0 million in 1997 and represented 8.31% of
total income for 1998. This increase was primarily attributable to an increase
of $88,000 in the gain on disposition of securities.
Other (i.e., non-interest) income increased $351,000 or 13.15% to $3.0
million in 1997 from $2.7 million in 1996 and represented 8.30% of total income
for 1997, an increase from 8.00% in 1996. This increase was primarily
attributable to an increase in ATM fee income, included in service charges on
deposit accounts.
Other Expenses. Other (i.e., non-interest) expenses in 1998 increased $1.2
million or 8.57% over 1997. Salaries and benefits, the largest component of
other expenses, increased by $500,000 or 6.27%, due to branch
8
<PAGE>
expansion and normal salary increases. Occupancy expense increased $101,000 or
6.94%. The increase in this category resulted from expansion in Lakeland's
branch network. Furniture and fixtures increased by $252,000 or 19.50%. The
increase in this category resulted partially from an $84,000 or 36.74% increase
in service agreements. This increase was due to the purchasing of maintenance
contracts for imaging and computer equipment. Exclusive of this increase in
service agreements, furniture and fixtures expense increased $168,000 or
15.77%. This aspect of the increase was due primarily to an increase in
depreciation expense, resulting from the mid-1997 purchase of optical imaging
equipment and the expansion of Lakeland's branch network. Legal expense
increased $219,000 or 92.40%. This was due principally to legal costs incurred
in connection with Lakeland's acquisition of Metropolitan State Bank. Other
expense categories increased in the aggregate by $170,000 or 4.82%. This was
due to increased costs incurred in operating the branch network and Lakeland's
banking business.
Other (i.e., non-interest) expenses in 1997 increased $1.8 million or 14.31%
over 1996. Salaries and benefits increased by $1.1 million or 15.17%. This
increase was due to increased staffing levels and normal salary increases, as
well as increased health benefit and pension costs. Occupancy expense increased
$79,000 or 5.74%. Furniture and fixtures expense increased $118,000 or 10.05%.
Increases in these two categories are due to costs incurred in operating the
branch network, as well as the depreciating of the optical imaging equipment
acquired in 1997. Legal expense increased $42,000 or 21.75%. This was due to
increased legal costs incurred in Lakeland's normal banking business. Other
expense categories increased in the aggregate $525,000 or 17.46%. Significant
sources of changes in other expenses were auditing expense, which increased
$104,000 or 78.5%, consulting fees, which increased $152,000 or 727.5%, and
stationery, supplies, and postage expense, which increased $145,000 or 18.64%.
These increases were due largely to increased costs incurred in connection with
Lakeland's acquisition of Metropolitan State Bank. Exclusive of these expenses,
other expenses increased $124,000 or 6.0%. This was due to increased costs
incurred in operating the branch network and Lakeland's banking business.
Income Taxes. The components of income taxes are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1998 1997 1996
------- ------ ------
(in thousands)
<S> <C> <C> <C>
Current........................................... $ 2,751 $2,854 $2,753
Deferred.......................................... 165 (206) (88)
------- ------ ------
$ 2,916 $2,648 $2,665
======= ====== ======
</TABLE>
Lakeland's effective income tax rate was 33.7%, 33.2%, and 33.3%, in the
years ended December 31, 1998, 1997, and 1996, respectively.
Loans. The following table sets forth the classification of Lakeland's loans
by major category as of December 31 for each of the last five years:
<TABLE>
<CAPTION>
December 31
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Commercial.................. $114,979 $109,163 $ 96,321 $ 84,693 $ 79,978
Real estate mortgage........ 113,627 96,911 95,538 83,688 78,551
Real estate construction.... 5,251 7,696 2,473 2,097 1,687
Home equity and consumer
installment................ 77,814 77,589 74,336 61,704 59,373
-------- -------- -------- -------- --------
Total Loans............... 311,671 291,359 268,668 232,182 219,589
Less: Unearned income....... (178) (214) (122) (118) ( 69)
Allowance for loan
losses................... (3,897) (4,142) (3,585) (3,470) (3,547)
-------- -------- -------- -------- --------
Net loans................... $307,596 $287,003 $264,961 $228,594 $215,973
======== ======== ======== ======== ========
</TABLE>
9
<PAGE>
Lakeland has not made loans to borrowers outside the United States.
Commercial loans increased $6.4 million from December 31, 1997, to December
31, 1998, representing 36.9% of total loans at December 31, 1998, as compared
to 37.3% at December 31, 1997. These loans are primarily to borrowers within
Lakeland's market area.
Real estate (including construction) loans increased $14.3 million from
December 31, 1997 to December 31, 1998, representing 38.1% of total loans at
December 31, 1998, as compared to 35.9% at December 31, 1997.
Home equity and consumer installment loans decreased $389,000 from December
31, 1997, to December 31, 1998, representing 25.0% of total loans at December
31, 1998, as compared to 26.8% at December 31, 1997.
Rate sensitive loans of $50.4 million represented 16.2% of total loans at
December 31, 1998, as compared to $52.5 million or 18.0% of total loans at
December 31, 1997. These rate sensitive loans consist primarily of commercial
loans of $43.0 million and home equity credit lines of $7.4 million that
reprice with changes in the prime lending rate.
The following table sets forth certain categories of loans as of December
31, 1998, in terms of contractual maturity due:
<TABLE>
<CAPTION>
Within 1 to 5 After 5
1 Year Years Years Total
------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C>
Commercial............................... $64,831 $32,749 $17,399 $114,979
Real Estate Construction................. 5,084 -- 167 5,251
------- ------- ------- --------
Total.................................. $69,915 $32,749 $17,566 $120,230
======= ======= ======= ========
</TABLE>
The following table sets forth the dollar amount of all commercial and real
estate construction loans due one year or more after December 31, 1998, which
have pre-determined interest rates or adjustable interest rates:
<TABLE>
<CAPTION>
1 to 5 After 5
Year Years Total
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Loans with fixed rates............................ $31,781 $17,558 $49,339
Loans with adjustable rates....................... 968 8 976
------- ------- -------
Total........................................... $32,749 $17,566 $50,315
======= ======= =======
</TABLE>
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.
10
<PAGE>
The following schedule sets forth certain information regarding Lakeland's
nonaccrual, past due and renegotiated loans and other real estate owned as of
December 31, for each of the last five years:
<TABLE>
<CAPTION>
December 31
---------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans (A)................. $ 1,257 $ 2,007 $ 1,845 $ 2,366 $ 2,658
Past due loans (B).................... 4,248 1,400 2,200 679 1,039
Renegotiated loans (C)................ 1,468 1,529 2,567 2,325 1,740
------- ------- ------- ------- -------
Total non-accrual, past due and
renegotiated loans................... 6,973 4,936 6,612 5,370 5,437
Other real estate owned............... 1,060 648 177 951 1,302
------- ------- ------- ------- -------
Total............................... $ 8,033 $ 5,584 $ 6,789 $ 6,321 $ 6,739
======= ======= ======= ======= =======
</TABLE>
- --------
(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, 1998.
There were no loans at December 31, 1998, other than those included in the
above table, where Lakeland 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, 1998, there were no concentrations of loans exceeding 10% of
total loans outstanding. Loan concentrations are considered to exist when there
are amounts loaned to a multiple number of borrowers engaged in similar
activities which would cause them to be similarly impacted by economic or other
related conditions.
Non-accrual loans decreased $750,000 to $1,257,000 at December 31, 1998,
from $2,007,000 at December 31, 1997. At December 31, 1998, non-accrual loans
consisted of one mortgage loan, twelve commercial loans, and thirty-two
consumer loans. All of these loans are in various stages of litigation,
foreclosure, or workout.
Loans past due ninety days or more and still accruing increased $2.8 million
to $4.2 million at December 31, 1998, from $1.4 million at December 31, 1997.
This increase is primarily the result of the addition of two commercial loans,
totaling $2.3 million, which are part of this category. Lakeland continues to
accrue interest on both of these loans, which are past maturity but continue to
make interest payments. They will become current upon renewal pending the
receipt of documentation. At December 31, 1998, loans past due ninety days or
more and still accruing consisted of three mortgage loans, nineteen commercial
loans, and twenty-four consumer loans.
For 1998, 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 $239,000. The amount of interest income actually recorded on
those loans for 1998 was $127,000. The resultant income lost of $112,000 for
1998 compares to $175,000 and $182,000 for 1997 and 1996, respectively.
11
<PAGE>
Lakeland 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 Lakeland 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 Lakeland, will not
cause a loan to be classified as impaired. A loan is not impaired during a
period of delay in payment if Lakeland 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 Lakeland 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.
Lakeland does not aggregate such loans for evaluation purposes.
Lakeland'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, Lakeland follows
FDIC guidelines, which apply any payments to principal as long as there is
doubt as to the collectibility of the loan balance.
As of December 31, 1998, based on the above criteria, Lakeland classified
thirteen loans, totaling $2.2 million, as impaired. The impairment of these
loans is measured using the present value of future cash flows for three
renegotiated loans and is based on the fair value of the underlying collateral
for the remaining ten loans. Based upon such evaluation, $381,000 has been
allocated to the allowance for loan losses for impairment.
