SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): July 15, 1999
LAKELAND BANCORP, INC.
----------------------
(Exact name of registrant as specified in its charter)
New Jersey
------------------------
(State or other jurisdiction of incorporation)
33-27312 22-2953275
------------------------ ---------------------------------
(Commission File Number) (IRS Employer Identification No.)
250 Oak Ridge Road, Oak Ridge, New Jersey 07438
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 973-697-2000
Not Applicable
------------------------------
(Former name of former address, if changed since last report)
<PAGE>
Item 5. Other Events
On July 15, 1999, Lakeland Bancorp, Inc. completed its acquisition of
High Point Financial Corp. by merging High Point into Lakeland. The merger was
accounted for as a pooling of interests under generally accepted accounting
principles.
The following historical consolidated financial statements of Lakeland
which take into account the merger are attached as Exhibit 99.1:
1. Consolidated Statements of Condition as of December 31, 1998
and 1997.
2. Consolidated Statements of Income for the Three Years Ended
December 31, 1998, 1997 and 1996.
3. Consolidated Statements of Changes in Stockholders' Equity
for the Three Years Ended December 31, 1998, 1997 and 1996.
4. Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1998, 1997 and 1996.
5. Notes to Consolidated Financial Statements as of December
31, 1998 and 1997 and for the three years ended December 31,
1998, 1997 and 1996.
The reports of Radics & Co., LLC, Grant Thornton LLP and Arthur
Andersen LLP, independent accountants, on the consolidated financial statements
are filed herewith as part of Exhibit 99.1.
Lakeland's Management's Discussion and Analysis of Financial Condition
and Results of Operations for the three years ended December 31, 1998, 1997 and
1996, relating to the historical consolidated financial statements filed
herewith, is attached hereto as Exhibit 99.2.
Lakeland is a bank holding company whose principal operating
subsidiaries prior to the merger were Lakeland Bank and Metropolitan State Bank,
each New Jersey chartered banking associations. Following the merger, Lakeland's
principal operating subsidiaries are Lakeland Bank, Metropolitan State Bank and
The National Bank of Sussex County. The corporate headquarters of Lakeland and
Lakeland Bank are located in Oak Ridge, New Jersey and the main office of
Metropolitan State Bank is located in Montville, New Jersey. The main office of
The National Bank of Sussex County is located in Branchville, New Jersey.
Item 7. Financial Statements and Exhibits
The following exhibits are attached to this Current Report on Form 8-K:
<PAGE>
99.1 Consolidated Financial Statements of Lakeland as of December
31, 1998 and 1997 and for the three years ended December 31,
1998, 1997 and 1996.
99.2 Management's Discussion and Analysis of Financial Condition
and Results of Operations for the three years ended December
31, 1998, 1997 and 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
LAKELAND BANCORP, INC.
/s/ Arthur L. Zande
-------------------------------
Arthur L. Zande, Vice President
Dated: October 7, 1999
<PAGE>
EXHIBIT INDEX
99.1 Consolidated Financial Statements of Lakeland as of December 31,
1998 and 1997 and for the three years ended December 31, 1998,
1997 and 1996.
99.2 Management's Discussion and Analysis of Financial Condition
and Results of Operations for the three years ended December
31, 1998, 1997 and 1996.
Exhibit 99.1
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
High Point Financial Corp. and Metropolitan State Bank, both wholly-owned
subsidiaries, which statements reflect, at December 31, 1998 and 1997, total
assets constituting 45 percent of the related consolidated total at each date
and for each of the years in the three-year period ended December 31, 1998,
total income of 47 percent, 47 percent and 45 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 both High Point Financial Corp. and 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
<PAGE>
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 19, 1999, except for the last
paragraph of Note A to consolidated
financial statements, as to which the
date is July 15, 1999.
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Metropolitan State Bank
We have audited the consolidated balance sheets of Metropolitan State
Bank (a wholly owned subsidiary of Lakeland Bancorp, Inc.) (a New Jersey State
Chartered Bank) and Subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in shareholders' equity and
comprehensive income and cash flows for the years then ended. These financial
statements (not presented separately herein) are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above (not
presented separately herein) present fairly, in all material respects, the
consolidated financial position of Metropolitan State Bank and Subsidiary as of
December 31, 1998 and 1997, and the consolidated results of their operations and
their consolidated cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Grant Thornton LLP
Philadelphia, Pennsylvania
January 8, 1999
<PAGE>
Report of Independent Public Accountants
To the Stockholders and Board of Directors of High Point Financial Corp.:
We have audited the consolidated balance sheets of High Point Financial Corp. (a
New Jersey corporation) and it s subsidiary, The National Bank of Sussex County
(collectively, the "Company"), 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 three years in the period ended December 31, 1998. These
financial statements (not presented separately herein) are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above (not
presented separately herein) present fairly, in all material respects, the
financial position of the Company as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Roseland, New Jersey
January 19, 1999
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of
Metropolitan State Bank:
We have audited the consolidated statements of income, changes in shareholders'
equity and cash flows of Metropolitan State Bank (a New Jersey State Chartered
Bank) and subsidiary for the year ended December 31, 1996. These financial
statements (not presented separately herein) are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above (not presented
separately herein) present fairly, in all material respects, the results of
operations and cash flows of Metropolitan State Bank and subsidiary for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Roseland, New Jersey
January 23, 1997
<PAGE>
FINANCIAL STATEMENTS
LAKELAND BANCORP, INC. AND SUBSIDIARIES
December 31, 1998 and 1997
<PAGE>
C O N T E N T S
Page
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION 3
CONSOLIDATED STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9
<PAGE>
<TABLE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
December 31,
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 35,105,000 $ 38,232,000
Federal funds sold 28,700,000 23,925,000
------------ ------------
Cash and cash equivalents 63,805,000 62,157,000
Certificates of deposit 204,000 102,000
Securities available for sale, at estimated fair value 165,282,000 151,186,000
Securities held to maturity; estimated fair value of $91,846,000
in 1998 and $82,295,000 in 1997 90,657,000 81,775,000
Loans 442,067,000 409,693,000
Land held for sale 1,865,000 1,865,000
Premises and equipment 20,755,000 16,948,000
Accrued interest receivable 5,704,000 5,525,000
Other assets 12,685,000 11,924,000
------------ ------------
Total assets $803,024,000 $741,175,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing demand $153,111,000 $137,857,000
Savings and interest-bearing demand 327,210,000 301,074,000
Club accounts 1,975,000 1,989,000
Time under $100,000 190,146,000 179,749,000
Time of $100,000 and over 39,369,000 31,232,000
----------- -----------
Total deposits 711,811,000 651,901,000
Securities sold under agreements to repurchase 8,110,000 11,737,000
Long-term debt 5,000,000 5,000,000
Other liabilities 4,340,000 4,410,000
----------- -----------
Total liabilities 729,261,000 673,048,000
----------- -----------
Commitments and contingencies - -
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,
12,672,262 in 1998 and 6,305,198 in 1997; outstanding
shares, 12,663,662 in 1998 and 6,305,198 in 1997 31,681,000 15,763,000
Additional paid in capital 50,836,000 50,657,000
(Accumulated deficit) undivided profits (9,297,000) 1,153,000
Treasury stock, at cost, 8,600 shares (129,000) -
Accumulated other comprehensive income, net of income tax 841,000 554,000
Loans for options exercised (169,000) -
---------- -----------
Total stockholders' equity 73,763,000 68,127,000
----------- -----------
Total liabilities and stockholders' equity $803,024,000 $741,175,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
<CAPTION>
1998 1997 1996
---------------- --------------- ------------
INTEREST INCOME
<S> <C> <C> <C>
Loans and fees $36,970,000 $34,533,000 $30,792,000
Federal funds sold 1,834,000 1,391,000 1,356,000
Investment securities
U.S. Treasury 4,712,000 5,464,000 5,712,000
U.S. Government agencies 6,033,000 6,381,000 5,313,000
States and political subdivisions 1,683,000 1,244,000 1,091,000
Other 983,000 911,000 896,000
----------- ----------- -----------
Total interest income 52,215,000 49,924,000 45,160,000
---------- ---------- ----------
INTEREST EXPENSE
Deposits 19,043,000 18,566,000 17,073,000
Borrowed money 833,000 684,000 472,000
------------ ------------ ------------
Total interest expense 19,876,000 19,250,000 17,545,000
---------- ---------- ----------
Net interest income 32,339,000 30,674,000 27,615,000
PROVISION FOR LOAN LOSSES 698,000 1,026,000 908,000
------------ ----------- ------------
Net interest income after provision
for loan losses 31,641,000 29,648,000 26,707,000
---------- ---------- ----------
OTHER INCOME
Service charges on deposit accounts 3,991,000 3,966,000 3,634,000
Commission and fees 568,000 809,000 767,000
Gain (loss) on disposition of securities 119,000 46,000 (4,000)
Other 1,095,000 1,140,000 826,000
----------- ----------- ------------
Total other income 5,773,000 5,961,000 5,223,000
----------- ----------- -----------
OTHER EXPENSES
Salaries and benefits 13,503,000 12,929,000 11,507,000
Occupancy expense, net 2,319,000 2,375,000 2,332,000
Furniture and equipment 2,352,000 2,180,000 1,728,000
Stationery, supplies and postage 1,400,000 1,332,000 1,164,000
Legal fees 743,000 422,000 470,000
Other 4,716,000 4,511,000 4,588,000
----------- ----------- -----------
Total other expenses 25,033,000 23,749,000 21,789,000
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 12,381,000 11,860,000 10,141,000
Income taxes 4,424,000 4,234,000 3,845,000
----------- ----------- -----------
NET INCOME $ 7,957,000 $ 7,626,000 $ 6,296,000
=========== =========== ===========
Net income per common share
Basic $ 0.63 $ 0.61 $ 0.51
======== ======== ========
Diluted $ 0.63 $ 0.60 $ 0.50
======== ======== ========
Weighted average number of common shares outstanding
Basic 12,637,927 12,535,202 12,426,277
========== ========== ==========
Diluted 12,718,920 12,684,676 12,565,263
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Undivided Accumulated Loans Total
Compre- profits other com- for stock-
Number of Common hensive accumulated Treasury prehensive options holders'
