LAKELAND BANCORP INC - 10-Q Quarterly Report

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission file number 33-27312

LAKELAND BANCORP, INC.
(Exact name of registrant as specified in its charter)

New Jersey	22-2953275

(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

250 Oak Ridge Road, Oak Ridge, New Jersey	07438

(Address of principal executive offices)	(Zip Code)

(973) 697-2000

(Registrant's telephone number, including area code)


(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12(b)-2 of the Exchange Act).

Yes [X] No [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

As of June 30, 2004 there were 16,018,525 outstanding shares of Common Stock, no par value.

LAKELAND BANCORP, INC.

Form 10-Q Index

			PAGE
		Part I Financial Information
Item 1.	Financial Statements:
	Consolidated Balance Sheets - June 30, 2004 (unaudited) and December 31, 2003		1
	Consolidated Income Statements - Unaudited Three Months and Six Months
	ended June 30, 2004 and 2003		2
	Consolidated Statements of Changes in Stockholders' Equity - Six months
	ended June 30, 2004 (unaudited) and 12 months ended December 31, 2003		3
	Consolidated Statements of Cash Flows - Unaudited Six Months ended June 30,
	2004 and 2003		4
	Notes to Consolidated Financial Statements (unaudited)		5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of
	Operations		11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		20
Item 4.	Controls and Procedures		20
		Part II Other Information
Item 1.	Legal Proceedings		21
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		21
Item 3.	Defaults Upon Senior Securities		22
Item 4.	Submission of Matters to a Vote of Security Holders		22
Item 5.	Other Information		22
Item 6.	Exhibits and Reports on Form 8-K		22

	The Securities and Exchange Commission maintains a web site which contains reports, proxy and information statements and other information relating to registrants that file electronically at the address: http:/ / www.sec.gov.

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

	June 30, 2004		December 31,
ASSETS	(unaudited)		2003

	(dollars in thousands)
Cash	$42,326		$42,760
Federal funds sold and interest-bearing deposits due from banks	34,353		3,324

Total cash and cash equivalents	76,679		46,084

Investment securities available for sale	523,529		557,402
Investment securities held to maturity; fair value of $62,171
in 2004 and $43,650 in 2003	62,529		43,009
Loans, net of deferred fees	890,860		851,536
Less: allowance for loan and lease losses	17,329		16,899

Net loans	873,531		834,637
Premises and equipment - net	27,633		27,510
Accrued interest receivable	6,329		6,391
Goodwill and other identifiable intangible assets	28,383		27,609
Bank owned life insurance	28,105		27,575
Other assets	15,718		15,073

TOTAL ASSETS	$1,642,436		$1,585,290


LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Deposits:
Noninterest bearing	$271,562		$242,710
Savings and interest-bearing transaction accounts	867,049		795,485
Time deposits under $100 thousand	198,010		209,216
Time deposits $100 thousand and over	80,137		78,271

Total deposits	1,416,758		1,325,682
Federal funds purchased and securities sold under
agreements to repurchase	19,294		51,423
Long-term debt	33,500		34,500
Subordinated debentures	56,703		—
Other liabilities	5,862		7,734
Guaranteed preferred beneficial interests in Company's
subordinated debentures	—		55,000

TOTAL LIABILITIES	1,532,117		1,474,339

Commitments and contingencies
Stockholders' equity:
Common stock, no par value; authorized shares, 40,000,000; issued
shares, 16,483,551 at June 30, 2004 and December 31, 2003;
outstanding shares, 16,018,525 at June 30, 2004 and
15,948,526 at December 31, 2003	130,968		131,116
Accumulated Deficit	(8,888	)	(12,980	)
Treasury stock, at cost, 465,026 shares in 2004 and 535,025 shares in 2003	(6,714	)	(7,283	)
Accumulated other comprehensive income (loss)	(5,047	)	98