12
<PAGE>
The following table sets forth for each of the five years ended December 31,
1998, the historical relationships among the amount of loans outstanding, the
allowance for loan losses, the provision for loan losses, the amount of loans
charged-off and the amount of loan recoveries:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance of allowance at beginning of
year.................................. $4,142 $3,585 $3,470 $3,547 $3,455
------ ------ ------ ------ ------
Charge-offs:
Commercial........................... 834 466 451 119 339
Installment.......................... 426 133 328 291 250
Mortgage............................. -- -- 70 217 23
------ ------ ------ ------ ------
Total Charge-offs.................. 1,260 599 849 627 612
------ ------ ------ ------ ------
Recoveries:
Commercial........................... 256 20 25 128 69
Installment.......................... 61 77 31 65 65
Mortgage............................. -- 33 -- -- --
Total Recoveries................... 317 130 56 193 134
------ ------ ------ ------ ------
Net Charge-offs...................... 943 469 793 434 478
Provision for loan losses.............. 698 1,026 908 357 570
------ ------ ------ ------ ------
Balance of allowance at end of year.... $3,897 $4,142 $3,585 $3,470 $3,547
====== ====== ====== ====== ======
Ratio of net charge-offs to average
loans outstanding..................... 0.32% 0.17% 0.32% 0.19% 0.23%
Balance of allowance at end of year as
a percentage of
year end loans........................ 1.25% 1.42% 1.34% 1.49% 1.62%
</TABLE>
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.
Lakeland 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 SEC, the table below presents an
allocation of the allowance among various loan categories and sets forth the
percentage of loans in each category to total loans. The allocation of the
allowance as shown in the table should neither be interpreted as an indication
of future charge-offs, nor as an indication that charge-offs in future periods
will necessarily occur in these amounts or in the indicated proportions.
The following table sets forth the allocation of the allowance for loan
losses at the dates indicated by category of loans:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
of of of of of
Amount Total (1) Amount Total (1) Amount Total (1) Amount Total (1) Amount Total (1)
------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $2,002 36.89 $2,389 37.47 $1,907 35.85 $1,936 36.48 $1,846 36.42
Real estate mortgage.... 999 36.46 796 33.26 717 35.56 628 36.04 786 35.77
Real estate
construction........... 37 1.68 97 2.64 44 0.92 31 0.90 34 0.77
Home equity and Consumer
Installment............ 859 24.97 860 26.63 917 27.67 875 26.58 881 27.04
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$3,897 100.00 $4,142 100.00 $3,585 100.00 $3,470 100.00 $3,547 100.00
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- --------
(1) Represents the percentage of type of loan to total loans outstanding.
13
<PAGE>
Investment Securities. Lakeland 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." For information, see Notes
to Lakeland's Consolidated Financial Statements.
The following table sets forth the carrying value of Lakeland's investment
securities, both available for sale and held to maturity, as of December 31 for
each of the last three years. Securities available for sale are stated at
estimated fair value while securities held for maturity are stated at cost,
adjusted for amortization of premiums and accretion of discounts.
<TABLE>
<CAPTION>
December 31
--------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
U.S. Treasury.................................. $ 61,696 $ 65,253 $ 63,442
U.S. Government agencies....................... 47,581 44,082 36,846
Mortgage-backed securities..................... 5,462 7,941 8,033
States and political subdivisions.............. 43,293 34,760 22,939
Other debt securities.......................... 20,226 3,007 6,447
Equity securities.............................. 5,892 4,300 3,175
-------- -------- --------
Totals....................................... $184,150 $159,343 $140,882
======== ======== ========
</TABLE>
Included in equity securities is Lakeland's investment in High Point
Financial Corp., which had a carrying value of $5,594,000, $4,002,000, and
$2,926,000 in 1998, 1997, and 1996, respectively.
The following tables present the estimated fair values and unrealized gains
and losses on investment securities at December 31, 1998:
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------
Gross
Unrealized
Amortized ------------- Carrying
Cost Gains Losses Value
--------- ------ ------ --------
(in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury............................ $ 28,552 $ 587 $ 19 $ 29,120
U.S. Government agencies................. 25,719 62 110 25,671
Mortgage-backed securities............... 3,279 32 14 3,297
States and political subdivisions........ 38,456 384 60 38,780
Other debt securities.................... 14,163 25 100 14,088
Equity security.......................... 1,503 4,389 -- 5,892
-------- ------ ---- --------
Totals................................. $111,672 $5,479 $303 $116,848
======== ====== ==== ========
</TABLE>
Included in equity securities is Lakeland's investment in High Point
Financial Corp., which had a $1,205,000 amortized cost and a $5,594,000 carrying
value at December 31, 1998. Proceeds from sales of securities available for sale
totaled $20,182,000, during the year ended December 31, 1998. No sales of High
Point common stock were made during the period. Gross gains of $143,000 were
realized on those transactions.
14
<PAGE>
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------
Gross
Unrealized
Amortized ------------- Estimated
Cost Gains Losses Fair Value
--------- ------ ------ ----------
(in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury.......................... $32,576 $ 630 $-- $33,206
U.S. Government agencies............... 21,910 317 27 22,200
Mortgage-backed securities............. 2,165 23 5 2,183
States and political subdivisions...... 4,513 78 -- 4,591
Other.................................. 6,138 6 53 6,091
------- ------ --- -------
Totals............................... $67,302 $1,054 $85 $68,271
======= ====== === =======
</TABLE>
There were no sales of securities held to maturity during the year ended
December 31, 1998. Proceeds from repayments on and maturities of securities
held to maturity during the year ended December 31, 1998, totaled $14,995,000.
Securities available for sale with a carrying value of approximately
$12,494,000 at December 31, 1998, 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, 1998:
<TABLE>
<CAPTION>
After After
1 Year 5 Years
Within But Within But Within After 10
1 Year 5 Years 10 Years Years Total
------- ---------- ---------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities:
Book value............... $14,403 $ 47,293 $ -- $ -- $ 61,696
Yield.................... 6.06% 6.02% --% --% 6.03%
Obligations of U.S.
Government Agencies:
Book value............... $11,784 $ 30,159 $ 3,059 $ 2,579 $ 47,581
Yield.................... 6.00% 5.57% 6.52% 6.76% 5.80%
Mortgage-backed securities:
Book value............... $ 890 $ 234 $ 575 $ 3,763 $ 5,462
Yield.................... 5.99% 6.20% 5.92% 5.76% 5.83%
Obligations of States and
Political Subdivisions:
Book value............... $ 9,682 $ 13,477 $13,545 $ 6,589 $ 43,293
Yield.................... 5.57% 5.89% 6.21% 6.61% 6.03%
Other Securities
Book value............... $ 802 $ 18,711 $ 513 $ 200 $ 20,226
Yield.................... 6.53% 5.61% 5.34% 6.66% 5.65%
------- -------- ------- ------- --------
Total book value......... $37,561 $109,874 $17,692 $13,131 $178,258
======= ======== ======= ======= ========
Weighted average yield... 5.93% 5.81% 6.23% 6.39% 5.92%
======= ======== ======= ======= ========
</TABLE>
15
<PAGE>
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, 1998:
<TABLE>
<CAPTION>
After 1 Year After 5 Years
Within But Within 5 But Within 10 After
1 Year Years Years 10 Years Total
------- ------------ ------------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury
securities:
Book value............ $ 5,055 $24,065 $ -- $ -- $ 29,120
Yield................. 6.20% 5.97% -- % -- % 6.01%
Obligations of U.S.
Government Agencies:
Book value............ $ 7,028 $13,005 $ 3,059 $ 2,579 $ 25,671
Yield................. 6.01% 5.25% 6.52% 6.76% 5.76%
Mortgage-backed
securities:
Book value............ $ 890 $ 234 $ 213 $ 1,960 $ 3,297
Yield................. 5.99% 6.20% 6.30% 6.71% 6.45%
Obligations of States
and Political
Subdivisions:
Book value............ $ 8,870 $11,027 $12,394 $ 6,489 $ 38,780
Yield................. 5.58% 5.88% 6.18% 6.57% 6.02%
Other Securities
Book value............ $ 802 $13,286 $ -- $ -- $ 14,088
Yield................. 6.53% 5.56% -- % -- % 5.61%
------- ------- ------- ------- --------
Total book value.... $22,645 $61,617 $15,666 $11,028 $110,956
======= ======= ======= ======= ========
Weighted average
yield.............. 5.90% 5.71% 6.25% 6.64% 5.92%
======= ======= ======= ======= ========
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, 1998:
<CAPTION>
After 1 Year After 5 Years
Within But Within 5 But Within 10 After
1 Year Years Years 10 Years Total
------- ------------ ------------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury
securities:
Book value............ $ 9,348 $23,228 $ -- $ -- $ 32,576
Yield................. 5.99% 6.08% -- % -- % 6.05%
Obligations of U.S.
Government Agencies:
Book value............ $ 4,756 $17,154 $ -- $ -- $ 21,910
Yield................. 6.00% 5.82% -- % -- % 5.86%
Mortgage-backed
securities:
Book value............ $ -- $ -- $ 362 $ 1,803 $ 2,165
Yield................. -- % -- % 5.69% 4.73% 4.89%
Obligations of States
and Political
Subdivisions:
Book value............ $ 812 $ 2,450 $ 1,151 $ 100 $ 4,513
Yield................. 5.57% 5.93% 6.49% 9.09% 6.08%
Other Securities
Book value............ $ -- $ 5,425 $ 513 $ 200 $ 6,138
Yield................. -- % 5.75% 5.34% 6.66% 5.74%
------- ------- ------- ------- --------
Total book value.... $14,916 $48,257 $ 2,026 $ 2,103 $ 67,302
======= ======= ======= ======= ========
Weighted average yield.. 5.97% 5.94% 6.06% 5.12% 5.93%
======= ======= ======= ======= ========
</TABLE>
16
<PAGE>
For further information, regarding Lakeland's investment securities, see
Notes to Lakeland's Consolidated Financial Statements.