shares stock income Surplus (deficit) stock income exercised equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 5,733,454 $14,334,000 $39,057,000 $ 925,000 $ - $ 881,000 $ - $ 55,197,000
Net income - - $6,296,000 - 6,296,000 - - - 6,296,000
Other comprehensive income,
net of income taxes
Unrealized loss on securities
available for sale - - (622,000) - - - - - -
Reclassification adjustment
for losses included
in income - - 2,000 - - - - - -
------------
Other comprehensive income, net of
income taxes - - (620,000) - - - (620,000) - (620,000)
-----------
Comprehensive income $ 5,676,000
==========
Conversion of equity contracts 23,269 58,000 722,000 - - - - 780,000
Stock dividends 104,297 261,000 2,242,000 (2,503,000) - - - -
Stock issuances 62,451 156,000 1,216,000 - - - - 1,372,000
Cash dividend - - - (1,704,000) - - - (1,704,000)
-------- ---------- ---------- ---------- -------- -------- ----- -----------
Balance, December 31, 1996 5,923,471 14,809,000 43,237,000 3,014,000 - 261,000 - 61,321,000
Net income - - $ 7,626,000 - 7,626,000 - - - 7,626,000
Other comprehensive income, net of
income taxes
Unrealized gain on securities
available for sale - - 320,000 - - - - - -
Reclassification adjustment
for gains included in income - - (27,000) - - - - - -
--------
Other comprehensive income, net of
income taxes - - 293,000 - - - 293,000 - 293,000
--------
Comprehensive income $ 7,919,000
==========
Exercise of stock option - - (24,000) - 64,000 - - 40,000
Stock dividends 326,042 815,000 6,684,000 (7,499,000) - - - -
Stock issuances 55,685 139,000 760,000 - - - - 899,000
Cash dividend - - - (1,988,000) - - - (1,988,000)
Purchase of treasury stock - - - - (64,000) - - (64,000)
------- -------- ---------- ------------------- --------- ----- -----------
Balance, December 31, 1997 6,305,198 $15,763,000 $50,657,000 $1,153,000 $ - $ 554,000 $ - $68,127,000
(Continued)
</TABLE>
<PAGE>
<TABLE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED
<CAPTION>
Undivided Accumulated Total
Compre- profits other Loans for stock-
Number of Common hensive (accumulated Treasury comprehensive options holders'
shares stock income Surplus deficit) stock income exercised equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 6,305,198 $15,763,000 $50,657,000 $ 1,153,000 $ - $ 554,000 $ - $68,127,000
Net income - - $ 7,957,000 - 7,957,000 - - - 7,957,000
Other comprehensive income,
net of income taxes
Unrealized gain on securities
available for sale - - 358,000 - - - - - -
Reclassification adjustment
for gains included
in income - - (71,000) - - - - - -
--------
Other comprehensive income,
net of income taxes - - 287,000 - - - 287,000 - 287,000
--------
Comprehensive income $ 8,244,000
==========
Exercise of stock options 15,000 37,000 (231,000) - 653,000 - - 459,000
Stock dividend 6,328,256 15,821,000 - (15,821,000) - - - -
Stock issuances 23,808 60,000 410,000 - - - - 470,000
Loans for options exercised - - - - - - (169,000) (169,000)
Purchase of treasury stock - - - - (782,000) - - (782,000)
Cash dividends - - - (2,586,000) - - - (2,586,000)
---------- ----------- ----------- ---------- -------- -------- ---------------------
Balance, December 31, 1998 12,672,262 $31,681,000 $50,836,000 $(9,297,000) $(129,000) $ 841,000 $(169,000) $73,763,000
========== =========== =========== =========== ========= ======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1998 1997 1996
---- ----- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 7,957,000 $ 7,626,000 $ 6,296,000
Adjustments to reconcile net income to net cash provided
by operating activities
Net amortization of premiums, discounts and deferred
loan fees and costs 1,011,000 1,185,000 1,430,000
Depreciation and amortization 1,758,000 1,569,000 1,320,000
Provision for loan losses 698,000 1,026,000 908,000
Provision for losses on other real estate - 121,000 50,000
(Gain) loss on sales and calls of securities (119,000) (46,000) 4,000
Gain on sale of student loans - (11,000) -
Gain on dispositions of premises and equipment (63,000) (139,000) (195,000)
(Gain) loss on sale of other real estate owned (10,000) 17,000 274,000
Deferred income tax 19,000 665,000 991,000
(Increase) decrease in accrued interest receivable (178,000) (232,000) 148,000
Increase in other assets (712,000) (487,000) (2,859,000)
(Decrease) increase in other liabilities (4,000) 1,319,000 97,000
------------ ----------- ----------
Net cash provided by operating activities 10,357,000 12,613,000 8,464,000
------------ ---------- ----------
Cash flows from investing activities
Net change in certificates of deposit (102,000) 98,000 (200,000)
Net decrease in interest bearing deposits with banks - 123,000 2,000
Proceeds from repayments on and maturities of securities
available for sale 57,081,000 52,019,000 35,887,000
Proceeds from sales of securities available for sale 23,891,000 17,821,000 13,258,000
Purchases of securities available for sale (105,296,000) (87,522,000) (55,761,000)
Proceeds from repayments on and maturities of securities
held to maturity 26,982,000 23,150,000 28,212,000
Purchases of securities held to maturity (26,181,000) (24,786,000) (32,849,000)
Net increase in loans (39,139,000) (36,382,000) (47,085,000)
Purchase of loans - (2,855,000) -
Sale of loans and participation interest in loan 5,962,000 3,378,000 500,000
Cash received for land held for sale - 20,000 -
Proceeds from dispositions of premises and equipment 9,000 26,000 78,000
Additions to premises and equipment (5,849,000) (3,066,000) (3,207,000)
Net decrease in other real estate owned 258,000 286,000 2,435,000
-------------- ------------- -----------
Net cash used in investing activities (62,384,000) (57,690,000) (58,730,000)
-------------- ------------- -----------
</TABLE>
(Continued)
<PAGE>
<TABLE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities
Net increase in deposits $59,910,000 $53,316,000 $ 28,242,000
(Decrease) increase in securities sold under agreements to
repurchase (3,627,000) 3,347,000 41,000
Proceeds from long term repurchase agreements - 5,000,000 -
Repayment of mortgage payable - (1,295,000) (424,000)
Proceeds from common stock issuances 470,000 939,000 1,373,000
Purchase of treasury stock (782,000) (64,000) -
Exercise of stock options 290,000 - -
Proceeds from conversion of equity contracts - - 396,000
Cash dividends paid on common stock (2,586,000) (1,988,000) (1,704,000)
----------- ----------- -------------
Net cash provided by financing activities 53,675,000 59,255,000 27,924,000
---------- ---------- ------------
Net increase (decrease) in cash and cash equivalents 1,648,000 14,178,000 (22,342,000)
Cash and cash equivalents-beginning 62,157,000 47,979,000 70,321,000
---------- ---------- ------------
Cash and cash equivalents-ending $63,805,000 $62,157,000 $ 47,979,000
========== ========== ============
Supplemental disclosures of cash flow information
Cash paid during the year for
Income taxes (federal and state) $ 4,244,000 $ 3,784,000 $ 2,870,000
Interest 19,806,000 18,730,000 17,643,000
Supplemental schedule of noncash investing and financing
activities
Transfer of securities available for sale to securities held
to maturity 10,101,000 - -
Transfer of loans receivable to other real estate owned 772,000 771,000 483,000
Loans to facilitate the sale of other real estate owned 565,000 33,000 -
Transfer of premises to other real estate owned 272,000 81,000 -
Mortgage payable incurred in connection with purchases of
premises - 322,000 -
Stock dividend 10,620,000 5,235,000 1,588,000
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE A - ACQUISITIONS
On September 16, 1997, Lakeland Bancorp, Inc. (the Corporation) entered into
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.
On December 7, 1998, the Corporation entered into an Agreement and Plan of
Merger (the Merger Agreement) and a Stock 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 (NBSC) will become a wholly owned
subsidiary of the Corporation. Pursuant to the Merger Agreement, each share
of High Point common stock not previously owned by the Corporation
(3,811,480 shares of High Point common stock, including 344,252 shares owned
by the Corporation, were outstanding as of December 31, 1998) will be
converted into 1.2 shares of Corporation common stock. As of December 31,
1998, High Point had total assets, deposits and stockholders' equity of
$259.0 million, $222.9 million and $24.3 million, respectively.
On July 15, 1999, the Corporation completed its merger with High Point.
Amounts previously reported by the Corporation in its consolidated statement
of condition as of December 31, 1998 and 1997 and its consolidated
statements of income, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998, have been
retroactively restated to include the accounts of High Point.
NOTE B - 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), NBSC and Metropolitan (collectively, the Banks). The Banks
combine to generate commercial, mortgage and consumer loans and to receive
deposits from customers located primarily in Northern New Jersey. NBSC also
provides securities brokerage services, including mutual funds and variable
annuities, in cooperation with Linsco/Private Ledger, and provides insurance
services through a joint venture with Van Den Heuvel and Fountain, Inc. 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 (FDIC). NBSC is a federally chartered national banking
association and a member of the Federal Reserve System. The Banks' deposits
are insured by the FDIC.
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE C - ACCOUNTING POLICIES
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation, the Corporation's wholly owned subsidiaries, the Bank, NBSC and
Metropolitan, the Bank's wholly owned subsidiary, Lakeland Investment
Corporation (LIC), NBSC's wholly owned subsidiary, NBSC Investment Company,
and Metropolitan's wholly owned subsidiary, Metropolitan State Bank
Investment Company. All significant intercompany accounts and transactions
have been eliminated in consolidation.
2. 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 each Banks' 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.
3. 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.
4. 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.
(Continued)
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE C - ACCOUNTING POLICIES - Continued
5. Loans
Loans are stated at the amount of unpaid principal less unearned income,
which includes unearned interest and net deferred loan origination fees, and
the allowance for loan losses. Interest on commercial, mortgage and simple
interest installment loans is recognized as income based on the loan
principal outstanding. Interest on discounted installment loans is credited
to income based on a method which approximates the actuarial method.
Recognition of interest on the accrual method is generally discontinued when
factors indicate that the collection of such amounts is doubtful. At the
time a loan is placed on non-accrual status, previously accrued and
uncollected interest is reversed against interest income in the current
period. Interest on such loans, if appropriate, is recognized as income when
payments are received. A loan is returned to an accrual status when factors
indicating doubtful collectibility no longer exist.