TOTAL STOCKHOLDERS' EQUITY	110,319		110,951

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$1,642,436		$1,585,290

See accompanying notes to consolidated financial statements

Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED INCOME STATEMENTS

	For the three months ended June 30,			For the six months ended June 30,
	2004		2003	2004		2003

	(In thousands, except per share data)
INTEREST INCOME
Loans and fees	$12,812		$11,725	$25,481		$23,578
Federal funds sold and interest-bearing deposits with banks	38		58	48		126
Taxable investment securities	4,728		3,507	9,741		7,139
Tax-exempt investment securities	735		712	1,499		1,370

TOTAL INTEREST INCOME	18,313		16,002	36,769		32,213

INTEREST EXPENSE
Deposits	3,274		3,030	6,661		6,466
Federal funds purchased and securities sold under agreements to repurchase	56		47	167		110
Long-term debt	1,387		470	2,787		872

TOTAL INTEREST EXPENSE	4,717		3,547	9,615		7,448

NET INTEREST INCOME	13,596		12,455	27,154		24,765
Provision for loan and lease losses	875		750	1,750		1,500

NET INTEREST INCOME AFTER PROVISION FOR
LOAN AND LEASE LOSSES	12,721		11,705	25,404		23,265

NONINTEREST INCOME
Service charges on deposit accounts	1,839		1,808	3,703		3,319
Commissions and fees	729		616	1,358		1,155
Gains on the sales of investment securities	413		487	416		752
Income on bank owned life insurance	251		218	530		394
Other income	96		68	197		156

TOTAL NONINTEREST INCOME	3,328		3,197	6,204		5,776

NONINTEREST EXPENSE
Salaries and employee benefits	5,562		5,051	11,109		10,010
Net occupancy expense	1,004		851	2,025		1,776
Furniture and equipment	907		761	1,752		1,575
Stationery, supplies and postage	341		336	689		666
Legal fees	505		399	989		652
Marketing expense	376		315	691		511
Other expenses	1,883		1,675	3,634		3,165

TOTAL NONINTEREST EXPENSE	10,578		9,388	20,889		18,355

Income before provision for income taxes	5,471		5,514	10,719		10,686
Provision for income taxes	1,753		1,768	3,432		3,397

NET INCOME	$3,718		$3,746	$7,287		$7,289


EARNINGS PER SHARE
Basic	$0.23		$0.25	$0.46		$0.49

Diluted	$0.23		$0.25	$0.45		$0.48



UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
	For the three months ended June 30,			For the six months ended June 30,
	2004		2003	2004		2003

	(in thousands)			(in thousands)
NET INCOME	$3,718		$3,746	$7,287		$7,289


OTHER COMPREHENSIVE INCOME NET OF TAX:
Unrealized securities gains (losses) arising during period	(9,525	)	1,296	(4,875	)	1,651
Less: reclassification for gains included in net income	268		333	270		511

Other Comprehensive Income	(9,793	)	963	(5,145	)	1,140

TOTAL COMPREHENSIVE INCOME	$(6,075	)	$4,709	$2,142		$8,429

See accompanying notes to consolidated financial statements

	Lakeland Bancorp, Inc. and Subsidiaries
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

								Accumulated
	Common stock							Other
								Comprehensive
	Number of			Accumulated		Treasury		Income
	Shares	Amount		deficit		Stock		(Loss)		Total

	(dollars in thousands)
BALANCE DECEMBER 31, 2002	14,671,097	$101,664		($9,436	)	($5,881	)	$4,420		$90,767
Net Income 2003	—	—		15,107		—		—		15,107
Other comprehensive loss,
net of tax	—	—		—		—		(4,322	)	(4,322	)
Exercise of stock options	—	(210	)	—		680		—		470
Shares issued for the purchase of
CSB Financial Corp	1,028,492	16,742		—		—		—		16,742
Stock dividend	783,962	12,920		(12,920	)	—		—		—
Cash dividends	—	—		(5,731	)	—		—		(5,731	)
Purchase of treasury stock	—	—		—		(2,082	)	—		(2,082	)