Deposits. The following table sets forth the average amounts of various
types of deposits for each of the three years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Non-interest-bearing demand deposits........... $ 98,076 $ 84,619 $ 76,780
Interest-bearing demand deposits............... 99,313 86,142 74,741
Savings deposits............................... 116,146 115,622 114,546
Time deposits.................................. 143,530 144,259 125,056
-------- -------- --------
TOTAL........................................ $457,065 $430,642 $391,123
======== ======== ========
</TABLE>
As of December 31, 1998, the aggregate amount of outstanding time deposits
issued in amounts of $100,000 or more, broken down by time remaining to
maturity, was as follows (in thousands):
<TABLE>
<S> <C>
Three months or less.............................................. $11,841
Over three months through six months.............................. 5,429
Over six months through twelve months............................. 7,409
Over twelve months................................................ 4,404
-------
TOTAL........................................................... $29,083
=======
</TABLE>
Liquidity. Lakeland's primary sources of liquidity are deposits, asset
maturities, and funds provided from operations. At December 31, 1998, liquid
assets, consisting of cash and due from banks, federal funds sold, certificates
of deposit and investment securities that mature within one year, amounted to
$71.9 million. The maturity schedule of the investment portfolio, at carrying
value, indicates that 21.1% of the debt securities included in the portfolio
mature within one year, and 82.7% mature within five years. For additional
information regarding the investment portfolio, see Notes to Lakeland's
Consolidated Financial Statements.
The $491,609 deficit in undivided profits contained in the December 31, 1998
consolidated financial statements is the result of a bookkeeping entry charging
undivided profits $10,619,797 in connection with Lakeland's accounting for its
2 for 1 stock split effected in the form of a 100% stock dividend distributed
on October 1, 1998. In accordance with New Jersey corporate law, Lakeland's
Board of Directors on March 10, 1999, approved the reversing of this accounting
treatment of the stock dividend, thereby moving the $10,619,797 from the
capital stock account to the undivided profits account to more accurately
reflect Lakeland's financial condition. This reclassification was made in the
first quarter of 1999.
17
<PAGE>
Lakeland's liquidity, represented by cash and cash equivalents, is a product
of its operating activities, investing activities and financing activities.
These activities are summarized below:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Cash and cash equivalents at beginning of period..... $ 41,168 $ 33,450
-------- --------
Operating activities:
Net income......................................... 5,725 5,321
Adjustments to reconcile net income to net cash
provided by operating activities.................. 1,359 3,678
-------- --------
Net cash provided by operating activities............ 7,084 8,999
Net cash used in investing activities................ (46,747) (43,809)
Net cash provided by financing activities............ 33,564 42,528
-------- --------
Net (decrease) increase in cash and equivalents...... (6,099) 7,718
-------- --------
Cash and cash equivalents at end of period........... $ 35,069 $ 41,168
======== ========
</TABLE>
Cash and cash equivalents decreased by $6.1 million during 1998. Such
decrease resulted from investing activities, which used $46.7 million in cash
flow, where $21.4 million was invested in the loan portfolio and $23.5 million
was invested in the investment portfolio. Net cash of $33.6 million was
provided in financing activities primarily due to deposit inflow of $35.4
million, which was partially offset by $2.4 million used in payment of cash
dividends paid on common stock.
Operating activities produced $7.1 million of cash flow, $5.7 million of
which was derived from net income.
Lakeland anticipates that it will have sufficient funds available to meet
its current loan commitments and deposit maturities. At December 31, 1998,
Lakeland has outstanding loan origination commitments of $59.2 million. Time
deposits that mature in one year or less, at December 31, 1998, totaled $130.5
million. Management believes that a substantial portion of such deposits will
remain with Lakeland. 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
conditions; unanticipated decreases in deposits; changes in or failure to
comply with governmental regulations; and uncertainties relating to the
analysis of Lakeland'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 Lakeland 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.
18
<PAGE>
Discussion of Market Risk. As a financial institution, Lakeland'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 Lakeland'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 Lakeland's nature of operations, Lakeland is not subject
to foreign currency exchange or commodity price risk. Lakeland does not own any
trading assets and does not have any hedging transactions in place, such as
interest rate swaps and caps.
Lakeland'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. Lakeland's performance as compared to the Asset/Liability
Policy is monitored by its Board of Directors. In addition, to effectively
administer the Asset/Liability Policy and to monitor exposure to fluctuations
in interest rates, Lakeland maintains an Asset/Liability Committee, consisting
of the Chief Executive Officer, Treasurer, Controller and certain other senior
officers. This committee meets monthly to review Lakeland'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 risk
management strategy:
Assets. Lakeland's largest asset component is the loan portfolio. This
portfolio consists of residential and commercial mortgage loans, commercial
loans, and consumer loans. Lakeland's borrowers are concentrated in Lakeland's
trading area in northern New Jersey and are subject to risks associated with
the local economy. Both fixed rate and variable rate products are offered. As
of December 31, 1998, approximately $50.4 million or 16.2% of the loan
portfolio were variable rate loans.
Lakeland'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 totaled
$116.8 million at December 31, 1998, is available for liquidity needs when
necessary. The "held to maturity" category, which totaled $67.3 million at
December 31, 1998, is available for liquidity when bonds mature. Approximately
$37.6 million or 20% of the investment portfolio matures within one year and
approximately $147.4 million or 80% of the portfolio matures within five years.
U.S. Treasury and Agency securities with a predominant maximum maturity of five
years represented approximately $109.3 million or 59% of the portfolio at
December 31, 1998. Of the remaining $74.9 million of the investment securities
portfolio, approximately $43.3 million are invested in State, County, and
Municipal securities with a predominant maturity of under ten years.
Deposit Liabilities. Lakeland's banks, traditional community-based
commercial banks, are largely dependent upon their 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.
Lakeland believes that its banks have 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, 1998, were $334.7 million or
68% of total deposits. The balance of certificates of deposit at December 31,
1998, was $154.2 million or 32% of total deposits. Of the $154.2 million
outstanding, $130.5 million or 85% mature within one year.
Wholesale Funds. Lakeland 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, Lakeland has established federal funds lines of credit
with several of its correspondent banks. However, Lakeland has rarely utilized
these borrowing arrangements.
Depending on the existing interest rate environment, Lakeland has various
alternatives to mitigate interest rate exposure. If Lakeland 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
19
<PAGE>
certificates of deposit. If Lakeland 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.
The following table sets forth the estimated maturity/repricing structure of
Lakeland's interest-earning assets and interest-bearing liabilities at December
31, 1998. 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. Lakeland 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 Lakeland'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 Lakeland'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, 1998
-------------------------------------------------------
More Than
More Than One Year More
Three Months Through Than
Three Months Through Five Five
or Less One Year Years Years Total
------------ ------------ --------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1)
Adjustable and
floating rate
commercial......... $ 42,453 $ 22 $ 494 $ -- $ 42,969
Fixed rate
commercial......... 12,495 12,409 33,725 13,305 71,934
Real estate
mortgage........... 6,668 10,069 36,802 59,725 113,264
Real estate
construction....... 4,506 578 -- 167 5,251
Installment and
other.............. 12,630 10,282 37,406 17,757 78,075
Investment securities... 16,120 31,885 109,689 26,456 184,150
Other investments (2)... 10,929 150 -- -- 11,079
-------- -------- -------- -------- --------
Total interest-
earning assets... 105,801 65,395 218,116 117,410 506,722
-------- -------- -------- -------- --------
Interest-bearing
liabilities:
Deposits:
Interest-bearing
demand............. 16,250 24,947 58,154 -- 99,351
Savings............. 16,600 16,202 95,404 -- 128,206
Time................ 39,682 90,921 23,624 -- 154,227
Borrowed money........ 2,896 899 -- -- 3,795
-------- -------- -------- -------- --------
Total interest-
bearing
liabilities...... 75,428 132,969 177,182 -- 385,579
-------- -------- -------- -------- --------
GAP during the period... $ 30,373 $(67,574) $ 40,934 $117,410 $121,143
======== ======== ======== ======== ========
Cumulative GAP.......... $ 30,373 $(37,201) $ 3,733 $121,143
======== ======== ======== ========
Interest-sensitive
assets as a percent of
interest-sensitive
liabilities
(cumulative)........... 140.27% 82.15% 100.97% 131.42%
Cumulative interest-
sensitive assets as a
percent of total
assets................. 19.29% 31.21 % 70.97% 92.37%
Ratio of GAP to total
assets................. 5.54% (12.32)% 7.46% 21.40%
Ratio of cumulative GAP
to total assets........ 5.54% (6.78)% 0.68% 22.08%
</TABLE>
- --------
(1) Loans are stated net of unearned income.
(2) Other investments consist of federal funds sold and interest-bearing
deposits in banks.
20
<PAGE>
Capital Resources. Stockholders' equity increased $4.65 million to $53.3
million at December 31, 1998, from $48.7 million at December 31, 1997,
reflecting net income during the year of $5.7 million, dividends to
stockholders of $2.4 million, an unrealized securities gain, net of deferred
income taxes, of $1,031,000, net proceeds of $470,000 from the issuance of
common stock, and net disbursement from the purchase of treasury stock of
$129,000.
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 Lakeland 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 Lakeland's capital ratios as of December 31,
1998:
RISK-BASED CAPITAL RATIOS
<TABLE>
<CAPTION>
Amount Ratio
------- -----
<S> <C> <C>
Actual Tier I Capital..................................... $50,216 15.58%
Tier I Capital minimum amount............................. 12,894 4.00%
------- -----
Excess.................................................... $37,322 11.58%
======= =====
Actual Combined Tier I and Tier II Capital................ $53,732 16.67%
Combined Tier I and Tier II Capital minimum requirement... 25,789 8.00%
------- -----
Excess.................................................... $27,945 8.67%
======= =====
LEVERAGE RATIO
Actual Tier I Capital to average fourth quarter assets.... $50,216 9.33%
Minimum leverage target * ................................ * *
------- -----
Excess.................................................... $ * *%
======= =====
</TABLE>
- --------
* No formal minimum leverage target (other than the three percent floor
described above) has been established for Lakeland or its bank subsidiaries as
of December 31, 1998.