6. 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.
7. 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.
8. Concentration of Risk
Lending activity is concentrated in loans secured by real estate located in
the State of New Jersey.
9. 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.
(Continued)
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE C - ACCOUNTING POLICIES - Continued
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.
10. 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
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 other expenses.
11. 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.
12. 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. 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.
13. Comprehensive Income
Effective January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS
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.
(Continued)
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE C - ACCOUNTING POLICIES - Continued
14. Interest-Rate Risk
The Corporation, through the Banks, is principally engaged in the business
of attracting deposits from the general public and using these deposits,
together with borrowings and other funds, to make loans secured by real
estate and, to a lesser extent, commercial and consumer loans. Additionally,
such funds are utilized to purchase investment securities. The potential for
interest-rate risk exists as a result of the differences in the duration of
the Corporation's interest-sensitive liabilities compared to its
interest-sensitive assets. In a changing interest rate environment,
liabilities will reprice at different speeds and to different degrees than
assets, thereby impacting net interest income. For this reason, management
regularly monitors the maturity structure of the Corporation's assets and
liabilities in order to measure its level of interest-rate risk and to plan
for future volatility.
15. Reclassification
Certain amounts for the years ended December 31, 1997 and 1996 have been
reclassified to conform to the current year's presentation.
NOTE D - SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
December 31, 1998
Amortized Gross unrealized Carrying
cost Gains Losses value
(in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury $ 39,097 $ 784 $ 20 $ 39,861
U.S. Government agencies 41,991 308 117 42,182
Mortgage-backed securities 18,022 140 48 18,114
States and political subdivisions 44,221 443 81 44,583
Other debt securities 14,163 25 100 14,088
Equity and other securities 6,442 12 - 6,454
----------- ------------ --------- -------
$ 163,936 $ 1,712 $ 366 $165,282
=========== ============ ========= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
Amortized Gross unrealized Carrying
cost Gains Losses value
(in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury $ 45,422 $ 488 $ 3 $ 45,907
U.S. Government agencies 40,285 251 50 40,486
Mortgage-backed securities 26,679 98 112 26,665
States and political subdivisions 30,062 217 11 30,268
Other debt securities 2,299 8 - 2,307
Equity and other securities 5,542 11 - 5,553
-------- ------- ------- ---------
$ 150,289 $ 1,073 $ 176 $ 151,186
======== ======== ======= ==========
</TABLE>
(Continued)
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE D - SECURITIES AVAILABLE FOR SALE - Continued
<TABLE>
<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 $ 29,490 $ 29,643 $ 33,179 $ 33,149
Due after one year through five years 80,637 81,552 74,365 75,138
Due after five years through ten years 19,638 19,824 8,748 8,916
Due after ten years 9,707 9,695 1,776 1,765
Mortgage-backed securities 18,022 18,114 26,679 26,665
Equity and other securities 6,442 6,454 5,542 5,553
---------- ---------- ---------- -----------
$ 163,936 $ 165,282 $ 150,289 $ 151,186
========== ========== ========== ==========
</TABLE>
The following presents details of sales of securities available for sale.
<TABLE>
Year ended December 31,
1998 1997 1996
(in thousands)
<S> <C> <C> <C>
Sales proceeds $ 23,891 $ 17,821 $ 13,258
Gross gains 143 63 26
Gross losses 24 17 30
</TABLE>
Securities with a carrying value of approximately $26,794,000 and
$35,833,000 at December 31, 1998 and 1997, respectively, were pledged to
secure public deposits and for other purposes required by applicable laws
and regulations.
Equity and other securities include Vanguard Money Market Fund, FRB stock
and FHLB stock.
NOTE E - SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
December 31, 1998
Amortized Gross unrealized
cost Gains Losses Fair value
(in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury $ 32,576 $ 630 $ - $ 33,206
U.S. Government agencies 24,407 352 27 24,732
Mortgage-backed securities 23,023 213 10 23,226
States and political subdivisions 4,513 78 - 4,591
Other 6,138 6 53 6,091
-------- ------- -------- ----------
$ 90,657 $ 1,279 $ 90 $ 91,846
========= ======== ======== ===========
</TABLE>
(Continued)
<PAGE>
<TABLE>
<CAPTION>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE E - SECURITIES HELD TO MATURITY - Continued
December 31, 1997
Amortized Gross unrealized
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 18,421 77 37 18,461
Mortgage-backed securities 23,674 181 56 23,799
States and political subdivisions 4,492 42 1 4,533
Other 700 3 - 703
--------- ------- ------- ---------
$ 81,775 $ 622 $ 102 $ 82,295
========= ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
December 31,
1998 1997
Amortized Carrying Amortized
cost value cost Fair value
(in thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 14,916 $ 15,007 $ 14,061 $ 14,120
Due after one year through five years 49,753 50,607 40,525 40,848
Due after five years through ten years 2,665 2,697 3,315 3,325
Due after ten years 300 309 200 203
Mortgage-backed securities 23,023 23,226 23,674 23,799
-------- --------- --------- ---------
$ 90,657 $ 91,846 $ 81,775 $ 82,295
======== ========= ========= =========
</TABLE>
There were no sales of securities held to maturity during the years ended
December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
NOTE F - LOANS
December 31,
1998 1997
(in thousands)
<S> <C> <C>
Commercial $ 159,299 $ 154,651
Construction 12,526 14,712
Mortgage 172,321 141,972
Home equity and improvement 73,588 69,695
Other consumer 32,322 37,104
----------- -----------
450,056 418,134
----------- -----------
Less
Unearned income 5 179
Allowance for loan losses 7,984 8,262
----------- -----------
7,989 8,441
----------- -----------
$ 442,067 $ 409,693
=========== ===========
</TABLE>
(Continued)
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE F - LOANS - Continued
At December 31, 1998, 1997 and 1996, loans serviced by the Banks for the
benefit of others totaled approximately $38,755,000, $41,855,000 and
$47,083,000, 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:
December 31,
1998 1997 1996
(in thousands)
Nonaccrual $ 3,281 $ 4,850 $ 5,695
Renegotiated 1,867 1,942 3,072
---------- --------- ----------
$ 5,148 $ 6,792 $ 8,767
========== ========= ==========
The impact of the above non-performing loans on interest income is as
follows:
Year ended December 31,
1998 1997 1996
(in thousands)
Interest income if performing
in accordance with original terms $ 593 $ 765 $ 991
Interest income actually recorded 606 722 414
-------- -------- ---------
$ (13) $ 43 $ 577
======== ========= =========
The Banks 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:
Year ended December 31,
1998 1997
(in thousands)
Balance - beginning $ 18,775 $ 15,415
Loans originated 14,682 12,354
Repayments (14,283) (9,065)
Other changes - 71
------------ ------------
Balance - ending $ 19,174 $ 18,775
=========== ===========
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE G - ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
(in thousands)
<S> <C> <C> <C>
Balance - beginning $ 8,262 $ 7,558 $ 8,079
Provision for loan losses 698 1,026 908
Loans charged off (1,667) (778) (1,947)
Recoveries 691 456 518
------------- ------------- -------------
Balance - ending $ 7,984 $ 8,262 $ 7,558
============ ============ ============
</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>
Recorded investment in impaired loans
With recorded allowances $ 3,133 $ 4,838
Without recorded allowances 1,119 704
-------- ------
Total impaired loans 4,252 5,542
Related allowance for loan losses 638 1,331
-------- ------
Net impaired loans $ 3,614 $ 4,211
======== ========
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, the average recorded
investment in impaired loans totaled $5,920,000, $6,538,000 and $8,912,000,
respectively. Interest income recognized, primarily on the cash basis, on
such loans during the time each was impaired totaled $621,000, $657,000 and
$308,000, respectively.
NOTE H - PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
Estimated December 31,
useful lives 1998 1997
(in thousands)
<S> <C> <C> <C>
Land - $ 4,273 $ 3,823
Buildings and building improvements 10 to 50 years 13,501 9,925
Leasehold improvements 10 to 50 years 1,008 1,581
Furniture, fixtures and equipment 2 to 30 years 10,536 9,518
Construction-in-progress - 55 5
----------- --------
29,373 24,852
Less accumulated depreciation and amortization 8,618 7,904
----------- --------
$ 20,755 $ 16,948
========== ========
</TABLE>
(Continued)
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE H - PREMISES AND EQUIPMENT - Continued
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 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.
In 1988, NBSC sold certain banking and other premises to FMI, Inc. The
banking premises were leased back to the Corporation (as the successor of
High Point) for periods ranging from 10 to 15 years. The Corporation (as the
successor of High Point) realized a gain on this transaction, which was
deferred and was amortized into income over the applicable lease terms. As
of December 31, 1997, the unamortized deferred gain was approximately
$216,000. In July 1998, NBSC repurchased those branches and other premises
sold to FMI, Inc. in 1998 for $3.2 million, the fair market value at the
time of the transaction. The unamortized deferred gain of $150,000 was used
to reduce the cost basis of the property. FMI, Inc. is a wholly owned
subsidiary of Franklin Mutual Insurance Co. The president of FMI, Inc. is a
member of the Corporation's Board of Directors.
Depreciation and amortization expense charged to operations was $1,758,000,
$1,569,000 and $1,320,000 during the years ended December 31, 1998, 1997 and
1996, respectively.
NOTE I - LAND HELD FOR SALE
The Corporation (as the successor to High Point) owns 66 acres of
undeveloped land in Frankford Township, New Jersey classified on the
statements of financial condition as "land held for sale". The Corporation
evaluates the carrying value of the property for impairment and takes into
consideration events or changes in circumstances which may indicate that the
Corporation may be unable to recover the carrying amount of this asset.
NOTE J - DEPOSITS
At December 31, 1998, the schedule of maturities of certificates of deposit
is as follows (in thousands):
Year Amount
---- --------
1999 $ 190,819
2000 19,958
2001 13,375
2002 2,493
2003 1,198
Thereafter 1,672
--------
$ 229,515
===========
NOTE K - BORROWED MONEY
1. Line of Credit
As of December 31, 1998, Metropolitan and NBSC had approved but unused
borrowing capacity with the Federal Home Loan Bank (FHLB), collateralized by
FHLB stock, of $9,443,000 and $12,500,000, respectively. 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.