BALANCE DECEMBER 31, 2003	16,483,551	131,116		(12,980	)	(7,283	)	98		110,951
Net Income, first six months 2004	—	—		7,287		—		—		7,287
Other comprehensive loss,
net of tax	—	—		—		—		(5,145	)	(5,145	)
Exercise of stock options	—	(148	)	—		749		—		601
Cash dividends	—	—		(3,195	)	—		—		(3,195	)
Purchase of treasury stock	—	—		—		(180	)	—		(180	)

BALANCE JUNE 30, 2004
(unaudited)	16,483,551	$130,968		($8,888	)	($6,714	)	($5,047	)	$110,319

See accompanying notes to consolidated financial statements

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS-(UNAUDITED)

	For the six months ended June 30,
	2004		2003

CASH FLOWS FROM OPERATING ACTIVITIES	(in thousands)
Net income	$7,287		$7,289
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of premiums, discounts and deferred loan
fees and costs	2,005		2,715
Depreciation and amortization	1,561		1,269
Provision for loan and lease losses	1,750		1,500
Gain on sales and calls of securities	(416	)	(752	)
(Gain) loss on disposition of premises and equipment	40		(9	)
Deferred income tax	1,334		(2,423	)
Increase in other assets	1,244		3,546
Decrease in other liabilities	(1,872	)	(2,891	)

NET CASH PROVIDED BY OPERATING ACTIVITIES	12,933		10,244

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from repayments on and maturity of securities:
Available for sale	80,885		96,582
Held for maturity	9,234		8,628
Proceeds from sales of securities available for sale	—		35,269
Purchase of securities:
Available for sale	(56,273	)	(190,263	)
Held for maturity	(28,404	)	(12,864	)
Net increase in loans	(41,433	)	(18,854	)
Purchase of Bank Owned Life Insurance	—		(5,000	)
Proceeds from dispositions of premises and
equipment	1		9
Capital expenditures	(1,521	)	(1,116	)
Net decrease in other real estate owned	—		(324	)

NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES	(37,511	)	(87,933	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits	91,076		88,873
Decrease in federal funds purchased and
securities sold under agreements to repurchase	(32,129	)	(435	)
Repayment of long-term debt	(1,000	)	—
Issuance of subordinated debentures	—		30,000
Purchase of treasury stock	(180	)	(1,138	)
Exercise of stock options	601		332
Dividends paid	(3,195	)	(2,701	)

NET CASH PROVIDED BY(USED IN) FINANCING ACTIVITIES	55,173		114,931

Net increase in cash and cash equivalents	30,595		37,242
Cash and cash equivalents, beginning of year	46,084		35,465

CASH AND CASH EQUIVALENTS, END OF PERIOD	$76,679		$72,707

See accompanying notes to consolidated financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

Note 1. Significant Accounting Policies

Basis of Presentation.

This quarterly report presents the consolidated financial statements of Lakeland Bancorp, Inc. (the Company) and its subsidiary, Lakeland Bank (Lakeland).

The Company’s financial statements reflect all adjustments and disclosures which management believes are necessary for a fair presentation of interim results. The results of operations for the quarter presented do not necessarily indicate the results that the Company will achieve for all of 2004. You should read these interim financial statements in conjunction with the consolidated financial statements and accompanying notes that are presented in the Lakeland Bancorp, Inc. Annual Report on Form 10-K for the year ended December 31, 2003.

The financial information in this quarterly report has been prepared in accordance with the Company’s customary accounting practices; these financial statements have not been audited. Certain information and footnote disclosures required under generally accepted accounting principles have been condensed or omitted, as permitted by rules and regulations of the Securities and Exchange Commission.

Stock-Based Compensation

The Company follows the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the standard permits entities to continue accounting for employee stock options and similar equity instruments under Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied.