Recent Accounting Pronouncements. In June 1997 the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." 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. Statement 130 was implemented effective January 1, 1998, and did not have
a material impact on Lakeland.
In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." 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 does not have a material impact
on Lakeland.
21
<PAGE>
In April 1998, the FASB issued SFAS 132, "Employers Disclosures About
Pensions and Other Post Retirement Benefits." Statement 132 standardizes the
disclosure requirements for these plans and it requires additional information
about changes in the benefit obligations and fair value of plan assets.
Statement 132 is effective for fiscal years beginning after December 15, 1997,
and information for previous periods presented for comparative purposes is
required to be restated. Statement 132 does not change measurement or
recognition standards for these plans and is only disclosure related, therefore
its implementation had no impact on Lakeland's financial condition or results
of operations.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which addresses the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. Statement 133 supersedes Statement 80,
"Accounting for Futures Contracts," Statement 105, "Disclosure of Information
about Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk," and Statement 119, "Disclosure
about Derivative Financial Instruments and Fair Value of Financial
Instruments." It amends Statement 107, "Disclosure about Fair Value of
Financial Instruments" to include in Statement 107 the disclosure provisions
about concentrations of credit risk from Statement 105. Statement 133 is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. As Lakeland does not have any derivative instruments or similar
contracts, the implementation of Statement 133 will have no impact on
Lakeland's financial condition or results of operations. Statement 133 has a
provision that at the date of initial application, an entity may transfer any
held-to-maturity security into the available-for-sale category or the trading
category. The unrealized holding gain or loss on a held-to-maturity security
transferred to another category at the date of initial application shall be
reported in net income or accumulated other comprehensive income consistent
with the requirements of paragraphs 15(b) and 15(c) of Statement 115. Statement
133 states that transfers from the held-to-maturity category at the date of
initial adoption shall not call into question an entity's intent to hold other
debt securities to maturity in the future.
Year 2000 Compliance. As the year 2000 approaches, an important business
issue has emerged regarding how existing software and operating systems can
accommodate this date value. Many existing software products were designed to
accommodate only two-digits. For example, "98" is stored on the system and
represents 1998. Lakeland has been identifying potential problems associated
with the "Year 2000" issue and has implemented a plan designated to ensure that
all information technology systems including hardware and software used in
connection with Lakeland's business will handle date related data in a manner
which will provide accurate results.
Lakeland has formed a committee of representatives from its various areas to
monitor this project. This committee has prepared a schedule of vendors that
supply Lakeland with various products and services. This listing of vendors was
then put into priority order, determining how critical the vendor is to the
continuance of Lakeland's daily operations. Finally, the status as to the stage
of completion of each vendor is charged. The five stages in the process are
awareness, assessment, renovation, validation, and implementation. All vendors
listed as "highest priority", which Lakeland considers to be critical to daily
operations, have completed the five stages by December 31, 1998. Included in
this grouping of "highest priority" are vendors which provide and support
hardware and software for all critical aspects of Lakeland's information
technology systems. Lakeland has tested all vendors listed as "high priority,"
and has determined that these vendors have completed the five stages. All
vendors listed as "mid-range priority" and "low priority" have either been
tested by Lakeland or, in Lakeland's determination, do not present a material
concern to Lakeland's daily operations. Lakeland has received written
assurances as to Year 2000 compliance from many of its vendors. Lakeland is
comfortable with the accuracy and level of these assurances. As part of this
project, Lakeland is also requiring its computer systems and software vendors
to represent that the products provided are or will be Year 2000 compliant and
has planned a program of testing for compliance.
Lakeland recognizes that any Year 2000 failure on the part of its customers
could result in additional expense or loss. In this regard, Lakeland sent a
letter to its significant commercial borrowers to determine their
22
<PAGE>
readiness for Year 2000 and has monitored their responses. Overall, 43.7% of
Lakeland's borrowers responded to the survey. 65.5% of the borrowers who
responded indicated that they had developed a comprehensive plan for Year 2000
compliance. 69.6% of the borrowers who responded indicated that they had taken
some action regarding Year 2000 compliance. Finally, 25.6% of the borrowers who
responded indicated that they did not have any information technology systems
which were susceptible to Year 2000 issues. Lakeland is comfortable with the
accuracy and level of the representation made by the borrowers in their
responses. Additionally, a brochure was sent to all demand deposit customers to
make them aware of the Year 2000 issue and Lakeland's concern regarding the
same. Lakeland does consider Year 2000 compliance of potential borrowers in its
lending practice.
Lakeland employed a consultant to assist in the preparation of a contingency
plan in the event there are any system interruptions due to Year 2000 issues.
As part of the contingency plan:
. each manager identified the resources required to sustain daily
operations in his or her area of responsibility;
. Lakeland prepared a list of various Year 2000 potential interruption
scenarios and assigned a probability as to the scenario occurring; and
. Lakeland will allocate contingency plan resources based on the
likelihood of each scenario occurring.
Lakeland's Year 2000 committee will coordinate and monitor the contingency
plan. As Lakeland continues to monitor Year 2000 issues throughout 1999, it
will adjust its contingency plan accordingly. In a worse case scenario,
Lakeland would not be able to update its records and service its customers.
However, based on the written assurances that Lakeland has received from its
major software vendor and upon Lakeland's own testing, Lakeland believes that
the likelihood of this scenario happening is very remote.
Lakeland believes that its costs related to Year 2000 will be approximately
$75,000. At December 31, 1998, Lakeland had expensed approximately $36,000
relating to its Year 2000 project.
There can be no assurances, however, that the plan developed in the Year
2000 project or the performance by Lakeland's vendors will be effective to
remedy all potential problems. To the extent Lakeland's systems are not fully
Year 2000 compliant, there can be no assurance that potential systems
interruptions or the cost necessary to update software would not have a
materially adverse effect on Lakeland's business, financial condition, results
of operations or business prospects.
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. Lakeland 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.
23
<PAGE>
Item 8. Financial Statements and Supplementary Data
<PAGE>
INDEPENDENT AUDITORS' REPORT
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,
1998 and 1997 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, 1998. We did not audit the financial statements of
Metropolitan State Bank, a wholly-owned subsidiary, which statements reflect,
at December 31, 1998 and 1997, total assets constituting 18 percent and
19 percent, respectively, and, for each of the years in the three-year period
ended December 31, 1998, total income of 19 percent, 18 percent and 17
percent, respectively, of the related consolidated totals. Those statements
were audited by other auditors whose reports have been furnished to us, and
our opinion, insofar as it relates to the amounts included for Metropolitan
State Bank, is based solely on the reports of the other auditors. The auditors
report on the financial statements of Metropolitan State Bank for the year
ended December 31, 1996 does not cover the restatement of net income per
common share upon the implementation in 1997 of Statement of Financial
Accounting Standards ("SFAS") No. 128 and the restatement to present
comprehensive income upon the implementation in 1998 of SFAS No. 130. 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, based on our audits and the reports of the other auditors,
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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
We also audited the adjustments applied, as they relate to the financial
statements of Metropolitan State Bank for the year ended December 31, 1996, to
restate net income per common share and to present comprehensive income. In
our opinion, such adjustments are appropriate and have been properly applied.