(Continued)
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE K - BORROWED MONEY - Continued
2. Securities Sold Under Agreements to Repurchase
Borrowed money at December 31, 1998 and 1997 consisted of short-term
securities sold under agreements to repurchase. Securities underlying the
agreements were under NBSC's and Metropolitan's control.
3. Long-Term Debt
In August 1997, the Corporation (as the successor to High Point) sold $5
million in securities under an agreement to repurchase to the Federal Home
Loan Bank of New York. The securities bear an interest rate of 5.98% and
have a maturity date of August 20, 2002, subject to an early call at the
option of the FHLB on August 20, 2000 and quarterly thereafter. The fair
market value of the securities under agreement to repurchase, estimated
using a discounted cash flow approach, was $5.3 million as of December 31,
1998 and $5.1 million as of December 31, 1997.
Until 1997, the Corporation (as the successor to High Point) was obligated
under a note payable to an unaffiliated bank. That note, which was scheduled
to mature on January 2, 1998, was secured by the land held for sale
discussed in Note I. In May 1997, the Corporation (as the successor to High
Point) satisfied the note payable using the proceeds of a $500,000 dividend
from NBSC and other funds. Although the outstanding balance on the note was
$821,000 at the time of repayment, the lender agreed to cancel the note in
exchange for the early payment of $770,000 plus outstanding interest,
effectively forgiving $51,000 on the debt, which appears on the
Corporation's consolidated statement of income for the year ended December
31, 1997 as "other income."
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE L - INCOME TAXES
The tax effects of existing temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities
are as follows:
December 31,
1998 1997
(in thousands)
Deferred tax assets
State NOL carryforward $ 308 $ 736
Valuation reserve for land held for
sale and other real estate owned 793 745
Allowance for loan losses in excess
of tax reserves 1,779 1,826
Non-accrued interest 622 611
Depreciation 162 161
Deferred compensation and retirement plans 479 348
Other 373 419
Less: valuation allowance (325) (539)
-------- --------
Total 4,191 4,307
-------- --------
Deferred tax liabilities
Unrealized gain on securities
available for sale 505 343
Other 220 257
-------- --------
Total 725 600
-------- --------
Net deferred tax assets $ 3,466 $ 3,707
======== =========
The components of income taxes are summarized as follows:
Year ended December 31,
1998 1997 1996
(in thousands)
Current $ 4,405 $ 3,569 $ 2,854
Deferred 19 665 991
--------- --------- --------
$ 4,424 $ 4,234 $ 3,845
========= ========= ========
As of December 31, 1998 and 1997, the Corporation has recorded a valuation
allowance of approximately $325,000 and $539,000, respectively, which
represents an estimated reserve for state net operating losses (NOL) at NBSC
that may expire prior to NBSC's ability to utilize those credits. NBSC
periodically evaluates the realizability of its deferred tax assets and will
adjust the level of the valuation allowance when necessary.
(Continued)
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE L - INCOME TAXES - Continued
At December 31, 1998, the Corporation has NOL carryforwards related to NBSC
for state tax purposes of approximately $5.1 million. These tax benefits
expire in varying amounts through 2010.
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 $ 4,209 34.0% $ 4,032 34.0% $ 3,448 34.0%
Deduct effect of
Change in valuation allowance (214) (1.7) (34) (0.3) - -
Non-taxable interest income (497) (4.0) (353) (3.0) (312) (3.1)
State income tax, net of federal
income tax effect 566 4.5 524 4.4 326 3.2
Other items, net 360 2.9 65 0.6 383 3.8
--------- ------ -------- ------- ------ ------
$ 4,424 35.7% $ 4,234 35.7% $ 3,845 37.9%
======== ====== ======= ====== ======= ======
</TABLE>
NOTE M - EARNINGS PER SHARE
The following table shows the Corporation's earnings per share calculation
(in thousands except for per share amounts):
<TABLE>
<CAPTION>
Year ended December 31, 1998
Average common
Net shares and common Per share
income equivalents amount
<S> <C> <C> <C>
Basic earnings per share
Net income available to
common shareholders $ 7,957 12,638 $ 0.63
Options issued to executives
and directors - 81 -
--------- -------- --------
Diluted earnings per share
Net income available to common
shareholders plus
assumed conversions $ 7,957 12,719 $ 0.63
========= ======= =======
</TABLE>
(Continued)
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE M - EARNINGS PER SHARE - Continued
<TABLE>
<CAPTION>
Year ended December 31, 1997
Average common
Net shares and common Per share
income equivalents amount
<S> <C> <C> <C>
Basic earnings per share
Net income available to common shareholders $ 7,626 12,535 $ 0.61
Options issued to executives and directors - 150 (0.01)
---------- ------- ------
Diluted earnings per share
Net income available to common shareholders
plus assumed conversions $ 7,626 12,685 $ 0.60
========= ====== ======
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1996
Average common
Net shares and common Per share
income equivalents amount
<S> <C> <C> <C>
Basic earnings per share
Net income available to common shareholders $ 6,296 12,426 $ 0.51
Options issued to executives and directors - 139 (0.01)
---------- --------- -------
Diluted earnings per share
Net income available to common shareholders
plus assumed conversions $ 6,296 12,565 $ 0.50
========= ========= ======
</TABLE>
NOTE N - EMPLOYEE BENEFIT PLANS
1. Profit Sharing Plan
The Bank has a profit sharing plan for all its eligible employees. The plan
meets the requirements of the Employee Retirement Income Security Act of
1974. The Bank's annual contribution to the plan is determined by the Bank's
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.
2. CEO Retirement Benefits
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 CEO 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.
(Continued)
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - EMPLOYEE BENEFIT PLANS - Continued
3. Retirement Income Plan
In 1995, NBSC elected to liquidate its pension plan. On December 31, 1995,
NBSC reduced its pension asset to the level that it expected to recover upon
termination, less the excise taxes that management expected would be due at
that time. Upon termination of the plan in the third quarter of 1996, and
after payments to plan participants and payments for service charges and
excise taxes, the remaining plan assets that reverted to NBSC were $167,000.
Since the amount recovered exceeded the $44,000 recorded value of the plan
assets, NBSC recorded a gain of $123,000.
4. Retirement Savings Plan (401K)
NBSC has a retirement savings plan (commonly known as a "401(k)") covering
qualified employees. NBSC's contributions to the 401(k) totaled $76,000 in
1998, $85,000 in 1997, and $58,000 in 1996.
Metropolitan has a noncontributory 401(k) savings plan covering
substantially all employees. Beginning January 1, 1997, Metropolitan matched
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 $-0-, respectively, for the years ended December 31, 1998, 1997 and
1996.
5. Employee Stock Ownership Plan
NBSC has an Employee Stock Ownership Plan ("ESOP"). NBSC's contributions to
the ESOP totaled $200,000 each year in 1998, 1997, and 1996. These amounts
are included in "salaries and employee benefits."
6. Postretirement Health Care Benefits
NBSC provides postretirement health care benefits and life insurance
coverage to its employees who meet certain predefined criteria. The expected
cost of these benefits is charged to expense during the years that eligible
employees render service.
The accumulated postretirement benefit obligations as of December 31, 1998
and 1997 were as follows:
1998 1997
(in thousands)
Accumulated post retirement benefit
obligation, January 1 $ 390 $ 463
Service cost 8 20
Interest cost 12 25
Actuarial gain (213) (98)
Estimated benefit payments (13) (19)
------- ---------
Total accumulated post retirement benefit
obligation 184 391
Unrecognized net gain (loss) due to past
experience different from that assumed
and effects of changes in assumptions made 183 178
Unamortized transition obligation (119) (325)
------- ---------
Accrued accumulated post retirement
benefit obligation $ 248 $ 244
======= =======
(Continued)
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - EMPLOYEE BENEFIT PLANS - Continued
In 1998, NBSC changed its method of providing hospital and medical benefits
to its retirees from a traditional point of service plan to a fully insured
Medicare Supplement plan. As a result, the costs to offer health benefits to
NBSC's retirees were substantially reduced. This reduction resulted in a
reduction in NBSC's unamortized transition obligation of $198,000.
The net periodic postretirement benefit cost -- or the amount recognized by
NBSC as the cost of its postretirement benefit plans -- for 1998 was
$10,000, although required cash payments were approximately $4,000. The
components of net periodic post retirement benefit cost are as follows:
For the years ended December 31,
1998 1997 1996
(in thousands)
Service cost, benefits attributed to
employee service during the year $ 8 $ 20 $ 21
Interest cost on APBO 12 25 29
Amortization of transition obligation 8 22 22
Amortization of gains (18) (32) (13)
------ ------- -------
Net periodic postretirement
benefit cost $ 10 $ 35 $ 59
====== ====== ======
The discount rate used to determine the NBSC's APBO for 1998 was 6.75% and
for 1997 and 1996 was 7.0%. The rate of increase projected for future
compensation levels was 4.0%. NBSC projected that the cost of medical
benefits would increase at the following rates: 8.0% in 1998, 7.0% in 1999,
6.5% in 2000, 6.0% in 2001, 5.5% in 2002, and 5% in 2003 and each year
thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one percentage point change in
assumed health care cost trend rates would have the following effects:
Increase Decrease
Effect on total of service and interest cost components 7.0% (5.8%)
Effect on the postretirement benefit obligation 3.9% (3.4%)
7. Deferred Compensation Arrangements
High Point has established deferred compensation arrangements for certain
directors and executives of High Point and NBSC. The deferred compensation
plans differ, but generally provide for annual payments for ten to fifteen
years following retirement. High Point's liabilities under these
arrangements are being accrued from the commencement of the plans over the
participants' remaining periods of service. High Point intends to fund its
obligations under the deferred compensation arrangements with the proceeds
of life insurance policies that it has purchased on the respective
participants. The deferred compensation plans do not hold any assets.
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O - 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.
December 31,
1998 1997
------------ --------
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>
<CAPTION>
Year ended December 31,
1998 1997 1996
--------- ---------- ----------
Net periodic plan cost included the
following components:
<S> <C> <C> <C>
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.
NOTE P - STOCK OPTION PLANS
1. Employee Incentive Stock Option Plans
The Corporation (as the successor to High Point) has assumed the outstanding
options granted under three employee stock option plans established by High
Point in 1987, 1990, and 1996 so that key employees of NBSC could benefit
from increases in the price of the Corporation's common stock and would
therefore have an incentive to contribute to the Corporation's success. The
1996 plan covers options to purchase up to 162,000 shares; the 1990 plan
covers options to purchase up to 60,000 shares; and the 1987 plan covers
options to purchase up to 60,065 shares.