At June 30, 2004, the Company had four stock-based employee compensation plans, which are more fully described in the Company’s Annual Report on Form 10-K. The Company accounts for these plans under the recognition and measurement principles of APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Stock-based employee compensation costs are not reflected in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation (in thousands, except per share amounts).

	For the Three Months Ended		For the Six Months Ended
	June 30,		June 30,
	2004	2003	2004	2003

Net income, as reported	$3,718	$3,746	$7,287	$7,289
Deduct: Stock-based compensation costs
determined under fair value based method
for all awards	197	124	394	248

Pro forma net income	$3,521	$3,622	$6,893	$7,041


Earnings per share:
Basic, as reported	$0.23	$0.25	$0.46	$0.49
Basic, pro forma	$0.22	$0.24	$0.43	$0.47

Diluted, as reported	$0.23	$0.25	$0.45	$0.48
Diluted, pro forma	$0.22	$0.24	$0.43	$0.47

Stock Options outstanding were 781,590 and 739,707 at June 30, 2004 and 2003, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in 2003: dividend rate of 2%, expected volatility of 35%, risk-free interest rate of 3.39% and expected lives of 7 years. The Company did not grant stock options for the six months ended June 30, 2004.

On June 30, 2004, the Financial Accounting Standards Board (FASB) issued a proposed Statement, “Share-Based Payment-an Amendment of FASB Statement No. 123 and APB 95,” that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Under the FASB’s proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award would generally be measured at fair value at the grant date. Current accounting guidance requires that the expense relating to so-called fixed plan employee stock options only be disclosed in the footnotes to the financial statements. The proposed Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The Company is currently evaluating this proposed statement and its effects on the Company’s results of operations.

Note 2. Statement of Cash Flow Information.

	For the six months ended
	June 30,
	2004	2003

Supplemental schedule of noncash investing and	(in thousands)
financing activities:
Cash paid during the period for income taxes	$4,290	$1,413
Cash paid during the period for interest	9,674	7,407
Transfer of loans receivable to other real estate owned	—	324

Note 3. Earnings Per Share.

Basic earnings per share for a particular period of time is calculated by dividing net income by the weighted average number of common shares outstanding during that period.

Diluted earnings per share is calculated by dividing net income by the weighted average number of outstanding common shares and common share equivalents. The Company’s only outstanding “common share equivalents” are options to purchase its common stock.

All weighted average, actual shares and per share information has been adjusted retroactively for the effects of stock dividends. The following schedule shows the Company’s earnings per share for the periods presented:

	For the three months ended		For the six months ended
	June 30,		June 30,
(In thousands except per share data)	2004	2003	2004	2003

Income applicable to common stock	$3,718	$3,746	$7,287	$7,289

Weighted average number of common
shares outstanding - basic	16,004	14,919	15,980	14,921
Stock options	176	212	189	219
Weighted average number of common shares
and common share equivalents - diluted	16,180	15,132	16,169	15,140

Basic earnings per share	$0.23	$0.25	$0.46	$0.49


Diluted earnings per share	$0.23	$0.25	$0.45	$0.48

Note 4. Investment Securities

AVAILABLE FOR SALE	June 30, 2004					December 31, 2003

		Gross	Gross				Gross	Gross
	Amortized	Unrealized	Unrealized		Fair	Amortized	Unrealized	Unrealized		Fair
(in thousands)	Cost	Gains	Losses		Value	Cost	Gains	Losses		Value

U.S. Treasury and
U.S. government agencies	$153,467	$73	($3,982	)	$149,558	$160,834	$448	$(2,487	)	$158,795
Mortgage-backed securities	314,613	602	(8,101	)	307,114	331,995	1,593	(3,541	)	330,047
Obligations of states and
political subdivisions	47,792	1,112	(146	)	48,758	51,559	2,079	(20	)	53,618
Other debt securities	4,096	42	(11	)	4,127	4,102	35