Radics & Co., LLC
Pine Brook, New Jersey
January 11, 1999
25
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks............................. $ 24,193,899 $ 28,443,103
Federal funds sold.................................. 10,875,000 12,725,000
------------ ------------
Cash and cash equivalents......................... 35,068,899 41,168,103
Certificates of deposit............................. 204,033 101,768
Securities available for sale, at estimated fair
value.............................................. 116,847,825 102,333,878
Securities held to maturity; estimated fair value of
$68,271,000 in 1998 and $57,372,000 in 1997........ 67,302,146 57,009,136
Loans............................................... 307,596,324 287,003,467
Premises and equipment.............................. 14,260,225 13,812,631
Accrued interest receivable......................... 4,414,733 4,210,406
Other assets........................................ 2,863,222 2,085,816
------------ ------------
Total assets.................................... $548,557,407 $507,725,205
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest-bearing demand....................... $107,097,017 $ 97,491,314
Savings and interest-bearing demand............... 225,894,802 208,419,317
Club accounts..................................... 1,661,786 1,698,523
Time.............................................. 125,144,292 122,252,678
Time of $100,000 and over......................... 29,082,870 23,608,695
------------ ------------
Total deposits.................................. 488,880,767 453,470,527
Borrowed money...................................... 3,795,114 3,535,792
Other liabilities................................... 2,567,989 2,056,637
------------ ------------
Total liabilities............................... 495,243,870 459,062,956
------------ ------------
Commitments......................................... -- --
Stockholders' Equity
Common stock (par value $2.50 per share)
Authorized shares 14,806,718 in 1998 and 7,403,359
in 1997; issued shares 8,511,588 in 1998 and
4,239,861 in 1997; outstanding shares 8,502,988
in 1998 and 4,239,861 in 1997.................... 21,278,970 10,599,653
Surplus............................................. 29,557,747 29,147,426
(Accumulated deficit) undivided profits............. (491,609) 6,849,079
Accumulated other comprehensive income, net of
income tax......................................... 3,097,429 2,066,091
Treasury stock, at cost; 8,600 shares............... (129,000) --
------------ ------------
Total stockholders' equity...................... 53,313,537 48,662,249
------------ ------------
Total liabilities and stockholders' equity...... $548,557,407 $507,725,205
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans and fees........................... $25,070,997 $23,501,595 $21,442,534
Federal funds sold....................... 1,022,314 948,964 741,574
Investments securities:
U.S. Treasury.......................... 3,910,071 4,187,778 4,072,688
U.S. Government agencies............... 2,819,773 3,149,005 2,813,594
State and political subdivisions....... 1,586,486 1,243,756 1,091,139
Other.................................. 525,157 373,920 569,419
----------- ----------- -----------
Total interest income................ 34,934,798 33,405,018 30,730,948
----------- ----------- -----------
Interest expense:
Deposits................................. 12,813,023 12,761,155 11,613,464
Borrowed money........................... 195,980 163,621 173,661
----------- ----------- -----------
Total interest expense............... 13,009,003 12,924,776 11,787,125
----------- ----------- -----------
Net interest income.................... 21,925,795 20,480,242 18,943,823
Provisions for loan losses................. 698,377 1,025,664 907,697
----------- ----------- -----------
Net interest income after provision for
loan losses........................... 21,227,418 19,454,578 18,036,126
----------- ----------- -----------
Other income:
Service charges on deposit accounts...... 2,410,357 2,400,649 2,152,637
Gain (loss) on dispositions of
securities.............................. 142,858 55,239 24,108
Other.................................... 611,999 566,642 494,444
----------- ----------- -----------
Total other income................... 3,165,214 3,022,530 2,671,189
----------- ----------- -----------
Other expenses:
Salaries and benefits.................... 8,484,565 7,984,130 6,932,458
Occupancy, net........................... 1,561,020 1,459,668 1,380,403
Furniture and equipment.................. 1,546,438 1,294,073 1,175,864
Stationary, supplies and postage......... 967,276 924,934 779,641
Legal fees............................... 455,340 236,665 194,392
Other.................................... 2,736,844 2,608,807 2,228,890
----------- ----------- -----------
Total other expenses................. 15,751,483 14,508,277 12,691,648
----------- ----------- -----------
Income before income taxes................. 8,641,149 7,968,831 8,015,667
Income taxes............................... 2,915,794 2,648,109 2,665,326
----------- ----------- -----------
Net income................................. $ 5,725,355 $ 5,320,722 $ 5,350,341
=========== =========== ===========
Net income per common share--basic and
diluted................................... $ 0.67 $ 0.63 $ 0.64
=========== =========== ===========
Weighted average number of common shares
outstanding:
Basic..................................... 8,492,953 8,404,528 8,304,142
Diluted................................... 8,492,953 8,435,377 8,337,068
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Undivided Accumulated
Profits Other Total
Number of Common Comprehensive (Accumulated Treasury Comprehensive Stockholders'
Shares Stock Income Surplus Deficit) Stock Income Equity
--------- ----------- ------------- ----------- ------------ --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1995......... 3,827,847 $ 9,569,618 $21,082,355 $ 6,693,400 $ -- $1,254,642 $38,600,015
Net income........ -- -- $5,350,341 -- 5,350,341 -- -- 5,350,341
----------
Other
comprehensive
income, net of
income taxes:
Unrealized loss
on securities
available for
sale............. (25,857)
Reclassification
adjustment for
gains included
in income........ (14,270)
----------
Other
comprehensive
income........... (40,127) -- -- -- (40,127) (40,127)
----------
Comprehensive
income........... $5,310,214
==========
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......... 3,956,483 9,891,208 23,721,714 8,751,660 -- 1,214,515 43,579,097
Net income........ -- -- $5,320,722 -- 5,320,722 -- -- 5,320,722
----------
Other
comprehensive
income, net of
income taxes:
Unrealized gain
on securities
available for
sale............. 885,043
Reclassification
adjustment for
gains included
in income........ (33,467)
----------
Other
comprehensive
income, net of
income........... -- -- 851,576 -- -- -- 851,576 851,576
----------
Comprehensive
income........... $6,172,298
==========
Stock dividend.... 227,693 569,233 4,666,062 (5,235,295) -- -- --
Stock issuances... 55,685 139,212 759,650 -- -- -- 898,862
Cash dividend..... -- -- -- (1,988,008) -- -- (1,988,008)
--------- ----------- ----------- ------------ --------- ---------- -----------
Balance, December
31, 1997......... 4,239,861 10,599,653 29,147,426 6,849,079 -- 2,066,091 48,662,249
Net Income........ -- -- $5,725,355 -- 5,725,355 -- -- 5,725,355
----------
Other
comprehensive
income, net of
income taxes:
Unrealized gain
on securities
available for
sale............. 1,118,196
Reclassification
adjustment for
gains included
in income........ (86,858)
----------
Other
comprehensive
income........... -- -- 1,031,338 -- -- -- 1,031,338 1,031,338
----------
Comprehensive
income........... $6,756,693
==========
Stock dividend.... 4,247,919 10,619,797 -- (10,619,797) -- -- --
Stock issuances... 23,808 59,520 410,321 -- -- -- 469,841
Purchase of
treasury stock... -- -- -- -- (129,000) -- (129,000)
Cash dividends.... -- -- -- (2,446,246) -- -- (2,446,246)
--------- ----------- ----------- ------------ --------- ---------- -----------
Balance--December
31, 1998......... 8,511,588 $21,278,970 $29,557,747 $ (491,609) $(129,000) $3,097,429 $53,313,537
========= =========== =========== ============ ========= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
Net income.......................... $ 5,725,355 $ 5,320,722 $ 5,350,341
Adjustments to reconcile net income
to net cash provided by operating
activities:
Net amortization of premiums,
discounts and deferred loan fees
and costs......................... 463,389 1,057,452 1,407,563
Depreciation and amortization...... 1,106,581 980,607 900,991
Provision for loan losses.......... 698,377 1,025,664 907,697
Gain on sales and calls of
securities........................ (142,858) (55,239) (24,108)
Gain on sale of student loans...... -- (10,604) --
Gain on dispositions of premises
and equipment..................... -- -- (54,452)
(Gain) loss on sales of other real
estate owned...................... (9,634) 16,576 24,468
Deferred federal income tax
(benefit)......................... 165,336 (206,391) (87,890)
(Increase) decrease in accrued
interest receivable............... (204,327) (173,939) 19,514
(Increase) in other assets......... (525,329) (99,056) (226,954)
(Decrease) increase in other
liabilities....................... (192,480) 1,143,353 (1,128)
------------ ------------ ------------
Net cash provided by operating
activities...................... 7,084,410 8,999,145 8,216,042
------------ ------------ ------------
Cash flows from investing activities:
Net change in certificates of
deposit............................ (102,265) 98,232 (200,000)
Proceeds from repayments on and
maturities of securities available
for sale........................... 44,651,498 36,134,181 25,553,182
Proceeds from sales of securities
available for sale................. 20,182,000 15,829,622 8,999,037
Purchases of securities available
for sale........................... (87,849,435) (70,420,721) (36,746,204)
Proceeds from repayments on and
maturities of securities held to
maturity........................... 14,995,000 18,004,462 23,731,751
Purchases of securities held to
maturity........................... (15,479,509) (17,482,870) (21,064,358)
Net increase in loans............... (21,708,126) (24,537,564) (36,592,461)
Purchase of loans................... -- (2,854,877) --
Sale of loans and participation
interest in loan................... 312,069 3,378,045 --
Proceeds from dispositions of
premises and equipment............. -- -- 64,539
Additions to premises and
equipment.......................... (1,826,258) (2,218,697) (2,550,872)
Net decrease in other real estate
owned.............................. 77,255 260,393 830,204
------------ ------------ ------------
Net cash used in investing
activities...................... (46,747,771) (43,809,794) (37,975,182)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in deposits............. $35,410,240 $43,739,852 $ 17,712,957
Net increase (decrease) in short-term
borrowings.......................... 259,322 199,554 (2,053,304)
Repayment of mortgage payable........ -- (322,000) --
Proceeds from common stock
issuances........................... 469,841 898,862 1,372,509
Purchase of treasury stock........... (129,000) -- --
Cash dividends paid on common stock.. (2,446,246) (1,988,008) (1,703,641)
----------- ----------- ------------
Net cash provided by financing
activities........................ 33,564,157 42,528,260 15,328,521
----------- ----------- ------------
Net (decrease) increase in cash and
cash equivalents...................... (6,099,204) 7,717,611 (14,430,619)
Cash and cash equivalents--beginning... 41,168,103 33,450,492 47,881,111
----------- ----------- ------------
Cash and cash equivalents--ending...... $35,068,899 $41,168,103 $ 33,450,492
=========== =========== ============
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Income taxes (federal and state)... $ 2,989,383 $ 2,894,502 $ 2,866,680
Interest........................... 12,962,187 12,531,612 11,851,537
Supplemental schedule of noncash
investing and financing activities:
Transfer of securities available for
sale to securities held to
maturity............................ $10,100,590 $ -- $ --
Transfer of loans receivable to other
real estate owned................... 772,454 771,169 80,394
Loans to facilitate the sale of other
real estate owned................... 565,000 33,000 --
Transfer of premises to other real
estate owned........................ 272,222 -- --
Mortgage payable incurred in
connection with purchase of
premises............................ -- 322,000 --
Stock dividend....................... 10,619,797 5,235,295 1,588,440
See accompanying notes to financial statements.