(Continued)
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE P - STOCK OPTION PLANS - Continued
In November 1995, options to purchase an aggregate 114,000 shares of stock
were granted under the 1987 and 1990 stock option plans. Each option had an
exercise price of $5.63, which was the fair value of a share on the date of
grant. All of these options vested within three months after the date of
grant.
In October 1997, High Point granted options to purchase an aggregate 6,000
shares of stock under the 1990 stock option plan. Each option had an
exercise price of $10.52, which was the fair value of a share on the date of
grant. All of these options vested on the date of grant.
2. Non-employee Director Stock Option Plan
The Corporation (as the successor to High Point) has assumed outstanding
options granted under the 1996 Non-employee Director Stock Option Plan. On
February 20, 1996, options were granted under this plan to purchase a total
of 117,000 shares at an exercise price of $5.63 per share, the fair market
value of a share as of the date of grant. These options vest at a rate of
20% a year for five years.
The following table shows the activity in the various stock option plans for
the last three years.
Options outstanding
Price
Shares per share
Balance, December 31, 1995 114,000 $ 5.63
Granted 117,000 5.63
------- ------
Balance, December 31, 1996 231,000 5.63
Granted 6,000 10.52
Exercised (7,200) 5.63
Forfeited (16,200) 5.63
-------- ------
Balance, December 31, 1997 213,600 5.63 - 10.52
Exercised (81,600) 5.63
Forfeited (1,200) 10.52
--------- ------
Balance, December 31, 1998 130,800 $5.63 - $10.52
======== ==============
(Continued)
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE P - STOCK OPTION PLANS - Continued
The Corporation follows APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations when accounting for its stock option
plans. Accordingly, the Corporation has not recognized a compensation cost
for the stock option plans. SFAS No. 123, "Accounting for Stock-Based
Compensation," requires determination of compensation cost for stock option
plans based on the fair value of the options awarded at the respective grant
dates. If the Corporation calculated compensation cost in that manner, the
Corporation's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
Year ended December 31,
1998 1997 1996
(Dollars in thousands except
per share amounts)
Net income As reported $ 7,957 $ 7,626 $ 6,296
Pro forma 7,924 7,579 6,181
Basic earnings per share As reported $ 0.63 $ 0.61 $ 0.51
Pro forma 0.63 0.60 0.50
Diluted earnings per share As reported $ 0.63 $ 0.60 $ 0.50
Pro forma 0.62 0.60 0.49
In the preceding table, the fair value of each option award is estimated as
of the date of grant using a binomial option-pricing model with the
following weighted average assumptions:
o Expected volatility of 59% for 1996 and 31% for 1997
o A dividend rate of $0.10 per share beginning three years after the
date of the grant for options issued in 1996 and 1997
o A risk-free interest rate of 5.3% for 1996 and 5.5% for 1997
o Expected option life of seven years for options issued or vested in
1996 and 1997
The following table summarizes information about the outstanding stock
options at December 31, 1998.
<TABLE>
<CAPTION>
Number Weighted
Range of outstanding at average remaining Number exercisable at
exercise prices December 31, 1998 contractual life December 31, 1998
<S> <C> <C> <C> <C>
$ 5.63 126,000 8.56 years 86,400
$10.52 4,800 8.75 years 4,800
</TABLE>
(Continued)
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE P - STOCK OPTION PLANS - Continued
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 to purchase 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.
NOTE Q - COMMITMENTS AND CONTINGENCIES
1. Cash and Due From Banks
Based on its level of deposits, NBSC is required to maintain an average
reserve balance with the Federal Reserve Bank of New York. The amount of
this reserve balance at December 31, 1998, was approximately $1,354,000.
2. Litigation
From time to time, the Corporation and its subsidiaries are defendants in
legal proceedings relating to their respective businesses. Management does
not believe that the outcome of any legal proceeding that was pending as of
December 31, 1998, or any other contingent liability or commitment, will
materially affect the Corporation's consolidated financial position or
results of operations.
3. Commitments With Off-Balance Sheet Risk
The consolidated statements of financial condition do not reflect various
commitments, such as commitments to extend credit and letters of credit,
which the Corporation makes in the normal course of business. Management
does not anticipate that the settlement of its outstanding off-balance sheet
commitments will have a material adverse effect on the Corporation's
consolidated financial position. However, as with typical loans, these
commitments carry various degrees of credit risk.
The Banks 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 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
Banks 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:
December 31,
1998 1997
(in thousands)
Commitments to extend credit $ 96,924 $ 93,110
Standby letters of credit and financial guarantees 3,419 4,318
(Continued)
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE Q - COMMITMENTS AND CONTINGENCIES - Continued
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 Banks 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 Banks 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 Banks hold collateral supporting those
commitments for which collateral is deemed necessary.
4. Lease Obligations
Rentals under long-term operating leases amounted to approximately $511,000,
$627,000, and $623,000 for the years ended December 31, 1998, 1997 and 1996,
respectively, including rent expense to related parties of $277,000 in 1998
and $428,000 for 1997 and 1996. 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:
December 31, Amount
(in thousands)
1999 $ 436
2000 342
2001 303
2002 226
2003 166
Thereafter 544
-------------
$ 2,017
NOTE R - 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 these limitations, approximately $38.8 million
was available for payment of dividends from the Bank and Metropolitan to the
Corporation as of December 31, 1998.
NBSC may not declare dividends in excess of the current year's earnings,
plus the retained earnings from the prior two years, without prior approval
from the Office of the Comptroller of the Currency. In addition, if NBSC
sustains losses that exceed its aggregate retained earnings, NBSC may not
pay dividends until the losses are recovered.
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE S - 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.
Securities sold under agreements to repurchase and long-term debt
The fair value of securities sold under agreements to repurchase and
long-term debt are based upon discounted value of contractual cash flows.
The Corporation estimates the discount rate using the rates currently
offered for similar borrowing arrangements.
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.
(Continued)
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE S - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
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 $ 63,805 $ 63,805 $ 62,157 $ 62,157
Certificates of deposit 204 204 102 102
Securities available for sale 165,282 165,282 151,186 151,186
Securities held to maturity 90,657 91,846 81,775 82,295
Loans 442,067 454,601 409,693 417,237
Accrued interest receivable 5,704 5,704 5,525 5,525
Financial liabilities
Deposits 711,811 714,837 651,901 653,765
Securities sold under agreements to repurchase 8,110 8,110 11,737 11,737
Long-term debt 5,000 5,298 5,000 5,057
Commitments
To extend credit - - - -
Standby letters of credit - 3 - 3
</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.
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE T - CONDENSED FINANCIAL STATEMENTS OF THE CORPORATION (PARENT
COMPANY ONLY):
<TABLE>
<CAPTION>
STATEMENTS OF CONDITION
December 31,
1998 1997
Assets
<S> <C> <C>
Cash and due from banks $ 288,000 $ 295,000
Federal funds sold 142,000 115,000
Land held for sale 1,865,000 1,865,000
Securities available for sale 18,000 17,000
Investment in subsidiaries 70,570,000 64,881,000
Other assets 924,000 968,000
----------- ------------
Total assets $73,807,000 $68,141,000
========== ===========
Liabilities
Other liabilities $ 44,000 $ 14,000
Stockholders' equity 73,763,000 68,127,000
---------- ----------
Total liabilities and stockholders' equity $73,807,000 $68,141,000
========== ==========
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Other income $ 11,000 $ 61,000 $ 62,000
Dividends from subsidiary banks 2,650,000 2,421,000 568,000
---------- ---------- -----------
Total income 2,661,000 2,482,000 630,000
---------- ---------- -----------
Interest expense - 32,000 131,000
Other expenses 396,000 233,000 443,000
----------- ----------- -----------
Total expense 396,000 265,000 574,000
----------- ----------- -----------
Income before income tax (benefit) 2,265,000 2,217,000 56,000
Income tax (benefit) (120,000) (70,000) -
----------- ------------ -----------
Income before undistributed earnings of subsidiaries 2,385,000 2,287,000 56,000
Equity in undistributed earnings of subsidiaries 5,572,000 5,339,000 6,240,000
---------- ----------- ---------
Net income $ 7,957,000 $ 7,626,000 $ 6,296,000
========== ========== ==========
</TABLE>
(Continued)
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE T - CONDENSED FINANCIAL STATEMENTS OF THE CORPORATION (PARENT
COMPANY ONLY) - Continued
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1998 1997 1996
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 7,957,000 $ 7,626,000 $ 6,296,000
Adjustments to reconcile net income to net cash
provided by operating activities
Unrealized loss on land held for sale - - 250,000
Increase (decrease) in other liabilities 199,000 (9,000) (28,000)
Decrease (increase) in other assets 44,000 (333,000) (133,000)
Equity in undistributed earnings of subsidiaries (5,572,000) (5,589,000) (6,240,000)
---------- ---------- ----------
Net cash provided by operating activities 2,628,000 1,695,000 145,000
---------- ---------- -----------
Cash flows in investing activities
Proceeds from sale and maturity of securities - 198,000 -
Decrease in interest bearing deposits - 123,000 2,000
Proceeds received from option on land held for sale - 20,000 -
---------- ---------- -----------
Net cash provided by investing activities - 341,000 2,000
---------- ----------- -------------
Cash flows from financing activities
Proceeds from issuances of common stock 760,000 939,000 1,373,000
Cash dividends paid on common stock (2,586,000) (1,988,000) (1,704,000)
Purchase of treasury stock (782,000) (64,000) -
Repayments of long-term debt - (973,000) (424,000)
Proceeds from equity contract conversion - - 396,000
------------ ----------- -----------
Net cash (used in) financing activities (2,608,000) (2,086,000) (359,000)
------------ ----------- -----------
Net increase (decrease) in cash and
cash equivalents 20,000 (50,000) (212,000)
Cash and cash equivalents at beginning 410,000 460,000 672,000
------------ ----------- -----------
Cash and cash equivalents at ending. $ 430,000 $ 410,000 $ 460,000
=========== =========== ===========
</TABLE>
(Continued)
<PAGE>
LAKELAND BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE U - 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. $ 12,813 $ 12,814 $ 13,008 $ 13,580
Total interest expense 4,915 4,846 5,001 5,114
--------- --------- --------- ---------
Net interest income. 7,898 7,968 8,007 8,466
Provision for loan losses. 49 53 62 534
Other income 1,469 1,396 1,366 1,542
Other expenses 6,407 6,239 5,937 6,450
Income taxes 1,032 1,105 1,176 1,111
--------- ---------- --------- ---------
Net income $ 1,879 $ 1,967 $ 2,198 $ 1,913
========= ========= ========= =========
Net income per share--basic and diluted $ 0.15 $ 0.16 $ 0.17 $ 0.15
Weighted average number of
common shares outstanding
Basic 12,619 12,627 12,649 12,653
Diluted 12,748 12,756 12,760 12,734
Quarter Ended
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
(In Thousands, Except Per Share Amounts)
Total interest income. $ 11,855 $ 12,145 $ 12,998 $ 12,926
Total interest expense 4,645 4,673 4,914 5,018
--------- --------- --------- ---------
Net interest income. 7,210 7,472 8,084 7,908
Provision for loan losses. 116 77 98 735
Other income 1,457 1,435 1,465 1,604
Other expenses 5,738 5,752 5,916 6,343
Income taxes 988 1,067 1,265 914
---------- --------- --------- ---------
Net income $ 1,825 $ 2,011 $ 2,270 $ 1,520
========= ========= ========= =========
Net income per share
Basic $ 0.15 $ 0.16 $ 0.18 $ 0.12
Diluted 0.14 0.16 0.18 0.12
Weighted average number of
common shares outstanding
Basic 12,505 12,521 12,531 12,585
Diluted 12,666 12,686 12,700 12,703
</TABLE>
Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Review
Lakeland reported net income of $8.0 million for the year ended
December 31, 1998, an increase of $331,000 or 4.34% compared to $7.6 million for
the year ended December 31, 1997. Net income per share diluted increased $.03 to
$.63 per share for the year ended December 31, 1998, as compared to $.60 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 gains on disposition of securities and a decrease in the provision
for loan losses, were partially offset by increases in other expenses and income
tax expense. Net income in 1997 increased by $1.3 million or 21% as compared to
$6.3 million in 1996. As of December 31, 1998, Lakeland had total assets of
$803.0 million, an increase of $61.8 million or 8.34%, compared to $741.2
million at December 31, 1997.
Lakeland's return on average assets and average stockholders' equity
was 1.04% and 11.03%, respectively, for 1998, compared to 1.07% and 11.73%,
respectively, in 1997, and 0.98% and 11.32%, respectively, in 1996. The decline
in the return on average stockholders' equity from 1997 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 $31.9 million or 7.63% from
$418.1 million at December 31, 1997, to $450.1 million at December 31, 1998.
This increase consisted of commercial loan increases of $4.6 million, mortgage
(including construction) loan increases of $28.2 million, and consumer
installment (including home equity and improvement) loan decreases of $889,000.
The investment portfolio, including both held to maturity and
available for sale securities, increased $23.0 million or 9.86% from $233.0
million at December 31, 1997, to $255.9 million at December 31, 1998. The
investment portfolio contains net unrealized gains on available for sale
securities of $1.3 million at December 31, 1998, an increase of $449,000 from
the net unrealized gain of $897,000 in the portfolio at December 31, 1997. Cash
and cash equivalents increased $1.6 million, or 2.65%, to $63.8 million at
December 31, 1998, from $62.2 million at December 31, 1997. Cash and cash
equivalents represented 7.9% and 8.4% of total assets at December 31, 1998, and
1997, respectively.
Total deposits increased $59.9 million or 9.19% from $711.8 million at
December 31, 1997 to $651.9 million at December 31, 1998. This increase
consisted of non-interest-bearing demand deposit increases of $15.3 million,
savings and interest-bearing demand deposit increases of $26.1 million, and time
deposit increases of $18.5 million.
Interest Income
Interest income increased $2.3 million or 4.59% to $52.2 million in
1998. In 1997, interest income increased $4.8 million or 10.5% to $49.9 million
from $45.2 million in 1996.
The increase in 1998 was attributable to an increase in average
interest earning assets of $45.3 million or 6.96%, partially offset by a 17
basis point decline in average yield. Interest income on loans increased $2.4
million, or 7.06%, to $37.0 million in 1998 from $34.5 million in 1997, due to
an increase in average loan balances which was partially offset by a decrease in
average yield. During 1998 average loans increased $34.7 million. These
increased average balances were partially offset by an 14 basis point decrease
in the average yield on loans.
<PAGE>
Interest income on taxable investment securities decreased $1.0
million or 8.05% to $11.7 million in 1998, due to a $8.6 million, or 4.23%,
decrease in the average balance of such securities, along with a 25 basis point
decrease in average yield.
Interest income on tax-exempt investment securities increased $439,000
or 35.29% to $1.7 million in 1998 from $1.2 million in 1997, due to an $10.6
million increase in the average balance outstanding.
Interest income on federal funds sold increased $443,000 or 31.85% to
$1.8 million in 1998 from $1.4 million in 1997, due primarily to a $8.5 million
increase in the average balance outstanding, which was partially offset by a 5
basis point decrease in average yield.
The $4.8 million increase in interest income in 1997 was attributable
to an increase in average interest earning assets of $56.5 million or 9.50%.
Interest income on loans increased $3.7 million, or 12.15%, to $34.5 million in
1997 from $30.8 million in 1996, due to an increase in average loan balances and
a slight increase in average yield. During 1997 average loans increased $42.0
million.
Interest income on taxable investment securities increased $835,000 or
7.00% to $12.8 million in 1997 from $11.9 million in 1996, due to an $10.6
million, or 5.53%, increase in the average balance of such securities and a 9
basis point increase in average yield.
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 $35,000 or 2.58%, due
to a 15 basis point increase in average yield.
Interest Expense
The increase in Lakeland's earning asset base was funded in part by
increased deposits. Interest expense on deposits during 1998 increased $477,000
or 2.57% to $19.0 million from $18.6 million in 1997, as a result of increased
average balances. While the average volume of interest-bearing deposits
increased $25.8 million or 5.16% during 1998, the average rate paid on those
deposits increased by 9 basis points. Interest expense on time deposits
increased $123,000 or 1.10% from $11.2 million in 1997 to $11.3 million in 1998.
During 1998, the average volume of time deposits increased $4.2 million as the
average rate paid on time deposits decreased by 5 basis points. Interest expense
on interest-bearing demand deposits increased $559,000 or 21.31%. During 1998,
the average volume of interest-bearing demand deposits increased $18.4 million,
or 15.97%, and the average rate paid on interest-bearing demand deposits
increased by 11 basis points from 2.27% during 1997 to 2.38% during 1998.
Interest expense on savings and club deposits decreased by $205,000 or 4.33%.
During 1998, the average volume of savings and club deposits increased by $3.2
million, while the average rate paid on savings and club deposits decreased by
16 basis points from 2.70% during 1997 to 2.54% during 1998. Total interest
expense increased $626,000 or 3.25%, reflecting the aforementioned factors
affecting deposits along with a $149,000 increase in interest expense on
borrowed money.
<PAGE>
Interest expense on deposits during 1997 increased $1.5 million or
8.75% to $18.6 million from $17.1 million in 1996, as a result of increased
average balances. The average volume of interest-bearing deposits increased
$41.4 million during 1997, while the average rate paid on those deposits
remained relatively consistent. During 1997 the average volume of time deposits
increased $23.1 million as the average rate paid on time deposits also increased
by 6 basis points. During 1997 the average volume of interest-bearing demand
deposits increased $14.4 million or 14.20%, and the average rate paid on
interest- bearing demand deposits increased by 15 basis points from 2.12% during
1996 to 2.27% in 1997. Interest expense on savings and club deposits decreased
by $331,000 or 6.53%. During 1997 the average volume of savings and club
deposits increased by $3.9 million, while the average rate paid on savings and
club deposits decreased by 25 basis points from 2.95% during 1996 to 2.70%
during 1997. Total interest expense increased $1.7 million or 9.72%, reflecting
the aforementioned factors affecting deposits including a $212,000 increase 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.
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) $431,233 $36,970 8.57% $396,486 $34,533 8.71% $354,525 $30,792 8.69%
Taxable investment securities (B) 193,577 11,728 6.06 202,135 12,756 6.31 191,544 11,921 6.22
Tax-exempt investment securities 37,594 1,683 4.47 27,002 1,244 4.61 22,994 1,091 4.74
Federal funds sold 34,184 1,834 5.37 25,654 1,391 5.42 25,711 1,356 5.27
Total interest-earning assets 696,588 52,215 7.50 651,277 49,924 7.67 594,774 45,160 7.59
Non-interest-earning assets
Allowance for loan losses (7,912) (7,741) (7,757)
Other assets 72,847 66,736 57,189
Total assets $761,523 $710,272 $644,206
</TABLE>
<PAGE>
<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-bearing liabilities
Interest-bearing demand deposits $133,961 $ 3,182 2.38% $115,518 $ 2,623 2.27% $101,114 $ 2,144 2.12%
Savings and club deposits 178,615 4,532 2.54 175,427 4,737 2.70 171,530 5,068 2.95
Time deposits 213,007 11,329 5.32 208,857 11,206 5.37 185,749 9,861 5.31
Borrowings 18,022 833 4.62 16,267 684 4.20 10,641 472 4.44
Total interest-bearing liabilities 543,605 19,876 3.66 516,069 19,250 3.73 469,034 17,545 3.74
Non-interest-bearing liabilities
Demand deposits 140,781 124,536 114,859
Other liabilities 4,979 4,653 4,697
Stockholders' equity 72,158 65,014 55,616
Total liabilities and
stockholders' equity $761,523 $710,272 $644,206
Net interest income/net interest spread $32,339 3.84% $30,674 3.94% $27,615 3.85%
Net yield on interest-earning assets (C) 4.64% 4.71% 4.64%
</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.
<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.