29
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquisition
On September 16, 1997, Lakeland Bancorp, Inc. (the "Corporation") entered in
an Agreement and Plan of Merger with Metropolitan State Bank ("Metropolitan"),
pursuant to which, on February 20, 1998, each outstanding share of
Metropolitan common stock was converted into Corporation common stock and
Metropolitan became a wholly-owned subsidiary of the Corporation. Each share
of Metropolitan's common stock (711,868 shares of Metropolitan's common stock
were outstanding as of December 31, 1997) was converted into 0.941 shares of
Corporation common stock. The merger was accounted for as a pooling of
interests. Amounts previously reported by the Corporation in its consolidated
statement of condition as of December 31, 1997 and in its Consolidated
Statements of Income, Changes in Stockholders' Equity and Cash Flows for the
years ended December 31, 1997 and 1996 have been retroactively restated to
include the accounts of Metropolitan. Acquisition costs of approximately
$324,000 and $372,000 were expensed during the years ended December 31, 1998
and 1997, respectively, in regard to this acquisition.
Pending Acquisition
On December 7, 1998, the Corporation entered into an Agreement and Plan of
Merger (the "Merger Agreement") and a Stock Option Agreement (the "Option
Agreement") with High Point Financial Corp. ("High Point") pursuant to which
outstanding shares of High Point common stock will be converted into shares of
Corporation common stock and The National Bank of Sussex County will become a
wholly-owned subsidiary of the Corporation. Pursuant to the Merger Agreement,
each share of High Point common stock (3,811,480 shares of High Point common
stock were outstanding as of September 30, 1998) will be converted into 1.2
shares of Corporation common stock. As of September 30, 1998, High Point had
total assets, deposits and stockholders' equity of $252.7 million, $214.5
million and $24.2 million, respectively. The merger is subject to regulatory
approval, the approval of the Corporation's and High Point's shareholders and
other standard conditions. If consummated, the merger is intended to be
accounted for as a pooling of interests. As of December 31, 1998, costs
incurred in regard to the pending acquisition totaled $15,000 and are included
in other assets. Such amount will be expensed upon either consummation or
termination of the Merger Agreement.
In 1994, the Corporation, for $1,204,882, purchased 344,252 shares of High
Point common stock and has retained such shares since. At December 31, 1998,
these shares are carried as securities available for sale at a fair value of
$5,594,095, including an unrealized gain of $4,389,213 ($2,625,298 net of
deferred income taxes). If the merger is consummated, these shares will be
canceled and stockholders' equity reduced accordingly.
In the event the merger is terminated, under certain circumstances, the
Option Agreement provides the Corporation with the option to purchase an
additional 772,243 shares of High Point common stock at a price of $13.25 per
share.
Nature of Operations
The Corporation is a bank holding company whose principal activity is the
ownership and management of its wholly-owned subsidiaries, Lakeland Bank (the
"Bank") and Metropolitan. The Bank and Metropolitan combine to generate
commercial, mortgage and consumer loans and receive deposits from customers
located primarily in Northern New Jersey. The Bank and Metropolitan operate
under state bank charters and provide full banking services and, as state
banks, each is subject to regulation by the New Jersey Department of Banking
and Insurance and the Federal Deposit Insurance Corporation.
30
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounting Principles
Principles of consolidation
The consolidated financial statements include the accounts of the
Corporation, the Corporation's wholly owned subsidiaries, the Bank and
Metropolitan, the Bank's wholly owned subsidiary, Lakeland Investment
Corporation ("LIC"), and Metropolitan's wholly owned subsidiary, Metropolitan
State Bank Investment Company. 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 and Metropolitan's
allowance for loan losses. Such agencies may require 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
31
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, the collection of all amounts due according to the contractual terms
of the loan agreement is not probable. 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.
Payments received on impaired loans are applied to principal, accrued
interest receivable and interest income, in that order.
Concentration of risk
Lending activity is concentrated in loans secured by real estate located in
Bergen, Essex, Morris, Passaic, Sussex and adjacent counties 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:
<TABLE>
<S> <C>
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
</TABLE>
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.
Other real estate owned ("OREO")
OREO is carried at the lower of cost or fair value, less estimated cost to
sell. When a property is acquired, the excess of the carrying amount over fair
value, if any, is charged to the allowance for loan losses. An
32
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
allowance for OREO has been established, through charges to OREO expense, to
maintain properties at the lower of cost or fair value less estimated cost to
sell. Operating results of OREO, including rental income, operating expenses,
and gains and losses realized from the sale of properties owned, are included
in non-interest expenses.
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
Basic net income per share of common stock is calculated by dividing net
income by the weighted average number of shares of common stock outstanding
during the period. Diluted net income per share is calculated by dividing net
income by the weighted average number of shares of common stock outstanding
during the period plus the potential dilutive effect of outstanding stock
options. Other than outstanding stock options, which were fully exercised in
1997, there are no other potentially dilutive securities. On August 27, 1997,
the Corporation's Board of Directors authorized a 5% stock dividend, which was
distributed on October 15, 1997. On August 26, 1998, the Corporation's Board
of Directors authorized a 2 for 1 stock split effected in the form of a 100%
stock dividend, which was distributed on October 1, 1998. Basic and diluted
net income per common share have been retroactively restated to give effect to
the stock dividends and splits.
Comprehensive income
Effective January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income".
Statement No. 130 requires the reporting of comprehensive income in addition
to net income from operations. Comprehensive income is a more inclusive
financial reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the calculation of
net income. As required, the provisions of SFAS No. 130 have been
retroactively applied to previously reported periods. The application of SFAS
No. 130 had no material effect on the Corporation's consolidated financial
condition or operations.
Unrealized gains and losses reflected in the consolidated statements of
changes in stockholders' equity at December 31, 1998, 1997 and 1996 are
reflected net of deferred income tax assets (liabilities) of $(754,000),
$(582,000) and $13,000, while the reclassification adjustments for gains
included in income for the same periods are shown net of income tax expense of
$56,000, $22,000 and $10,000, respectively.
Interest-rate risk
The Corporation, through the Bank and Metropolitan, 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
33
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Reclassification
Certain amounts for the years ended December 31, 1997 and 1996 have been
reclassified to conform to the current year's presentation.
Securities Available for Sale
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------
Gross Unrealized
Amortized ------------------ Carrying
Cost Gains Losses Value
--------- -------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury........................ $ 28,552 $ 587 $ 19 $ 29,120
U.S. Government agencies............. 25,719 62 110 25,671
Mortgage-backed securities........... 3,279 32 14 3,297
States and political subdivisions.... 38,456 384 60 38,780
Other debt securities................ 14,163 25 100 14,088
Equity securities.................... 1,503 4,389 -- 5,892
-------- -------- ------- --------
$111,672 $ 5,479 $ 303 $116,848
======== ======== ======= ========
<CAPTION>
December 31, 1997
-------------------------------------
Gross Unrealized
Amortized ------------------
Cost Gains Losses Carrying
--------- -------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury........................ $ 30,425 $ 340 $ -- $ 30,765
U.S. Government agencies............. 29,074 121 42 29,153
Mortgage-backed securities........... 5,524 35 18 5,541
States and political subdivisions.... 30,062 217 11 30,268
Other debt securities................ 2,299 8 -- 2,307
Equity securities.................... 1,503 2,797 -- 4,300
-------- -------- ------- --------
$ 98,887 $ 3,518 $ 71 $102,334
======== ======== ======= ========
<CAPTION>
December 31,
-------------------------------------
1998 1997
------------------ ------------------
Amortized Carrying Amortized Carrying
Cost Value Cost Value
--------- -------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Due in one year or less.............. $ 21,669 $ 21,755 $26,708 $ 26,667
Due after one year through five
years............................... 60,842 61,384 54,628 55,145
Due after five years through ten
years............................... 15,293 15,441 8,748 8,916
Due after ten years.................. 9,086 9,079 1,776 1,765
Mortgage-backed securities........... 3,279 3,297 5,524 5,541
Equity securities.................... 1,503 5,892 1,503 4,300
-------- -------- ------- --------
$111,672 $116,848 $98,887 $102,334
======== ======== ======= ========
</TABLE>
34
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following presents details of sales of securities available for sale:
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1998 1997 1996
------- ------- ------
(In Thousands)
<S> <C> <C> <C>
Sales proceeds........................................ $20,182 $15,830 $8,999
Gross gains........................................... 143 63 26
Gross losses.......................................... -- 8 2
</TABLE>
Securities with a carrying value of approximately $12,494,000 and
$15,133,000 at December 31, 1998 and 1997, respectively, were pledged to
secure public deposits and for other purposes required by applicable laws and
regulations.
Equity securities include shares of common stock of an institution with
which the Corporation is involved in a proposed merger. See "Pending
Acquisition" for further discussion.
Securities Held to Maturity
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------
Gross Unrealized
Amortized ------------------ Estimated
Cost Gains Losses Fair Value
--------- --------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury....................... $32,576 $ 630 $ -- $33,206
U.S. Government agencies............ 21,910 317 27 22,200
Mortgage-backed securities.......... 2,165 23 5 2,183
States and political subdivisions... 4,513 78 -- 4,591
Other............................... 6,138 6 53 6,091
------- --------- ------- -------
$67,302 $ 1,054 $ 85 $68,271
======= ========= ======= =======
<CAPTION>
December 31, 1997
---------------------------------------
Gross Unrealized
Amortized ------------------ Estimated
Cost Gains Losses Fair Value
--------- --------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury....................... $34,488 $ 319 $ 8 $34,799
U.S. Government agencies............ 14,929 47 36 14,940
Mortgage-backed securities.......... 2,400 32 35 2,397
States and political subdivisions... 4,492 42 1 4,533
Other............................... 700 3 -- 703
------- --------- ------- -------
$57,009 $ 443 $ 80 $57,372
======= ========= ======= =======
</TABLE>
35
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1998 1997
-------------------- --------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Due in one year or less.......... $14,916 $15,007 $13,561 $13,619
Due after one year through five
years........................... 48,257 49,095 38,531 38,839
Due after five years through ten
years........................... 1,664 1,677 2,317 2,314
Due after ten years.............. 300 309 200 203
Mortgage-backed securities....... 2,165 2,183 2,400 2,397
------- ------- ------- -------
$67,302 $68,271 $57,009 $57,372
======= ======= ======= =======
</TABLE>
There were no sales of securities held to maturity during the years ended
December 31, 1998, 1997 and 1996.