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
1998 vs. 1997 1997 vs. 1996
Increase (decrease) Total Increase (decrease) Total
due to change in increase due to change in increase
Volume Rate (decrease) Volume Rate (decrease)
(in thousands)
Interest income
<S> <C> <C> <C> <C> <C> <C>
Loans $ 2,798 $ (361) $ 2,437 $ 3,629 $ 112 $ 3,741
Taxable investment securities (453) (575) (1,028) 656 179 835
Tax-exempt investment securities 472 (33) 439 184 (31) 153
Federal funds sold 465 (22) 443 (4) 39 35
Total interest income $ 3,282 $ (991) $ 2,291 $ 4,465 $ 299 $ 4,764
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
1998 vs. 1997 1997 vs. 1996
Increase (decrease) Total Increase (decrease) Total
due to change in increase due to change in increase
Volume Rate (decrease) Volume Rate (decrease)
(in thousands)
Interest expense
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing demand deposits $ 427 $ 132 $ 559 $ 323 $ 156 $ 479
Savings and club deposits 88 (293) (205) 113 (444) (331)
Time deposits 224 (101) 123 1,236 109 1,345
Borrowings 137 12 149 239 (27) 212
Total interest expense 876 (250) 626 1,911 (206) 1,705
Net interest income $ 2,406 $ (741) $ 1,665 $ 2,554 $ 505 $ 3,059
</TABLE>
For the year ended 1998, net interest income increased $1.7 million to
$32.3 million from $30.7 million in 1997. This increase was attributable to an
increase in the volume of average net interest earning assets. A $17.8 million
increase in the excess of average interest-earning assets over average
interest-bearing liabilities was offset in part by a 10 basis point decrease in
the net interest spread. The net yield on interest-earning assets decreased to
4.64% in 1998 from 4.71% in 1997. For the year ended 1997, net interest income
increased $3.1 million to $30.7 million from $27.6 million in 1996. This
increase was attributable to an increase in the volume of average net interest
earning assets of $9.5 million along with a 9 basis point increase in the net
interest spread.
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
<PAGE>
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 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.
<PAGE>
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 $7,984,000, a $278,000
decrease from December 31, 1997, as Lakeland provided $698,000 to the allowance
and had net charge-offs of $976,000. 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 $8,262,000, a $704,000 increase from
December 31, 1996, as Lakeland provided $1,026,000 to the allowance and had net
charge-offs of $322,000. $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 1.77%, as compared to 1.98% and 1.97% at December 31, 1997, and
1996, respectively.
Other Income
Other (i.e., non-interest) income decreased $188,000 or 3.15% to $5.8
million in 1998 from $6.0 million in 1997 and represented 9.96% of total income
for 1998. The primary source of this decrease was NBSC's commissions on annuity
sale and investment planning services. These commissions decreased from $478,000
in 1997 to $189,000 in 1998 because NBSC changed its way of providing full
brokerage services in the second quarter of 1998 from providing the services
through an in-house broker to contracting with an outside party to provide these
services. The fees recorded are now recorded net of commissions paid, whereas
the fees recorded second quarter and prior to that were recorded gross of
commissions paid to the in-house broker. Commissions paid were recorded in
salary and benefit expense. Partially offsetting the impact of the decline in
brokerage commissions is an increase in service charges related to an imposition
of fees for non-customer ATM transactions, and an increase in revenues related
to the debit cards that NBSC began offering in the third quarter of 1998. This
decrease was primarily offset by an increase of $73,000 in the gain on
disposition of securities.
Other (i.e., non-interest) income increased $738,000 or 14.13% to $6.0
million in 1997 from $5.2 million in 1996 and represented 10.67% of total income
for 1997, an increase from 10.37% in 1996. This increase was primarily
attributable to an increase in ATM fee income, included in service charges on
deposit accounts.
<PAGE>
Other Expenses
Other (i.e., non-interest) expenses in 1998 increased $1.3 million or
5.41% over 1997. Salaries and benefits, the largest component of other expenses,
increased by $574,000 or 4.44%, due to branch expansion and normal salary
increases. Occupancy expense decreased $56,000 or 2.36%. The decrease in this
category was due to the repurchase of six branches previously sold in a
sale/leaseback arrangement. Furniture and fixtures increased by $172,000 or
7.98%. This increase was due to the purchasing of maintenance contracts for
imaging and computer equipment and 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 $321,000 or
76.07%. This was due principally to legal costs incurred in connection with
Lakeland's acquisition of Metropolitan State Bank and High Point Financial Corp.
Other expense categories increased in the aggregate by $205,000 or 4.54%. 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 $2.0 million or
9.00% over 1996. Salaries and benefits increased by $1.4 million or 12.36%. This
increase was due to increased staffing levels and normal salary increases, as
well as increased health benefit and pension costs. Occupancy expense increased
$43,000 or 1.84%. Furniture and fixtures expense increased $452,000 or 26.16%.
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 decreased $48,000 or 10.22%. Other expense
categories increased in the aggregate $91,000 or 1.58%. 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:
Year Ended December 31,
1998 1997 1996
(in thousands)
Current $ 4,405 $ 3,569 $ 2,854
Deferred 19 665 991
$ 4,424 $ 4,234 $ 3,845
Lakeland's effective income tax rate was 35.7%, 35.7%, and 37.9%, in
the years ended December 31, 1998, 1997, and 1996, respectively.
<PAGE>
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 $159,299 $154,651 $147,386 $142,967 $146,826
Real estate mortgage 172,321 141,972 128,939 107,884 100,346
Real estate construction 12,526 14,712 9,424 6,397 4,859
Home equity and consumer installment 105,910 106,799 97,550 79,777 73,166
Total Loans 450,056 418,134 383,299 337,025 325,197
Less
Unearned income (5) (179) (112) (148) (121)
Allowance for loan losses (7,984) (8,262) (7,558) (8,079) (8,781)
Net loans $442,067 $409,693 $375,629 $328,798 $316,295
</TABLE>
Lakeland has not made loans to borrowers outside the United States.
Commercial loans increased $4.6 million from December 31, 1997, to
December 31, 1998, representing 35.4% of total loans at December 31, 1998, as
compared to 37.0% at December 31, 1997. These loans are primarily to borrowers
within Lakeland's market area.
Real estate (including construction) loans increased $28.2 million
from December 31, 1997 to December 31, 1998, representing 41.1% of total loans
at December 31, 1998, as compared to 37.5% at December 31, 1997.
Home equity and consumer installment loans decreased $889,000 from
December 31, 1997, to December 31, 1998, representing 23.5% of total loans at
December 31, 1998, as compared to 25.5% at December 31, 1997.
The following table sets forth certain categories of loans as of
December 31, 1998, in terms of contractual maturity due:
<TABLE>
<CAPTION>
Within One to After
one year five years five years Total
(in thousands)
<S> <C> <C> <C> <C>
Commercial $ 76,794 $ 53,563 $ 28,942 $159,299
Real estate construction 10,501 498 1,527 12,526
Total $ 87,295 $ 54,061 $ 30,469 $171,825
</TABLE>
<PAGE>
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>
One to After
five years five years Total
(in thousands)
<S> <C> <C> <C>
Loans with fixed rates $ 48,211 $ 19,885 $ 68,096
Loans with adjustable rates 5,850 10,584 16,434
Total $ 54,061 $ 30,469 $ 84,530
</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.
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:
December 31,
1998 1997 1996 1995 1994
(in thousands)
Non-accrual loans (A) $ 3,281 $ 4,850 $ 5,695 $ 8,110 $ 11,093
Past due loans (B) 4,265 1,404 2,200 835 1,328
Renegotiated loans (C) 1,867 1,942 3,072 3,209 5,904
Total non-accrual, past
due and renegotiated
loans 9,413 8,196 10,967 12,154 18,325
Other real estate owned 1,989 1,758 1,313 3,692 5,908
Total $11,402 $ 9,954 $12,280 $15,846 $24,233
(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.
<PAGE>
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 $1.6 million to $3.3 million at December
31, 1998, from $4.9 million at December 31, 1997. At December 31, 1998,
non-accrual loans consisted of eleven mortgage loans, twenty-two commercial
loans, and thirty-four 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 $2.9
million to $4.3 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-nine 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 $593,000. The amount of interest income actually recorded on those
loans for 1998 was $606,000. The resultant income gain of $33,000 for 1998
compares to losses of $43,000 and $577,000 for 1997 and 1996, respectively.
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.
<PAGE>
As of December 31, 1998, based on the above criteria, Lakeland had
impaired loans totaling $4.3 million. 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, $638,000 has been allocated to the allowance
for loan losses for impairment.
The following table sets forth for each of the five years ended
December 31, 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>
December 31,
1998 1997 1996 1995 1994
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance of allowance at beginning of year $ 8,262 $ 7,558 $ 8,079 $ 8,781 $ 8,874
Charge-offs
Commercial 1,134 561 1,384 1,272 2,016
Installment 476 202 402 380 385
Construction - - - 86 254
Mortgage 57 15 161 360 212
Total charge-offs 1,667 778 1,947 2,098 2,867
Recoveries
Commercial 581 262 353 688 705
Installment 95 157 150 114 129
Construction - - 13 9 16
Mortgage 15 37 2 3 27
Total Recoveries 691 456 518 814 877
Net Charge-offs 976 322 1,429 1,284 1,990
Provision for loan losses 698 1,026 908 582 1,897
Balance of allowance at end of year $ 7,984 $ 8,262 $ 7,558 $ 8,079 $ 8,781
Ratio of net charge-offs to average loans
outstanding 0.23% 0.08% 0.40% 0.39% 0.63%
Balance of allowance at end of year as
a percentage of year end total loans 1.77% 1.98% 1.97% 2.40% 2.70%
</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.
<PAGE>
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 $5,888 35.40% $6,250 36.99% $5,621 38.45% $6,254 42.42% $6,793 45.15%
Mortgage 1,049 38.29 888 33.95 820 33.64 820 32.01 915 30.86
Construction 54 2.78 114 3.51 61 2.46 35 1.90 115 1.49
Home equity and consumer
installment 993 23.53 1,010 25.55 1,056 25.45 970 23.67 958 22.50
$ 7,984 100.00% $8,262 100.00% $7,558 100.00% $8,079 100.00% $8,781 100.00%
</TABLE>
(1) Represents the percentage of type of loan to total loans outstanding.
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>
Year Ended December 31,
1998 1997 1996
(in thousands)
<S> <C> <C> <C>
U.S. Treasury $ 72,437 $ 80,395 $ 91,280
U.S. Government agencies 66,589 58,907 43,023
Mortgage-backed securities 41,137 50,339 43,063
States and political subdivisions 49,096 34,760 22,939
Other debt securities 20,226 3,007 6,447
Equity and other securities 6,454 5,553 7,446
Totals $255,939 $232,961 $214,198
</TABLE>
<PAGE>
The following tables present the estimated fair values and unrealized
gains and losses on investment securities at December 31, 1998:
SECURITIES AVAILABLE FOR SALE
December 31, 1998
Amortized Gross unrealized Carrying
Cost Gains Losses Value
(in thousands)
U.S. Treasury $ 39,097 $ 784 $ 20 $39,861
U.S. Government agencies 41,991 308 117 42,182
Mortgage-backed securities 18,022 140 48 18,114
States and political subdivisions 44,221 443 81 44,583
Other debt securities 14,163 25 100 14,088
Equity and other security 6,442 12 - 6,454
Totals $163,936 $ 1712 $ 366 $165,282
Proceeds from sales of securities available for sale totaled $23.9
million, during the year ended December 31, 1998. Gross gains and losses of
$143,000 and $24,000, respectively, were realized on those transactions.
SECURITIES HELD TO MATURITY
December 31, 1998
Amortized Gross unrealized Fair
Cost Gains Losses Value
(in thousands)
U.S. Treasury $ 32,576 $ 630 $ - $ 33,206
U.S. Government agencies 24,407 352 27 24,732
Mortgage-backed securities 23,023 213 10 23,226
States and political subdivisions 4,513 78 - 4,591
Other 6,138 6 53 6,091
Totals $ 90,657 $ 1279 $ 90 $ 91,846
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
$27.0 million.
Securities available for sale with a carrying value of approximately
$26.7 million at December 31, 1998, were pledged to secure public deposits and
for other purposes required by applicable law and regulations.
<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 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 $ 18,469 $ 53,968 $ - $ - $ 72,437
Yield 6.16% 6.03% - % - % 6.07%
Obligations of U.S. Government Agencies
Book value 15,181 44,770 4,048 2,590 66,589
Yield 5.58% 5.75% 6.60% 6.73% 5.86%
Mortgage-backed securities
Book value 2,652 11,671 13,369 13,445 41,137
Yield 6.36% 6.43% 6.20% 6.54% 6.38%
Obligations of States and Political Subdivisions
Book value 10,107 13,856 17,928 7,205 49,096
Yield 5.50% 5.82% 5.71% 6.41% 5.80%
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 $ 47,211 $142,976 $ 35,858 $ 23,440 $ 249,485
Weighted average yield 5.94% 5.90% 5.99% 6.52% 5.98%
</TABLE>
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 After
one year five years
Within but within but within After ten
one year five years ten years years Total
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities
Book value $ 9,121 $ 30,740 $ - $ - $ 39,861
Yield 6.33% 6.00% - % - % 6.08%
Obligations of U.S. Government Agencies
Book value 10,425 26,120 3,047 2,590 42,182
Yield 5.78% 5.67% 6.55% 6.73% 5.83%
Mortgage-backed securities
Book value 1,679 2,419 2,683 11,333 18,114
Yield 6.33% 6.03% 6.01% 6.80% 6.54%
Obligations of States and Political Subdivisions
Book value 9,295 11,406 16,777 7,105 44,583
Yield 5.49% 5.80% 5.65% 6.38% 5.77%
Other Securities
Book value 802 13,286 - - 14,088
Yield 6.53% 5.56% - % - % 5.62%
Total book value $ 31,322 $ 83,971 $ 22,507 $ 21,028 $158,828
Weighted average yield 5.90% 5.80% 5.82% 6.65% 5.94%
</TABLE>
<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 held to maturity as of December 31, 1998:
<TABLE>
<CAPTION>
After After
one year five years
Within but within but within After ten
one year five years ten years 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 18,650 1,001 - 24,407
Yield 6.00% 5.86% 6.76% - % 5.92%
Mortgage-backed securities
Book value 973 9,252 10,686 2,112 23,023
Yield 6.41% 6.53% 6.24% 5.15% 6.26%
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 $ 15,889 $ 59,005 $ 13,351 $ 2,412 $ 90,657
Weighted average yield 6.00% 6.04% 6.27% 5.44% 6.05%
</TABLE>
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: 1998 1997 1996 (in
thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Non-interest-bearing demand deposits. $140,781 $124,536 $114,859
Interest-bearing demand deposits 133,961 115,518 101,114
Savings deposits. 178,615 175,427 171,530
Time deposits 213,007 208,857 185,749
Total $666,364 $624,338 $573,252
</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):
Three months or less $ 17,016
Over three months through six months 6,830
Over six months through twelve months 9,967
Over twelve months 5,556
Total $ 39,369
<PAGE>
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
$108.6 million. The maturity schedule of the investment portfolio, at carrying
value, indicates that 17.9% of the debt securities included in the portfolio
mature within one year, and 70.5% mature within five years. For additional
information regarding the investment portfolio, see Notes to Lakeland's
Consolidated Financial Statements.
The $9,297,000 deficit in undivided profits contained in the December
31, 1998 consolidated financial statements is the result of a bookkeeping entry
charging undivided profits $15,821,000 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 $15,821,000 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.
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 $ 62,157 $ 47,979
Operating activities
Net income 7,957 7,626
Adjustments to reconcile net income to net cash
provided by operating activities 2,400 4,987
Net cash provided by operating activities 10,357 12,613
Net cash used in investing activities (62,384) (57,690)
Net cash provided by financing activities 53,675 59,255
Net increase in cash and equivalents 1,648 14,178
Cash and cash equivalents at end of period. $ 63,805 $ 62,157
</TABLE>
Cash and cash equivalents increased by $1.6 million during 1998.
Operating activities produced $10.4 million of cash flow, $7.9 million of which
was derived from net income. Investing activities used $62.4 million in cash
flow, where $33.2 million was invested in the loan portfolio and $23.5 million
was invested in the investment portfolio. Net cash of $53.7 million was provided
in financing activities primarily due to deposit inflow of $59.9 million, which
was partially offset by $2.6 million used in payment of cash dividends paid on
common stock.
<PAGE>
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 $96.9 million. Time
deposits that mature in one year or less, at December 31, 1998, totaled $190.8
million. Management believes that a substantial portion of such deposits will
remain with Lakeland. The first and third sentences of 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.
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 $72.9 million or 16.2% of the total loan
portfolio were variable rate loans.
<PAGE>
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
$165.3 million at December 31, 1998, is available for liquidity needs when
necessary. The "held to maturity" category, which totaled $90.7 million at
December 31, 1998, is available for liquidity when bonds mature. Approximately
$44.6 million or 17.4% of the investment portfolio represents debt issues which
mature within one year and approximately $175.9 million or 68.7% of the
portfolio represents debt issues which mature within five years. U.S. Treasury
and Agency securities with a predominant maximum maturity of five years
represented approximately $139.0 million or 54% of the portfolio at December 31,
1998. Of the remaining $116.9 million of the investment securities portfolio,
approximately $49.1 million are invested in state, county, and municipal
securities with a predominant maturity of under ten years.
Deposit Liabilities
Lakeland's 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 $482.3 million or 67.8% of total deposits. The
balance of certificates of deposit at December 31, 1998, was $229.5 million or
32.2% of total deposits. Of the $229.5 million outstanding, $190.8 million or
83.1% 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 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.
<PAGE>
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.
<PAGE>
<TABLE>
December 31, 1998
More than More than
three months one year
Three months through through More than
or less one year five years five years Total
(dollars in thousands)
Interest-earning assets
<S> <C> <C> <C> <C> <C>
Loans (1) $112,419 $ 41,829 $138,271 $157,532 $450,051
Investment securities 17,442 40,603 143,167 54,727 255,939
Other investments (2) 28,754 150 - - 28,904
Total interest-earning assets 158,615 82,582 281,438 212,259 734,894
Interest-bearing liabilities
Deposits
Interest-bearing demand 18,165 30,694 88,800 - 137,659
Savings 20,557 28,075 142,894 - 191,526
Time 64,524 126,425 36,906 1,660 229,515
Borrowed money 7,211 899 5,000 - 13,110
Total interest-bearing liabilities 110,457 186,093 273,600 1,660 571,810
GAP during the period $ 48,158 $(103,511) $ 7,838 $210,599 $163,084
Cumulative GAP $ 48,158 $ (55,353) $ (47,515) $163,084 $ -
Interest-sensitive assets as a percent
of interest-sensitive liabilities
(cumulative) 143.60% 81.33% 91.67% 128.52%
Cumulative interest-sensitive assets
as a percent of total assets 19.75 30.04 65.08 91.52
Ratio of GAP to total assets 6.00 (12.89) 0.98 26.23
Ratio of cumulative GAP to total assets 6.00 (6.89) (5.91) 20.31
</TABLE>
(1) Loans are stated net of unearned income.
(2) Other investments consist of federal funds sold and interest-bearing
deposits in banks.
Capital Resources
Stockholders' equity increased $5.6 million to $73.8 million at
December 31, 1998, from $68.1 million at December 31, 1997, reflecting net
income during the year of $8.0 million, cash dividends to stockholders of $2.6
million, an unrealized securities gain, net of deferred income taxes, of
$287,000, net proceeds of $470,000 from the issuance of common stock, and net
disbursement from the purchase of treasury stock of $782,000.
<PAGE>
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
Amount Ratio
Actual Tier I Capital. $ 72,922 15.80%
Tier I Capital minimum amount. 18,458 4.00
Excess $ 54,464 11.80%
Actual Combined Tier I and Tier II Capital $ 78,690 17.05%
Combined Tier I and Tier II Capital
minimum requirement. 36,916 8.00
Excess $ 41,774 9.05%
LEVERAGE RATIO
Amount Ratio
Actual Tier I Capital to average
fourth quarter assets $ 72,922 9.36%
Minimum leverage target * * *
Excess $ * *%
* 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's financial condition or results of operations.
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's financial condition or results of operations.
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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. 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. Subsequent to SFAS No. 133, the FASB issued SFAS No. 137, which amended
the effective date of SFAS No. 133 to be all fiscal quarters of fiscal years
beginning after June 15, 2000. Earlier application is permitted only as of the
beginning of any fiscal quarter. Lakeland is currently reviewing the provisions
of SFAS No. 133, as amended by SFAS No. 137.
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.
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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
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 $445,000. At December 31, 1998, Lakeland had expensed
approximately $115,000 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, liquidity 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.