Loans
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- --------
(In Thousands)
<S> <C> <C>
Commercial................................................ $114,979 $108,549
Construction.............................................. 5,251 7,696
Mortgage.................................................. 113,627 96,911
Home equity and improvement............................... 67,251 62,153
Other consumer............................................ 10,563 16,050
-------- --------
311,671 291,359
-------- --------
Less: Unearned income..................................... 178 214
Allowance for loan losses.............................. 3,897 4,142
-------- --------
4,075 4,356
-------- --------
$307,596 $287,003
======== ========
</TABLE>
At December 31, 1998, 1997 and 1996, loans serviced by the Bank for the
benefit of others totaled approximately $1,252,000, $1,669,000 and $849,000,
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:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997 1996
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Nonaccrual.............................................. $1,257 $2,007 $1,845
Renegotiated............................................ 1,468 1,529 2,567
------ ------ ------
$2,725 $3,536 $4,412
====== ====== ======
</TABLE>
36
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The impact of the above non-performing loans on interest income is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Interest income if performing in accordance with
original terms................................... $ 239 $ 329 $ 414
Interest income actually recorded................. 127 154 232
------- ------- -------
$ 112 $ 175 $ 182
======= ======= =======
</TABLE>
The Bank and Metropolitan have 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, 1998, 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:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997
--------- ---------
(In Thousands)
<S> <C> <C> <C>
Balance--beginning............................... $ 17,289 $ 13,615
Loans originated................................. 13,772 11,920
Repayments....................................... (14,105) (8,317)
Other changes.................................... -- 71
--------- ---------
Balance--ending.................................. $ 16,956 $ 17,289
========= =========
</TABLE>
Allowance for Loan Losses
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997 1996
-------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Balance--beginning............................... $ 4,142 $ 3,585 $ 3,470
Provision for loan losses........................ 698 1,026 908
Loans charged off................................ (1,260) (599) (849)
Recoveries....................................... 317 130 56
-------- ------- -------
Balance--ending.................................. $ 3,897 $ 4,142 $ 3,585
======== ======= =======
</TABLE>
Impaired loans and related amounts recorded in the allowance for loan losses
are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
------ ------
(In Thousands)
<S> <C> <C> <C>
Recorded investment in impaired loans:
With recorded allowances................................. $1,133 $1,738
Without recorded allowances.............................. 1,119 704
------ ------
Total impaired loans..................................... 2,252 2,442
Related allowance for loan losses........................ 381 865
------ ------
Net impaired loans....................................... $1,871 $1,577
====== ======
</TABLE>
37
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1998, 1997 and 1996, the average recorded
investment in impaired loans totaled $3,139,000, $3,976,000 and $4,324,000,
respectively. Interest income recognized, primarily on the cash basis, on such
loans during the time each was impaired totaled $153,000, $179,000 and
$211,000, respectively.
Premises and Equipment
<TABLE>
<CAPTION>
December 31,
---------------
1998 1997
------- -------
(In Thousands)
<S> <C> <C>
Land........................................................ $ 3,252 $ 3,463
Buildings and building improvements......................... 8,138 8,153
Leasehold improvements...................................... 972 910
Furniture, fixtures and equipment........................... 6,563 5,492
------- -------
18,925 18,018
Less accumulated depreciation and amortization.............. 4,665 4,205
------- -------
$14,260 $13,813
======= =======
</TABLE>
Included in premises and equipment at December 31, 1998 and 1997 is
$1,518,000 and $1,348,000, respectively, related to properties purchased 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, which was reclassified as other real
estate owned in 1998, is not expected to result in any loss.
Depreciation and amortization expense charged to operations was $1,106,000,
$981,000 and $901,000 during the years ended December 31, 1998, 1997 and 1996,
respectively.
Deposits
At December 31, 1998, the schedule of maturities of certificates of deposit
is as follows (in thousands):
<TABLE>
<CAPTION>
Year Amount
---- --------
<S> <C>
1999........................................................... $130,472
2000........................................................... 12,578
2001........................................................... 9,579
2002........................................................... 1,298
2003........................................................... 288
Thereafter..................................................... 12
--------
$154,227
========
</TABLE>
Borrowed Money
Borrowed money at December 31, 1998 and 1997 consisted of short-term
securities sold under agreements to repurchase. Securities underlying the
agreements were under Metropolitan's control.
As of December 31, 1998, Metropolitan had an approved but unused borrowing
capacity with the Federal Home Loan Bank ("FHLB"), collateralized by FHLB
stock, of $9,443,000. Borrowings under this arrangement have an interest rate
that fluctuates based on market conditions and customer demand. As of December
31, 1998 and 1997, there were no related outstanding borrowings.
38
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
(In Thousands)
<S> <C> <C>
Prepaid state............................................... $ 418 $ 444
Current state liability..................................... (46) (78)
Current federal refundable (payable)........................ 194 (17)
Deferred federal and state (liability) asset................ (704) 159
------- ------
$ (138) $ 508
======= ======
</TABLE>
The tax effects of existing temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities
are as follows:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan and real estate losses in excess of
tax reserves........................................... $ 1,224 $ 1,275
Non-accrued interest.................................... 104 110
Depreciation............................................ 70 100
Deferred loan fees...................................... 52 46
Other................................................... 56 139
------- -------
1,506 1,670
------- -------
Deferred tax liabilities:
Unrealized gain on securities available for sale........ 2,079 1,382
Discount accretion...................................... 131 118
Other................................................... -- 11
------- -------
2,210 1,511
------- -------
Net deferred tax (liabilities) assets..................... $ (704) $ 159
======= =======
</TABLE>
The components of income taxes are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December
31,
---------------------
1998 1997 1996
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Current............................................... $2,751 $2,854 $2,753
Deferred.............................................. 165 (206) (88)
------ ------ ------
$2,916 $2,648 $2,665
====== ====== ======
</TABLE>
39
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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,
-----------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal income tax............. $2,938 34.0 $2,709 34.0 $2,725 34.0
Add (deduct) effect of:
Non-taxable interest income.. (464) (5.4) (353) (4.4) (312) (3.9)
State income tax, net of
federal income tax effect... 327 3.8 278 3.5 260 3.2
Other items, net............. 115 1.3 14 0.1 (8) --
------ ---- ------ ---- ------ ----
$2,916 33.7 $2,648 33.2 $2,665 33.3
====== ==== ====== ==== ====== ====
</TABLE>
Employee Benefit Plans
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, 1998, 1997 and 1996 was approximately $200,000.
Metropolitan has a noncontrbutory 401(k) savings plan covering substantially
all employees. Beginning January 1, 1997, Metropolitan matches 50% of employee
contributions for all participants, not to exceed 5% of their total salary.
Contributions made by Metropolitan were $27,000, $26,000 and $- ,
respectively, for the years ended December 31, 1998, 1997 and 1996.
In January 1996, Metropolitan entered into an agreement with its Chief
Executive Officer ("CEO"), which provides for an annual retirement benefit of
$35,000 for a 15-year period. In February 1998, the Corporation entered into
an additional agreement with Metropolitan's CEO. Such agreement provides for
an additional retirement benefit of $35,000 per annum for a fifteen year
period as well as certain retiree medical benefits. Although there are certain
provisions for early retirement, it is expected that the officer will remain
in the employment of Metropolitan until his retirement date in 2000 at age 65.
The present value of this obligation is being charged to operations. During
1998, 1997 and 1996, $154,000, $194,000 and $40,000, respectively, was charged
to operations related to these obligations.
40
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
years then ended:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested............................................. $ 266,629 $ 259,519
Nonvested.......................................... 10,756 9,165
--------- ---------
$ 277,385 $ 268,684
========= =========
Projected benefit obligation......................... $ 293,087 $ 285,330
Unrecognized net loss................................ (13,507) (15,939)
Unrecognized prior service cost being amortized over
fifteen years....................................... (193,260) (208,896)
--------- ---------
Accrued plan cost included in other liabilities...... $ 86,320 $ 60,495
========= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net periodic plan cost included the following
components:
Service cost.................................... $ 742 $ 1,868 $ 1,754
Interest cost................................... 19,447 18,666 16,935
Amortization of prior service cost.............. 15,636 15,636 15,636
------- ------- -------
$35,825 $36,170 $34,325
======= ======= =======
</TABLE>
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.
Stock Option Plan
During 1989, the shareholders of Metropolitan approved a stock option plan
(the "Plan") for officers and key employees of Metropolitan. In accordance
with the Plan, options for the purchases of 33,275 shares of Metropolitan's
common stock could be granted. Prior to 1997, options to purchase 19,965 and
12,856 shares of the Metropolitan common stock at a price of $7.51 per share
were granted to Metropolitan's President and Executive Vice President,
respectively. All such options were exercisable within and would expire 10
years from the date of grant. All options under the Plan were exercised during
1997. The aforementioned amounts have not been adjusted to reflect either the
subsequent conversion to Corporation shares or subsequent stock dividends as
such disclosure is not meaningful.
Commitments
The Bank and Metropolitan are parties to financial instruments with off-
balance-sheet risk in the normal course of business to meet the financing
needs of their 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
41
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
statements. The contract or notional amounts of those instruments reflect the
extent of involvement in particular classes of financial instruments. The
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 and Metropolitan use the same credit policies in making
commitments and conditional obligations as they do for on-balance-sheet
instruments. The commitments to extend credit are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
------- -------
(In Thousands)
<S> <C> <C> <C>
Commitments to extend credit............................. $59,192 $54,064
Standby letters of credit and financial guarantees....... 2,668 3,539
</TABLE>
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 and Metropolitan
evaluate each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained if deemed necessary 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 and Metropolitan to guarantee the performance
of a customer to a third party. Those guarantees are primarily issued to
support public and private borrowing arrangements, including commercial paper,
bond financing, and similar transactions. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Bank and Metropolitan hold collateral supporting
those commitments for which collateral is deemed necessary.
Rentals under long-term operating leases amounted to approximately $264,000,
$206,000, and $189,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. At December 31, 1998, the minimum commitments, which include
rental, real estate tax and other related amounts, under all noncancellable
leases with remaining terms of more than one year and expiring through 2008
are as follows:
<TABLE>
<CAPTION>
December 31, Amount
------------ --------------
(In Thousands)
<S> <C>
1999...................................................... $ 376
2000...................................................... 282
2001...................................................... 256
2002...................................................... 219
2003...................................................... 159
Thereafter................................................ 537
------
$1,829
======
</TABLE>
The Corporation and its subsidiaries are also subject to litigation which
arises primarily in the ordinary course of business. In the opinion of
management, the ultimate disposition of such litigation should not have a
material adverse effect on the consolidated financial position or results of
operations of the Corporation.
42
<PAGE>
LAKELAND BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Dividend Limitation
A limitation exists on the ability of the Bank and Metropolitan to pay
dividends to the Corporation. State of New Jersey Banking laws specify that no
dividend shall be paid by a 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 $38.8 million was
available for payment of dividends to the Corporation as of December 31, 1998.
43
<PAGE>
Lakeland Bancorp, Inc. (Parent Company Only)
Condensed financial statements of the Corporation (parent company only)
follow:
Statements of Condition
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Assets:
Cash and due from banks.............................. $ 277,597 $ 270,493
Securities available for sale........................ 5,594,095 4,001,929
Investment in subsidiaries........................... 48,384,672 44,563,868
Other assets......................................... 821,088 950,022
----------- -----------
Total assets....................................... $55,077,452 $49,786,312
=========== ===========
Liabilities:
Deferred income taxes................................ $ 1,763,915 $ 1,124,063
Stockholders' equity................................... 53,313,537 48,662,249
----------- -----------
Total liabilities and stockholders' equity............. $55,077,452 $49,786,312
=========== ===========
</TABLE>
Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Dividends from subsidiary bank............. $1,983,524 $1,720,707 $ 568,021
Other expenses............................. 14 67 3,493
---------- ---------- ----------
Income before income tax (benefit)
expense................................... 1,983,510 1,720,640 564,528
Income tax (benefit) expense............... (65) (1,096) 44
---------- ---------- ----------
Income before undistributed earings of
subsidiaries.............................. 1,983,575 1,721,736 564,484
Equity in undistributed earnings of
subsidiaries.............................. 3,741,780 3,598,986 4,785,857
---------- ---------- ----------
Net income................................. $5,725,355 $5,320,722 $5,350,341
========== ========== ==========
</TABLE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 5,725,355 $ 5,320,722 $ 5,350,341
Adjustments to reconcile net income to
net cash provided by operating
activities:
Decrease (increase) in other
assets............................. 128,934 (326,221) (178,135)
Equity in undistributed earnings of
subsidiaries....................... (3,741,780) (3,598,986) (4,785,857)
----------- ----------- -----------
Net cash provided by operating
activities....................... 2,112,509 1,395,515 386,349
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuances of common
stock................................ 469,841 648,862 1,372,509
Cash dividends paid on common stock... (2,446,246) (1,988,008) (1,703,641)
Purchase of treasury stock............ (129,000) -- --
----------- ----------- -----------
Net cash (used in) financing
activities....................... (2,105,405) (1,339,146) (331,132)
----------- ----------- -----------
Net increase in cash and cash
equivalents............................ 7,104 56,369 55,217
Cash and cash equivalents--beginning.... 270,493 214,124 158,907
----------- ----------- -----------
Cash and cash equivalents--ending....... $ 277,597 $ 270,493 $ 214,124
=========== =========== ===========
</TABLE>
44
<PAGE>
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, accrued interest receivable and certificates of
deposit
The carrying amounts for cash and cash equivalents, accrued interest
receivable and certificates of deposit 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.
45
<PAGE>
The carrying values and estimated fair values of the Corporation's financial
instruments are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1998 1997
------------------- -------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents......... $ 35,069 $ 35,069 $ 41,168 $ 41,168
Certificates of deposit........... 204 204 102 102
Securities available for sale..... 116,848 116,848 102,334 102,334
Securities held to maturity....... 67,302 68,271 57,009 57,372
Loans............................. 307,596 313,357 287,003 290,149
Accrued interest receivable....... 4,415 4,415 4,210 4,210
Financial liabilities
Deposits.......................... 488,881 490,166 453,471 453,959
Borrowed money.................... 3,795 3,795 3,536 3,536
Commitments
To extend credit.................. 59,192 59,192 54,064 54,064
Standby letters of credit......... 2,668 2,668 3,539 3,539
</TABLE>
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the entire holdings of a particular financial
instrument. Because no 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.
46
<PAGE>
Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------- -------- ------------- ------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Total interest income........... $8,608 $8,598 $8,734 $8,995
Total interest expense.......... 3,227 3,143 3,249 3,390
------ ------ ------ ------
Net interest income........... 5,381 5,455 5,485 5,605
Provision for loan losses....... 49 53 62 534
Other income.................... 775 717 788 885
Other expenses.................. 4,057 3,829 3,829 4,037
Income taxes.................... 685 773 786 672
------ ------ ------ ------
Net income...................... $1,365 $1,517 $1,596 $1,247
====== ====== ====== ======
Net income per share--basic and
diluted........................ $0.161 $0.179 $0.188 $0.147
====== ====== ====== ======
Weighted average number of
common shares outstanding--
basic and diluted.............. 8,488 8,496 8,492 8,496
====== ====== ====== ======
<CAPTION>
Quarter Ended
---------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Total interest income........... $8,061 $8,205 $8,484 $8,614
Total interest expense.......... 3,198 3,172 3,256 3,258
------ ------ ------ ------
Net interest income........... 4,863 5,033 5,228 5,356
Provision for loan losses....... 116 77 98 735
Other income.................... 741 728 717 837
Other expenses.................. 3,383 3,484 3,523 4,118
Income taxes.................... 702 713 769 464
------ ------ ------ ------
Net income...................... $1,403 $1,487 $1,555 $ 876
====== ====== ====== ======
Net income per share:
Basic......................... $0.168 $0.177 $0.185 $0.104
Diluted....................... 0.167 0.176 0.184 0.104
====== ====== ====== ======
Weighted average number of
common shares outstanding:
Basic......................... 8,374 8,390 8,400 8,454
Diluted....................... 8,414 8,431 8,442 8,454
====== ====== ====== ======
</TABLE>
Net income per common share and weighted average number of common shares
outstanding for the quarters ended June 30, 1998 and prior have been restated
to give retroactive effect to subsequent stock dividends.
47
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The following exhibit is filed with this Amendment No. 2 to Lakeland's
Annual Report on Form 10-K:
23.1 Consent of Radics & Co., LLC, Independent Certified Public
Accountants.
48
<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 Amendment No. 2 to its Annual
Report on Form 10-K for the year ended December 31, 1998 to be signed on its
behalf by the undersigned, thereunto duly authorized.
LAKELAND BANCORP, INC.
By:/s/ Roger Bosma
-------------------------------------
Roger Bosma
President and Chief Executive Officer
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 2 to the Annual Report on Form 10-K for the year ended December
31, 1998 has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Robert B. Nicholson* Director June 18, 1999
- --------------------------------------
Robert B. Nicholson
/s/ John W. Fredericks* Director June 18, 1999
- --------------------------------------
John W. Fredericks
/s/ Bruce G. Bohuny* Director June 18, 1999
- --------------------------------------
Bruce G. Bohuny
/s/ Mary Ann Deacon* Director June 18, 1999
- --------------------------------------
Mary Ann Deacon
/s/ Mark J. Fredericks* Director June 18, 1999
- --------------------------------------
Mark J. Fredericks
/s/ John Pier* Director June 18, 1999
- --------------------------------------
John Pier
/s/ Paul P. Lubertazzi* Director June 18, 1999
- --------------------------------------
Paul P. Lubertazzi
/s/ Joseph P. O'Dowd* Director June 18, 1999
- --------------------------------------
Joseph P. O'Dowd
/s/ Arthur L Zande Vice President and June 18, 1999
- -------------------------------------- Treasurer (Principal
Arthur L. Zande Financial and Accounting
Officer) and Director
/s/ Roger Bosma President and Chief June 18, 1999
- -------------------------------------- Executive Officer
Roger Bosma (Principal Executive
Officer) and Director
</TABLE>
*By:/s/ Arthur L Zande
------------------
Arthur L. Zande
Attorney-in-Fact
<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 11, 1999, included in the
Company's Amendment No. 2 to its Annual Report on Form 10-K for the year ended
December 31, 1998.
/s/ Radics & Co., LLC
---------------------
Radics & Co., LLC
June 18, 1999
Pine Brook, New Jersey
